‘We’ll rip up health fund contracts,’ says Ramsay boss Craig McNally as inflation changes healthcare

Ramsay Healthcare boss Craig McNally said while its costs inflation has peaked and the company’s outlook is strong, it is taking a harder position on negotiating health fund contracts.

Ramsay chief executive Craig McNally says its costs inflation has peaked, while the private hospital operator has begun to rebound from Covid-19 – with interim profit surging almost 20 per cent.

But he warns the path out of the pandemic “is not expected to smooth”, as the company continues to battle a tight labour market, and he says is not afraid to tear up contracts with health funds that it deems to be unprofitable.

“You have to take a longer-term view about what you’re going to do and negotiate that accordingly,” Mr McNally said.

“The environment has changed and in this inflationary period, the pricing needs to reflect that.

“We’re not prepared to live with agreements that are historical and reflecting the way they used to be. And we’ll take a hard position on it. If that means we have to not have an agreement because they don’t recognise that, then so be it.”

Ramsay was embroiled in a high-profile dispute with Bupa last year, with the pair salvaging an agreement after its existing deal expired, sparing patients hundreds of dollars in extra out-of-pocket costs. Smaller rival Healthscope had a similar fight with HCF, setting the scene for more hardball negotiations as agreements rollover.

At the same time, Ramsay repelled a $20bn takeover from US private equity titan, KKR. Mr McNally is now upbeat about the company’s outlook, saying it was “well-placed to take advantage of the positive long-term dynamics driving the healthcare industry”. But he did not give more detailed earnings guidance.

His comments come as Ramsay’s interim net profit soared nearly 20 per cent to $194.4m. Meanwhile, revenue rose around 14 per cent to $7.38bn.

“We are pleased the underlying earnings momentum in the business continued into the 2QFY23 despite the re-emergence of Covid in each of our regions and the significant burden on the business caused by staff shortages and inflationary cost pressures,” Mr McNally said.

“We expect the underlying earnings momentum in the business will continue in 2HFY23, albeit the path out of the Covid environment is not expected to be smooth. We expect non-surgical admissions to improve as the environment starts to normalise”.

Ramsay Healthcare boss Craig McNally expects earnings growth to continue.

The company’s shares leapt 3 per cent to $67.91 on Thursday, giving it a market value of $15.54bn. This compared with a 0.4 per cent dip across the broader sharemarket.

Wilsons analyst Shane Storey said Ramsay’s interim profit beat his forecast by 25 per cent.

“We expect the underlying earnings momentum in the business will continue in 2HFY23 (second half of this financial year),” Dr Storey said in a note to investors.

Meanwhile, Macquarie maintained a neutral rating for the company. “On balance, improved operating trends into 2H23 for Australia, with inflation/labour constraints impacting UK/Europe,” Macquarie said.

“Net debt remains elevated, with one-off benefits impacting the 1H23 result.”

Ramsay’s Asia Pacific operations, which includes Australia, reported a 4 per cent rise in revenue to $2.84bn, while earnings before interest and tax jumped 7.6 per cent to $307m.

Mr McNally said Asia Pacific pandemic-related costs fell from $56.8m in the September quarter to an “immaterial impact” in the three months to December.

“The operating environment across the six-month period improved as Covid cases in the community declined from the peak in July. A wave of cases in late November/December temporarily slowed the momentum in activity levels however Q2 was stronger than Q1,” he said.

“Growth in activity levels was driven by elective day surgery. The recovery in non-surgical admissions, particularly mental health, remains patchy with ongoing Covid restrictions such as testing and mask wearing impacting the return of day admissions.”

Revenue across its UK operations soared nearly 78 per cent to $910.2m, while EBIT near tripled to $32.1m, with the company citing better management of pandemic disruptions.

Its European division reported a 5.1 per cent rise in revenue to $3.4bn, while EBIT dropped 12 per cent to $210.5m. Mr McNally said high inflation rates in Europe combined with increases in staff expenses increased costs beyond payor compensation.

“A range of initiatives have been introduced in response to the industry wide critical staff shortages. Vacancy rates have declined 69 per cent since January 2022 however higher labour costs and staff shortages continued to impact the result.

“After a slow start, activity in the region increased with surgical activity skewed to day surgery. Non-surgical activity, in particular rehab, also increased on the previous corresponding period.

“Support from governments in the region including to cover the increased costs of operating in the current inflationary environment was $227m compared to $203m in the prior corresponding period.”

Ramsay will pay an interim dividend of 50c a share, fully franked, on March 30. This is a 3 per cent lift on the previous corresponding period.

The group has also reactivated its dividend reinvestment plan, which will involve issuing shares at a 1.5 per cent discount to the average of the daily volume weighted average price during the 10 trading day from March 9.