Who will feel better after Medibank privatisation?

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Medibank Private shop front

The Federal Finance Minister, Mathias Cormann, when mounting his case for selling off Medibank Private, announced that 'the scoping study found no evidence that premiums would increase as a result of the sale.'  One wonders how the study could have found any evidence. The sale has not happened yet.

Not content with one statement of the obvious, Cormann continued with a further exploration of the self evident. 'As it does now, Medibank Private will need to continue to compete against other funds for policyholders and will need to continue to comply with relevant regulatory requirements around changes in premiums.'

Well, yes, no argument there. There is nothing so effective as the application of circular logic when demonising government, it seems.

It is worth briefly examining the history of the word privatisation. The term is often credited, wrongly, to the Austrian management thinker Peter Drucker. In his 1969 book The Age of Discontinuity he made a point about management in government that has come to be considered a self-evident truism. 'Government is a poor manager …. It has no choice but to be 'bureaucratic'. The only solution, he concluded, was to use non-governmental organisations for the actual doing of things, a process he dubbed ‘re-privatisation’, not privatisation (some academics believe the first moderns to use the term were actually the Nazis).

Drucker’s idea, that government is unable ‘do’ anything well, has since taken complete hold. A neat dichotomy has been created in which there is seen to be a single choice between government, which is inefficient and lacks proper incentives, and business, which is efficient and has good incentives (greed and self interest). It is a neat duality that ensures that other options are never considered, such as effective ways to make government efficient, for example.

The sale of Medibank Private is thus presented as a self-evident good, a way to make the fund more efficient and effectively run. If that turns out to be the case, it will become a very dominant player indeed. Medibank Private has the largest market share of the 34 registered health insurers, at 27 per cent (just ahead of BUPA). Given that it is supposedly run by government managers, who are, by definition, low quality and overly bureaucratic, this can only be seen as surprising. Even more surprising, Medibank Private’s management expenses are relatively stable and close to the industry average. As a report by the Parliamentary Library notes drily, 'this raises questions about the extent to which additional efficiencies could be achieved by a sale.' 

Medibank Private has been behaving like a business for some years. Initially, surplus revenues were used for the benefit of policy holders. But when the entity was changed to for-profit status in 2009, surplus revenues were paid back to government, rather than being used for the benefit of customers. In 2012-2013 $450 million was paid to government. Other money was used for acquisitions.

The current price for Medibank Private is expected to be between $2.5 billion and $4 billion. So is it a good deal for the Australian public, who are the de facto owners of the fund? Not especially. One way to evaluate public companies is to look at the earnings multiple, which is the value of the company divided by the earnings of the company. Taking that $450 million annual surplus figure, you get somewhere between five times earnings and nine times earnings. Put another way, it will take between five and nine years to pay back the amount raised from profits.

That is not an especially good price for an entity that already has a dominant market share and is very likely to be around for decades. The average earnings multiple on the Australian Stock Exchange is in the double figures. Australian tax payers are getting only a barely adequate return for what they have bank rolled.

There are a few likely outcomes. One, an absolute certainty, is that the financiers who participate in the capital raising will get some serious fee income. Another strong likelihood is that it will lead to reduced diversity in the health market. The usual pattern in Australia, in which most markets are dominated by oligopolies, will probably occur in the health insurance market.

By being a different kind of player — for-profit, but government owned — Medibank Private functioned as a brake on the growth-through-acquisition motive that is rampant in business. The fund did do some acquisition of its own, but there is little doubt that business players tend to be far more aggressive in their pursuit of scale. It is a great way to keep shareholders happy, and there is the odd ego effect as well.

Such acquisition is, at least in part, usually achieved using debt. The cost of servicing that debt is routinely passed on to customers. Oligopolies also have much more pricing power. The prospects for insurance premiums growth being kept under control are thus not good. There is also a greater risk of disruption in the market. Businesses do not last as long as government enterprises. Their managers may be more efficient, but they are also more reckless.

Happily, if premiums do rise sharply because of these influences, or there is disruption, there will be no scoping study by government. The evidence may by that time be there, but nobody will be looking.


David JamesDavid James is a business journalist with a PhD in English literature. He edits Personal Super Investor.


Topic tags: David James, Medibank Private, finance, privatisation, politics, Mathias Cormann, Peter Drucker.

 

 

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Existing comments

For many years I have been a member of Medibank and have contributed several thousands of dollars to it in payments for my family cover and for top hospital cover. Consequently I have always considered myself a part owner of Medibank. Our Federal Government seems ready to disregard history and the ways people like me funded Medibank and contributed its existence and growth. If it is sold we should be compensated. Gerry Costigan
Gerard Costigan | 12 October 2014


David, the other major beneficieries of Medibank's privatisation are the present senior management who are likely see massive increases in salary so that they can 'compete' with senior management in equivalent private companies. Talk is that the MD will go from about 1.5 million to upwards of 5 million - nice work if you can get it and no wonder that they are so keen about the privatisation. There is no guarantee that Medibank will maintain its present market share. Premiums are expensive and I suspect that a lot of present members stay with Medibank out of loyalty and a desire to insure with a government owned fund. I will be leaving the day of privatisation.
chris g | 13 October 2014


Of course the premiums will rise. The only health insurance I have is Medibank Private extras denta. All of us used to own it but now the rich will own it and up goes the cost. Welcome to capitalism.
busbygoers@gmail.com | 13 October 2014


The models of care that private health insurance funds will now pursue are ones that drive down costs so as to benefit fund managers and institutional shareholders over and above patients and policy holders. Advocacy for models of care that are holistic and that that do not penalise the very sick with multiple conditions is important. It would seem that private not-for-profit health care providers are going to need to engage robustly on behalf of patients for models of care that improve outcomes rather than profits. Medibank has a new shareholder and it certainly is now the sick. The patient is now reduced to the long list of interested stakeholders.
Jack de Groot | 13 October 2014


"The current price for Medibank Private is expected to be between $2.5 billion and $4 billion." Interestingly that's less than the government pays out each and every year for the private health insurance rebate. Surely Mr Cormann would be better off scrapping that weird subsidy if he wants to improve the budget's bottom line. I'm with Medibank Private and like Chris G intend to move to another fund when Medibank is privatised.
Russell | 13 October 2014


I thought the privatise at all costs syndrome was dead. Has there ever been a situation where the prior customers of the organisation have benefited? This is simply another case of government ideology dominating over pure common sense at the expense of the existing owners of the business - the taxpayers of Australia.
Hugh | 15 October 2014


To answer your question Hugh, Telstra, the Commonwealth Bank, the major airports, even QANTAS, the answer is no, clearly not. I can't see that Medibank will be any different. I hope the share price does not go south as it did for the first Telstra sale or the poor old small investor (as a taxpayer and Medibank member, already an owner) will just lose again. But then that is the risk with the share market, isn't it?
Brett | 20 October 2014


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