Duncan Guy wrote:
It constantly annoys me the greed of some specialists and device
companies...
With the help of this quote from Duncan the Canberra Times published
Part I of my diatribe about private health insurance as an OpEd titled,
"Rebate is a prescription for lazy healthcare". See:
http://tinyurl.com/mzl2h!
Part 2 of my essay "The Sale of Medibank Private" is now out in
"NewMatilda" (albeit locked up for subscribers only).
For those interested, I've appended the text below.
Cheers
Ken
--
Dr. Ken Harvey
Adjunct Senior Research Fellow
School of Public Health, La Trobe University
http://www.medreach.com.au
VOIP: +61 (03) 9029 0634; Mobile +61 (04) 1918 1910
------------------------------------------------------------------------
The Sale of Medibank Private
By: Ken Harvey
The Coalition government is considering selling off Medibank Private.
Yet the 2004 National Platform and Constitution of the Australian Labor
Party says, ‘Labor believes Medibank Private plays an important role as
a market leader to hold down premiums and keep the private health
insurance market competitive and consumer oriented. Medibank Private
will therefore be retained in public ownership’. So what's the right policy?
While Medibank Private currently has the largest national market share
of all funds (29 per cent) there is little evidence that it's led the
way in keeping the private health insurance (PHI) market competitive. In
2002 Medibank Private made a net loss of $175 million. Its cost
structure was high, revenue didn't cover costs and the company only
survived on investment income, the interest of which was also declining
due to a downturn in the share market. Subsequently, a new management
team steadily improved performance. Nevertheless, the 2004 PHI
Ombudsman's ‘State of the Health Funds Report’ ranked Medibank Private
behind a number of other funds on finances and costs, price of top
hospital cover and ancillary cover.
By 2004/05, Medibank Private had substantially improved its financial
position with a revenue of $2.8 billion and an underwriting profit of
$63 million; the latter the first for 5 years. In addition, helped by an
equity injection of $85 million from their shareholder (the Federal
government), investment income rose to $68 million. Medibank Private
also reported reduced management expenses (9.2 per cent of premium
income) and a reduction in the inexorable increase of provider costs by
more competitive contract negotiations. Furthermore, over the last 6
months of 2005, their membership has shown a small increase
(particularly amongst younger people) in response to the introduction of
new products.
So would Medibank Private now be attractive to potential purchasers?
Last Friday, in response to yet another increase in PHI premiums, Health
Insurance Association chief executive Dr. Michael Armitage said the
sector only had a 2.7 per cent profit margin. ‘These rises are not going
to pay out huge profits and luxurious lifestyles’, he said. On the other
hand, in 2005 Medibank Private had the biggest market share, it's book
value (equity) is only $653 million and its operating profit of $131
million gave a 25 per cent return on equity; pretty attractive for a
business substantially subsidised by government. In addition, out of its
total assets of $1300 million, the firm had $900 million in cash. Any
private company so highly cashed up would be considered ripe for a takeover.
So it's not surprising that some in government think Medibank Private
should be flogged off as soon as possible, especially before the overall
slow decline in PHI membership accelerates as a result of inexorably
increasing premiums. If floated on the market, some analysts think
Medibank Private could be the biggest listing for years (with the
exception of Telstra) with a market capitalisation estimated to be
around $2 billion. The alternative approach is a trade sale. While it's
unlikely that a total sale of Medibank Private to another major fund
would be approved by the Australian Competition and Consumer Commission,
other funds may be interested in stripping off parts of the organisation
in order to improve their own national coverage.
However, the top four health funds already control around 80 per cent of
the market so allowing three funds to digest portions of Medibank
Private seems unlikely to produce improved performance by itself.
Administrative costs might be reduced slightly by economies of scale but
these savings are insignificant when compared with the cost drivers of
increased premiums; increasing price of services purchased (linked to
advances in medical technology) and increased utilisation by members.
These drivers will only be moderated by an innovative health fund who
takes on the more aggressive role of health broker (with the support of
their members) as distinct from being a passive health payer. A fund
acting as a health broker would use its market power to purchase
cost-effective services for members at the most competitive price taking
into account quality and safety considerations. It would encourage
members to utilise more cost-effective services, perhaps by reducing the
front-end deductible or co-payment for such services. It would actively
assist members to maintain a healthy lifestyle, address their health
risks and better manage chronic disease knowing that investments in
these areas will reduce hospital utilisation and health costs in the
longer term.
One reason for the recently improved financial performance of Medibank
Private has been more competitive price negotiations with private
hospitals. It may be that government ownership (and sensitivity) hampers
commercial negotiations, particularly with high cost hospitals in
marginal electorates. It is possible that a privatised Medibank Private
could negotiate cost-effective services more aggressively if existing
members were educated about what needs to be done and participated in
the organisation's transformation, for example by being offered shares
and greater involvement in return for past loyalty. After all, it has
been the increased premiums borne by members (as well as more efficient
administration) that has made Medibank Private viable for sale. Finally,
a privatised, freer, more innovative Medibank Private might stimulate a
wave of demutualisation, amalgamation and increased efficiency of the
remaining 42 health funds, many of whom are far too small to achieve
economies of scales.
However, like all funds, a privatised Medibank Private will still be
constrained by existing perverse government regulation. For example,
urinary incontinence is prevalent in older women and its management has
traditionally been surgical with the cost of treatment around $4000.
Physiotherapy has been shown to be an equally effective, low-risk,
first-line treatment and costs only about $300. Yet surgery is routinely
covered by PHI hospital tables (and Medicare item numbers) whereas
physiotherapy is only covered if consumers take out ‘extra’ PHI cover.
Another example is the successful pilot programs run by Medicare Private
to encourage health risk assessment by members and better
self-management of diabetes. Currently, any financial benefit that
accrues to Medibank Private from a reduction in members’ hospital claims
as a consequence of preventative programs is largely nullified by the
reinsurance pool to which all funds must contribute. There is little
incentive for one fund to spend substantial money on preventative
programs for their members if they end up having to contribute to the
hospital costs of other funds who have not undertaken such activities.
In short, regulatory issues also need to be addressed by government if
PHI funds (and private health care) are to become more efficient.
The following policy options appear open to the government with respect
to the sale of Medibank Private:
1. A trade sale of parts of the organisation to other funds to
improve their national coverage. This would appear to have negligible
impact on making PHI more efficient.
2. A float of the existing organisation, ideally with active member
participation through share options and other strategies. It is possible
that a privatised Medibank Private could become more innovative and
customer-orientated if the government was removed from its role as
share-holder.
3. Regulatory changes to encourage all funds to become more
innovative and cost-effective. These could include linking government
rebates to fund performance indicators as suggested in last week's essay
on PHI.
4. A combination of 2 and 3. This would appear the best option.
5. Doing nothing until such time as the inexorable cycle of rising
health care costs, rising PHI premiums and falling fund membership
produces another unavoidable crisis.
------------------------------------------------------------------------
Dr Harvey is Adjunct Senior Research Fellow School of Public Health, La
Trobe University, and a member of Medibank Private and of the ALP.
------------------------------------------------------------------------
References
Bartholomeusz S. Government has its finger on the pulse as it considers
Medibank Private float. The Age, Feb 11, 2006.
Australian Labor Party. National Platform and Constitution 2004 [90].
Available: http://www.alp.org.au/platform/index.php
Private Health Insurance Ombudsman. The State of the Health Funds Report
2004. Sydney, NSW. Available:
http://www.phio.org.au/publication.php?mediaid=143
Medibank Private. Annual Report 2005. Medibank Private Limited,
Melbourne. Available:
http://www.medibank.com.au/pdfs/annual_report_lowres.pdf
Hurrell B. Families to pay $123 more for health cover. The Advertiser,
Feb 25, 2006. Available:
http://www.theadvertiser.news.com.au/common/story_page/0,5936,18265085
per cent255E911,00.html
Hindle D, McAuley I. The effects of increased private health insurance:
a review of the evidence. Australian Health Review 2004: 28; 119-138.
Metherell M. Hospital costs outed in bid to ease excess fees. Sydney
Morning Herald; June 8, 2005. Available:
http://smh.com.au/news/National/Hospital-costs-outed-in-bid-to-ease-excess-fees/2005/06/07/1118123841735.html
Willcox S. Buying best value health care: Evolution of purchasing among
Australian private health insurers. Australia and New Zealand Health
Policy 2005; 2:6. Available: http://www.anzhealthpolicy.com/content/2/1/6
Abbott T. Private patient gap payments. Press release, July 25, 2005.
Available:
http://www.health.gov.au/internet/ministers/publishing.nsf/Content/health-mediarel-yr2005-ta-abb090.htm
Neumann PB. The costs and benefits of physiotherapy as first-line
treatment for female stress urinary incontinence. Aust N Z J Public
Health 2005; 29: 416-21.
------------------------------------------------------------------------
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