Fairfax media recently spoke with Medibank Private Ltd (ASX: MPL) CEO Craig Drummond who, despite being bullish on his company?s prospects, was decidedly negative about the health insurance industry as a whole.
Some of his comments were alarming:
?(customers)… are making choices about mortgage, food ? and we have had people say to us they have cut back on their meat meals.?
?”Customers in recent weeks are telling us they are not heating their house because they can’t afford all of the things currently in their budget,”?
This is a serious challenge for the industry, which implicitly depends on healthy policyholders subsidising the…
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Fairfax media recently spoke with Medibank Private Ltd (ASX: MPL) CEO Craig Drummond who, despite being bullish on his company’s prospects, was decidedly negative about the health insurance industry as a whole.
Some of his comments were alarming:
“(customers)… are making choices about mortgage, food – and we have had people say to us they have cut back on their meat meals.”
“”Customers in recent weeks are telling us they are not heating their house because they can’t afford all of the things currently in their budget,””
This is a serious challenge for the industry, which implicitly depends on healthy policyholders subsidising the unhealthy. For example, 35% of Medibank’s claims expenses come from just 2% of customers. This means that a significant cohort of healthy customers with minimal claims must be found to offset these expenses.
Convincing healthy customers (e.g. young people) to take out health insurance is becoming increasingly difficult however, with premiums rising at more than 5% per annum every year. Customers are opting for more basic cover or shopping around for a better deal.
Private health insurer NIB Holdings Limited (ASX: NHF) has commented that at least part of the rise is due to higher demand for healthcare (people are going to the doctor more often) rather than rising prices for individual services.
So insurers are simultaneously faced with rising healthcare demand (higher costs) at the same time as their customer numbers are stagnant or declining. Insurance premiums are likely to continue rising for the foreseeable future without an industry-wide effort to tackle waste. This places these companies and their suppliers (e.g. hospitals) in a tricky position.
A ship in icy waters
Amidst these macroeconomic challenges, Medibank is trying to turn its business around and stem 8 years of continuous market share losses. The company has reinvested heavily in improving its customer experience and recently reported significant success with its Net Promoter Score (NPS) up and the number of customer complaints down. I increasingly believe that new CEO Drummond will prove a boon to shareholders; he appears totally switched on and proactive about tackling the issues the company and the industry face.
However, I still think that at today’s prices Medibank will make a mediocre investment prospect. Profit margins on its insurance are declining and it is still losing market share, albeit at a slower rate than previously. It might improve customer happiness but if margins continue to fall the company will be hard pressed to grow shareholder’s wealth.
So I'm avoiding Medibank today, and would prefer to own one of these five companies instead:
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Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.