What Hockey can learn from Medibank

Whether Medibank can maintain the 2014-15 prospectus forecast dividend rate in the next financial year, 2015-16, depends on the success of a remarkable exercise in technology.

Had Treasurer Joe Hockey and his Health Minister Peter Dutton bothered to examine what Medibank CEO George Savvides was doing with technology, they might have avoided the co-payment fiasco and been able to duplicate the planned Medibank savings in their own health payments.

I recommend that both Hockey and Dutton view the remarkable KGB interview with George Savvides published today.

Savvides is a CEO who tells the truth, so when I asked whether the Medibank float was a ‘bit naughty' in paying out 89 per cent of profits in 2014-15, when around 75 per cent was a sustainable payout ratio, he did not deny the ‘naughtiness'.

Savvides countered by saying that the 2014-15 dividend rate was a decision made by the previous owners (the government) and what he did was to make sure the prospectus clearly set out what was happening

However, very few commentators on the Medibank prospectus pointed out the inflated dividend, though Business Spectator was one exception (Medibank investors must read the fine print, October 24). 

There is no doubt that the weakness in the Medibank dividend policy is a key reason why the shares have disappointed many who looked for a higher market premium after the float.

In essence, Medibank pays out about 87 per cent of its health fund revenue in claims. But two per cent of its customer base is responsible for about one third of its claims and there is enormous variation in the costs and performance of hospitals.

Savvides has invested in technology systems that enable Medibank to analyse in great detail the differences between hospitals and it is now able to use this knowledge to negotiate detailed issues with non-performing hospitals. Firstly, the information is used to help them, but if they can't or will not change their performance, then they may be crossed off the Medibank list.

Similarly, Medibank now knows exactly who the major claimants are and Savvides believes Medibank can help them reduce their hospital visits by offering better primary care. And, of course, if there is any over-servicing, that will also be attended to.

The benefits of the microanalysis that the system provides will be shared between Medibank shareholders and its customers via health fund premiums. Medibank shareholders need the system to work and lift profits or the dividend rate will be reduced.

And, of course, almost certainly a very close examination of those claiming on the government for health benefits will reveal a similar pattern. But you need the necessary technology and executive talents to take government health services down to the actual patient and what is happening on the ground.

Technology enables big organisations to look very closely at what is happening at the micro level. It takes an extra level of skill to be able to apply the knowledge without getting marked with the ‘big brother' tag.

It will not be easy but the government's co-payment scheme was ugly and its replacement is not much better. 

A new approach is required and one that works with the medical industry instead of against it. The problem with Joe Hockey is that he spends too much time with Treasury and not enough time in the real world and health minister Peter Dutton is not finding the portfolio easy.