Health insurance is unique, backed by members for members
MUTUAL health insurer NIB recently posted out the prospectus for its proposed float to potential investors. A couple of weeks ago I, along with other policy holders, received NIB’s offer of an estimated 70 to 90 cents per share if we sell before the planned listing in November. As a long-time NIB policyholder opposed to demutualisation, I still can’t see anything to change my mind about Australia’s private health funds going public. MBF is also keen to follow NIB into public ownership.
As a consumer, there are several factors that make me wary.
The high level of government regulation of private health insurance, including the fact that the federal Government directly sets premium levels, is an obvious one. Any investor should be wary when a company is subject to controls that are political in nature.
A bigger reason is that private heath insurance is not general insurance with a few special wrinkles. It is a fundamentally different product.
It’s necessary to look behind the rhetoric about the need for the health funds to be able to raise capital, expand their offerings, be more aggressively competitive and all the other benefits that are supposed to flow from restructuring the private funds into public companies. Such benefits would be real, not illusory, but another question would be — is flotation the only way to achieve them?
Health funds can’t directly control their most significant costs in the way other businesses can. There’s no simple lever to pull to limit provider costs. Doctors, dentists and other providers in the private sector are free to charge what they can. The great majority of procedures performed by doctors that funds cover are done in hospitals. These cost the most. It’s obviously in the best interests of the private hospitals, because of their need to enter into agreements with the funds, to reach agreement with the specialist doctors who practise in the hospital about fees. But at the end of the day, a doctor in private practice sets his or her own fees.
The same goes for dentists, physiotherapists etc, and alternative practitioners such as naturopaths. Funds cope with this by limiting the rebates for services, giving rise to out of pocket expenses — the maligned ‘‘ gap’’. In order to introduce greater competition, the Government actively encourages people to find out what the gap is, with the implied encouragement to shop around for another provider if the gap is too wide. This has been pretty successful. About 80 per cent of inhospital services now have no gap. Again, good news for consumers, but not such good news for a market eager to see profits rise quickly.
A Standard and Poor’s report in 2006 showed that benefits paid out by funds had continued to grow at twice the rate of inflation (measured by the CPI) in 2005. This trend means that controlling costs is vital for funds, essential in the unforgiving public market.
But funds can’t enter into a preferred supplier scheme with individual health providers to keep premiums down, the way general insurers do with smash repairers or suppliers of white goods. The only sure way to control provider costs and offer bigger, more attractive, rebates to members would be for a health fund to own its own hospitals and medical centres and employ its own doctors, nurses, health professionals and alternative practitioners. It’s very hard to see this happening in Australia with our long and strong history of private medicine.
As a policyholder, you have to ask yourself: if government is controlling the pricing, and 60 per cent of a listed fund’s revenue has to go to shareholders in the form of dividends, what pressure does that put on the fund to cut services to members? Not to mention that for the first time, these listed funds will be paying tax — 30 per cent — whereas a mutual pays none.
The logical place to look for efficiencies is in product offerings such as the ancillary tables: fitness costs, weight-loss programs, massages and alternative therapies, or further limiting other services such as audiology or optical — an even harder task. The risk here is that members will vote with their feet and the fund will lose market share — not a good thing to have to explain at an AGM. Funds need to attract young healthy members whose premiums will pay for the older sick ones, and brand loyalty is increasingly a foreign concept to younger demographics. Fitness perks and massages are exactly the kinds of benefits that appeal to the young and fit.
Like thousands of others, I maintained my private health insurance through the years of ever-rising premiums and no government subsidy. It’s been good to see the funds become more competitive, better run, and more flexible in product offerings. What I wonder is, how will a listing on the ASX enable a fund to become even leaner and meaner without cutting into benefits to members?
Some often-neglected facts have to be stated. Private health insurance in Australia is not simply general insurance with a bit more government scrutiny. As an industry sector, it is unique in several particulars. Fund members receive compensation for outlays on premiums; those premiums are directly set by the federal Government; funds don’t control significant costs; demand is elastic to say the least as consumers do not make rational choices. Dr Barbara Carney is a former chief of staff to federal health ministers Michael Wooldridge and Kay Patterson, and a former head of government affairs for Insurance Australia Group.