Medibank breach exposes long-term real risk: Robert Gottliebsen

Medibank shareholders need to be aware of the unique dangers facing the company as a result of the publication of its customers’ medical data on the dark web. Picture: Muhammad Farooq/AFP

Medibank shareholders need to be aware of the unique dangers facing the company as a result of the publication of its customers’ medical data on the dark web.

The Medibank repercussions are potentially more dangerous to the corporation than those that are being faced by Optus.

Just as casino operators have discovered in recent times that governance is an integral part of running a casino, and not an add-on, for health funds maintaining personal record confidentiality is also integral to their base business.

Medibank may or may not have understood this, but the data breach indicates that their health fund middle managers may not have understood just how vital data confidentially is to their base business.

Medibank has a skilled team that will be fully aware of the unique dangers now facing the company and will be working on a set of plans to minimise the impact.

Those plans will need to work.

Optus will obviously lose customers as a result of the hacking.

But for Optus customers, while there is a great deal of inconvenience, any financial damages sustained can be overcome with money.

To understand why the Medibank situation is more dangerous for many of its customers – and therefore the company – we need to detail the business model of most health funds in Australia.

In past years, health funds were facing a grim future because their elderly customers were increasing claims as part of the ageing process.

On the other side, young people were not being attracted to private health anywhere near the numbers required to offset increasing claims from older members. .

Longer term, the whole private health insurance movement was headed for the rocks.

But former health minister Greg Hunt and some of the top health fund executives led by Medibank former chief executive Craig Drummond reconfigured the offerings to young people to make them more attractive.

The revamp worked, and we have seen a large number of young people taking out private health cover.

No fund was more successful than Medibank with younger people last year totalling 70 per cent of its new members.

If Medibank or any other private health fund were to lose a big portion of its young members, it would battle to cover the losses on its older members, led by the Baby Boomers as they speed into retirement.

The medical data released on the dark web might be an annoyance to older people but, at least among many retired men, swapping medical experience yarns is almost the national pastime.

For the vast majority, disclosure of the information might be annoying, but it has no tangible impact on their lives.

But for young people, the situation is very different.

People in their 20s to 40s (or even 50s) are often in a vital stage of their career or lives.

If the organisation they are working in, either via employment or independent contracting, or a prospective organisation, find out about past or current treatment for mental health, alcohol or drug consumption, or some other serious illness, they are much less likely to be hired or promoted.

Many of them will have recently taken out large mortgages and are hoping for promotions or new jobs to service the increasing cost of the debt.

It is likely that they will be very angry, particularly as it appears that a simple human error triggered the availability of their personal information.

The danger for Medibank is that anger will cause young members to leave the health insurer and go to another fund.

Some funds are already reporting a rising membership as people leave Medibank.

The future of Medibank now depends on the skills of the current executives to minimise the exodus of young people.

If they fail to restrict the exodus, their older customers will put a huge burden on the bottom line, with insufficient “young people profits” to generate an offset.

It will need special skills to convince young people to forgive the company for its error and stay with Medibank.

And Medibank will need to offset the subtle marketing messages from rival funds to convince its younger brigade to leave.

Medibank’s share price normally fluctuates with trends in profits and dividends, but for the next year or two, the dominating force will be the retention of young members.

The Medibank share price has fallen by almost 20 per cent following the data breach.

Medibank has been a brilliantly performing company and will need to keep shareholders abreast of just how they plan to retain as many as possible of their younger customers and regularly update shareholders on the progress.