Private Health Insurance

Medibank Private: let's wait and see

The Government has now made the long-expected decision to sell Medibank Private. If a decision could be unpopular with some voters, it is a common ploy to feign consideration over a period of time to allow indignation to settle. At the same time, market interest can be quietly tested.

Some members of Medibank Private will undoubtedly be very indignant. The Government did not invest in Medibank Private, it just pulled dividends. The reserves are amounts that members have been 'overcharged' over the years to build up a buffer for rainy days.

All funds hold reserves - as required by law - and there is nothing untoward about Medibank Private's reserves.

Members may argue that to sell Medibank Private is to sell the reserves that are morally owned by them, not the Government. Whatever the merits of that argument, the Finance Department will not be listening.

Legally, the Federal Government owns Medibank Private, in trust for taxpayers. Were any legal attempts made to block the sale, we would expect them to fail.

Let's assume Medibank Private is sold for $1 billion. Whether the buyer(s) funds the purchase by debt, equity or a mix of the two matters little, as both debt and equity have to be 'serviced'.

Together, the dividend and interest payments will almost certainly be more than the dividend hitherto taken by the Government. All else equal, premiums will have to rise. Given the private health insurance tax rebate, both public and private outlays on private health insurance will rise.

The Federal Treasurer claimed that the sale of Medibank Private would increase competition, hence it is good for consumers. How so? A simple change of ownership from public to private does not increase the number of players in the market. Were the buyer an existing private health insurance fund, the outcome would be less competition, not more.

Private health insurance funds sometimes keep premiums down by reducing benefits to members, but that reduces the value of the policy to the consumer. Pay less, get less.

A newly privatised Medibank Private might seek to use its market power to force down contract prices. However, the private health insurance industry has done this to death over the past decade and it is not obvious that there is any more blood in the stone.

Despite its large market share, Medibank Private has been a relatively poor performer on management expenses. Admittedly, there have been recent successful efforts by the management at Medibank Private to bring it more into line with market norms.

Part of the problem was the regulatory requirement for Medibank Private, probably more than other funds, to maintain more than 100 separate products on the shelf. Some of these products had only a handful of members. Such was the Government's sway.

Could a new private owner run it more efficiently? Perhaps. But for that, we'll just have to wait and see. But don't believe anyone who says that the sale will not be inflationary on premiums. If you believe that, you still believe in Santa Claus.

John O'Dea is the Director of the Medical Practice Department at the Federal AMA

[Australian Medicine, Volume 18, Number 7, April 17, 2006, page 6]

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