Medibank Private Doubles Profits on the Back of High Premiums

There must be a lot of sick people in Australia. Or, rather, a lot of Australians worried about getting sick; so they start paying for private healthcare. Some might think it’s unnecessary, but there are benefits to private healthcare. The amount of choices available in the private sector is one of its biggest hooks. Under private healthcare, you can choose your own physician. You’re also able to have more control over when, and where, you receive medical treatment.

But the biggest advantage, I believe, is in the waiting room. If you require surgery, you don’t have to wait if you have private healthcare. However, whether private healthcare is really worth it or not is up to the individual. You need to determine if it is really worth it on a cost/benefit basis. And it seems Australians do believe private healthcare is worth the cost.

Medibank Private [ASX:MPL] released their financial results for the first half of FY16 this morning. Impressively, MPL was able to increase operating profits by 58.8%, totalling $271.7 million. There were a number factors contributing to the profit increase. More Australians are being admitted to hospital; 20% more in fact. This was a key driver behind the increase in health insurance sales. And health benefit claims drove cost savings for the half. But health insurance premiums were the biggest profit driver for MPL.

In six months MPL’s premium revenue increased 4.6%. For customers, rising premiums are never good. Yet they might reflect a much bigger issue that needs addressing. Does medical care cost too much?

MPL’s CEO, George Savvides, believes the sheer cost of healthcare is getting out of hand:

The costs of healthcare are rising, Australians are going to hospital more often than they were five years ago, patients are receiving more services and treatments when they’re admitted, and treatments are generally becoming more expensive.

Adding to the actual cost of care, rising management expenses, and cuts to their investment income, have hampered MPL’s potential performance. Management costs increased 8.5% from the prior corresponding period. Total net returns from MPL’s investments have come down from 2.1% to 0.8%. But St John of God healthcare CEO, Michael Stanford, believes this is no excuse to increase premiums. He explains:

For the first time I can remember the number of people who are dropping out of insurance exceeded the number going into insurance and that is a significant concern for us because people are dropping out as the population is ageing.

Stanford is 100% right; Australia’s population is getting older. The estimates for the nation’s future demographics actually look quiet scary. The graph below shows the estimated increase, split by age groups, for Australia’s population in the decades ahead.

Population Growth Indices by age group Australia

Source: Australia’s Demographic Challenges

Stanford notes:

There is no doubt that once people past their 40s they start going to hospital more and over 50 it really kicks up. It is really profound if people over 50 start to drop out [of private health cover]. It is definitely the case that ageing relates to the number of things that can go wrong, the number of admissions, and the severity of admissions.

However, we must remember that private healthcare is a business, not a charity. There are those, like St John of God, which are non-profit organisations. Yet this doesn’t mean that they won’t increase premiums to combat rising costs.

An ageing population is good for private healthcare companies, but there’s a fine line to walk. Stanford indicated that ‘people over 50 start to drop out’ of private health cover. This could be a major concern for MPL. If the elderly starts to drop out, then changes will be needed. Changes to either premiums or the cost of healthcare will need to be addressed sooner or later.

Right now, though, MPL is on top of the world. Management has done its job by increasing profits and adding value for shareholders. Yet one wonders how many elderly men and women were disregarded when management made the decision to increase their premiums.

Härje Ronngard,

Junior Analyst, Money Morning

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