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The distinctive balance between the private and public sectors makes the Australian health system one of the best in the world. But it is at a precipice. Surges in premiums are averaging 3% to 5% a year, while wages increase is tightly stuck at around 2%. One of the reasons premiums are going up is because an ever-increasing number of younger and healthy Australians are opting out of private health insurance. This is leaving a higher proportion of older patients who are increasingly more likely to be suffering from illness or chronic diseases and who are expensive-to-insure patients in the system. More of these patients are joining every day. This causes fund outlays to go up, putting even more pressure on premiums.
As healthcare costs rise faster than CPI and wages, consumers are paying higher premiums and out-of-pocket costs. At the same time, government infrastructure investment is increasing the size and improving the look and feel of public hospitals. As a result, the proportion of Australians with private health cover has fallen to the lowest level in 8 years.
Source: AIHW Quarterly Statistics, March 2018
Key Players in Health Insurer Industry
In 2017–18, there were a total of 37 health funds operating in Australia, including both not-for-profit insurers and for-profit insurers. Bupa remained Australia’s largest insurer ahead of Medibank Private Limited, ending the 2017–18 financial year with just over 3.65 million members, compared to Medibank’s 3.53 million members.
Insurer Market Share (Source: ACCC)
Let’s look at two private health insurance companies listed on ASX.
Medibank Private Limited (ASX: MPL)
Medibank Private Limited is a private health insurer which provides underwriting and distribution of private health insurance policies under its two brands ahm and Medibank. The company is also a provider of health-related services through the Medibank Health businesses, which capitalise on Medibank’s expertise and experience, and supports the Health Insurance business. To broaden the provision of health-related services, the company acquired Home Support Services Pty Ltd in August 2018.
Strong Policyholder Growth Delivered Led by Customer Focus
Solid Service NPS for both ahm and Medibank has allowed to keep momentum in policyholder expansion with a net rise of 11,700 resident policyholders in 1HFY20, providing an 8-basis point rise in market share. The main driver of claims increase was a 6.4% rise in prostheses cost, which was liable for 69% of the rise of growth in hospital claims which led to decrease in Health Insurance operating profit but was moderately compensated by a rise in net investment income.
Despite the increase in Revenue from external customers by 2.7% to $3,421.5 million, total segment profit was down by 19.2% to $237.5 million. Group NPAT decreased by 9.0% to $178.6 million.
Medibank to revise premiums from 1 April 2020
Amidst rising household budgets, affording a private health insurance is one of the biggest challenges which Australian consumers are facing. Health insurance premiums are set to witness an upside starting April 2020 as the government approved an average premium hike of ~2.92% across industry, which is the lowest hike in last 19 years. Following this Medibank got an approval to raise the average health premium for both ahm and Medibank by ~3.27% which is still lower than the hospital services inflation of ~3.8%.
The company’s chief customer officer said in a release that the company will continue to work on delivering great value to its customers by reducing unnecessary costs and making business more efficient. Last year, Medibank delivered benefits amounting to ~$5.4 Billion which includes ~500,000 surgical procedures, ~1.3 million hospital admissions and ~24.3 million extras services.
Other Key Highlights during the year are as follows:
- The company started a preventative health program “Live Better”. This will assist consumers in saving ~ $200 on their premiums;
- To improve the health support, MPL arranged treatment at home for its customers and arranged ~1.5 million personalised health interactions;
- It introduced a new 24/7 mental health phone support line for its hospital policyholders;
- Offered a new premium discount to all 150,000 young adult customers.
nib holdings limited (ASX: NHF)
nib holdings limited is a private health insurer in New Zealand and Australia, where it underwrites and distributes private health insurance to Australia and New Zealand residents and also international students and tourists to Australia.
NHF Reports Growth in All Business Segments
The company registered increase in premium and membership revenue in the 6 months to 31 December 2019 growing company’s underlying revenue to $1.3 billion up by 6.4% as compared to the pcp. However, the company reported Underlying Operating Profit of $83.2 million, down by 27.2% compared to 1HFY19.
First Half Results (Source: Company’s Report)
NHF Reduces FY20 Profit Guidance Due to Increase in Claims
The company is anticipating to register Operating Profit of about $170 million in FY20, a decline of about $30 million as earlier forecasted.
- The downgrade in profit is because of recent claims environment within its Australian and New Zealand health insurance operations that started to exert pressure on the company’s expected earnings;
- The company’s Australian health insurance business was witnessing claims growth in line with expectations, but industry data from the December quarter suggests that there will be greater than originally forecast risk equalisation net contribution in FY20;
- As a result, FY20 risk equalisation net contribution now expected to be around $250 million, up about $20 million or 9% on FY19.
As per Mark Fitzgibbon the company’s Managing Director, additional claims incidental to the company’s FY19 results due to Australian resident’s health insurance (arhi), is now 6.2%. In FY19 it was 6.5%, stated at the time of the company’s full year results in August 2019.
- This has seen some changing of claims experience in adjacent underwriting segments such as international students and workers as well as New Zealand operations, after several years of benevolent claims;
- While still very strong businesses, the company is expecting margins for each business line to revert closer to longer term sustainable levels going forward;
- Although, these businesses account for a relatively minor proportion of the company’s earnings, they are likely to result in a drag to its FY20 earnings.
Stock Performance
NHF share price closed the day’s trading at $4.630 per share on 28 February 2020, down by 1.279% from its previous closing price. At this closing price, the company had a market capitalisation of $2.14 billion as on 28 February 2020. The stock of the company has given a return of -31.03% and -34.13% in the time period of 3 months and 6 months, respectively.
