Elective surgery bans lead to halving of Ramsay’s profit, dividend scratching

Widespread elective surgery bans across the globe have hit Australia’s biggest private hospital group hard.

COVID-19 has put elective surgery on the backburner in many countries. Picture: Claudia Baxter

Australia’s biggest private hospital operator, Ramsay Health Care, wants a slice of the $1.4bn health insurers have “saved” as a result of elective surgery bans during the pandemic.

Chief executive Craig McNally said the COVID-19 pandemic had added about $6m in costs per month across its Australian operations, which was evenly split between rises of $2m for protective personal equipment, extra staffing and other costs associated with the health crisis.

“It has been an extremely challenging time for our staff and doctors as we have pivoted to support national efforts during this crisis. In Australia we put our 30,000 staff and 900 beds and made them available to the country so the health system would be able to cope with whatever happened,” Mr McNally said.

As a result, Ramsay’s net profit tumbled 47.9 per cent to $284m in the year to June 30, with its Australian and Asian operations the hardest hit, amid a 23.2 per cent slide in earnings.

In contrast, Australian health insurers have set aside $1.4bn in the June quarter, as directed by the Australian Prudential Regulatory Authority, to cover the cost of deferred claims as a result of elective surgery bans.

While health insurers — including Medibank, which set aside $297m to fund the backlog of elective surgeries — say they haven’t profiteered from elective surgery bans and delays in people seeking dental, optical and other extras treatment, Mr McNally said they had still saved money.

“I’d like to get a share of the $1bn-plus that the health funds saved in the June quarter, that would be handy,” Mr McNally said.

“My view is if the health insurers have made that gain of $1bn-plus then there should be some value back to the communities. There is no doubt that operators like ourselves and right across the system are going to have an increased cost basis as a result of the pandemic.

“However you account for that, the numbers are the numbers and the APRA data says the health funds save over $1bn in claims cost for that quarter. Their windfall gain puts them in a very strong financial position and it would be unreasonable of them not to look at what the broader impact on the system is.”

Weighing further on Ramsay’s earnings is a stalemate with the country’s biggest health insurer, Medibank. It hasn’t struck a fresh funding agreement with Medibank since its previous deal ended on August 31 last year, meaning Ramsay has not received any indexation in the cost of treating Medicare policyholders at its hospitals for the past 12 months.

“For Medibank, I won’t specifically comment on what will happen retrospectively or what the terms and conditions will be, other than to say we are continuing the negotiation with Medibank. We are back at the table and let’s see how we go and it will be nice to see it resolved quickly.”

Mr McNally said Ramsay would also seek to claw back some of the PPE costs from health insurers in its upcoming funding negotiations.

“None of the funds have an obligation and there is no mechanism that as our PPE costs increase, you have to pay us more money. That’s a negotiation that we will have with the funds as the agreements come to their negotiation phase.”

Relationships between hospital and health insurers, which fund the bulk of the business, are robust but have become more fraught after Medibank acquired a 49 per cent in East Sydney Private Hospital as part of its strategy to reduce out-of-pocket costs.

While Medibank says it won’t be involved in clinical decisions, the Australian Medical Association fears it is step towards US-style managed care, where health insurers have a greater say over the treatment of their policyholders, and Mr McNally shares that view.

“One of the great concern the sector has is vertical integration and the self referral of services within a payer’s portfolio. That introduction of managed care by stealth in the Australian market is something everything should be concerned about.

“You wouldn’t want to see that windfall gain (from health insurers) diverted to accelerating that strategy.”

As announced earlier this year, Ramsay will not be paying a final dividend. Last year its final payout was 91.5c.

Its overall revenue rose 7.3 per cent to $12.4bn, with continental Europe recording the lion’s share with a 14.3 per cent increase to €3.9bn ($6.4bn).

Ord Minnett analysts while there was no guidance, commentary on the recovery story was encouraging.

“The key positive was confirmation of the recovery in surgical activity outside of Victoria as we had hoped. Similarly activity has picked up in the group’s European operations from June and has been ramping up since,” the analysts said.

“However, management did call out the higher costs for PPE, social distancing, etc.”

Ramsay shares closed down 0.5 per cent, at $65.27 each.