Can Medibank Private Ltd continue its success in 2016?

Health insurer Medibank Private Ltd (ASX: MPL) recently grew its half-year profit by 58%, although revenues only lifted 4.6%.

An important driver of health insurance revenues are legislated increases in insurance premiums allocated by the government. In my coverage of Medibank’s results I warned readers that future premium increases are likely to be much lower than in the past, as a result of government reluctance to lift premiums by as much as insurers want.

In its recent submission to the Commonwealth review of the healthcare system, Medibank identified several ways to reduce waste in the healthcare system that would likely, as a side effect, result in increased customers for the insurer.

Here are several key recommendations and the potential savings from Medibank’s submission:

  • Improve information-sharing for consumers and insurers
  • Standardise simpler products and terminology ($150-$330m p.a.)
  • End cost-shifting from public hospitals to privately insured consumers ($1.05bn p.a.)
  • Introduce reference pricing system to reduce costs of prostheses ($800m p.a.)
  • Reduce hospital default costs ($610m p.a.)
  • Improve competition and premium setting ($200m p.a.)
  • Reward under-30s for early uptake of health insurance ($100m p.a.)

According to Medibank’s figures, 500,000 Australians downgraded or cancelled their health insurance in 2015 as a result of spiralling premiums. In 2011-2012, the Australian Bureau of Statistics reported that 9.7 million adults (57% of people aged 18 and over) had private health insurance.

Thus if Medibank’s figures are correct, approximately 5% of the total number of private health customers reduced or cancelled their cover in 2015. This is a big hit and appears to confirm Medibank’s own assertion that affordability is ‘becoming critical‘ for customers.

Depending on the change to statistics since 2012, there could also be room for growth in the total number of individuals with private health insurance. With up to $3bn in waste to be cut from the system, lower costs should entice a number of lapsed and even new members to improve their private health cover.

Additional initiatives such as discounts for under-30s, superannuation-style programs that pay premiums after retirements, and insurance products that provide rest-of-life cover for an up-front payment could potentially draw many more customers into the private health insurance sphere.

So while Medibank and other insurers may not expect great premium increases in coming years, there appears to be plenty of room for them to grow revenues by attracting more customers. The caveat is that some or none of the proposed changes to the healthcare system may make it off the drawing board.

Looking for a blue-chip dividend income? 

Discover these 3 "new breed" blue chips that pay fully franked dividends and offer the very real prospect of significant capital appreciation. Click here to discover our latest free report on these three outstanding investment opportunities.

Simply click on the link, enter your email address, and we'll send you our full coverage for free - no credit card details or payment required!

What are you waiting for? Just click here now for your copy.

Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. 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.