Why selling Medibank Private won't hurt the health sector

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By Stephen Duckett

Published by , Wednesday 2 April 2014

Finance Minister Mathias Cormann confirmed last week that the Government would sell Medibank Private, the private health insurer created by the Fraser Government in 1976 as a fig leaf to enable it to pretend it was keeping its promise to maintain the Whitlam government’s universal healthcare scheme, Medibank.

It was no surprise the Abbott Government’s hand-picked advisers – global financial advisers Lazard, lawyers Herbert Smith Freehills and accounting firm Ernst and Young – have declared the sale worthwhile. To a government facing a difficult budgetary situation, the sale is likely to be a $4 billion windfall.

Among those to publicly oppose the sale are two people who were vital to Medibank in its early years in 1975: first general manager, Ray Williams, and co-founder, John Deeble. Williams described the sale as “tantamount to theft” as all the value of Medibank Private has been created from members' contributions with little investment from government.

Deeble argued it should be kept in government hands to provide a window into the private health insurance industry. There is no evidence the Government has used it in this way. Instead, for at least a decade Medibank Private has effectively functioned as a profit or surplus-making enterprise, in the same way as other private funds.

Williams and Deeble are shrewd, longtime players and analysts in the health sector; their views are worth hearing. But in this case there is no evidence they are right.

Others argue Medibank Private should be kept in public hands because it might act as a moderating influence on premium rises. Yet we have no evidence that Medibank Private plays this role. On the contrary, in recent rounds its premium rises have been above industry averages. There is no evidence to suggest that selling Medibank Private will lead other insurers to raise their premiums sooner and higher than they would otherwise do.

Others oppose the sale on the ground that Medibank Private generates an income stream for government. This is true. The implication is that the sale price (once the cost of paying the consultants and brokers who advised on the sale has been subtracted) needs to be greater than the value of the income stream. Unfortunately, we won’t know whether this is the case until the sale price is known. If the price is not right, the losers will be taxpayers and the winners the financial and legal consultants who broker the sale and the new owners who get an undervalued asset.

Unless the price is too low, the grounds for keeping Medibank Private in government hands are slim.

Government interventions in the private market place can take multiple forms. Direct public provision of services is declining, in favour of regulation, subsidies and strategies to promote competition through publication of comparative data.

The private health insurance industry is saddled with all of these. The government both owns Medibank Private and subsidises the industry to the tune of about $3-4 billion per annum through the health insurance rebate. It also provides a comparison website to help consumers choose which fund (if any) to join or leave, and it wraps all this up in a massive tangle of red tape.

At present the Government, as owner of Medibank Private, is compromised by being both the regulator and the regulated. Although we have seen no evidence that it has regulated in the interest of Medibank Private, eliminating this potential conflict is valuable.

What hasn’t been much discussed as part of the private health insurance landscape is the over-regulation of the industry. The Government’s war on red tape should be extended to private health insurance.

The existing regulatory framework has many elements that were developed in the days before Medibank was created as a universal public insurer. Private insurers are hobbled in the benefits they can accrue by keeping their members healthy. For example, complex equalisation arrangements dating back to the 1950s spread the cost of loss-making contributors among all funds.

The private health insurance industry is overdue for a shake-up. Selling Medibank Private won’t achieve that, but nor will it do harm.

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