Medibank Private Ltd (ASX: MPL) shares have bounced back strongly to just under $2.40 after plunging to a 2015 low of $2.28 in late March, but after digging into the numbers a little, I'm even less convinced about its long-term prospects!
A Premium Provider
Medibank is a lot like the Flight Centre Travel Group Ltd (ASX: FLT) of health insurance companies, as its network of 90 retail stores and 3,000 employees makes it a slow-moving beast and ensures that while its service is better than online rivals, it also has significantly higher fixed costs.
Having said that, Medibank's management has done a great job at slashing its management expense ratio (the proportion of premium income spent administering policies) from 9.2 per cent to 8 per cent over the last half to match that of major rival NIB Holdings Limited (ASX: NHF).
Is Medibank Private Ltd putting itself out of business?
Medibank's insurance premiums (according to my research a little over six months ago) didn't compare favourably with that of light-weight online rivals. To combat this, Medibank launched discount provider ahm in parallel to Medibank's premium service.
The problem now is that while ahm's policyholder numbers jumped nearly 20% from a year ago, Medibank policyholder numbers actually FELL by 1.5%. If this trend continues I struggle to see how Medibank's margins can't fall as more individuals choose discount products and heathcare spending rises as a result of Australia's aging population. This would be bad news for Medibank shareholders and underscores another reason to wait for Medibank to be REALLY cheap before buying!
