A curious factor goes some way to explaining why Australia’s two listed health insurers, Medibank and NIB, have recently been paying out smaller proportions of their premiums to members making claims.
The number of operations and other medical procedures in private hospitals in Australia dropped sharply in September-October last year, meaning fewer patients were making claims on their insurance.
The timing coincided with the Rugby World Cup in England.
The indication is many specialists and surgeons took time off to go to the event, staged in England and Wales, perhaps watching the final between Australia and New Zealand and staying on for a holiday.
There’s an historical connection between the medical world and rugby, perhaps because of the strong tradition of the sport at Australian and New Zealand universities with older medical faculties. For example, David Kirk, former World Cup-winning captain of the All Blacks, has a medical degree.
“Both NIB and and Medibank both said they thought that that may have been one of the reasons why there was — in their words — a lot lower private hospital utilisation,” David Ellis, a senior equity analyst at Morningstar, told Business Insider.
“The number, and hence the dollar value, of claims declined in the six months ending 31 December.”
Health insurance, and any type of insurance generally, is all about margins — paying out less than comes in from premiums.
In Australia, and the rest of the developed world, there seems a never ending growth in appetite for health services, perhaps partly explained by ageing populations. Health spending in Australia has increased to 9.7% of GDP, about $154.6 billion, from 6.5% about 15 years ago.
The rugby factor, at best a one-off but a welcome one for the insurers, improved first the recently announced results of the two listed companies.
This chart shows the change between the first six months in 2015 and 2016 in the makeup of operating profit at Medibank Private, the biggest player in the market:
While the actual payout of claims for benefits increased in dollar terms by just 0.6%, the proportion of premiums paid back to members was substantially lower in 2016.
Between the two half years, the payout proportion fell 3.3 percentage points to 82.8%.
This effectively increased the health insurance operating profit to 8.8% from 5.8% — a jump of more than half — to $271.7 million.
The NIB also announced its half year results but it didn’t have a direct comparison to Medibank’s.
But it did compare what it called “claims inflation” to that of the industry.
NIB says this easing of “claims inflation” contributed a 170 basis point improvement to its gross margin of 15.1% in the first half of 2016. This compared to 13.4% in the corresponding period.
Managing director Mark Fitzgibbon points out that the actual amount of cash paid out was higher, a 8.3% rise to $663.5 million for the six months.
However, this should be read in the light of the fact that premium revenue also rose $781.3 million, a 10.5% increase.
David Ellis at Morningstar says both Medibank and NIB noted that there was a Rugby World Cup influence last year. “They both thought that may have been a reason the number of claims had declined,” he says.
However, he says there’s also an underlying trend of less claims going through private hospitals.
All insurers, and health insurers in particular, are focusing on what they call avoiding adverse selection in policy holders.
They are using analytics and their experience to be more careful about who they take on as customers.
Then there is the the long term negotiation with hospitals on what can and cannot be claimed.
“They are refusing to pay for some claims they believe are not necessary or are the hospital’s fault,” Ellis says. “It might have been a repeat admission for what the insurer’s believe was an issue the responsibility of the hospital or the specialist and so why should the health insurer pay for that?”
The health insurers are also looking at the variability of the cost of operations across Australia.
“NIB has often made the claim that if you live in certain parts of South Australia you have a substantially higher chance of having a knee replacement than if you live anywhere else in Australia,” Ellis says.
“They put that down to the fact that some of the hospitals are owned and operated by the specialists.
“Slowly, slowly the private health insurers are trying to make it more transparent so the cost of a particular service is more consistent and that the whole health system and consumers will benefit from less wastage and less overcharging.
“Eventually, we — the Australian population, the Australian economy — are going to have to change things because we are not going to be able to afford to pay for the ongoing increase in health spending.”
Ellis says both insurers posted good results.
Medibank had a full year profit of $291.8 million, beating its own prospectus forecast of $258.2 million. NIB recorded a 4.7% lift in half year profit to $43.1 million on a 15.2% rise in revenue to $927.1 million.
From next month, both will be able to charge their members more, increasing premium revenue from current members after the federal government approved a 5.64% lift in premiums for Medibank and 5.55% for NIB.
All they have to do now is to hang on to their membership base and keep that payout ratio down in a year without a World Cup Rugby month.