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Primary health ambitions central to Medibank’s sales pitch

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Medibank Private’s push into primary health care and its efforts to screw down on payments to private hospitals are at the centre of its sales pitch to investors as the sell-off process enters its final stages.

In its Share Offer prospectus released to the market last week, the insurer flagged an increasingly aggressive approach to containing growth in costs, including through a controversial plan to intervene in the provision of primary health care.

More than 750,000 people, including almost 279,000 Medibank Private policyholders, have pre-registered their interest in the float, with shares expected to be sold for between $1.55 and $2 each, suggesting the privatisation could raise between $4.3 and $5.5 billion for the Commonwealth.

But demand for the shares will be heavily influenced by the extent to which management plans to drive down costs and boost profits are deemed credible by the markets.

The insurer’s task has been made harder by Private Health Insurance Administration Council figures which show the sector is struggling to contain rising benefit costs.

According to PHIAC, before tax profits across the industry fell 2.2 per cent last financial year because a 7.5 per cent lift in revenue was overshadowed by an 8.1 per cent jump in payouts.

In its sale prospectus, issued on 20 October, Medibank Private’s management team predicted a 10.5 per cent jump in operating profit this financial year, primarily due to higher health insurance revenue and continued success in pushing down costs.

Overall, the insurer predicts its gross operating profit will rise to 4.9 per cent, from 4.4 per cent last financial year and 3.4 per cent in 2012-13.

To achieve this improvement, the fund expects to do better at holding down costs, including by becoming much more involved in the provision of primary care and through striking better deals with private hospitals and other health service providers.

In a statement of intent that has underlined warnings from AMA President Associate Professor Brian Owler about the ambitions of health insurers to intrude on the doctor-patient relationship and move the country toward a US-style system of managed care, Medibank said a key focus was to limit claims growth.

“Medibank Private, like many other funders in the Australian health care industry, is increasing its focus on managing the growth in claims expenses through a number of strategies, including those aimed at supporting primary care givers such as GPs to better prevent chronic diseases,” the insurer said.

Medibank said it was particularly looking at those it described as “high-needs” policyholders, reporting that about 2.2 per cent of all those it insured accounted for 35.2 per cent of all claims between 2010 and 2013.

“Medibank Private is starting to work with these policyholders, initially with a small group, to provide them with support to improve their health,” the insurer said. “By supporting these policyholders and their primary care givers to achieve better health outcomes, Medibank Private intends to reduce related claims expenses.”

In July, A/Professor Owler warned that the stage was being set for managed care, in which health funds would seek to intervene in the doctor-patient relationship and try to influence or dictate clinical care – something that insurers publicly deny.

On the management side, Medibank Private’s executive team led by Chief Executive George Savvides, has achieved some success in recent years in driving down the cost of its operations. Management costs as a proportion of net asset value, while still above the health industry norm, have shrunk from 10.2 per cent in 2011-12 to 9.2 per cent in 2012-13 and 8.7 per cent last financial year – compared with 8.4 per cent for the rest of the industry.

But the insurer has also got big ambitions to rein in claims expenditure, particularly payments to private hospitals, which amounted to around $2 billion last financial year.

In its prospectus issued last week, Medibank Private indicated it will take an increasingly hard line approach in its dealing with private hospitals, which constitute the bulk of its business relationships.

The insurer said that, when negotiating arrangements with private hospitals, it will not only look at the price it pays for services, but also the quality of patient care provided and the extent of demand for the services provided by a particular hospital.

The fund is also expected to look closely at offering more slimmed-down insurance cover, such as policies with a low claim limit and restricted range of services provided through its budget policy arm ahm.

The float is expected to draw considerable interest because of Medibank Private strategic position as the nation’s largest health insurer – it has 29.1 per cent of the market, with 1.9 million policyholders and 3.8 million people insured – and the long-term growth prospects for the health sector.

Retail investors have until 14 November to bid for shares, with the final allocation announced on 25 November, when conditional trading will commence on the Australian Securities Exchange. Normal, unconditional trading is due to commence on 5 December.

 Adrian Rollins