Checking Up on Private Health Insurance
The Minister for Health has released the premium rate approvals for the Private Health Funds, which will come into effect from 1 April 2015. So what does it mean for our investment with Medibank Private (ASX: MPL)?
Medibank has received a 6.59 per cent premium rate increase for 2015, which is above the 2014 increase of 6.49 per cent. In its prospectus, Medibank assumed the rate increase for 2015 would be consistent with 2014, so this premium should be viewed as a slight positive.
It’s interesting to see that Bupa received the lowest premium inflation of the major funds. This could reflect better claims control, as we know that Bupa have been more proactive with performance targets in their contracts with hospitals, in comparison to Medibank. A 1 per cent lower rate would also be a meaningful marketing tool for Bupa, which may contribute to churn in the sector.
For NIB Holdings (ASX: NHF), the 6.55 per cent rate does not appear to be large enough to offset the pressure of rising claims. In 2014, ancillary benefits rose by 14.6 per cent, while hospital and medical benefits increased by 8.6 per cent.
It is also worth noting that the Health Minister Sussan Ley seems to be encouraging competition in the sector; “With over 30 private health funds now operating in the Australian market, my strong advice to consumers is shop around to get the best deal if you are unhappy with your health fund’s offering.”
Unfortunately for consumers, the sticker shock on private health insurance is only going to worsen, as Australia’s health care system races to increase capacity for the pending generational shift.
Ben MacNevin is an Analyst with Montgomery Investment Management. To invest with Montgomery, find out more.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
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Wayne A
:
At this rate of increase, private health insurance is a disaster waiting to happen. A 30 year old taking out a policy today costing 4000, and living until they are 100, could be looking at annual premiums around half a million dollars.
While a dollar then will be worth much less than today, on a shorter timeframe, a 50 year old today living until 90 could still be looking at 60 or 70 thousand a year. As income declines throughout retirement, what number of people are seriously going to be able to afford this?
I can see a lot of people bending over backwards to afford this for most of their working lives, only to be forced to bail at the time of their lives it is most needed. While there are obviously a lot of variables in this, government and the industry are either thinking short term or know very well where this is headed.
All the while, providers like Ramsay are thriving with record profits year after year in an industry which, like it or not, really should have a broader agenda than profit alone.
Roger Montgomery
:
Thanks Wayne, with exposure to Ramsay (on which we have nearly doubled investor’s money) and medibank, we are taking a keen interest in everyone’s views.
Gaveen Jayarajan
:
I also think that if there is sufficient breadth of competition in the sector they should do away with getting government approval for premium increases and just let the market sort it out.
Roger Montgomery
:
Ahhh the Laissez-faire approach! Thanks Gaveen
Gaveen Jayarajan
:
So what does this mean for your investment in MPL Ben? Are you still long on this stock and comfortable with its future prospects? Would a better play on private health insurance be to take a position in a comparison website? ISU (i-Select) though still not covering BUPA and MPL’s premium brand, does include MPL’s ahm brand and NHF policies now amongst others. Admittedly it’s had a checkered history since it’s IPO, and has some loans to sort out, but perhaps something worth considering? Though not without its own risks of course. It’s also worth noting that our private health insurance system makes it easy to switch policies without having to re-serve waiting periods if switching to an equivalent or lesser cover. So if costs become too much to bear, policyholders won’t be so sticky anymore.