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How the government’s breathing new life into Medibank Private Ltd

We’ve written previously of the challenges facing the health insurance industry. Companies like Medibank Private Ltd (ASX: MPL) and NIB Holdings Limited (ASX: NHF) are grappling with higher volumes and higher demand for health care services, which has seen premiums skyrocket in recent years.

On top of this, people that can’t afford health insurance or don’t see the benefit (typically younger people) are dropping out, meaning that there are fewer healthy policyholders subsidising the sick. This creates a vicious cycle where fees rise, causing people to reduce their coverage, which causes fees to rise again because fewer people have coverage.

The government has just unveiled several measures to halt declining participation in private health insurance. According to media reports, young people will benefit from discounted premiums (up to a 10% discount between the age of 18-25) in order to encourage more young people to improve their coverage.

There are a wide range of other changes, many of which address gripes that the health insurers have presented to government directly. Medibank had suggestions that could save the industry up to $3 billion and I know that NIB Holdings has made similar submissions to government.

How does this affect my investment?

This is a tricky question. Indirectly, Medibank and NIB should benefit from increasing uptake and higher retention of customers. I think it’s exceedingly unlikely that overall premium prices will decrease, which means that if claim costs fall, profitability could improve somewhat at the insurers.

If health insurance coverage (currently about 50% of the population) does improve markedly, it could also lead to growth in premiums and profits due to higher policyholder numbers.

On a company-specific level however, Medibank still faces significant competitive challenges from the likes of NIB and Bupa, and continues to lose market share. As a whole the health insurance industry looks fully priced to me, and I consider these companies a ‘Hold’.

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Motley Fool contributor Sean O'Neill has no position in any of the 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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