Medibank Private Ltd shares could run higher

Credit: Keoni Cabral

Australia’s biggest insurer, Medibank Private Ltd (ASX: MPL) has seen its share price soar recently after successful cost cutting resulted in a big leap in profits – and today’s prices suggest investors are expecting more where that came from.

But how much more is there to cut?

Medibank reported that in the 2014-2015 financial year, it paid out $5.1 billion in claims. $3.47 billion (68%) of this went on hospital admissions and procedures, while a further $480 million (14%) went on prosthetics.

The company has already made headlines for putting the squeeze on hospital operators (who Medibank reimburses for their services), effectively demanding improved terms. Prosthetic device sellers like Lifehealthcare Group Ltd (ASX: LHC) and Paragon Care Ltd. (ASX: PGC) may also come under pressure, as the cost of fitting these devices is reportedly exorbitant.

The next step may be to target customers, since Medibank claims on its website that one in five Australians lives with two or more chronic conditions. The most common conditions are diabetes, heart disease, cancer, mental health, eye disease, respiratory conditions, and arthritis.

An egalitarian healthcare system

Passing on costs will be difficult, since Medibank has publicly affirmed its commitment to an equal health insurance system – where each customer pays the same premiums regardless of their level of health and wellbeing.

Here is a picture of the most prevalent conditions, according to Medibank:



In one sense, Australians are fortunate that the procedures requiring more resource-intensive treatments like cancer and cardiovascular disease are comparatively less prevalent, as this limits the burden on the healthcare system.

However, the prevalence of ‘lifestyle’ conditions such as poor diet and obesity – which can lead to cardiovascular disease and diabetes among others – is rising.

Additionally, my own experience studying psychology suggests that mental health conditions are significantly under-treated. This could be a potential source of rising claims costs in coming years.

Insurers like Medibank and NIB Holdings Limited (ASX: NHF) attempt to target lifestyle conditions by offering incentives like discounted gym memberships and similar, although it’s an open question whether free gym memberships will have a significant correlation with a reduction in lifestyle diseases.

Medibank has reported in the past that a minority of clients account for a significant percentage of its expenses, and with the health system also an enormous burden on the national budget, the logical next step may be to attempt to recover some costs from consumers. There are a variety of alternatives for cutting costs, including the following proposals previously put forward by Medibank.

Lower costs don’t have to result in the cessation of services like the recently announced government cuts to pathology services. Instead, it could take the form of an additional percentage-based fee on top of ordinary premiums for individuals who fail to meet certain scientifically justified ‘wellness’ criteria. The advent of wearable technology is likely to make the implementation of this substantially easier in coming years.

Food for thought if you’re a shareholder – or feeling the sting of higher premiums in recent years.

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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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