Medibank CEO flags 'alarming, curious' rise in prosthetic device claims

Medibank Private chief executive Craig Drummond says an "alarming" and "curious" increase in surgeries involving prosthetic devices is driving up costs and threatening the stability of the private health sector.

Medibank on Wednesday said that its hospital claims bill for 2019 was $21 million higher than it originally disclosed in August, pushing claims growth per member from 2 per cent to 2.4 per cent in a trend it expects to continue through 2020.

Medibank Private CEO Craig Drummond. Credit: Arsineh Houspian

The cost spike spooked investors, with Medibank's shares plunging 8.5 per cent to close trading at $3.11.

Mr Drummond said claims were driven higher by the volume of prostheses - such as hip and knee replacements and other medical devices - which grew by 8.5 per cent last year, compared to 2 per cent and 4 per cent growth in the previous two years, respectively.

"We’ve got surgical volumes that are flat-ish, and we’ve got prostheses volumes that are close to double digits," he told investors.

“We’re very curious about what’s going on. Something doesn’t feel right. It’s quite inverse to the situation that we’ve had over the last two or three years."

We’re very curious about what’s going on. Something doesn’t feel right.

Medibank Private CEO Craig Drummond

A deal between government and medical device makers to put a cap on how much insurers had to pay for prostheses was supposed to deliver $200 million in savings last year. But Medibank said it only saved it $13 million because of the rise in the number of devices being implanted.

Mr Drummond pushed for further government intervention to address the "alarming" cost increase.

"What we’re talking about is the sustainability of the whole private health system, and that is something the government is very interested in," he said.

"We are seeing stuff that we think is unsustainable and unreasonable, and ultimately it’s the consumer that’s going to pay for this."

Medibank and other health funds are preparing to submit their annual premium increase proposals to government. While Mr Drummond declined to comment on what his fund would push for, he said the cost claims uplift would affect future premiums.

Health insurers are facing what has been described as a "death spiral" as claim costs rise and people increasingly drop out of the system because of rising insurance premiums.

Medibank said it would continue its own cost-cutting drive, having managed to grow it memberships by 0.6 per cent in the first quarter of 2020 - about double the rate as in the same period in 2019.

Medibanks’ membership base grew 0.8 per cent in 2019, while the number of Australians with hospital insurance fell 0.3 per cent, according to Australian Prudential Regulation Authority data.

Fellow ASX-listed health fund nib also updated the market on its 2019 claims bill, revising it up by $4.9 million, which saw its gross margin fall from 6.5 per cent to 6.3 per cent. However, nib said its 2020 earnings outlook remained unchanged. Nib's shares fell 1.9 per cent to $6.83.