The hype surrounding the Medibank Private IPO continues to grow, following the release of the prospectus on Monday this week.
As more analysis is being done on the data provided, some holes are appearing, which suggest that Medibank Private may not be the strong, stable company the federal government has made it out to be.
There are plenty of positives of course.
Yes the company has the largest market share of all private health insurers in Australia at 29.1%, expects to report 19% growth in operating profit in the 2015 financial year, and moving from government owned to publicly listed should mean the company can drive costs down and improve its existing margins.
But here are a number of issues Medibank faces…
More and more people are switching from Medibank- branded policies to its cheaper ahm-brand. In 2012, 8.8% of policyholders switched to ahm, while in 2014, 10.0% of members with Medibank policies switched to the cheaper ahm brand. Should that trend continue, Medibank may see its margins come under more pressure.
While the insurer doesn't list its Medibank-branded policies online with comparison sites such as iSelect Ltd (ASX: ISU), its cheaper ahm policies are listed. Sites such as iSelect take a percentage of the premiums as commission, further cutting into Medibank's total return. More members are also heading directly to the cheaper ahm, perhaps thanks to the comparison sites. Medibank could take ahm policies off those sites, but may then face a fall in new members.
Primary Health Care Limited (ASX: PRY), with its large medical centre network, not to mention pathology and diagnostic imaging, is also entering the health insurance market. When the providers of the health services decide to offer insurance in direct competition with the likes of Medibank that raises a number of issues.
Will Medibank policyholders be able to get insurance-covered treatment at Primary's facilities? Does this give Primary the upper hand when it negotiates with Medibank on how much the insurer will pay for services to members? As more consolidation in the healthcare sector occurs, will Medibank have to deal with companies that hold the upper hand?
There's form for that already. Last year, Medibank had a very public stoush with private hospital operator Ramsay Health Care Limited (ASX: RHC), with the insurer claiming Ramsay was driving up the cost of a night in hospital unfairly. The spat has ended, with the pair signing a 3-year agreement, but one wonders who conceded the most?
Those factors should give investors some food for thought. Medibank Private is not a risk-free investment, which makes the price you pay extremely important.
