How Medibank Private Ltd could slash costs and lift profits

Medibank Private Ltd‘s (ASX: MPL) new CEO, Craig Drummond, has shared his thoughts on the company’s direction with Fairfax media. His comments should reassure investors that he has the company’s (and shareholders’) best interests at heart:

  • One of his first tasks is to bring government, insurers, and healthcare providers together to get a more sustainable business model
  • Healthcare insurance/expenditure is consistently growing significantly faster than inflation, which means it is ultimately unsustainable according to the new CEO
  • Would not comment on Medibank’s dual-brand strategy, but says there needs to be a ‘continued focus for us all on improving our customer value proposition’

Mr Drummond certainly has his work cut out for him, as Medibank’s premiums have risen consistently at around 6% per annum, prompting a number of customers to downgrade their insurance, change providers, or cancel their coverage entirely.

Outgoing CEO George Savvides has been able to significantly improve Medibank’s profitability through reducing costs by renegotiating deals with healthcare providers, although he claims there is still significant room for improvement. Medibank also recently published a report identifying $1 billion in savings that could be made within the healthcare system, an agenda Mr Drummond looks set to continue.

In addition to the struggle of dwindling customer numbers and rising costs, Medibank also faces external problems, in the form of competitors like Bupa and NIB Holdings Limited (ASX: NHF). Bupa in particular is the second largest insurer in Australia and is nipping at Medibank’s heels.

While this might be enough to turn the stomach of potential investors, readers should also bear in mind that Medibank is a market-leading business, has a strong brand presence, the market power to receive better terms from suppliers, and a capable incoming CEO.

Although the company is not cheap, I don’t see any compelling reason to sell and continue to believe the business is a ‘Hold’ today.

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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.

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