Medibank Private Ltd wins another 5.6% increase in revenue – should you buy?

The results of the annual government health insurance review were released today, and those with health insurance can expect an average increase of around 5.59%.

According to News Corp media, Medibank Private Ltd (ASX: MPL) will lift prices by an average of 5.64%, while Bupa and NIB Holdings Limited (ASX: NHF) will raise premiums by 5.69% and 5.55% respectively.

What does this mean for shareholders?

Medibank and NIB shareholders can look forward to another lift in revenues this year as a result of the price increases, which were higher than expected but reportedly lower than the insurers initially demanded.

Health insurers have enjoyed several years of ~6% annual increases in premiums, which reflect the rising cost of healthcare and an ageing population. Insurance is a lumpy business, and the revenue doesn’t necessarily come out as profit.

However, with an increased focus on reducing expenses and cutting waste from the healthcare system, reduced claim expenses as well as lower cost of procedures could well result in higher profits for insurers.

Great news, but…

The catch is that the affordability of health insurance is becoming critical for consumers. Health Minister Sussan Ley touted the 5.59% increase as a victory, given the reduction from insurers’ original claims which the Minister rejected.

However, half-a-million Australians downgraded or cancelled their health insurance in the last year – an estimated 5% of total individuals with insurance. With price reportedly a big consideration, funds might expect a continuing decline in customer numbers this year, as well as ongoing churn of customers changing insurers, looking for a better deal.

(As a side note, this could be a positive for insurance comparison website iSelect Ltd (ASX: ISU), which is currently running promotions to benefit from the premium rise).

So while today’s announcement appears to be good news for shareholders, it’s not that good. Investors will want to watch for further developments on customer numbers and churn, as well as an ongoing industry and government efforts to reign in healthcare expenditure, which is growing substantially faster than inflation.

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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.

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