Selling Medibank private

As we move towards the last two weeks of Senate sittings for 2006, the government is adopting the traditional pre-Christmas practice of piling up a list of ‘urgent’ Bills which must be passed in the final fortnight.

In the past the Senate was able to determine which of these Bills were really urgent and which was were just try-ons in an effort to push things through without decent scrutiny or raising media or public interests. However, now the government has control of the Senate, it basically pushes through whatever it wants, regardless of whether it is urgent or not. Two examples I’ve touched on in previous posts are Bills making major amendments to our strong national environment laws and to our Copyright law.

However, probably the most blatant example of a non-urgent Bill being pushed through purely for politically expedient reasons is the one authorising the privatisation of Medibank Private. The government has stated that any sale will not occur before 2008, making any claims of urgency totally spurious. There’s another perfunctory Senate Inquiry happening into the legislation at the moment.

Regardless of whether you are for or against such a move, to be bulldozing it through with minimal public political debate is unnecessary and inappropriate. I suspect their intent is as much about pushing it through before internal opposition builds up as it is about avoiding a major public debate – although as the reversal of the decision to sell the Snowy Hydro shows, sometimes having the legislation locked in still prevent the subsequent political backlash.

Many people take an ideological approach on privatisation – public ownership is good and private ownership bad, or vice versa. My approach is more basic on assessing what the practical consequences are likely to be. I think that before the irreversible step to sell is made, a clear case should be made that such a sale would be in the interests of the general public. Key questions include whether it will lead to a rise or fall in insurance premiums (or have no particular impact), and what the consequences will be for the private health insurance area in general – particularly in import areas like maintaining community rating (the principle that everyone should pay the same premium regardless of risk status).

Below is a range of background information about the issue:

• Approx 43% of the population currently have private health insurance (PHI). This has been stable since 2003.
• There are 38 operational private health insurance funds.
• The sector is fairly concentrated. The industry is dominated by the six largest funds which, when measured by premium income, share 76.4% of the national market, with approximately 80% of the market in each state controlled by the 4 biggest insurers in each state
• There are 26 individual funds that each have less than 1% of market share and, when combined, comprise 8.1% of the market.
• Currently only 4 of the funds are “for profit” and they account for 15.47% of the market.
• Medibank Private is the largest fund in the Australian PHI sector, with 29% of the market based on total contribution income. Total membership has been stable at around 1.3 million in the last few years.
• Medibank Private operates as a not for profit (NFP) organisation and is the only national private health insurance fund. It has 100 retails outlets and about 70 agencies.
• In 2004-05 Medibank Private recorded $2.8 billion in total revenue (around $2.6 was from member contributions
• In its 2005 annual report Medibank Private reported net assets of $653.3 millions
• Medibank Private recorded a loss of $175.5 million in 2001-02, primarily as a result of a paying benefits to members (This was a trend across the industry as a result of the membership spike following legislative changes to increase membership)
• The government put in a cash injection of $85 million in 2005 in return for 85 million $1 shares in the company Medibank Private Limited. This was to consolidate a capital structure more consistent with industry practice
• The sale of Medibank has been mooted as netting between $1.5 and $2 billion.
• Although worth about $10 billion a year in contributions, health insurance is not a hugely profitable or efficient industry. This is partly because of its structure (comprising mostly regional, industry or company-based mutual societies) and partly because the government controls pricing and the types of services that can be offered.
• Inflation in the health sector is running at around 8% a year and the economics of health care, combined with an ageing population, make it inevitable that health insurance premiums will continue to rise.
• If the sale should proceed, the Government will retain its control over premium increases, although it has indicated that it would like to introduce new and clearer criteria against which applications would be assessed
• The Government have indicated that proceeds from the sale will go to augmenting the budget of the National Health and Medical Research Council.
• There is debate about whether the Government is entitled to cash out the value that has built up in a not for profit structure or whether it belongs to the policy holders. The Parliamentary Library has argued that while the Government owns the business, the members own the assets. It has been suggested that Medibank Private received similar advice 5 years ago although this has not been confirmed. The CPSU has asked for legal advice on whether a class action would be able to be mounted. The Government has received legal advice that contributors have no rights to assets in the fund.
• If Medibank Private becomes a for-profit organisation, this will mean that the PHI sector has changed from 15% for profit to 45% for profit – substantially changing the nature of the sector. This raises the question of whether it is better for the sector to remain dominated by NFPs.
• NFPs by definition return any operating surplus to members in the form of lower premiums and/or higher services. They do not need to generate shareholder dividends. Medibank Private itself has previously argued for the maintenance of a predominately NFP industry, suggesting that the sector is then more likely to be responsive to the interests of members. For-profit organisations have as part of their motive paying returns to investors and maximising share price. It has been argued that meeting the needs of shareholders will add a layer of cost and therefore increase pressure on premiums and/or reduce benefits to members.
• It is difficult to know if for-profit organisations provide a lesser service. There is only one for-profit organisation, BUFA, which is large enough to use as a comparison. It has approximately 10% of the market share. In 2005 BUFA had lower management costs and premiums than Medibank Private and than the industry average, but it also had less success in retaining members, received a higher proportion of total complaints compared to market share and returned a lower percentage of benefits to members as a percentage of contributions.
• The counter argument to privatisation causing upward pressure on premiums is that increased competition will moderate increases. However it is not clear that the sale of Medibank Private will necessarily increase competition.
• The recent innovation and efficiency of Medibank Private could be argued to have more to do with the ability of the current management team rather than public or private ownership. Other funds have reasonably strong record in terms of administrative efficiency, with most of the top six funds having close to the industry average in management expenses as a % of member contributions in 2004-05.
• Currently the industry is heavily regulated limiting innovation. Therefore a change of ownership will not automatically create significant opportunities for more innovation or more aggressive negotiating. This will depend on the wider regulatory environment. The Government has flagged changes to industry wide regulation but it is not clear that these are of the type to address issues such as cost containment, quality and efficiency.
• It is arguable that the important characteristics required to ensure competitive pressure are not public ownership but whether a fund is strong enough to negotiate with healthcare providers and whether it has a national presence so that it can exert pressure in every PHI market in Australia.
• Public ownership may be more important with regard to Medibank Private’s role in promoting community interests. There is evidence historically that Medibank Private has sought to play a public interest role by advocating for ‘community rating’ (the principle that everyone should pay the same premium regardless of risk status). This is not in the immediate business interests of a private health insurer. Privately owned PHI funds are more likely to favour a move to risk based approaches. A move to private ownership is likely to weaken Medibank Private’s commitment to providing arguments against moving in this direction. Medibank has been less active in paying this role since corporatisation.
• If Medibank Private becomes a for-profit organisation, it raises bigger questions about public money via the Private Health Insurance Rebate subsidising private profits.

You can read a comprehensive briefing paper on the legislation put together by the Parliamentary Library by clicking here.

Here are some statements on the issue by the Coalition’s Finance Minister, the Labor Party, the Democrats, the Green Party and Family First.

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  1. My initial response is this is a bad decision. We all know that the rebate hasn’t kept Private Health Insurance costs down. But I see this as being akin to banking. Once Medibank is sold then there will be nothing to keep them in check.
    I expect costs to go up and hence the rebate amount as well. Anyway I look at it it comes out bad.

  2. Once again, Geoff and I find something to agree on.

    I suspect this is all about ideology rather than any rational purpose. Or maybe it’s about having some money in the Treasury to spend just before the next election.

  3. It really does need to be assessed with reference to the ends. Who benefits? Who loses?

    When decisions like this are made with reference to ideology alone the wrong decision tends to be made. It is hard to believe that the current Federal Government has made the decision without its readily apparent ideological blinkers on.

  4. It would be a very poorly disguised ideological decision. There would be no benefit to members that could not also be obtained while it remains in Government ownership and private ownership would virtually guarantee that member contributions would then be paid to investors – abhorrant when I have been paying all these years with the expectation that those payments represent an investment of my own in my health and the health of my family.

    That my investment should be sold to someone else without my consent disgusts me.

  5. It certainly doesn’t appear to be an overwhelming public interest and, as you say, there is definitely no cause to rush this through.

    I think this sale, like some before it, could be used to fund a potential tax-cutting budget in 2008/2009, perhaps. John Howard certainly has a campaigning history of making expensive promises funded by privatisation or shifting tax burden of some sort. That said, Telstra’s sale will probably do quite nicely for next year…

  6. Just out of interest and because I’m not a member… does medibank officially belong to its members or the government?

  7. I think selling off Medibank Private is a very bad idea.

    It belongs to the government, but I’d say the assets less outlays must belong to the contributors.

    Doctors run and own both private hospitals and health funds – mostly to their own advantage.

    In private hospitals, they try to turnover patients as quickly as possible, in order to earn more money from surgical procedures and theatre fees.

    If they can cut you today and send you home tomorrow, that’s surgical, theatre and bed fees being pocketed for each bed every day – all done with a shortage of nurses.

    Doctors have done their best to keep access to free public hospital treatment very low.

    And now that people are captives of the new health insurance system, doctors from various companies will make a pact to line their pockets even further by increasing contributions.

  8. Andrew & friends. You mention that you don’t take an ideological view on privatisation but judge each issue on it’s merits. I would be interested if I could hear from you all which privitisations you have supported in the past and what enterprises you still believe could be privitised?

    I take a different starting point from you Andrew. You seem to hold a conservative metaphysics while I take a liberal metaphysics. I think it should be up to the government to show why they should continue to be involved in business. At first glance, I can’t see the value in a government owned private health insurance company any more than a 7-11.

    Having said that, if the government already owned a 7-11 then most Dems/ALP/Greens would oppose selling that too.

  9. to john H
    here is an idea whitch i dont think you would like because you cant make a profit from.
    how about we turn medibank private into a none proffit organisation run buy a private company .with directors on a set payment.

  10. In response to John H, some privatisations have more merit than others, but I think it is a bit narrow to look at the issue solely in terms of who ‘owns a business’. It is the impact beyond that on the individual business which is often not considered from the ‘liberal metaphysic’ you outline.

    I think the government selling Qantas was justifiable on policy grounds. I think the government selling off airports was crazy.

    It seems to me that Medibank Private sits somewhere in the middle of those two extremes.

    The private health insurance market is already heavily distorted and inefficient through the multibillion dollar annual taxpayer subsidy it gets each year – something which is going to continue regardless of who owns Medibank Private.

    But it is quite possible that the sale of it will impact on the way the overall health insurance market operates, and thus on the health system overall. It is not just ownership that will change, but it will also change its status from a not-for-profit to a for-profit organisation. In such a context, it would be fairly irresponsible to sell it off just for the sake of ideological purity – whether you call that a liberal metaphysic or not I don’t know – without being fairly clear on what the wider impacts may be.

    Geoff – questions of ownership of Medibank Private and its assets is a matter of some dispute. The Parl Library paper I linked to above goes into it some detail. I don’t think it is suggested that the fund members own Medibank Private, but it is argued that members may have some rights over the existing assets of Medibank Private.

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