Medibank gets set for ALP cap as it books lift in full-year profit

Medibank’s boss is preparing the firm for an ALP government and its plan to put a cap on health insurance premium hikes.

Medibank CEO Craig Drummond. Pic: Aaron Francis

The head of Medibank, Craig Drummond, says the executive of Australia’s largest health insurer is preparing the business for a Labor government and its plan to cap premium increases.

Mr Drummond said today he “appreciates” Labor’s position on premiums but warns it has to be sustainable.

Labor leader Bill Shorten has committed to capping health insurance premium increases at two per cent for the first two years of a Labor government, which some punters believe is looking more likely following the leadership dramas of the Liberal Party, which saw Malcolm Turnbull removed today as Prime Minister to be replaced by Scott Morrison.

“A two per cent cap is something we do appreciate and something our customers will appreciate but it has to be sustainable,” Mr Drummond said.

“When the industry is making a margin on aggregate of five per cent, costs are running at four to five per cent and the cap is two per cent, without reform it is not going to be sustainable.

“We do appreciate Labor’s position and in some respects what it does do is force all participants to get together and think about the issues, so from that perspective we are very supportive.”

Mr Drummond added that the insurer (MPL) was already focused on a range of areas to address a potential two per cent premium increase. He highlighted that the fact that its management expenses decreased was indicative of some of the early thinking around lower premium increases.

“The executive has been focused very strongly on what we would need to do to lean into a 2 per cent environment,” Mr Drummond said.

“We also continue to give a lot of thought to how we distribute and sell our product — the marketing expenses and the commissions we pay to third parties.”

Mr Drummond said the company was keen to participate in ongoing reform.

“It is ongoing reform that will, hopefully with bipartisan support, drive a more affordable system,” he said.

Mr Drummond made the comments as Medibank reported today that its group operating profit jumped 9.7 per cent to $548.8 million, while group net profit after tax fell one per cent to $449.5m.

Medibank also recorded a five basis point improvement in group market share in the second half of 2018 to 26.9 per cent. That was the first time in a decade Medibank had experienced growth over a six-month period.

Shares in the company are down almost 2 per cent at $3.11.

“This result demonstrates that our core health insurance business is back on track,” Mr Drummond said.

Medibank’s policyholder numbers grew by 0.3 per cent in 2018, compared to a 1.3 per cent reduction in 2017.

“We are back in the game, but we cannot be complacent … our customers are still hurting with affordability issues, so we have to do a better job,” Mr Drummond said.

The annual results also showed that net claims paid on behalf of customers increased by $47.7m, or 0.9 per cent, to $5.2 billion, representing 82.7 per cent of premium income.

Medibank’s health insurance gross margin increased from 17.1 per cent in 2017 to 17.3 per cent in 2018.

Mr Drummond also highlighted today that transforming Medibank into a broader health services company was a core part of the insurer’s strategy.

“We have made progress in scaling Medibank at Home, providing customers with choice over how and where their healthcare is delivered,” he said.

“We are pleased to be able to confirm that we are advancing our strategic agenda, which we have discussed in prior reporting periods, through an acquisition we expect to complete in the near term.”

The Medibank chief said the new opportunity would add scale and capability to Medibank’s home offering, through a national in home care business with clinical experience and capability.

The acquisition is expected to cost around $70m.

“We will see over the course of the next five to 10 years a substantial change in the way care is delivered,” Mr Drummond said.

“Hospitals will not be the first and only option. There will be many other care pathways.”

The board declared a final dividend of 7.2c-per-share, bringing the full year fiscal 2018 dividend to 12.7c-per-share, fully franked