Soon to list Medibank Private is the undisputed king of Australian private health insurers (PHI). Medibank’s 3.8m members give it a market share of 30% – more than HCF, NIB, and HBF combined.
You’d think such dominance would give Medibank a big advantage over the other players, but that’s not always the case: it’s almost impossible for PHIs to compete on price as regulation forbids the discounting of premiums by more than 12%. Furthermore, any premium hikes require approval from the Minister of Health, whose priority is, at least in principle, to protect the public from unfair pricing.
PHIs instead compete on product differentiation, offering a mix of inclusions and exclusions that’s as finely graded as they can administratively handle. The result has been an explosion of advertising and product variety. The industry’s marketing expenditure has nearly doubled over the past seven years and there are now close to 30,000 different health insurance policies for you to choose from.
Most people find the comparison process extremely difficult. This makes insurance policies some of the stickiest purchases consumers will make (so, if you’re shopping around, it’s a good idea to first visit the comparison website www.privatehealth.gov.au). Only around 5% of policyholders switch in any given year – roughly half the switching rate for other financial products such as life insurance and bank accounts.
The high customer captivity makes it easier for Medibank to upgrade members to more profitable products as they age and need more services to be covered. It also provides a strong base and stable revenue, which justifies Medibank’s investment in new products such as life, travel and pet insurance.
However, we think NIB’s strategy makes better use of health insurance’s low churn rate. NIB targets members at the very beginning of the 'upgrade treadmill' when they are young and healthy (via low-cost policies with lots of exclusions) and the company now has a disproportionate share of the under-35s market. Because that segment of the population is underrepresented as a proportion of total policyholders, NIB has been able to grow its member base at a faster rate than the overall market – it has increased market share every year for the past 15.
NIB also runs a much leaner operation than Medibank with an operating margin around 4–5% compared to 3–4% for Medibank. There’s certainly room for improvement once Medibank lists in December, but so far it’s meant the company has been more reliant on returns from its $1.5bn investment portfolio – or ‘float’ as Warren Buffett likes to say – so that’ll be the focus of next week’s Medibank update.