Interest in Medibank IPO highlights difference in nations’ attitudes

Australian investors have become excited about health insurance. The enthusiasm is over the privatisation of Medibank Private, Australia's largest health insurer.

The Federal Government is selling its 100 per cent stake at an indicative price range between A$1.55 and A$2 a share. This values Medibank between A$4.3 billion and A$5.5 billion at this IPO price range.

The IPO is generating a huge amount of investor interest because Medibank is a well known brand, it is the country's largest health insurer with a 29.1 per cent market share and investors have had a positive experience from most Australian Government privatisations.

Healthcare is a major growth industry and investors believe well run health insurance companies represent good investment potential.

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The Medibank IPO gives us an opportunity to compare the healthcare industry, particularly health insurance, on both sides of the Tasman.

Medibank, which was the brainchild of the Whitlam Government, began operations on October 1, 1976, as a competitor to the private "for profit" health funds.

John Howard's Government announced that it would privatise the insurer if re-elected at the 2007 election. However, the Howard Government was defeated and the victorious Labor Party kept Medibank under full Government ownership.

Liberal leader Tony Abbott also promised to privatise Medibank if he won the 2010 election but was again defeated by Labor.

The company is now being fully privatised following the Liberal Party's victory in last year's election.

The big difference between health insurance in Australia and New Zealand is that it is a growth industry in the former but not the latter. This is illustrated by the following figures:

The total number of Australians covered by private health insurance has risen from 10,118,000 to 10,958,000 over the past three years while the number insured in New Zealand has fallen from 1,382,000 to 1,336,000 over the same period.

47 per cent of Australians are covered by private health insurance compared with only 28.5 per cent in New Zealand.

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Private spending represents 31.6 per cent of total health expenditure in Australia compared with only 17.3 per cent in New Zealand.

But the most frightening statistic is that only 12.5 per cent of New Zealanders aged 65 and over are covered by health insurance compared with 52 per cent across the Tasman.

In other words, we are becoming more and more dependent on the state for our health care while Australians are much more self-sufficient through health insurance.

The Australian Government provides a number of incentives to support the private health insurance sector including:

A Medicare Levy Surcharge on individuals earning more than A$90,000 a year who do not hold an appropriate level of private health insurance.

A 2 per cent loading is imposed on the premiums paid on private health insurance for individuals who delay taking out insurance until after their base date, which is within 12 months after their 31st birthday.

The Australian Government provides a rebate on private health premiums which varies from 9.7 per cent to 38.7 per cent depending on age and income.

The Health Funds Association of New Zealand consistently argues that New Zealanders should also be encouraged to provide their own health insurance instead of being heavily reliant on the state. This argument has fallen on deaf ears even though total Crown health expenditure is forecast to surge from $15 billion per annum at present to $24 billion in 10 years' time and a massive $98 billion in 2050 according to the Treasury's forecasts.

Meanwhile, the Australian private health insurance sector is experiencing solid growth and is divided into "for profit" and "not for profit" organisations.

The major "for profit" organisations are Medibank, with a 29.5 per cent market share, Bupa Australia (26.8 per cent) and ASX listed Nib Holdings (7.7 per cent).

The largest "not for profit" insurers are Hospital Contribution Fund of Australia (10.8 per cent), HBF Health Funds (7.5 per cent) and Teachers Federation Health (1.9 per cent).

Nib Holdings, which was originally established as the Newcastle Industrial Benefits Hospital Fund for BHP steelworkers in 1952, listed on the ASX in November 2007.

It is the second largest health insurer in New Zealand after acquiring Tower Medical Insurance from the NZX-listed company at the end of 2012. Nib New Zealand had a high-profile launch through Benji Marshall, although the footballer has returned to Australia after his rugby union career failed to fire.

Nib Holdings trades on a projected June 2015 year price/earnings multiple of 17.3 to 19 after the chief executive told shareholders at this week's annual meeting that the company expects full year earnings in the A$75 million to A$82 million range compared with A$69.8 million for the June 2014 year.

The Medibank IPO, which opened this week, continues to receive considerable media attention, mostly positive. More than 750,000 Australians pre-registered for the prospectus and there are reports that the IPO has "been swamped with hopeful brokers wanting shares" for their clients.

But sceptics argue that the IPO's lead managers are talking up the company, the shares are expensive, the dividend could come under pressure and any change in government policy would have negative implications for the health insurance sector and Medibank.

An issue price in the A$1.63 to $1.78 per share price range would give Medibank a prospective June 2015 price/earnings multiple around the same level as Nib Holdings.

A small number of shares should be available through New Zealand brokers but demand will substantially exceed supply.

Auckland-based Southern Cross Medical Care Society, which is a "not for profit" organisation with a dominant 61 per cent domestic market share, will hold its annual general meeting at the Ellerslie Event Centre on December 4. This will be another lively meeting because it appears to be more focused on director, rather than member, issues.

The directors are seeking a 31.5 per cent fee increase and there is a specific resolution to recognise the retirement of chairman Graeme Hawkins. This latter motion is unwarranted as a normal show of gratitude would have been sufficient.

Southern Cross reported a deficit of $1.1 million for the June 2014 year because of "higher than expected claims costs for the year driven predominantly by orthopaedic procedures and specialist consultations".

The chairman wrote: "In the case of the Society, as a not for profit insurer with strong reserves, small deficits such as these can be absorbed without impacting the value we deliver to members."

The debate over health and insurance costs will continue at the Southern Cross meeting because New Zealanders are much more interested in insuring their car, home and home contents than their health. A contributing factor to this is the belief that the public health system will meet all our health needs.

This is clearly incorrect given the increasing number of New Zealanders aged 65 years and over.

New Zealand badly needs an Obamacare-type debate to highlight the issues associated with health insurance, including the merits of government subsidies and rebates.

The clear message from the Medibank IPO is that health insurance is a growth sector in Australia, partly due to subsidies and rebates, whereas it is contracting in New Zealand with less and less retirees having private health insurance.

This is not a situation we should be satisfied with, particularly given the massive increase in healthcare costs and our ageing population.

•Brian Gaynor is an executive director of Milford Asset Management and a member of Southern Cross Medical Care Society.