Private health insurance giant Medibank Private Ltd (ASX: MPL) has taken a tough stance against rising hospital costs by terminating its contract with private hospital operator Calvary Health Care.
So What: Australia's healthcare industry is booming, and I expect that trend will continue over the coming years as the nation's population ages and expands. However, investors need to be aware that there are two subsections gunning for the growth.
On the one hand, you have the private health insurers such as Medibank Private, BUPA and NIB Holdings Limited (ASX: NHF). Consumers are being encouraged to make the switch from public care to private care, so these companies should experience a surge in demand over the coming years, and even decades.
At the same time however, private hospital operators, such as Healthscope Ltd (ASX: HSO) and Ramsay Health Care Limited (ASX: RHC), are also trying to maximise their own profits by increasing their patient claims, which is creating larger expenses for the insurers themselves.
Indeed, as the insurer's hospital outlays rise, they are being forced to increase the premiums for customers. As a result of this growth in premiums, pocket-conscious consumers are being encouraged to seek cheaper private health insurance products elsewhere.
In the lead-up to Medibank's $5.7 billion public float last November, the group's Managing Director, George Savvides, said that it would begin to use its sheer size in negotiations with hospital operators and become more selective with the ones it would contract with, based on a criteria of quality and affordability.
As highlighted by the Fairfax press on Wednesday, Calvary Health Care was unable to live up to those standards while it had also asked Medibank for an "increase in the rates Medibank pays for services provided to its members to a rate which Medibank considers to be unsustainable."
Pleasingly, Medibank Private is prioritising sustainability and recognising the need to stop rapidly increasing premiums at the risk of losing more market share. According to Fairfax however, Medibank did say that it wants to keep discussions open with Calvary and regulators to find a suitable solution.
Now What: Medibank Private's shares have come under enormous pressure since the release of the group's first-half results in February, and hit an all-time low of $2 earlier this week.
Although Medibank could still prove to be a good investment in the long run, investors would be wise to remain on the sidelines until the company can prove its ability to cut costs dramatically, and to use its market-leading status to its advantage.
