The Medibank Private Ltd share price is sinking on its ‘challenging’ environment

Australia’s largest private health insurer, Medibank Private Ltd (ASX: MPL), updated the market on its prospects during its Annual General Meeting (AGM) today.

Improving customer service and providing better value is clearly a priority, and here are a few cherry-picked comments from new CEO Craig Drummond:

Make the customers happy

We clearly need to do more for our customers… we need to provide greater value for our customers and make it easier for them to do business with us.”

These comments were repeated several times during Mr Drummond’s announcement and it has become apparent that Medibank has dropped the ball in this area. New initiatives include hiring more call centre staff, extending contact hours with 24/7 online support, coaching staff in more complex enquiries, and delivering a better customer experience.

Medibank is also offering a number of new value initiatives including free unlimited emergency ambulance cover for all hospital policies, plus a free dental check-up for extras cover, and so on.

A slowing market

“We expect market (revenue) growth to slow in response to ongoing affordability concerns and slowing population growth.”

A slowing market is something I’ve been harping on about for some time, with the percentage of the population with private health cover either stagnant or falling. Ultimately not a huge concern due to the recurring nature of insurance, it nevertheless means that Medibank will have to compete better to maintain its performance.

Fortunately, management appears to be tackling this issue.

Flat outlook

“In the first four months of this year, revenue has been slightly below our initial expectations with premium growth of 1.3%… We expect the 2017 Health Insurance operating profit to be broadly in line with last year’s result…which equates to a Health Insurance operating profit of approximately $490 million.”

The above-mentioned issues can’t help but impact Medibank’s operations. Mr Drummond’s outlook was effectively ‘no growth this year’ and the customer service issues might take some time to have a positive impact. The company also noted that it was having implementation issues with its new DelPHI policy management system, which won’t become fully operational until next year.

A final note on regulation and costs

An important source of inflation in costs (and thus premiums) is a number of regulatory and market issues around things like prosthesis pricing, unnecessary admissions/readmissions, and so on. Medibank is quite active in lobbying the government for change, and the company has estimated at least $3 billion in savings (industry-wide) could be made through market reform.

Additionally, with the rise of ‘lifestyle’ and highly preventable or treatable conditions such as obesity, diabetes, anxiety, and depression, Medibank also has a (albeit unquantifiable) opportunity to achieve modest cost savings through promoting preventative health measures.

A relatively small number of chronically ill clients account for a significant amount of the company’s costs, so improvements in these areas are definitely worthwhile.

Foolish takeaway

Although Medibank is much more attractively priced at around $2.50 than it was above $3, the company still doesn’t look like a standout case of value. I continue to think it is a ‘Hold’.

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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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