Medibank earnings surge by $100m as hospital crackdown pays off

Medibank says insurance customers, investors and patients will benefit from its rejigging of hospital contracts.

Medibank boss George Savvides says savings have been greater than expected. Picture: Aaron Francis

Medibank boss George Savvides says insurance customers, investors and patients will benefit from its rejigging of hospital contracts, promising that the cost-cutting drive will restrict premium growth after the insurer flagged a 30 per cent surge in profit of at least $100 million.

Mr Savvides, who steps down as managing director in March, said Medibank was expecting a jump in operating profit in its health insurance business to more than $470m this financial year — revised from its previous target of $370m.

The bumper forecast saw shares in Medibank, which the government floated on the ASX for $5.7 billion in 2014, rise as much as 20 per cent higher to $2.70 yesterday, before easing to close 11 per cent up at $2.50.

The surge in profit followed a series of hospital contract renegotiations that sparked a stoush with private hospital operators last year, when Medibank pushed them to pay for their “mistakes”, such as patients being dropped off a trolley or suffering bedsores from insufficient patient rotation.

“The savings have come faster than we expected and they are larger than we expected,” Mr Savvides said.

While investors were happy with the news, Mr Savvides said Medibank customers would also welcome the result because Australia’s biggest private health ­insurer had withdrawn its application to the government to increase premium rates and was now preparing to lodge one seeking lower prices.

“We’ve always said the hard work of negotiating contracts on behalf of our customers will create a more affordable product with the savings that produces,” he said.

Medibank recently stepped up its campaign to get hospitals to pay for “mistakes”, releasing a list of 165 adverse events it will no longer foot the bill for, sparking a bitter public dispute with Calvary Hospitals.

Healthscope, the nation’s ­second-largest private hospital operator, endorsed Medibank’s plan in November.

The stoush had now reached “a tipping point”, Mr Savvides said, after two government agencies developed a plan to make sure no taxpayer funds went to public hospitals where the patient suffered avoidable complications, in a situation similar to the private sector-led funding model.

“The corridor chat with my peers in public hospital administration is that they wish Medibank every success,” Mr Savvides said. “They see the value coming from more focused procurement and not paying for mistakes.”

Bupa, Australia’s second-­largest private insurer, has backed its bigger rival in the dispute, which comes amid rising concerns about affordability, with premiums increasing faster than inflation, at about 5-6 per cent each year.

Mr Savvides said nearly 15 per cent of healthcare waste each year was “gettable”. This included diagnostic tests that were generated and charged for but never read by a doctor, or knee arthroscopies that had no credible efficacy in 90 per cent of applications.

“If we reduce the waste, premium increases can be at inflation or below,” he said.

Medibank was previously spending about 87c in the dollar on claims, totalling $5.1bn last financial year, but is now targeting around costs of 83c in the dollar.

Mr Savvides said the insurer would continue to hunt for further savings after he handed over the reins.

“This is not a George strategy,” he said. “This is a company-wide plan and it hasn’t finished its course. We haven’t contracted with all the hospitals in the market yet and we are still learning more from the data and analytics team. We’re making sure what we do is effective for our members and to make sure that the things we buy aren’t wasteful or unproductive.”

At the same time, Medibank was planning to combat lower-than-expected insurance sales, due to a competitive market and sluggish economy, with increased marketing activity, which would push management costs slightly higher to 8.5 per cent, up from previous estimates of 8.3 per cent.

The insurer is expecting to increase revenue by about 4.6 per cent during the financial year, after lowering premium revenue growth forecasts to between 4.5 per cent and 5 per cent for the year, down from a previous targeted at 5.5 per cent.

Medibank shares have held up since listing, gaining about 25 per cent compared to the broader market, which has plunged nearly 10 per cent in the same period.

However, the broader financial market volatility would result in a “subdued” performance by Medibank’s $2.4bn investment portfolio this year, Mr Savvides said, which could dampen the insurer’s full-year results.