Irony and confusion in Medibank's float

The sale of Medibank Private will allow the Coalition to cash in on the public's brand confusion and rid itself of a business it has despised since its inception.

Most of the money the Abbott government will receive in selling Medibank Private derives from confusion, and the rest of it from irony.

Essentially, the Coalition government is cashing in on brand confusion by selling a business it has always hated.

And of course the greatest irony of all is that the Medibank prospectus was issued on the day before its original architect, Gough Whitlam, died.

The company is the health insurance market leader only because it has been part of Australia’s legislated universal health system, and most people have always been confused (and still are) about the difference between Medibank and Medicare.

After all, Medicare used to be called Medibank and the addition of the word 'Private' has never meant 'privately-owned', and is therefore semantically meaningless.

The public system has always been 'Medicare for doctors and Medibank for hospitals', the former mandatory and covered by a levy, and the latter optional, but subsidised by a tax rebate.

Irony number one is that the Coalition fought Medibank's creation tooth and nail, tried very hard to kill it once it was born, and now gets to sell it for $5 billion or so.

The Coalition-controlled Senate rejected three successive Medibank bills in 1974 and the legislation was eventually passed by a joint sitting of Parliament after a double dissolution election. Medibank eventually opened for business on July 1, 1975, four months and 11 days before the Whitlam Government was sacked, whereafter Malcolm Fraser tried to strangle it.

The Whitlam legislation basically nationalised half the business of private health insurance operators, which covered both doctors and hospitals and had been operating since the 1930s under the banner of 'Blue Cross Funds'.

And for further historical irony: the legislation governing health insurance that was introduced by the Menzies Government in 1952 underpins the value of Medibank Private as an investment today.

It was that legislation that created community rating, which prohibited insurers from charging premiums based on risk, and open enrolment, which compelled the funds to take all comers, with no discrimination. Happily for the modern Coalition, a third principle -- that they were prohibited from making a profit -- went by the wayside.

The Fraser government tried hard to throttle Medibank in 1976 and launched Medibank Mark II in October that year, including the Medibank Private Act, allowing the government’s Health Insurance Commission to enter the private health insurance market.

Actually, the main thing that underpins the value of Medibank Private is the health insurance rebate that the Howard government introduced in 1999, as part of a package that included the Medicare levy surcharge and lifetime health cover, which was designed to arrest the trend of falling private insurance.

And here’s a final irony: a big part of Medibank Private CEO George Savvides’ growth strategy for the business, once privatised, is to move it back into the primary care sector (that is, GPs) not by insuring for them, but paying doctors directly.

The plan is to strike agreements with GPs on the care of high-cost patients and pay them retainers, as well as provide a concierge service for the patients. The aim is keep the patients out of hospital if possible, and therefore cut down on health insurance claims.

It’s one of a number of ways Savvides will get claim costs down, the main one being much tougher deals with the hospitals themselves. The seminal event in that process was last year’s contract negotiation with the nation’s biggest private hospital group, Ramsay Health Care, which nearly saw Medibank Private not give a contract to Ramsay.

Savvides is also talking to the government and health insurance regulators about offering a single health insurance premium on retirement that would cover a retiree for the rest of his or her life -- to be paid out of superannuation. That would effectively move Medibank Private into the wealth management business, and apparently the regulators and politicians are interested.

These things, plus the cost reduction that always comes after privatisation, when managers are suddenly paid big bonuses to cut costs (as opposed to being encouraged by politicians not to rock the boat), form the “growth story” for institutional investors on the roadshow now underway.

But note that the government is emphasising foreign investors in its instructions to the float’s lead managers.

That’s because American institutions, in particular, love Australia’s health system. This is because of the Howard government’s tax rebate that lowers the cost, and the community rating and open enrollment legislated by Robert Menzies in 1952.

These things means that, at more than 50 per cent of the population, the penetration of private health insurance in Australia is one of the highest in the world.

Will the government get it away at 21 times earnings, or $5.5bn? Probably not. But if the US institutions are allowed to set the price, it’s possible.

And it might even be worth that, too, if George Savvides and his team are given big enough bonuses. 

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