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| State/territory |
Market share (%) |
Position |
|---|---|---|
| Australia |
29 |
1 |
| New South Wales/ACT |
23 |
1 |
| Victoria |
38 |
1 |
| Northern Territory |
44 |
1 |
| Queensland |
36 |
2 |
| Western Australia |
20 |
2 |
| South Australia |
21 |
2 |
| Tasmania |
36 |
2 |
Source: Medibank Private Annual Report 2004–05, p. 13
Medibank Private’s administrative expenses continue to be below the industry average, with a management expense ratio (management expenses as a percentage of premium income) in 2004–05 of 9.2 per cent, compared with the industry average of 9.8 per cent. As can be seen from Figure 1, over the previous 15 years, Medibank Private’s management expenses as a percentage of premium income have been above the industry average only three times (1993–94, 1999–00 and 2000–01).(64)
Figure 1: Management expense ratio, Medibank Private and industry, 1989–90 to 2004–05
Source: PHIAC, Operations of the Registered Health Benefits Organisations, various years
In 2005, Medibank Private’s share of all complaints made to the Private Health Insurance Ombudsman was 28.8 per cent (that is, almost exactly in proportion with the fund’s market share).(65) Of these, 26.5 per cent were complaints about benefits paid and 33.2 per cent were about service.(66)
In 2004–05, Medibank Private recorded $2.8 billion in total revenue (around $2.6 billion of which was in the form of member contributions), with $2.3 billion paid to members as benefits. The ratio of benefits paid compared with contribution income was 88.4 per cent, just above the industry average of 87.8 per cent.(67) In 2006, Medibank Private’s premium has increased by an average of 5.9 per cent across the fund, compared with the industry average of 5.7 per cent.(68) In 2005, the average premium increase for Medibank Private was 7.9 per cent (about the same as the industry average).(69)
As noted, Medibank Private has stabilised its financial position since the loss recorded in 2001–02. Standard and Poor’s suggests that ‘the considerable improvement in operating performance is due to a better product mix, competitive pricing strategy, favourable claim experience, and good investment returns’.(70) It adds that the stronger financial position also benefited from ‘improved cost efficiency through better health care purchasing and business processes’.(71)
In its 2006 assessment of Medibank Private, Standard and Poor’s notes that the fund’s management ‘focuses on developing strategies that deliver long-term profitability and efficiencies’ but that its ‘creditworthiness is constrained by the highly regulated private health insurance industry, with limited growth prospects, and restrictions on selecting and pricing risk’.(72) This concern is consistent with broader concerns about the sustainability of the overall private health insurance sector discussed above.
There have been two main questions in the debates over the possible sale of Medibank Private since the possibility of the sale was raised during the late 1990s and the government announced its intentions to do so in early 2006:
Whenever the sale of Medibank Private has been canvassed, debate has arisen as to the ownership of the organisation. According to some commentators, Medibank Private’s members are the rightful owners of its assets. That seems to have been the view of Fred Millar AO CBE, who served as Chairman of the Health Insurance Commission for 15 years. Millar commented, in his Chairman’s report for 1987-88:
Medibank Private is a non-profit organisation based solely on its contributors’ funds. The Government has no financial interest in Medibank Private’s assets and reserves. They are the property of its contributors.(73)
According to a report in the (Canberra) Sunday Times in 2000, in documents canvassing a sale, the then Minister for Health referred to a risk of a campaign by members, possibly led by former employees, arguing that the assets of the Medibank Private fund belonged to the members.(74) The Minister, according to the report, asserted in a letter to the Finance Minister that ‘this argument has no force’.(75) That opinion was said to have been based on an unpublished opinion of the Commonwealth Solicitor General some years before, on the basis that it would be impossible to work out the respective rights of short and long-term members of Medibank Private on any ‘demutualisation’.(76) On the other hand, the founding Chief Executive of Medibank Private, Ray Williams,(77) has reportedly said that ‘there is not one cent of Government money invested in Medibank Private, thus any attempt to make a profit out of the sale/privatisation of Medibank Private would be an act of theft’.(78)
This section will consider these issues in more detail, but first it may be helpful to make some observations about the nature of the entities involved in what is often referred to collectively as ‘Medibank Private’.
Significant entities that have, at different times, been relevant to the operation of ‘Medibank Private’ are:
These entities are depicted in figure 2. The relevant legislation distinguishes between health funds and the registered organisations that operate them. Part VIA of the National Health Act, for example, provides separate regimes for the winding up of funds themselves and for the winding up of registered organisations. Note in this regard that the Act clearly treats funds as being entities capable of ownership of assets.(79) The Health Insurance Commission (Reform and Separation of Functions) Act 1997 defines ‘Medibank Private fund’ to mean ‘the health benefits fund conducted by the Commission’.(80) Therefore, the Medibank Private fund can and should be, at least in some senses, treated as distinct from the registered organisation that operates it.
The registered organisations operating the fund were first, from October 1976, the Health Insurance Commission,(81) and second, after corporatisation in 1998, Medibank Private Limited. The owner of these registered organisations is undoubtedly the Commonwealth, but the source of controversy that arises when the Government speaks of selling ‘Medibank Private’ relates, in substance, to the ownership of the Medibank Private fund and assets held for its purposes—which we will call ‘associated assets’.
Figure 2: Medibank Private relevant entities
| Commonwealth Government |
||
|---|---|---|
| Owner of shares in Medibank Private Limited from May 1998 |
||
| Health Insurance Commission Statutory body established in 1973 to operate Medibank and empowered in 1976 to enter private insurance market with Medibank Private, initial owner of shares in Medibank Private Limited |
Medibank Private Limited Company limited by shares established in 1998 to become registered organisation to replace HIC as conductor of Medibank Private fund |
|
| Medibank Private fund and associated assets |
||
The question about the ownership of Medibank Private assets is not answered simply by looking at the name entered on legal documents, share or land registries. Such inquiries might reveal the entity that is the ‘legal’ owner of a given asset, but that is not a satisfactory answer to the question of ownership. This is because ownership can be ‘legal, beneficial, joint, several, general or partial’ and ‘the precise meaning of the term may vary from case to case’.(82) Rights of ownership can also be defined, and limited, by law. For our purposes, it is important to note that it is possible for the legal and beneficial ownership of something to be separated. This is the case where one entity holds something on trust for another. In the private health industry, assets of a fund are frequently held by registered organisations because those organisations hold a more readily identifiable legal status—such as company or association—than do the funds themselves, but this does not mean that the registered organisations necessarily hold the legal and beneficial interest in the fund assets, or indeed in the funds themselves. Whilst organisations such as Medibank Private Limited and before it, the Health Insurance Commission, hold or have held the legal interest in Medibank Private fund assets, whether they hold the beneficial interest in those assets, or whether their interest is subject to the rights of others, are separate questions. These questions are the subject of our inquiry.
Determining the beneficial ownership of the fund and its assets is a matter of ascertaining who enjoys the substantial rights pertaining to those assets. The conventional definition of ownership of economic organisations, according to Yale law professor, Henry Hansmann, in The ownership of enterprise,(83) is associated with those who share two formal rights—the right to control the organisation and entitlement to residual earnings (profits or surpluses).(84)
Some of the general categories of ownership structure for economic organisations referred to by Hansmann and others are:
Of particular relevance, for our purposes, is another category referred to by Hansmann—non-profit organisations—organisations effectively without owners.
Because some of the debate surrounding the sale of Medibank Private has centred on whether the organisation is a ‘mutual’ fund, that question will be considered in more detail below. We now turn to the question of Commonwealth ownership of the Medibank Private fund.
The question of formal ownership of the fund does not appear to have been given much attention prior to its establishment. The Fraser government chose to create a government controlled private health insurer simply by legislating to make operating a private health insurance fund a ‘function’ of the Health Insurance Commission. Government owned business enterprises often take the form of statutory bodies or registered companies, the shares of which are beneficially owned by the Commonwealth. Examples include (prior to its privatisation) the Commonwealth Bank, established as a body corporate by the Commonwealth Bank Act 1911. Nevertheless, the method chosen to establish Medibank Private was not unique. Trans Australia Airlines (TAA), for instance, was not established as an entity of itself, but was a ‘function’ of the Australian National Airlines Commission–the latter having the status of a body corporate.(86) Whilst there are parallels between the establishment of Medibank Private and TAA, there are also important differences. Purchasers of air tickets were simply contracting with TAA for air travel, they were not purchasing any form of membership that was associated with certain benefits. The Medibank Private fund, on the other hand, was established as a not-for-profit entity and offered membership to those who paid contributions to it.
As mentioned above, both the Health Insurance Commission and Medibank Private Limited have at one time held assets for the purposes of the Medibank Private fund. Those entities–the Commission and the company–are properly described as government owned. The Commission was a statutory body and the shares in the company are owned, legally and beneficially, by the Commonwealth. In our view, however, the provisons of the relevant legislation have the effect that neither the Commonwealth, nor Medibank Private Limited or its predecessor, the HIC, hold the beneficial interest in the fund or associated assets. It seems difficult to attribute beneficial ownership of an asset to an entity that cannot sell the asset, cannot distribute profits generated by the asset and must give priority to the interests of others (i.e. members) when dealing with surplus earnings of the asset. All those restrictions are effectively imposed upon the Commonwealth and Medibank Private Limited in relation to the fund by the National Health Act, the Health Insurance Commission (Reform and Separation of Functions) Act 1997 and by the fact of Medibank Private’s status as a not-for-profit organisation.
This certainly seems to have been the view taken by the HIC, which has, on more than one occasion, expressed the view that neither it nor the Commonwealth is the beneficial owner of Medibank Private fund assets. For instance, in a submission to the 1992 Joint Committee of Public Accounts’ inquiry into the administrative and financial relationships between Medicare and Medibank Private, the Commission stated:
While HIC is the legal owner of the assets, the benefits of ownership pass to that function of HIC which provided the funds to acquire the asset.(87)
That position did not change, in our view, with the advent of corporatisation. On 1 March 1998 the Medibank Private fund and its assets were transferred to Medibank Private Limited. The transfer of assets was effected pursuant to the Health Insurance Commission (Reform and Separation of Functions) Act and instruments made thereunder. Shares in Medibank Private Limited were initially owned by the Commission, but later transferred to the Commonwealth. The transfer of shares to the Government occurred on 1 May 1998, and was achieved by instrument made by the Minister for Health pursuant to his powers under the Health Insurance Commission (Reform and Separation of Functions) Act. The Minister transferred the legal and beneficial interest in all of the shares in Medibank Private Limited to the Commonwealth.(88) There can be no doubt then, that the Commonwealth owns, both legally and beneficially, the shares in Medibank Private Limited, but it can be said that the effect of this was simply that Medibank Private Limited took the place of the HIC as holder of the legal, but not the beneficial interest, in the fund and associated assets.
This view is consistent with the expressed government intention at the time. The motivation for the change to the corporate structure came about not because of any government intention to substantially alter proprietary rights in the fund, but due to a perception in the industry that Medibank Private had an unfair advantage over its competitors by virtue of its association with the Health Insurance Commission, at a time when the latter was also operating Medicare, and the two organisations shared offices. As the relevant Minister, Tony Abbott, explained on the second reading of the Health Insurance Commission (Reform and Separation of Functions) Bill 1997:
This bill provides for the separation of Medibank Private from the Health Insurance Commission, HIC, and the creation of a new Medibank Private corporation. Through the separation, the government will ensure that Medibank Private cannot be perceived to have any competitive advantage over other private health funds through its association with Medicare or other government program functions of the HIC. It reinforces the government's commitment to the principle of competitive neutrality.(89)
Perhaps most conclusive in this regard though, is that fact that statutory requirements in place before and after corporatisation have the effect that Medibank Private Limited can not distribute profits to its shareholders and, in dealing with the assets of the fund, must give priority to the interests of the contributors.(90) The Commonwealth has, therefore, no entitlement to the residual earnings of the fund, and hence could not, on the definition of ownership outlined above, be described as the beneficial owner of the fund.
Finally, the language used by the board and management of the company since corporatisation can be said to be consistent with the view that the beneficial ownership of the fund and associated assets does not lie with the Commonwealth. Statements such as the following, found in Medibank Private annual reports, tend to reinforce the idea that the fund and associated assets are held for the benefit of the members:
Medibank Private is a not-for-profit Government Business Enterprise, with the sole purpose of providing high quality, excellent value private health insurance to our almost three million members. Medibank Private must earn sufficient returns to be financially sustainable, and build reserves to weather volatile, unforseen circumstances that may adversely impact member claiming. No dividends are paid and all of Medibank Private’s financial resources are directed to member benefits.(91)
As a not-for-profit organisation, every dollar of profit is retained within the fund for the benefit of members.(92)
For the reasons expressed above, it seems clear that Medibank Private Limited, like the Health Insurance Commission before it, is the vehicle used to hold the legal interest in the Medibank Private fund and its assets, but neither the company nor the Commonwealth can be described, on the definition outlined above, as the true owner of the funds and associated assets. From here, we turn to the question of whether the members own the fund and associated assets.
As mentioned above, some have argued that the Medibank Private fund is owned by its members. This implies that it is a ‘mutual’ organisation. Exactly what constitutes a mutual organisation is not easily determined. As has been noted by the New South Wales Supreme Court:
The Corporations Law does not anywhere refer to a mutual company. It makes no provision for the creation of such a company. Nor does it contain a definition of what a ‘mutual’ is, or articulate any principles for the management of the affairs of a mutual company … (93)
The question of what a mutual is has been considered, to some extent, in cases on taxation and in the recognition of a ‘mutuality principle’. The essence of that principle is that, where a number of people associate together for a common purpose and contribute to a fund in which they are all interested, any surplus remaining after the fund has been applied to the common purpose is in essence a return of their own moneys which they have overpaid and is not a profit.(94) More generally, a common attribute associated with a mutual organisation seems to be member or customer ownership. That certainly seems to be the sense in which some have applied the term ‘mutual’ to the Medibank Private debate.(95)
In Faulconbridge v National Mutual General Insurance Association, Justice Upjohn considered that a ‘mutual’ existed in circumstances where contributors enjoyed rights along the lines of those outlined in Hansmann’s ownership test—where the contributors have some control over or voice in the organisation and where they are entitled, ultimately, to share in the profits of the organisation.(96) As the substance of the suggestions made have been that members own the fund, we will equate mutuality with member ownership here, and will consider the issue by reference to the test outlined by Hansmann, as applied to the members of the Medibank Private fund.
The foundation of claims that the Medibank Private fund is a mutual organisation appears to be the fact that comparatively little has been contributed, by the government, to the Medibank Private fund by way of capital. The position regarding government capital injection can be shortly summarised. The Commonwealth Government made a grant of $10 million to the Medibank Private fund at the commencement of the fund.(97) On 4 December 1978 the Government decided to ‘capitalise’ the original grant of $10 million (that is, change it to capital of the Health Insurance Commission).(98) The $10 million was, however, eventually returned to the Commonwealth by Medibank Private apparently due to an administrative oversight in not giving the Government decision of 1978 appropriate legal standing.(99) At the same time as the purported capitalisation of the initial $10 million, the Commonwealth made a further establishment grant of $11 million. In relation to the latter grant, Medibank Private has explained:
A further grant of $11 million was made in 1978 in recognition of the fact that Medibank Private had repaid $13.3 million to the Commonwealth for benefits wrongly paid by Medibank Standard. An amount of $9.4 million, which was owed by other private funds and which arose in a similar fashion, was written off. While other funds were relieved of liability for their debt, Medibank Private effectively repaid $2.3 million of the total amount owed.(100)
In 1978 Medibank Standard was abolished and apportionment and adjustment of assets and liabilities ‘between the Commonwealth (Medibank Standard) and the Commission (Medibank Private)’ occurred.(101) No Commonwealth funding appears to have been provided from then until 2005, when the Commonwealth made an equity injection into Medibank Private Limited of $85 million in return for 85 million $1 shares. The explanation given for the cash injection is:
This year the Board obtained an equity injection of $85 million from our shareholder, the Federal Government, to consolidate a capital structure more consistent with industry practice. Prior to this, Medibank Private had almost 30 per cent of the health insurance market risk, but only 16 per cent of its capital. Upon receiving these funds, the Board agreed to a range of financial and non-financial targets and a rigorous reporting regime, including rate of return on equity.(102)
It is true then, that, since its inception, the Medibank Private fund’s capital needs have been met, in large part, by contributions from members. It should be noted that, when the fund was operated by the HIC, Medibank Private’s financial operations were always kept separate from those of the Commission and its other functions—that is, Medibank Standard then Medicare—so that the government did not subsidise the operation of Medibank Private, its administration was paid for from members’ contributions.
The issue of capital input is, however, not determinative of the question of ownership. In the most common form of business enterprise—the company limited by shares—the investors of capital are also the owners of the company. That is the case, however, not so much because of the capital input in itself, but because the investors of capital in those companies also have both formal control of the company and entitlement to share in its residual earnings (profits). These rights are granted statutorily or as a result of the company’s constitution, or both. But the Medibank Private fund (as opposed to the company) is not, and never has been, a company limited by shares, and in respect of organisations generally ‘ownership need not, and frequently does not, attach to investment of capital’.(103) Financial institutions, for example, can lend funds to an organisation to be used as capital, without acquiring any control over the organisation. Rather than input of capital being the defining factor, as outlined above, ownership of economic organisations is conventionally associated with two rights—the right to control the organisation and entitlement to residual earnings (profits or surpluses).(104)
If the members of the Medibank Private fund can properly be said to be the owners of the fund, the factors determining this will be not whether they have wholly supplied the fund’s capital but rather, whether members have control of the fund, as well as some entitlement to the residual earnings of the fund. It will be argued below that members of the Medibank Private fund do enjoy statutory rights to the benefit of residual fund assets. We note here, however, that there is a difficulty for those that argue that the Medibank Private fund is a mutual organisation, so far as our theoretical framework is concerned, because there is nothing from which a conclusion can be drawn that members have any right to participate in, or exercise control rights over, the Medibank Private fund. On the contrary, those rights have always resided with the HIC and now, Medibank Private Limited and the Commonwealth. That seems to dispose of the argument that the Medibank Private fund can truly be described as a mutual, as it can not be said to be an organisation owned by its members. The result is that members could not, in the event of a sale, claim entitlement to compensation on the basis that they were the owners of the fund. They would not, for instance, have an entitlement to share in any premium or goodwill paid by a purchaser for the organisation. That does not mean, however, that members could not claim compensation for loss of certain statutory rights over the fund and associated assets. See below for a discussion of members’ entitlements in this regard.
The critical characteristic of a not-for-profit firm, for Hansmann, is ‘that it is barred from distributing any profits it earns to persons who exercise control over the firm, such as members, officers, directors, or trustees’.(105) On that definition, much of the Australian private health insurance industry can arguably be said to be made up of member controlled non–profit organisations. MBF for example, an organisation commonly referred to as a mutual, operates through a company limited by guarantee—MBF Australia Limited. The constitution of the company provides for contributors to the fund to be members of the company. Only a relatively small number of the members are entitled, under the constitution of MBF Limited, to vote on resolutions. It might be said though, that members have, ultimately, formal rights of control by virtue of the Corporations Act 2001. Entitlement to share in surplus earnings is present, but only in the same way as are members of Medibank Private–through rights to benefit from surplus assets. The fact that might preserve MBF’s mutual status is that it is conceivable that the members, or at least those of them with voting rights, could resolve to seek to change the nature of the fund to a for-profit status, which could, ultimately, secure them the right to distribute residual earnings in the form of cash payments.
The members of Medibank Private, on the other hand, cannot be said to have any degree of control, and so the fund fits squarely within Hansmann’s definition of a not-for-profit, or more specifically, a government controlled not-for-profit. A peculiar feature of such organisations, according to Hansmann, is that they are essentially, without owners, by reason of no entity sharing the two ownership factors of control and entitlement to residual earnings.(106) For the reasons outlined above, there is no entity that can claim full ownership of the Medibank Private fund, and hence it is properly described as a non-profit organisation.
As the legal and beneficial owner of the shares in the company—Medibank Private Limited– the Commonwealth is free to sell that company. That does not necessarily mean, however, that the Commonwealth will not be liable in the event that the sale adversely affects the rights of members to benefit from the fund and associated assets. While the members cannot be said to be the owners of the fund, they nevertheless enjoy statutory rights in respect of the fund and associated assets. In this respect the view expressed herein differs, to some extent, with the pronouncement by Senator Nick Minchin that:
Medibank Private is a company owned by the Australian Government. It is not a mutual organisation and is not owned by its customers. The premiums paid by Medibank Private’s customers buy health insurance–not a stake in the company.(107)
For the reasons outlined above, we agree that the Medibank Private fund is not a mutual organisation, but Senator Minchin seems to be suggesting also that members of the Medibank Private fund are in no better position than purchasers of insurance from an insurance company. That suggestion is less sound. That is because members of the Medibank Private fund buy more than insurance—they buy membership of the fund, and that entails certain rights. Medibank Private, like other registered health funds, is subject to the provisions of the National Health Act.(108) That Act requires that the rules of a registered fund provide that ‘the whole of the income’ of a registered fund, arising out of the carrying on of its business as such, be credited to the fund, and that only specified amounts—essentially the costs of running the fund and payments to members–be debited to the fund.(109) At the time of the creation of Medibank Private, no allowance was made in the National Health Act for distribution of profits by a registered organisation. Currently, profits can be distributed only by organisations established on a for-profit basis. The National Health Act also requires that:
In making any decision, or taking any action, relating to the application, investment or management of the assets of the health benefits fund conducted by it, a registered organization must give priority to the interests of the contributors to the fund.(110)
The scheme of the legislation quite clearly seems to be that, at least in respect of not-for-profit organisations, members are to be entitled to the benefit, through their memberships, of the fund and associated assets. This view finds further support in provisions relating to the winding up of health funds. The National Health Act has, since 1976, required that funds be wound up only than under that Act. Between 1976 and 1999, the Act required that, unless a court considered that there were special reasons not to, schemes for the winding up of a fund include provision for the transfer of the business of the fund to another registered organisation which would agree to accept members of the wound up fund on terms substantially equivalent to those they previously enjoyed. Since corporatisation, Medibank Private Limited has a provision in its constitution for the transfer of any remaining assets, on winding up of the company, to another not-for-profit fund.
In 1983 section 82ZGA was inserted into the National Health Act. This section provided for the winding up of funds conducted by organisations which had not, by 1 February 1984, applied for registration as a combined ‘health benefits’ organisation (in that year the scheme of the Act changed from one registering separate ‘medical benefits’ and ‘hospital benefits’ organisations to one registering only ‘health benefits’ organisations). An interesting provision appeared in the form of subsection 82ZGA(3), which provided that, where a fund was to be wound up as a result of failure to apply for registration under the new regime, the scheme for the winding up of the fund must make provision:
for the refunding to each person who was a relevant contributor to the fund, in respect of the contributions paid to the fund by him, of an amount equal to so much of the excess as bears to the amount of the excess the same proportion as the sum of the contributions made by the relevant contributor in respect of the relevant period bears to the sum of the contributions made by all relevant contributors in respect of the relevant period.(111)
That provision was repealed in 1992, but it remains, for present purposes, of some interest. It appears to be an indication that, at least for a time, the Commonwealth recognised that, ultimately, the benefit of surplus fund assets was to be enjoyed by the members.
Whilst the fund remains operating, members’ entitlements can be experienced only through incidents of membership such as lower rates and/or extra services. These are valuable rights. In its 2005 annual report Medibank Private Limited reported net assets of $653.3 million. The effect of the current statutory requirements, in our view, is that the members are entitled to share in the benefit that this asset position will bring to the fund (less an adjustment for the government injection of $85 million in 1985).
For reasons we have outlined above, membership of the Medibank Private fund, whilst not amounting to ownership of the fund, nevertheless gives to members a valuable right to the benefit of the fund and associated assets. This means little, however, unless that right is of a nature such that it has constitutional protection from unjust acquisition. The Commonwealth has broad power to acquire property, but that power is limited by the need to provide adequate compensation or ‘just terms’, to adopt the phrase used in section 51(xxxi) of the Constitution. As the scope of the power to acquire property is broadly defined, so is the scope of the requirement for just terms. The breadth of the constitutional guarantee has been outlined by the High Court in this way:
It is now well established that the plenary grant of legislative power contained in s. 51(xxxi) [to acquire property on just terms] enjoys the status of a constitutional guarantee of just terms and is to be given the liberal construction appropriate to such a constitutional provision. In the context of that guarantee, the word ‘property’, which has been said to be ‘the most comprehensive term that can be used’, must be construed as extending to every species of valuable right and interest including real and personal property, incorporeal hereditaments and choses in action. In the context of s. 51(xxxi), the word ‘property’ must also be construed as extending to money and the right to receive a payment of money.(112)
There is a considerable body of precedent that considers the extent of the rights compensable under section 51(xxxi). We do not intend to undertake an exhaustive analysis of that question here. For our purposes we merely note that it seems to us arguable that the right of members of Medibank Private to enjoy the benefit of fund surplus earnings could be one that is protected by the section. The Commonwealth would not, however, necessarily ‘acquire’ any such right on sale. Whether it did would depend upon the kind of sale and associated deal offered to members of the fund. As Medibank Private is a not-for-profit entity, the requirement in the Act limiting distributions of its income and profits would have to be specifically abrogated if any proposed sale was on terms that did not continue those conditions, or the organisation’s status would have to be changed to for-profit.
A sale to another not-for-profit or to a mutual fund which undertook to comply with the existing requirements for not-for-profits under the National Health Act would have the result that they had not lost, and accordingly that the Commonwealth had not acquired, the rights associated with their membership status. That is, assuming existing members of the Medibank Private fund were offered continued membership on similar or better terms. Note in this regard that there are relatively few registered private health insurance organisations operating on a ‘for-profit’ basis, and all of those that do are ultimately owned by mutual organisations:(113)
At 30 June 2005, there were 40 registered health benefits organisations (RHBOs); 26 of which were available to the general public (open membership organisations) and 14 were restricted membership organisations.
Five organisations operated on a ‘for-profit’ basis. Organisations operating on a ‘for-profit’ basis may make distributions by way of dividends provided that they maintain sufficient capital to satisfy the requirements of the Solvency and Capital Adequacy Standards. Dividend payments totalling $20 million were provided for or paid during 2004–05. (114)
If, however, the sale was to a for-profit, and the terms of sale had the effect of giving full ownership of the fund and associated assets to the purchaser, then the members might be said to have lost the rights attached to their Medibank Private fund membership and the question of compensation could arise. If the sale was to be by way of public float of shares in Medibank Private, as Senator Minchin has recently revealed as his preference,(115) then the question would depend on whether Medibank Private Limited was to remain subject to the current requirements for the preservation of the fund. Presumably the organisation would, in that circumstance, be converted to a ‘for-profit’ one under the National Health Act. That would mean it would be entitled to distribute surplus profit to shareholders. Whether an entitlement to compensation would arise in these circumstances would depend on whether that right of distribution was prospective or retrospective. That is, whether it related to the existing assets or future profits.
Any sale of Medibank Private will probably be accompanied by amendments to the governing legislation. In the past, whenever there has been a perceived risk that property rights might be acquired, the government has included a ‘safety-net provision’ that provides for persons adversely affected to apply to a court for compensation.(116) Such a provision is likely to be included in any amending legislation associated with the sale. These provisions pre-empt attacks on the legislation that might seek to have it declared invalid by reason of non-compliance with the constitutional requirement for ‘just terms’. On the views we have expressed herein, any action by members in relation to the sale would be likely to be brought pursuant to the compensation provision, rather than, for instance, in an application to prevent the sale from proceeding. Having drawn these conclusions on the legal aspects of the proposed sale, this paper proceeds now to consider broader public policy questions regarding the sale of Medibank Private.
In stating its case for the sale, the government has argued that ‘there is no policy reason for the government to continue to own a health fund’.(117) The government has also suggested that a privatised Medibank Private is likely to be more efficient, enhance competition in the private health insurance sector and, as a result, reduce ‘upward pressure’ on premiums.(118) On the other hand, opponents of the sale have suggested that there are important policy reasons for maintaining the current ownership arrangements for Medibank Private.(119) For example, the Shadow Minister for Health, Julia Gillard, has stated that ‘Labor believes there is a role for a public, not-for-profit health insurer that can deliver quality and competing products, with its contributing members as the company’s main focus’.(120)
The question of whether there are policy reasons for the government to maintain the current Medibank Private ownership structure will form the basis for the discussion in this section of the paper. While there is no general agreement about what might be said to constitute sufficient ‘policy reasons’, we examine this question in relation to categories drawn from the government’s sale objectives for the fund, the above discussion about the state of the private health insurance sector and the current debate about the sale.
The categories used in this paper are as follows:
We conclude that there is no simple answer to the questions posed above. Indeed, we suggest that, at this stage, there is insufficient information available on the sale from which to develop a conclusive response. Any such response would be contingent on answers to a range of questions, including:
As such, the discussion in this section seeks to clarify key aspects of the debate and highlight those areas in which further information is required.
As noted above, the government has stated that one of its sale objectives is ‘to maintain service and quality levels for Medibank Private contributors’.(121) This raises the question of whether the sale is likely to materially affect the interests of members of Medibank Private.
Currently, Medibank Private could be considered to provide a reasonably good level of service and quality to its members. As noted above, complaints about Medibank Private are roughly proportional to its market share, it is slightly better than the industry standard in terms of the proportion of contributions returned to members as benefits, and it tends to raise premiums at around the same rate as the rest of the industry. The question is whether there is any risk that the sale of Medibank Private could make the fund any less focused on the interests of its members.
To some extent, this may depend on the type of organisation Medibank Private becomes following the sale. For example, it could be argued that, if it were to become a for-profit fund, Medibank Private would by definition be less focused on the interests of its members because it would now have to also focus on the interests of shareholders. This is one of the reasons that Medibank Private argued strongly for the maintenance of a predominately not-for-profit industry in its 1996 submission to the Productivity Commission’s inquiry into private health insurance. According to the Medibank Private submission, the interests of members are best served when funds ‘view their members as ‘shareholders’ for whom the delivery of lower prices is a dividend’.(122) As outlined above, a defining feature of not-for-profit funds is the expectation that they return any operating surplus to members in the form of lower premiums and/or higher benefits.
Medibank Private argued in its submission that assuming that insurers are supposed to act in the best interests of members for the payment of healthcare services (given that members are least able to ‘shop around’ when in need of treatment), they would be ‘acting irresponsibly if they were to have as their motive the payment of a return to investors’.(123) Further, they argued that increasing the number of for-profit health funds potentially adds an additional layer of cost to the financing of healthcare:
A situation where a for-profit ‘middleman’ (health insurers) is also involved [in addition to private for-profit healthcare providers] will unnecessarily escalate the premium (price) for private health insurance’.(124)
While competition with other funds might moderate any such increase, in practice many members (particularly older and/or long-term members) are likely to be ‘rusted on’ to a fund such as Medibank Private and hence unlikely to readily change funds despite above-average premium increases.(125)
The small number of for-profit funds in the sector makes it difficult to find adequate comparative information from which to examine claims such as these. Of the five for-profit funds, the only one large enough from which reasonable comparisons can be drawn is BUPA, which has a market share of around 9.9 per cent. As can be seen from the table below, no clear pattern capable of illustrating a difference between the for-profit BUPA, the not-for-profit Medibank Private and the industry average can be discerned in a comparison of each across various criteria indicative of responsiveness to members. While in 2005 BUPA had lower management costs and premiums than Medibank Private and than the industry average, it had less success in retaining members, received a higher proportion of total complaints compared to market share and returned a lower percentage of benefits to members as a percentage of contributions.
Table 2: responsiveness to members, various criteria BUPA, Medibank Private and industry, 2005
| Fund |
Surplus from health insurance |
Management expense ratio |
Member retention |
Market share |
Complaints |
Benefits as % contributions |
Premium increase 2006 |
||
|---|---|---|---|---|---|---|---|---|---|
| Benefits |
Service |
All |
|||||||
| BUPA |
5.8% |
7.7% |
83.7% |
9.9% |
12.8% |
10.7% |
11.7% |
86.5% |
4.9% |
| Medibank Private |
2.4% |
9.2% |
86.8% |
28.7 |
26.5% |
33.2% |
28.8% |
88.4% |
5.9% |
| Industry |
2.7% |
9.5% |
na |
na |
na |
na |
na |
87.8% |
5.7% |
Source: Private Health Insurance Ombudsman, State of the Health Funds Report 2005
As such, there may be some logic to the proposition that a predominately not-for-profit private health insurance sector is more likely to be more responsive to the interests of members. However, there is little available evidence from which to conclude that any one individual fund (such as a privatised Medibank Private) operating as a for-profit fund would necessarily reduce standards of service and quality.
Some opponents of the sale of Medibank Private have suggested that such an action could place at risk the fund’s historical role in promoting broader community interests in addition to the interests of its members.(126) For example, according to Deeble, if the fund is sold:
… there will be bigger pressure on the government to deregulate and let them chase their good risk members and all that sort of thing if Medibank Private is sold, because Medibank Private has always acted like the conscience of the industry, now selling that removes that pressure, that's what it was set up for that's what it's always done. (127)
In other words, Deeble suggests that Medibank Private has, in general, tended to avoid actions that might be in its short term business interests if those actions conflict with broader community obligations.
There is evidence that historically Medibank Private has sought to play the public interest role suggested by Deeble and others. For example, an examination of Medibank Private’s submissions (1996 and 1997) to the Productivity Commission’s private health insurance inquiry reveals that Medibank Private was a strong advocate for regarding private healthcare as essentially complementary (rather than supplementary) to that available from the public sector. As such, according to Medibank Private’s 1996 submission, private health insurance should be:
… subject to regulation which ensures social justice and community need are met. To achieve this, the universality principles applying to the public sector must be mirrored in private funding—private health insurance.(128)