Health insurer is addressing escalating medical costs.
The huge contrast between the largest Australian and New Zealand health insurance companies was clearly evident at the latter's annual meeting in Auckland on Thursday.
While Medibank has a sharemarket value of A$5.9 billion - and investors are arguing about its long-term earnings prospects - the bold banners on either side of the Southern Cross Health Society's board table read "Southern Cross Health Society makes no Profit. Again".
Medibank is a recently listed ASX company while Southern Cross is a friendly society with a nil profit objective.
However, they have one thing in common, they are both trying to curb excessive overcharging by a small number of medical professionals.
Two Auckland dermatologists told the Southern Cross meeting that the insurer should be willing to pay extra for quality specialists but this argument was quickly and firmly rejected by chairman Graeme Hawkins and other attendees.
One Southern Cross member told the meeting that he was delighted that the insurer had finally become a strong advocate for members as far as overcharging by medical professionals was concerned.
An assessment of Southern Cross' recent financial performance shows it has no option, it has to curtail claim expenses growth. If it doesn't it will lose more and more members and the profit-orientated Australian health insurers will gain a stronger foothold on this side of the Tasman.
This would be a less preferred outcome for our medical profession.
The main problem with Southern Cross - as the accompanying table shows - is that claim expenses are growing rapidly, premiums are soaring and membership is falling.
The following developments have occurred over the past five financial years:
•Membership has fallen from 842,044 to 815,447.
•Annual claim expenses have risen from $562.2 million to $694.5 million, or from $668 to $852 per member.
•Total premiums have soared from $597.3 million to $768.4 million, or from $709 to $942 per individual.
Operating expenses have also risen while investment returns have steadily fallen year after year. Former Southern Cross chief executive Dr Ian McPherson wrote in the 2013 annual report that the cost of a hip replacement has escalated from $350 to more than $18,000 over the past 40 years. He added that a 40-year-old could obtain hospital and specialist insurance for 20c a week in the early 1970s but this coverage was now costing $18 a week.
Roger France, who stood successfully for the Southern Cross board, told the meeting that when he joined the society in 1976 members were advised to submit claims every three months or when they reached $30, whichever was the earlier.
An elderly man told Thursday's meeting that his Southern Cross coverage cost $1200 a month and he had to continue working to fund this.
Finally, the New Zealand Institute of Economic Research believes that health expenditure will increase from 21 per cent to 32 per cent of total Government spending by 2050, if current spending rates continue.
Southern Cross is addressing escalating medical costs through its Affiliated Provider Programme. This is a programme whereby doctors, specialists and facilities contract to provide healthcare services to members of the Southern Cross Health Society at agreed prices. Affiliated Providers arrange prior approval from Southern Cross on behalf of their patients and submit invoices directly to the insurer.
Chief executive Peter Tynan wrote in Southern Cross' 2014 annual report: "Contracting with providers is part of a long-term strategy to keep premium increases lower than they otherwise would be by dampening down medical inflation."
"There are currently agreements in place throughout New Zealand covering over 1000 providers across 20 specialties. At present, over 34 per cent of all Southern Cross claims are paid to Affiliated Providers, and our aim is to grow this to 60 per cent by 2016," Tynan said. "We are aware that there is resistance by some providers to this programme. However, we believe if provider pricing goes unchecked, access to private healthcare options will become increasingly difficult for many New Zealanders."
Southern Cross is clearly delighted with its Affiliated Provider Programme but the two attending dermatologists, Fergus Oliver and Paul Le Grice, are not.
They argued that the programme would reduce the ability of patients to obtain quality care and there would be a 50 per cent reduction in specialist income. Le Grice told the meeting that medical professionals were only joining the programme because they had to, if they didn't they would have no patients.
He accused Southern Cross of controlling prices "just like they did in Russia".
Chairman Graeme Hawkins said that Southern Cross was not trying to control prices, it was attempting to establish reasonable prices. He said that a number of specialists had opposed the Affiliated Providers Programme out of self interest but the establishment of reasonable pricing would be the best outcome for the healthcare sector in the long run.
He said that Southern Cross, which has a 61 per cent share of the domestic health insurance market, had to curtail claims growth to survive.
The other medical professional who spoke was primarily concerned about patient welfare. He argued that Southern Cross should be advocating that at least one Auckland Hospital remain open for emergency procedures - he gave the example of breast cancer patients - over the Christmas/New Year period.
Medical fraud and investment returns were two other important issues raised.
Tynan admitted that medical fraud, mainly false invoices for medical care, was a problem for the health insurance sector and could cost between 1 per cent and 3 per cent per annum. He said that Southern Cross had placed a high priority on fighting medical fraud.
Another issue is the declining returns on the society's $490 million investment portfolio. The annual return has fallen steadily from 8.6 per cent in the June 2010 year to 5.9 per cent the following year, 5.3 per cent in 2012, 4.6 per cent in 2013 and just 3.8 per cent in the latest financial period.
Keith Taylor, chairman of the Southern Cross investment committee, said the society was required to adopt a conservative investment approach. This is true but Southern Cross is far too conservative as it has 84.5 per cent of its portfolio in bank deposits, commercial paper and float rate notes compared with just 30 per cent in June 2009.
An investment return of 6.9 per cent, instead of 3.8 per cent, would have generated an additional $15.2 million for the insurer and enabled it to reduce premiums by a similar amount.
Even though Southern Cross' investment returns are disappointing the overall mood at this week's meeting was fairly upbeat, particularly compared with the early 2000s when the 800 members in attendance were highly critical of the board and management.
Only 100 members attended this week's meeting. In addition there were only 15,000 proxies from 815,000 members giving a total member participation rate of less than 2 per cent. This is a worrying trend as fewer and fewer people attend most annual meetings and proxy participation by individuals is disappointingly low.
Brian Gaynor is an executive director of Milford Asset Management and a member of the Southern Cross Health Society.