WWN #7 – Health Premiums Confirmed to Rise as MediBank Faces Headwinds

What’s been happening?Premium Increases.png

Earlier in February, Health Minister Greg Hunt approved of an average rise in health fund premiums of 4.84% this year, effective 1 April 2017. Compared to
previous years, this rise is the lowest health premium increase in a decade.

Despite this fact, the increase in premiums is still more than three times the current inflation rate (1.5%) and will add up to $200 to the cost of family cover per year for most Australians.

Out of the four largest health funds in Australia, three have announced premium hikes that are below 4.84%. The nation’s largest health fund Bupa is the only insurer amongst the “Big Four” that will have premium increases exceeding the industry average.

What Now? Maybe not, Medibank

Medibank’s CEO Craig Drummond has been forced to defend its premium increase of 4.60% as it releases disappointing half yearly results for its investors. Underlying profit rose by only 1.9% to $231.9 million with lower new policyholders and margins negatively impacting the result.

  1. The number of new Medibank customers fell by a net 63,300 in the year to December.
  2. Margins in its health insurance unit fell from 17.2% to 16.9% even as insurance claims rose by 2.8%.
  3. Operating margins were lower at 7.7%, down from 8.1% as operational expenses increased over last year due to heavy investment in technology upgrades to its IT systems, customer website and apps.

It seems that the only reason why there was a slight positive return was due to a significant boost from its investment income where it earned $76.8 million compared with just $18.6 million in the year-earlier period.

In response to criticism, Medibank CEO Craig Drummond acknowledged that while the premium increase of 4.60% is “still an increase”, it is actually Medibank’s lowest in 15 years and was under the industry average by 24 basis points.

What’s Next?

The scheduled premium increase will not necessarily bolster Medibank’s bottom line as there are structural problems to overcome (outlined above). An integral part of the recovery process would be to bring back the business to the customer in order to win back customer loyalty and market share. IT systems also need to be able to run smoothly and without glitches. Once it is able to succeed in resolving these issues, margins should subsequently improve and maybe then, I can say yes to Medibank.

References:
http://www.theaustralian.com.au/business/markets/traders-cautious-as-sharemarket-opens-flat/news-story/016c6e439c5aaae527898964b6a5a04d
http://www.dailytelegraph.com.au/news/national/health-fund-premiums-rise-200-a-year-how-state-governments-are-to-blame/news-story/78f89b482569ba5fe223467d424095da
https://www.medibank.com.au/about/media-centre/2017/02/medibank-announces-approved-average-premium-increase/
https://www.canstar.com.au/news-articles/health-premiums-rise-average-4-84/
http://www.news.com.au/finance/business/other-industries/medibank-halfyear-profit-up-19/news-story/5e94824c2edc3b0f323276bf687fac4c
http://www.abc.net.au/news/2017-02-17/medibank-private-boss-defends-health-insurance-premium-rises/8281090
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