Is Medibank too big to fail?

The Government is ready to float Medibank Private and we're kicking off a series on the private health insurance industry with a simple question: is Medibank too big to fail?

Let the countdown begin. The Government is ready to float Medibank Private, Australia’s largest private health insurer, and, with an expected price tag of $4bn – $6bn, it will be the biggest privatisation since Telstra.

Andrew Sorkin popularised the idea that some financial institutions are so large and important to the overall system that the Government would never let them fail. In the lead up to the Medibank float we’ll make regular blog posts that explore the private health insurance (PHI) industry and familiarise you with the company. Let’s kick off the series by answering this question: is Medibank too big to fail?

Advances in technology and an aging population has caused unprecedented growth in healthcare costs. Government health spending has risen 74% over the past decade, and now accounts for 19% of the Australian budget. Quite simply, it’s getting too much to bear.

The Government is increasingly being forced to loosen its grip on the highly regulated private health insurers, which it needs to help pay the bills. It’s also funnelling a growing pool of customers towards the industry with financial incentives.

The National Commission of Audit, which concluded in March, made a list of healthcare related recommendations, most of which would benefit private health insurers. Two such recommendations were that private health insurance be mandatory for high-income earners and that the Medicare Levy Surcharge be lifted to 3.0–3.5% from the current 1.0–1.5%. This would encourage people to buy private health insurance by effectively making use of the public system more expensive.

The Commission has also recommended replacing Ministerial control of health insurance pricing with a ‘price monitoring arrangement’. This would let insurers set their own premiums and there are even suggestions they be allowed to charge higher prices to people where poor health is a result of lifestyle choices, such as smoking. This practice is currently forbidden even though it results in higher premiums for members who live healthy lifestyles.

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If the Government eases its regulatory grip and continues to funnel new customers towards the private health insurance industry, Medibank’s revenues and margins will have a significant tailwind. What’s more, with a 30% share of the $20bn PHI market, Medibank stands to benefit more than most (see Chart 1).

Healthcare spending is expected to grow at 5-10% a year over the coming decades, well above GDP growth. Without significant tax hikes, the Government can’t afford for people to shift back to the public healthcare system.

And with close to four million policyholders up its sleeve, yes, Medibank is too big to fail. However, no company is worth an infinite sum: whether it’s sensible to invest in the Medibank float depends on the company’s intrinsic value and price. The offer prospectus is expected to be released in late October and, if you would like to receive a copy, you can register here. We’ll assess the merits of investing in Medibank on Share Advisor (you can sign up for a free trial) once the prospectus is available, but stay tuned for regular updates on what the Government’s sale of Medibank means for taxpayers, policyholders and investors.

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