Building an alliance to save Medibank Private

Author: Stephen Jones is the National Secretary of the Community and Public Sector Union

Can I start by acknowledging the members of the Save Medibank Alliance who are here tonight. Thanks for coming.

At the CPSU started building the Alliance just over a month ago in response to concerns our members had about the approaching privatisation.

The number of community organisations and individuals who’ve agreed to join our Alliance is growing week by week.

In particular I’d like to thank representatives of the Chronic Illness Alliance and the MS Society who are here tonight. They’ve been paying close attention to this campaign. As have the CPSU members of our union who work at Medibank Private who are here.

In Australia we have an overly complex and highly regulated system of private health insurance. But it is beyond doubt that the Government entities – Medibank and Medicare are the bedrock of that system.

About Medibank

  • Provides hospital and ancillary insurance cover for 3 million members
  • 30% of private health insurance market & is the biggest and only national fund
  • Government-owned and established under Fraser Govt 30 years ago
  • 1500 staff and over 100 retail centres

According to its 2004/05 Annual Report:

  • paid a record $2.3 billion in claims on behalf of members, representing over 89 per cent of premium income received from members.
  • Operating profit $130 million
  • $ 1 billion in assets (shares and cash)

Medibank Private’s head office is here in Melbourne, and the Melbourne media have taken a closer interest than anywhere else in the proposed sale.

That interest – since the release of a parliamentary library report on the 1 st of September - has been pretty overwhelming.

But for the untimely demise of a few national icons it might have been even greater.

As it turned out the battle over Medibank Private in the court of public opinion was brutish and short.

Last week the Fairfax/A.C.Neilsen poll saw 63% of respondents opposing the sale, with only 17% in favour. Even among respondents who identified themselves as Coalition voters, almost half were opposed to the sale.

The results of an online survey on the Save Medibank Alliance website were even more decisive.

Of the more than one thousand people who filled out our survey – 96% believe the Government has not made a case for the selling of Medibank Private.

84% of respondents agreed that the way their local MP votes on this issue will affect their vote in a Federal election. We didn’t ask our respondents about who they voted for, but for what it’s worth we estimate around 40-percent of our unions’ members voted for the Coalition at the last election.

These polling figures were the coup de grace at the end of a sustained two-week beating on the issue for the Federal Government.

Fund members, doctors, health academics, business commentators, consumer groups, the Opposition… even conservative radio talkback hosts had all lined up to put the boot into the government’s privatisation plans.

At CPSU we took a decision that Medibank was an important public interest debate that directly impacted on our members and we took the decision to be a part of the campaign to oppose privatisation.

We began surveying CPSU members in Medibank in August about the proposed sale and started getting our heads around the issues by talking to public health academics such as Dr Ken Harvey. We also began talking to other groups about forming an Alliance.

So we were ready when the parliamentary library report was released on the Friday afternoon on the first of September.

We immediately released a series of comments from our survey guestbook, and began briefing journalists.

By Monday the 4th of September my Sydney radio namesake Alan Jones asked his listeners:

“Why would Medibank Private members be asked to buy back something they already own?”

He went on to call the sale financially unjust and politically reckless.

On the 5 th of September we released comments by former Health Insurance Commissioners – Mr Ray Williams, Professor John Deeble, and Dr Robert Marr calling the sale ‘irrational’ and issuing a warning that as soon as a large share of the market is held by private shareholders, there will be pressure on the government to:

  • deregulate the industry
  • remove government price control
  • reduce - if not eradicate - community rating (explain)

By the 12 th of September the Federal Government was in retreat, announcing that the sale would be postponed to 2008.

Finance Minister Senator Nick Minchin says Medibank Private will be sold - if the Howard Government is re-elected.

For those of you who blinked, let me run through the arguments involved… and most importantly why we’re fighting on.

PART ONE – MEDIBANK MYTHS DEBUNKED

In April this year the Federal Government announced its intention to sell Medibank Private – Australia’s largest, non-profit, and only national private health insurer.

It set aside $20 million in the May budget for costs associated with the sale.

The merchant bank Carnegie Wylie which previously recommended the sale to the Government was commissioned to advise on what form the sale should take. The legal work was farmed out to Blake Dawson Waldron.

Between April and September, the issue was relegated to the business pages of the daily press with discussion concentrating on the form of the sale – whether it should be a share market float or a trade sale – rather than the merits of the sale itself.

There was not then – nor has there been since – any cogent explanation of why it’s necessary to sell Medibank Private.

In making its case for the sale the Howard Government has made several assertions – that there was ‘no good public policy reason’ for the government to own a health fund, and that ‘a privately-owned fund would be able to be more efficient’, with the possibility that this may lead to ‘less upward pressure on premiums’.

I think the first assertion will answer itself as I go on, so let’s run through the efficiency arguments.

Running costs

Let’s look at running costs. Medibank Private’s running costs are below industry average and below the majority of private funds.

In 2005 the largest ‘for profit’ fund - HBA - had lower management costs than the industry average.

Importantly, low cost does not equate with good service. HBA had less success in retaining members, had a higher proportion of complaints to the industry Ombudsman compared to market share, and returned a lower percentage of benefits to members as a percentage of contributions.

Generally speaking administration costs account for less than 10% of health fund expenditure, with the majority being paid out to hospitals for patient services.

Medibank Private’s management expense ratio is 9.2% less than PHI fund average of 9.8% . (includes all costs associated with the administration of the fund, for example costs incurred while processing claims, advertising, staff salaries, office space)

So in the overall scheme of things running costs aren’t going to have a big effect on a fund’s efficiency.

I think it’s worth noting here that universal health funds such as Medicare only spend about three-percent on administration – as they don’t have to devote as many resources to attracting and retaining members… but I digress

What other things could effect costs and premiums?

 

‘For-profit’ vs. ‘not-for-profit’

Both Medibank Private and MBF are ‘not-for-profit’ funds.

Under the National Health Act all ‘not-for-profit’ funds are prohibited from giving dividends to shareholders or any financial return to members.

Every cent of any surplus is reinvested in the fund for the benefit of members.

If we take a look at the International & Co-operative Mutual Insurance Association survey of 97 insurance companies in Europe – not-for-profit also had better premiums-to-payments ratio.

After 30 years Medibank Private members have accumulated quite a nest egg… with close to a billion dollars in cash and equity. The only equity that belongs to the Federal Government is a cash injection of 85 million dollars made in 2005.

Then there’s Medibank Private’s market share.

Of the nine million Australians covered by private health funds, three million are covered by Medibank Private. Medibank Private is the leading insurer in NSW, Victoria, ACT, and the Northern Territory and number two elsewhere.

The size of the fund and its dominant market position allows Medibank Private to use its bargaining power to put downward pressure on the cost of hospital services.

In one recent example, Medibank Private entered into a provider agreement with Ramsay Healthcare that excludes private hospitals from Medibank’s ‘Member’s Choice’ framework if they’re considered too expensive, such as Epworth Hospital in Richmond.

Medibank Private uses its market strength and rewards private hospitals that provide cheaper quality services with more business.   That’s where the competition exists, t he balance of power between hospitals and health funds – one provides a service and the other pays for that service.

The management of Medibank Private expressed it best itself to a 1996 Productivity Commission inquiry – when it admitted the interests of members are best served when funds "view their members as 'shareholders' for whom the delivery of lower prices is a dividend."

The only significant ‘for profit’ fund operating in Australia is HBA – part of the UK-based for-profit health group BUPA.

‘For profit’ insurers need to provide dividends for investors, and the dividends will need to be high enough to attract investors to a high risk, low profit business.

The Government expects a return on assets of between 8 – 10% and Super funds could expect to provide returns of above 7% gross for their members. Its unknown what reasonable dividend a prospective shareholders could expect from Medibank Private shares.

Look what happened to AWB – soon after this former government entity was privatised AWB introduced individual workplace contracts and performance bonuses to a maximum payment of 100% of salary.

This bonus system heavily rewarded the marketing and sales managers and in 2005, remuneration for executives was in the range $450,000 to $1.7 million. This is a common pattern in recent years for all public sector entities that have been privatised such as CSL, Telstra, Commonwealth Bank and Qantas.

The American Way ……

We only need to look at the two-tiered system that operates in America to see the impact on the community of a health care system where the private sector dominates.

For the forty-five million Americans who can’t afford private health insurance, some 18-thousand die prematurely every year from treatable illness because they can’t afford health cover, medication or care. Illness is also the biggest cause of individual bankruptcy.

Americans pay a high price for not having a universal health care system – an unregulated private market where premiums are increasing at a rate of five times the increase in wages.

Premiums for those with the greatest need become unaffordable because health funds can choose who they cover and the risk of that potential member. Premiums for men aged 55-65 are around $US10,000 per annum younger men pay around $US1000.

We’re already starting to hear calls from the private health insurance sector for the Government to change the ‘community rating’ system

Health funds cannot discriminate between their members on the basis of risk, can’t charge different premiums on basis of age, gender, state of health or anything else (conditions of registration of health funds and National Health Act)

The US leads the world in health care expenditure at around 15% of GDP but falls into the bottom 5 out of thirty OECD countries on measures such as infant mortality and life expectancy. As Australians we can expect to live more than two years longer than Americans.   So do insured middle class Americans have better health outcomes? No – the Journal of the American Medical Association reports wealthy Americans only fare as well as working class English.   So handing the health sector over to private market forces doesn’t promote greater efficiency or better health outcomes even for the highest spending nation.   Does greater choice increase competition – you ask? Surely increased competition will bring market forces to bear to provide for better services for members.   Well that’s the Government's rhetoric … but with 42 health funds Australians are already spoilt for choice, and confused by it.   Generally Australian consumers don’t tend to shift between health funds. There are three reasons for this:   the rules such as waiting periods are overly complicated and   the range of health cover on offer is too complex to compare and shop around for a better deal.   your choice of fund is a false choice because it does not determine the medical services or treatments available   Consumer choice between health funds does not equate to competition because consumers don’t exercise any collective power and can’t influence premiums.   It is hospital costs that are the biggest driver of premiums, so the competition exists between hospitals trying to maximize their profits and Medibank Private using its market power to drive down hospital costs.  

Government claims that the Medibank Private sale will lower premiums through increased competition is misleading at best

Where does this leave us?

Without a single objective measure whereby the Federal Government can say that Medibank Private will operate more efficiently as a private entity.

 

Does this mean that everything is fine with the status quo?

Premiums are a real issue for a large section of the community; Medibank Private itself confirms that through their consumer research which showed an overwhelming majority of members believe that premiums will significantly increase if Medibank Private is privatised.

Private health insurance costs roughly 3-4% of the average family income and people with chronic illness pay up to 20% of their income on health related expenses.

Premiums have increased 40% over the past five years; at a rate double CPI, higher than wages growth and indexation on grants to run public health services. If anything there needs to be tighter controls on premium increases.

Clearly the Government aim is cost shifting to individuals by expanding private health insurance, if there is further privatisation where does that lead us?

 

Is the government entitled to sell Medibank Private?

A Parliamentary Library report released on 1 st September 2006 poses the question – “does the government own Medibank Private”? and suggests that members have rights that are protected under the Constitution.

The report concludes Medibank Private, though owned legally and beneficially by the government, is a vehicle used to facilitate the operation of the fund for the benefit of the members; and that the assets of Medibank Private, including the fund itself, are held in trust for the members.

The only equity that belongs to the government is the $85 million cash injection from 2005.

The question of ownership is potentially sensitive for the government which is adamant the sale will not be in the form of a demutualisation.

Opinions vary, but a common theme is that government’s claim of ownership of Medibank Private’s $1 billion in assets is a legal artefact, and in fact the assets are owned by the members. Even if this is not legally sustainable – it is, as Alan Jones has said, morally beyond question.

 

THE CAMPAIGN CONTINUES

While many of our Save Medibank Private alliance members rejoiced as the Government bowed under pressure of community opposition from doctors, consumer groups, unions and public opinion polls the fact that the Government will introduce legislation to enable the sale in two weeks time seemed to be missed.

Deferring a public float until after T3 still leaves Medibank Private members and staff in limbo. And it does nothing to relieve community concerns about higher premiums.

Once this legislation is passed the Government will be free to push the sale through when they think it is politically expedient.

I believe a sale of Medibank Private will be disastrous for Australian health consumers.

I also believe it is immoral and possibly even illegal for any sale to be considered without first agreeing on fair compensation for those who’ve contributed to the fund over the past 30 years.

To save Medibank - for our members who work there, for the members of the fund, and for all Australians.

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