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Why ASX private health shares aren’t as good as they look

From my humble observations, Australians seem to enjoy a love/hate relationship with private health insurance. It’s always nice flashing your card when you visit the dentist or physio, but paying those weekly or monthly premiums is a bit of a hassle (to put it mildly).

What’s more, private health premium costs are one of those things that just seem to keep on rising – usually well above inflation and the cost of living as well.

So with that in mind, you would think private health is a ripe place to invest these days. The sector enjoys widespread use and acceptance as a ‘backup’ to the publicly funded Medicare. Not only that, there are significant government incentives for individuals (particularly on higher incomes) to take out private health insurance – along with penalties for those who don’t.

Most companies don’t enjoy that kind of public assistance – in fact, having the government herd customers into your arms is something most businesses can only dream of. Reviewing the performance of the ASX’s 2 largest private health insurers, it looks on first glance as though private health is a no-brainer.

Medibank Private Ltd (ASX: MPL) shares have only been on the public markets since its privatisation in 2014 at around $2 per share. Today, MPL shares are going for $3.36 (at the time of writing) and come with a 3.88% dividend yield. A dividend yield that has been steadily increasing since 2014 to boot!

It’s a similar story with NIB Holdings Limited (ASX: NHF). NHF shares were asking around $1.30 10 years ago, but today will set you back $6.92, with a 3.89% dividend yield. NIB’s dividend payouts have also been steadily increasing over the past decade.

The problem with private health

Before you get the cheque book out, I think it’s worth noting that past performance is no indication of the future. As a matter of fact, I believe that things aren’t looking so rosy from here.

We have a rapidly ageing population in Australia, which means that over time there will be less healthy, younger people to pay for the higher medical needs of the older generations.

That means rising premiums.

Rising premiums in turn mean there is less incentive for younger people to take out the health insurance in the first place. This has the potential to become a vicious cycle for the fund providers, if it isn’t happening already.

Foolish takeaway

Whilst I love both Medibank’s and NIB’s management and past performance, I think there are significant structural issues for this space as a whole going forward. These issues make me disinclined to pursue this industry for my own portfolio – at least until I can see a clearer path towards the system’s sustainability.

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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia has recommended NIB Holdings Limited. 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 Scott Phillips.