Normally when governments storm into the marketplace to rein in prices and flex some regulatory muscle, the push-back from business is intense.
- Health insurance reforms won’t have a big impact on profitability
- Private hospital and health insurance shares jumped on the news
- Any loss in revenue from lower premiums for insurers likely to be made up with higher participation rates
Not this time with the Federal Government’s move on private health insurance in the biggest shake-up the industry has seen since the Lifetime Health Cover loading was introduced at the turn of the century.
The big players put out media statements supporting the reforms and investors jumped in an bid up the likes of Medibank Private and its smaller Newcastle-based rival, nib.
Even the big publicly listed private hospitals, which have a fairly testy relationship with the insurers over the prices they charge, got a hefty boost in their share prices.
What gives? Well, the short answer is despite insurance premiums and hospital prices being held in check, their profits probably won’t be hit too hard.
The reforms are a bit of mixed bag for the insurers, where lower margins could be offset by increased participation rates and the hospitals have seen reforms of prosthetic costs coming from a long way back.
Medical device inflation ‘scandalous’
The key trick is tackling the soaring cost of prosthetic devices the insurers are obliged to pay and getting insurers to pass on the savings to customers in the form of lower premiums.
nib chief executive mark Fitzgibbon said the prices for medical devices his customers have been paying “borders on scandalous”.
“Patients in private hospitals have been paying wildly inflated prices for medical devices, sometime five times what it costs in the public system for exactly the same devices,” he said.
Medibank chief executive Craig Drummond applauded the reforms for improving affordability, value and transparency of private health insurance for policy holders.
“This reform package is essential to keeping premiums affordable for our customers with Medibank committing to return every dollar of these savings to customers,” Mr Drummond said.
Analysts in Macquarie insurance team said the changes could have a number of positive impacts for the likes of Medibank and nib.
“[The reforms] could increase members — from the positive affordability impact. [They could] positively impact total premium growth and increase initial margins,” Macquarie told its clients.
Premium-prosthesis trade off
The trade-off in prosthesis savings against premium increases is the intriguing one for existing policy holders.
The 10 per cent cut across the board — though weighted to cardiac and ophthalmic, with a lower impact on orthopaedic devices — adds up to around $190 million and will be handed back to policy holders in the form of a 1 per cent lower premium hike next April.
The cuts are ongoing and should produce savings of around $1 billion over four years.
“[The] reforms should be profit neutral for insurers, but will reduce premium revenues and may help address lapses,” Morgan Stanley’s Daniel Toohey said.
For the private hospitals it is not a disaster either, according to UBS health sector analyst Andrew Goodsall.
“Based on disclosures from listed hospital operators, we expect minimal impact, as prostheses reform has been in the pipeline for around eight years, allowing time to mitigate impact and preserve handling fees,” Mr Goodsall said.
More carrot than stick
The long-term gain out of the deal for insurers may be reversing the continual decline of policy holders due to rising costs and complaints about coverage.
The incentive offered to young, potential policy holders is a 2 per cent premium discount before they 30 years old, with a maximum discount of 10 per cent. It reduces to zero discount at 40 years old.
There are almost half a million people who have been on their parents’ policies in their teenage years.
Clearly, if they could be encouraged to take on their own health insurance in their 20s that would be a big boost to the fortunes of the insurers.
There is also a neat demographic trick to this which also helps the insurers, Macquarie points out. It will slow average claims growth.
“Twenty-to-29 year-olds claim around 44 per cent of the average private health insurance [PHI] hospital claims and 85 per cent of the average PHI ancillary claim.
“As such adding new 20-29-year-olds will slow average claims growth as young policy holders have lower claims utilisation and reduce ageing of the pool.”
The removal of the government rebate on ancillary services — such as natural therapies — is likely to be something of a zero sum game for the insurers.
Mr Toohey calculated if the discount drove participation rates in younger age groups to the 30-to-40 year old level, it could add another 430,000 policy holders to the insurers books.
In other words, a one-off 4 per cent boost to the customer base.
“However, we think it is highly unlikely that a discount will lift participation rates to such a level,” Mr Toohey said.
“‘Carrot’ style regulations have proved far less effective in the past than ‘stick’ style measures — such as tax penalties — at driving participation.”
Higher maximum excesses
The net impact of the planned higher excesses is uncertain for insurers and policy holder.
While allowing insurers to offer higher excesses and lower premiums helps affordability — and therefore boost participation — it could dilute the average premium per policy as customers downgrade their policies, according to Mr Toohey.
“Healthier customers are most likely to select higher excesses, creating a risk of adverse selection,” he said.
Which would mean lower revenues. However, if the higher excess encourages healthier people to sign up, that could mean a lower impost for insurers.
Perhaps the bigger question out of all of this is, if both consumers and business can benefit from the reforms why weren’t a few heads knocked together earlier — years earlier?