Medibank chief Craig Drummond faces calls for private health overhaul

Medibank’s new chief has a big PR job ahead of him.

Medibank boss Craig Drummond. Illustration: Sturt Krygsman

New Medibank boss Craig Drummond faces an industry-wide reputational problem of similar proportions to that he encountered in his days at NAB, with the ACCC backing government calls for a major overhaul of the private health industry.

This will be a fight in which the industry has few friends ­because it has led the campaign for lower costs while maintaining a chronic lack of transparency on its own pricing.

Yesterday’s action by the ACCC against Medibank alleging misleading misrepresentations and unconscionable conduct is but the first of many actions the regulator has lined up against the industry.

In a speech this year, ACCC boss Rod Sims said the industry was a priority sector for the regulator and he was following through on his threats.

The ACCC warned as much in its annual review of the industry last year, noting “the research has revealed examples where representations by insurers to con­sumers, including when entwined with policy changes, may be at risk of breaching consumer laws”.

The ACCC hired market ­research agency Colmar Brunton to conduct a study of the industry and it noted: “It appears there are a ­number of market failures in the private health insurance industry. In particular, imperfect and ­asymmetric information impede consumers’ ability to make ­choices that are likely in their best interests.”

In this case it alleged Medibank had represented that it would cover radiology and pathology services in hospitals when, in ­September 2014, without telling members, the policy changed and members had to pay out-of-pocket fees.

To make matters worse, the ACCC alleged the changes made were linked to its successful $5.7 billion 2014 float. The ACCC noted Medibank “calculated there was a risk that the publicity around the benefit change would damage Medibank’s brand and reputation, and have a negative impact on its ­planned initial public offering of securities”.

It added: “Medibank estimated the change would lead to it making substantial financial gains, ­including from not paying the gaps, and from not paying the medical claims of members who left Medibank after becoming aware of the change.”

The millions of dollars saved by not paying these fees arguably helped boost profits.

The regulator’s action sent Medibank’s stock price down 5.5 per cent in a flat market to $2.91.

These are very serious allegations, which Medibank has denied, saying it is “committed to acting in the best interests of our members and refutes claims by the ACCC related to activities that took place in 2014”.

The claims follow warnings from former ACCC boss Graeme Samuel about the problems in the industry and the widely supported policy of Health Minister Sussan Ley to provide “colour-coded” policy to give people a clear idea exactly what they are getting.

Consumer confusion means people tend not to change insurer, which reduces competition in the sector.

Irrespective of the outcome of this case, the message to Drummond and his new sector comrades is that private health insurance is on the nose and in need of a major revamp in how it deals with its members.

This, of course, also represents a clear opportunity for the new boy in town to lead the revolution and make use of digital data to make the industry’s services and prices more transparent and convert the sector into an actual competitive service provider.

Pass the keys

The ACCC is not impressed when companies fail to tell it what they are doing, especially after it has knocked back a similar deal proposed by a rival.

That is precisely what happened when Healthscope’s ­Robert Cook effectively closed his Brisbane pathology operations two years ago, handing the keys to Peter Gregg at Primary.

Primary has about 50 per cent of the Queensland market and 35 per cent nationally, against Sonic with 43 per cent.

It’s a scale game with machines doing the work and, while the numbers were not big, the ACCC has intervened, forcing Primary to hand the Brisbane keys to NSW-based Medlab, which at least may provide some new competition.

Split profit

James Packer was worth $575.2 million more yesterday after the market added $1.49 a share, or 13.2 per cent, to the value of Crown, which is now worth $1.1bn more at $9.3bn.

This is the start of the value add to all shareholders through the UBS-advised split of the Crown domestic and international.

Ultimately, the deal will work if earnings rise accordingly.

Meeting stakeholders

Clydesdale chief David Duffy is confident Britain will stay with the European Union and thinks the market is way overreacting to fears of a Brexit.

Duffy is in town speaking to shareholders of his newly spun-off CYBG bank, which is 75 per cent-owned by Australian shareholders. The bank was spun out to its shareholders by NAB this year in an attempt to focus its resources on its local operations.

Duffy’s visit comes ahead of next week’s Brexit vote. Opinion polls are showing the vote will be close, with some even putting the leave campaign ahead.

Duffy said the same messages were put out before the Scottish independence referendum, which ended up being ­easily defeated.

In recent days the words of warning have come thick and fast, with British trade union leaders warning that nine million workers would lose employment rights, the government warning of ­increased taxes and the Bank of England speaking out on economic risks.

JPMorgan boss Jamie Dimon, on a recent trip, said if Britain withdrew from the EU the bank would shut its British office and 4000 jobs would disappear.

Britain is the biggest net recipient of direct foreign investment in Europe and this would tend to slow if it were to withdraw.

There is little doubt that economically Britain would do worse outside the EU, but the increasing concern in Britain is over immigration levels.

A defeat in the poll will inflict severe damage on the Conser­vative Party, putting Prime Min­ister David Cameron’s position in jeopardy.

From a Clydesdale perspective, the direct damage would be minimal, given about two-thirds of its income comes from mortgage customers, with another third from small business.

Duffy’s main agenda is to cut costs, working from the customer back to the bank with a new digital platform. The company was ­recently ­included in the FTSE 250 list, where it ranks as the 160th ­biggest company with a market value of about $5bn.

The bank has shut some branches, with the number falling from 274 to 248. But that term is not used any more and instead they are known as “advice” centres or “sales” centres.

Duffy sees Australia as leading Britain in comprehensive bank digital platforms and he is trying to play catch-up.

British cost-to-income ratios are well above those in Australia and, at 75 per cent, there is plenty of upside in driving out more costs.

In Australia, bank cost-to-­income ratios are in the low 40 per cent range, but the best in Britain are in the low 50 per cent range.

With no Brexit, Duffy sees the British economy ticking along at about a 2 per cent-plus rate.