MENU

Is Medibank Private Ltd’s industry in structural decline?

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:

Are you planning on a blue-chip retirement?

If term-deposit rates stay low your lifestyle expectancy could stay low with them.

But you must act now. This above report on dividend shares is available for a limited time only, and your copy is 100% FREE. So don't miss out!

At The Motley Fool we know share markets can be volatile with President Trump and the great unknown of China front and centre. So we've handpicked 5 of our favorite term-deposit-crushing dividend shares to make your savings work for you.

Simply click here to receive your free copy of "Our top 5 ASX higher income shares for financial year 2018" right now.

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.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.