Medibank chief takes dig at Bill Shorten’s premium cap policy pledge

Medibank boss Craig Drummond has said the ALP's promise to cap annual healthcare premiums fails to grasp the wider issues.

Medibank chief executive Craig Drummond. (Stuart McEvoy/The Australian)

The head of health insurance giant Medibank, Craig Drummond, has argued that Bill Shorten’s promise to cap annual premiums fails to grasp the wider issue of rising healthcare costs.

Mr Drummond said today — after his company (MPL) reported a 5.9 per cent jump in half-year profit to $245.6 million and launched a program to return $20m to customers — that he was happy there was a debate about affordability but he said it was important to be based on facts.

“The facts are that in the last 25 years total health sector costs in this country have been running at 4.5 per cent above inflation,” he said.

“To think that you would say let’s cap premiums … I understand why people want to go there but it’s not addressing the fundamental problem, which is that costs need to be addressed.

“We have addressed our costs. Management expenses at Medibank have fallen by 1.9 per cent in this half. We get it, we understand we need to do more.”

Opposition leader Bill Shorten made it clear health insurers are one of his targets in his attempt to win votes at the next election after he promised to curb rising policy premiums. Mr Shorten said he would cap annual health insurance premium increases at two per cent for the first two years of a Labor government, sparking a backlash from the sector.

The industry has argued there are wider issues that need reform, such as addressing “low value” care.

The Weekend Australian revealed that insurers were spending almost $700 million a year on common hospital procedures or care that could be performed as day surgery, in doctors’ rooms or in the home at a fraction of the cost. This, insurers say, is contributing to rising insurance premiums and needs urgent attention.

Mr Drummond said today that Australia was running behind the trend in increasing care pathways outside the hospital setting, which he said was happening in Asia, Europe and the US.

“There is a bigger picture here about redesigning the system and we want to work collaboratively with all parts of the health system, we don’t want to be the bad, or odd, boy out, because we need movement,” he said.

“We are the interface with the customer and the feedback from the customer is clear — give me more choice, give me transparency and if we can do things in a home or out of hospital setting, great. Our job is to advocate for our customer.”

Mr Shorten used the profits and return on equity recorded by the large insurers to add fuel to his attack but his argument was muted by Australian Prudential Regulation Authority official Geoff Summerhayes who said profit or capital levels was not the primary driver of rising health insurance premiums. He said the underlying cost of Australia’s health system was the ailment, while rising premiums was a symptom.

Mr Summerhayes also highlighted in a speech last week that the industry margin had been largely unchanged from 10 years ago.

“APRA is a strong regulator and it is independent and the facts are on the table,” Mr Drummond said of Mr Shorten’s attack on Medibank’s profit.

The health insurance boss added that he acknowledged that the company needed to do more on the issue of affordability.

Mr Drummond said he had been on store visits recently and listened to customers in the call centre and it was obvious many were still challenged by affordability issues.

“We still see downgrading in our policies. People are struggling and affordability is a real thing,” he said.

Mr Drummond also highlighted in the company’s half-year result today that Medibank had delivered its lowest premium increase in 17 years, at 3.88 per cent, attributing it to the work the company had done to cut its own costs and because it passed on 100 per cent of savings from prostheses reforms.

The Medibank chief said his focus on the second half of fiscal 2018 was to keep a close eye on reform.

“If we want to advocate for our customers for better value we have to push on with reform. We want to be collaborative in this process but we can’t stay in the ways of the past,” he said.

Medibank used its half-year results today to reveal a new initiative to reward its long-term customers, with a new priority program for members who have been with the fund for 10 or more years.

“To mark the launch of this program, we are pleased to announce a $20m one-off loyalty bonus to our Medibank customers in June this year, starting with our priority customers,” Mr Drummond said.

“For example, this means customers who have been with us for more than 10 years and have hospital and extras cover, will be able to put the bonus towards increasing their extras limits or seeing a physiotherapist.”

The half year result showed that health insurance operating profit increased 11 per cent from $249.4m last year to $277.3m for the fiscal 2018 first half. Health Insurance premium revenue was up 1.8 per cent to $3.17 billion.

Medibank flagged that industry volume growth continued to slow, which it said reflected the challenging affordability conditions. But the company said on a positive note, its brand had recorded improvement in the customer acquisition rate and a lower lapse rate.

Health claims rose by 1.3 per cent to $2.6bn for the half year, which the insurer said reflected prostheses cost savings, moderating hospitalisation utilisation growth, a higher claims provision release and lower risk equalisation receipts.

The results also highlighted that management expenses fell by 1.9 per cent to $273.2m.

Mr Drummond said 2018 marked a step change for Medibank, adding that the company was now in a position to launch new initiatives and to continue investing in the insurer’s chronic disease management programs and expand in-home services.

“We are now positioning for growth, which will allow us to leverage our scale to build the core business and transform into a broader health services company,” he said.

Medibank plans to pay an interim dividend of 5.5c-a-share, an increase of 4.8 per cent on last year.