Sale of Medibank Private: key arguments

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Sale of Medibank Private: key arguments

Posted 1/04/2014 by Amanda Biggs

The Minister for Finance has announced that the Government will sell the government-owned private health insurer Medibank Private Limited (MPL) sometime in the 2014–15 year, via an initial public offering (IPO). The long-expected decision follows the recommendations of a scoping study commissioned by government, but not publicly released.

Most estimates put the value of MPL at between $2.5–$4 billion or higher. The Medibank Sale Act 2006 allows the sale to proceed without further legislation and limits individual ownership to 15% for at least 5 years. The Minister indicated that current arrangements around premium setting would remain, while the scoping study found no evidence that a sale would increase premiums. According to the Government, monies realised from the sale will fund infrastructure projects.

MPL has the largest market share (27%) of the 34 registered health insurers, just ahead of BUPA on 26%. While 26 are non-profits, MPL converted to for-profit status in 2009.

When the sale of MPL was first proposed by the Howard Government, a number of issues were canvassed as highlighted in a Parliamentary Library paper and Bills Digest. Several of these issues continue to be pertinent.

One of the main arguments used in support of a sale is that selling MPL will improve its efficiency by lowering management costs and facilitating expansion into new business areas. This would in turn support greater competition in the private health insurance sector, ultimately benefitting consumers.

However, when the sale bill was debated in 2006, MPL was still a non-profit entity. Non-profits were generally restricted to utilising surplus revenues for the sole benefit of policy holders. With the passage of the Private Health Insurance Act 2007 and MPL’s change to for-profit status in 2009, these restrictions no longer applied. MPL was allowed to pay surplus revenues as dividends to Government ($450m in 2012–13) and pursue acquisitions. The Act also broadened the business activities of health insurers and the range of products they could offer, improving their competitiveness.

MPL’s management expenses have remained relatively stable and close to the industry average since conversion and premium increases have mirrored the industry average, even while new business opportunities were pursued and dividends paid. This raises questions over the extent to which additional efficiencies could be achieved by a sale.

Another argument is that selling MPL would remove the Government’s conflict of interest in being both the industry regulator and owner of the largest player. Evidence that this conflict has become more pressing since the passage of the Medibank Sale Act 2006 has not yet been presented.

Another argument is that a sale would assist in improving the Commonwealth’s budgetary position. This is partly correct.  In accounting terms, the sale would simply involve the swapping of one asset, shares in MPL, with another asset, cash.  The proceeds of the sale will not be treated as revenue for the Commonwealth, and will not improve the budget deficit or surplus position in the year the monies are received.  The Commonwealth will, however, have the proceeds for the sale available, and this will mean that it may either expend this money on other priorities without additional borrowing, or pay off some debt.  In this indirect way, the sale will improve the Commonwealth’s budgetary position.  However, it will no longer receive dividends from MPL, and this will reduce revenues, causing a deterioration in its budgetary position in all future years.

Arguments against a sale include that policy holders, as members of the fund, retain some rights over assets of the fund. Whether these rights continued following MPL’s conversion to for-profit is unclear. Dividends have been paid regularly to government potentially weakening the argument over members’ rights. Nevertheless the issue remains contentious.

Former Finance Minister Lindsay Tanner argued in favour of retaining MPL in public hands because of its potential role in progressing health reform. Academic Ken Harvey argued that MPL’s large market size gives it an advantage in negotiations with health providers, helping to moderate prices overall.

But it is debateable whether MPL was used to drive major health reform under the former Labor Government. While MPL once clearly dominated the market with 30% market share, others like BUPA are now significant players as well.

Finally, there are concerns that selling MPL would raise premiums. The Australian Medical Association (AMA) has argued in a Senate submission that a sale must lift premiums. This is because a buyer would seek to maximise their returns by optimising premium revenue. But the Health Minister must approve any premium increases (unless this is contrary to the public interest), so this potentially limits unnecessary rises.

A further issue is that to operate as a registered health insurer in Australia, a business must primarily operate for private health insurance purposes. This could potentially deter general insurance businesses from bidding for MPL and thus reduce the pool of potential buyers.

With assistance from Daniel Weight and Luke Buckmaster.

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