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Finance and Public Administration Legislation Committee - 25/05/2011 - Estimates - FINANCE AND DEREGULATION - Medibank Private Ltd

Medibank Private Ltd

[16:01]

CHAIR: We will begin with Medibank Private. Minister or Mr Sammells, do either of you have an opening statement?

Senator Wong: No, thank you.

Mr Sammells : I am happy to open with a few words. On behalf of George Savvides, our managing director, I would like to express his apologies. He is overseas on business at the moment and could not be here today. We would also like to acknowledge Ralph Hunt, the former Minister for Health in the Fraser government, who passed away on the weekend. He happened to be Medibank’s first ever member. So, there is a piece of our history that has passed away, unfortunately.

The business of Medibank is performing well in what is at times a challenging marketplace. We are well on the way through a journey of transforming ourselves from purely a private health insurance business to a genuine health company, with both health insurance and health solutions. Our core private health insurance division continues to perform strongly across our two brands of Medibank and AHM, where we have over 3.7 million residents insured and have a good strong overseas visitors and overseas students business.

Like any funder of health care services, we face the challenge of an ageing population and the pressure on outlays. We are really pleased to be able to advise that again in terms of managing our premiums and costs, we have delivered a premium increase that has been less than the industry average for the past four years, including this year. Our health solutions division continues to develop, which is a product of organic growth and acquisitions during the past three years, offering a combination of face-to-face and telehealth based services that we think are quite unique.

It is interesting to note how the business of Medibank has changed over the years with our workforce expanding from just under 2,000 people in private health insurance to over 4,500 people now, with 1,300 clinical staff. We operate those clinical staff over 60 clinics across the countryside in a whole range of services and that integration is going really smoothly. We are happy with progress and will continue to reform our business and play a key role in servicing our members and our customers. Without further ado, I am happy to take any questions.

CHAIR: Thank you and welcome. Is this your first estimates?

Mr Sammells : I have been a couple of times previously.

CHAIR: Senator Cormann, you have the call.

Senator CORMANN: When we last met, Medibank had not paid the $300 million special dividend. Have you paid that now?

Mr Sammells : We will be paying that next month.

Senator CORMANN: So in June, just in time for the end of the financial year?

Mr Sammells : That is correct.

Senator CORMANN: What about your regular dividend this year? Was that about $85 million?

Mr Sammells : We declared a dividend for the last financial year of $81 million and that has been paid.

Senator CORMANN: When do you normally pay that?

Mr Sammells : We typically pay an interim dividend in the May-June time period and a final dividend in the October time period.

Senator CORMANN: When do you make the determination as to how much the interim and the final dividend is going to be?

Mr Sammells : The interim dividend is typically decided around this time period, an April-May time window, and the final dividend is declared once we complete the finalisation of our annual accounts.

Senator CORMANN: What determination have you made about the next interim dividend?

Mr Sammells : We have a prevailing dividend policy that prescribes that approximately 50 per cent of our net profit after tax is payable in a dividend. Our board and shareholders are going through the process of formalising that for the interim dividend. That process is in train as we sit here now.

Senator CORMANN: What is your profit expectation? What is your expectation in terms of 50 per cent of net profit after tax in dollar terms?

Mr Sammells : We are not in the business of providing profit forecasts, unfortunately.

Senator CORMANN: Is that because you are not publicly listed? You are a for-profit publicly owned company.

Senator Wong: Is that a question?

Senator CORMANN: No, I am just asking. If you were publicly listed you would have to provide these sorts of profit forecasts, would you not?

Mr Sammells : The answer to that question is, yes, but we are not, so we do not.

Senator CORMANN: So, you do not because you are owned by government?

Mr Sammells : No. We are not under a continuous disclosure requirement under the ASX rules. We release our profit results on an annual basis, once our accounts are approved. Typically in September each year we would make a public announcement of results. That has been our custom for the history of Medibank.

Senator CORMANN: You are acting consistently with the rules and regulations, and I understand that, but I observe that even though you are a massive for-profit company, because you are a government business enterprise your disclosure requirements are less stringent than those that apply to publicly listed companies.

Senator Wong: People do not buy shares.

Senator CORMANN: There is still a value attached to it. Madam Chair, I was pursuing questions. I am happy to have a discussion with the minister.

Senator Wong: You were not pursuing a few questions. You were making a range of statements.

CHAIR: Senator Cormann has been in and out of this committee, but I have explained the process previously in terms of how we operate in estimates. We ask questions and we wait for the answers. It is not helpful to have political debate or dialogue before and during questions. The call is with you, Senator Cormann, if you have a question.

Senator CORMANN: The value of Medibank Private is, of course, a matter of public interest. Minister, I have asked questions about this to the Department of Finance and Deregulation before and the answer that I got back after they took it on notice was that ‘the department does not disclose the value of individual government business enterprises as such’ and ‘valuations are commercially sensitive’. I do not understand why they are more commercially sensitive for Medibank than they would be for any other for-profit company that has to comply with these sorts of disclosure requirements as a publicly listed company. Why would you be reluctant to reveal what the commercial value of Medibank Private is on your books?

Senator Wong: I assume that was a question to me.

Senator CORMANN: I have asked the question to you, yes.

Senator Wong: Chair, I take your direction to us both not to be too political.

Senator CORMANN: That was not political.

Senator Wong: Can I finish? I listened to your question.

CHAIR: Senator Cormann, you have put the question and you have made your statements. Allow the minister to respond.

Senator Wong: Senator Cormann, if you make a range of assertions in your questions that we do not agree with then obviously, on behalf of the government, I am going to respond to that. If you have questions regarding the answer provided by the department to the question on notice, I would ask you if we could deal with that when the departmental officials are here. That was a response, from memory, that the Department of Finance provided to you, so I am happy to deal with it if we could wait for the Department of Finance, which is after this.

Senator CORMANN: I was asking the question of you and I would like you to provide an answer now.

Senator Wong: You cannot do that. Who do you think you are saying, ‘I would like you to provide the answer now’? I have asked you, quite courteously—

Senator FIFIELD: We can ask questions.

Senator Wong: I do not mind that. I dislike being spoken to like that.

Senator CORMANN: I would like you to provide the answer, because I want to ask some more questions of Medibank.

Senator Wong: I am asking, as a matter of courtesy, as is usual practice, if you are addressing questions relating to the department and the department’s actions that you ask them in the appropriate place.

Senator CORMANN: I am asking questions about the value of Medibank. I can well understand that Mr Sammells is in a difficult position where he cannot assist me, but I am asking you as the shareholder minister, you as the representative of the owners of Medibank, why it is that you are not prepared to disclose what the commercial value of Medibank Private is?

Senator Wong: I will take it on notice until the department arrives, because I think it is not unreasonable for a minister at the table, if asked about a question on notice provided a different agency than the one sitting next to them, to ask that that be dealt with at the appropriate time in the agenda.

Senator CORMANN: This is not a question for the department; it is a question for the government. I note that, as the minister, you are not prepared to answer the question.

Senator Wong: I am going to take issue with that. That is not my answer. You do not verbal me.

Senator CORMANN: What is your answer?

Senator Wong: I have just taken it on notice and I will answer it when the department is before the committee, as is appropriate.

Senator CORMANN: Mr Sammells, obviously when we last met, Mr Savvides was able to assist us in terms of what the expectations were in terms of final dividends. He gave us a figure of approximately $85 million and it came in at $81 million. What is the expectation in terms of the regular dividend that Medibank would be expected to pay in the next financial year?

Mr Sammells : It will equate to 50 per cent of our full-year profit after tax, which is a number that we will not have a final view on until we have completed our annual accounts in August-September.

Senator CORMANN: Unlike Mr Savvides, who was able to tell us last time that it was about $85 million, have you now changed your policy on that?

Mr Sammells : No, not at all. What I am saying is that we are not in the business of providing profit forecasts and, therefore, on that basis, it is incredibly difficult for me to answer your question and provide a dividend forecast. I would point out that there are 37 health funds in the sector, of which there are 36 that do not disclose profits on a half-year basis or through the course of the year. Hence to do so would probably be disadvantaging ourselves, which is why we have that position.

Senator CORMANN: So, the $81 million dividend was for the 2009-10 financial year?

Mr Sammells : That is correct.

Senator CORMANN: So, that was 50 per cent of after tax profits, was it?

Mr Sammells : That is correct.

Senator CORMANN: So, whatever the dividend is for 2010-11 that will come on top of the special dividend, the $300 million dividend, which is payable in 2010-11?

Mr Sammells : That is correct.

Senator CORMANN: So, would the proportions be very different from the fifty-fifty that would be your ordinary dividend proportions?

Mr Sammells : Yes. The way to think about it is that the routine dividend policy is a product of paying 50 per cent of net profit after tax for any one given year. That $300 million special dividend is a special one-off dividend on top of that regime.

Senator CORMANN: What will be the overall dividend payment to the Commonwealth if you put the regular dividend and the special dividend together, in proportional terms, as a percentage?

Mr Sammells : As a percentage of what?

Senator CORMANN: As a percentage of your profits in 2010-11? Are you going to be paying your regular dividend?

Senator Wong: I suspect that is a different way of asking the question that Mr Sammells said that he cannot answer. For the reasons that he has outlined, he is not answering questions about profit. You then ask him what percentage this will be, which is essentially the same question.

Senator CORMANN: I am asking what the percentage of both the regular and special dividend are going to be. I am not asking him what percentage the special dividend is going to be of the overall profit. I am asking what the total dividend is. He has told me that the regular dividend is going to be 50 per cent of profits after tax, so what is going to be the overall dividend payment? Is it going to be more than your profits after tax?

Mr Sammells : It is hard for me to say because, firstly, we have not completed the financial year and, secondly, it is asking me to try to provide you with a forecast of what the full-year profit is going to be.

Senator CORMANN: Let me ask the question differently, and I am not trying to be cute here at all. Will part of or all of the $300 million in special dividend come out of your capital reserves or will it come out of your operating profit after tax?

Senator Wong: That is the same question.

Senator CORMANN: It is not the same question.

Senator Wong: It is. I admire your creativity in approaching it in a whole range of ways, but essentially you are seeking that Mr Sammells give you a profit forecast. That underpins all of the questions that you are asking and he has answered that question.

Senator CORMANN: What was your declared profit in 2009-10?

Mr Sammells : It was a profit of $380 million before tax. It was about $260 million after tax.

Senator CORMANN: So, $260 million after tax and your regular dividend in 2009-10 was $81 million. A special dividend of $300 million on top of it in that year would have caused you to have to go into your reserves.

Mr Sammells : The way to think about it is the fact that Medibank has a really strong balance sheet and that after payment of the routine dividends and after payment of the special dividend of $300 million Medibank remains in a strong and sound capital position that has a capital that is sufficiently in excess of the prudential minimum that provides future security to member benefits. I think that is probably the most important point to make.

Senator CORMANN: I am sure that Medibank is in a strong capital position and it is, of course, a capital position that has been accumulated over many years courtesy of a lot of members of Medibank Private. In order for you not to have to draw on your capital reserves to pay the $300 million special dividend it is fair to say that your profit in 2010-11 after tax would have to be higher than it was in 2009-10, because if it is the same then you will have to draw on your capital reserves that were accumulated by members of Medibank.

Mr Sammells : In essence, I understand what you are saying. The way I look at it is that our capital reserves are there and the business of running a strong and successful business in any given year adds to the value of those reserves, which provides the ability to pay the special dividend of $300 million, as requested by the shareholder, and maintain strong capital and balance sheets.

Senator CORMANN: When you say you understand what I am saying, what you are saying is that I am right. It stands to reason that if you had a profit of $260 million after tax and you pay $81 million in regular dividends, that leaves another $179 million. If you pay a $300 million dividend on top of that, that would be $120 million out of your reserves. Unless your profit, after tax, in 2010-11 is higher than what it was in 2009-10, you would have to draw on your reserves. That is a completely factual and logical conclusion of what you have been telling us.

Senator Wong: That is not a question.

Senator CORMANN: I am asking him to confirm what I am suggesting.

Senator Wong: That is your proposition. That is not a question.

Senator CORMANN: Is that right?

Mr Sammells : There are a whole range of timing issues there. The reality is that we have the reserves to fund the dividend. We have the reserves to maintain the financial security of the fund moving forward. That is where we are.

Senator CORMANN: So, you have the reserves to fund the dividend?

Mr Sammells : Yes. That is correct.

Senator CORMANN: You talked to us about this year’s premium rise. Have you had any feedback from your members about the premium increases this year?

Mr Sammells : We are really pleased that we are able to deliver a premium increase that was lower than the industry average. It is the fourth year in a row that we have been able to achieve that. I think our members get the benefit of that. It is fair to say that members do not like premiums going up at all, but given the challenges of an ageing population and the challenges of growing health expenditure, I think members understand that our increase was quite modest compared with that of many other funds.

Senator Wong: If you are a member or a customer of Medibank Private, this is your opportunity to tell Mr Sammells what your view is.

Senator CORMANN: I regret to say, and I think Mr Sammells well knows, that I am a member of a different fund. I will not do any competitive advertising. Have you made any provision in your costings, when putting your rate change application together, about things like the mooted change in the private health insurance rebate, tax payable, dividends payable and capital reserve targets? Can you talk us through, beyond your expected utilisation and so on, what factors went into your rate change application other than your normal expectations in terms of claims experience moving forward?

Mr Sammells : The primary driver is claims experience. We have been quite consistent with that. For every dollar that we collect in premiums 86c in the dollar is spent on health services. Regardless of the dynamics around us, that is the principal driver, and I expect that will remain the key driver of price changes into the future. Through that we have all the other factors that you have described that we take into consideration, but in terms of relative weighting of those measures, benefit outlays and health service expenditure will remain the dominant force in price changes.

Senator CORMANN: You would expect that. Obviously your claims expense is your most significant expense and it is your primary driver, but you concede that there are other drivers such as the mooted changes to the Private Health Insurance Rebate, your requirement to pay tax and to pay dividends and to continue to build your capital reserves?

Mr Sammells : All those factors are taken into account in any given year. The rate process invites you to look forward into the foreseeable future to try to understand what the future looks like. Based upon that there is a whole raft of decisions to be made.

Senator CORMANN: What does the special dividend of $300 million do to your expected rate change requirements into the future?

Mr Sammells : The point would be that it has had in essence no impact on prices. I think the evidence of that would be the fact that, whilst it is not paid until next month, it was declared quite a long time ago. So at the point of putting in a rate change we had all of that information, and we have increased our prices by lower than the industry average.

Senator CORMANN: So, that special dividend is funded by past surpluses, which are going to reserves?

Mr Sammells : It is funded in part by that capital base; that is true.

Senator CORMANN: What are your current capital reserves? You are going to laugh, because you think that I am going to ask the same question a different way.

Senator Wong: Surprise me.

Senator CORMANN: What are your current publicly disclosed capital reserves? I am sure there is something that you can share with us.

Mr Sammells : We have total reserves of about $2 billion to $2.2 billion.

Senator CORMANN: You need to be reasonably transparent with the regulator on your capital reserves and so on, do you not?

Mr Sammells : We are absolutely transparent with the regulator.

Senator CORMANN: I am not asking you some sort of national secret, am I?

Mr Sammells : No.

Senator CORMANN: The minister was getting a bit worried that I was trying to be sneaky and get another one in that would put you on the spot.

Senator Wong: I was observing your persistence. We spent quite some time on these same issues at the last estimates.

Senator CORMANN: I am very interested in these matters.

Senator Wong: You clearly are. You are very happy to continue to traverse the same ground.

Senator CORMANN: I am very interested in how these things develop. So, it is $2.2 billion. What is your regulatory minimum requirement in terms of your capital reserves?

Mr Sammells : Now you are asking for information that is not publicly available. The regulator understands that information. That is their formula. We run a prudential capital policy that provides for the minimum required under the capital adequacy and solvency requirements. We have a buffer that sits on top of that, which any responsible private health insurer would have, and ultimately that is their prevailing capital policy. Whilst you can look at our balance sheet and derive, as I said to you, that we have about $2 billion to $2.2 billion in total reserves, the value of the minimum requirement is not publicly available information.

Senator CORMANN: Maybe you need to take this on notice. I am very confident that Mr Savvides has shared this with us in the past. A figure of about $800 million to $1 billion above the minimum requirements, in terms of regulatory requirements, springs to mind as a figure that Mr Savvides has mentioned in the past. I can understand why you would be a bit more cautious and that maybe Mr Savvides feels that he is more at liberty to share some of these things, but you might want to take that on notice to see whether you can assist the committee any further. Have you made any further asset acquisitions since we last met in February?

Mr Sammells : No, not at all.

Senator CORMANN: Are there any that are currently being considered that you can share with us?

Mr Sammells : No.

Senator CORMANN: I am going to make the minister smile again, because I asked about this last time, too. Have you had any discussions with the government since we last met about a possible partial privatisation of Medibank Private?

Mr Sammells : No, not that I am aware of. Ownership is a question for the government and not for Medibank in any case.

Senator CORMANN: What I am asking you is whether you have had discussions, and that is something that only you can answer.

Mr Sammells : The answer is, no, to that question.

Senator CORMANN: Minister, if you want me to ask the question later then I can do that, but just to be completely clear about the government’s policy, do you remain committed to full public ownership of Medibank Private?

Senator Wong: That is correct.

Senator CORMANN: So, there are no plans to sell any part of Medibank over the next four years?

Senator Wong: Our government has no such plans.

Senator CORMANN: Thank you. That is a direct answer to a direct question.

Senator Wong: It is the same old question you asked me last time.

Senator CORMANN: Last time we had some commentary from the minister for health, who was mooting a partial sale. We will get to that. Would your current membership numbers be public information? Roughly how many of your members would currently have hospital cover?

Mr Sammells : I could not quote the exact number. I think we have 3.7 million resident members all up, of which the very large majority of those have hospital cover.

Senator CORMANN: When you say a ‘very large majority’, is that 80, 85 or 90 per cent?

Mr Sammells : I will have to take that one on notice.

Senator CORMANN: How does your most recent growth in membership compare with historical trends?

Mr Sammells : The number of members at Medibank has been growing by 1½ to 2 per cent. That has been quite consistent for the past couple of years.

Senator CORMANN: So, there has been no change?

Mr Sammells : No material change.

Senator CORMANN: What does that mean?

Mr Sammells : Some years it will be 1.4 and other years it will be 1.7. It is in that bandwidth of 1½ to 2 per cent. It has been quite consistent.

Senator CORMANN: What action have you taken to prepare for the mooted changes to private health insurance rebates?

Mr Sammells : What we would do, business as usual, is continually work away at providing members as much value as we can through our core products. More recently we have been increasing our level of health management services that we are offering to members through our product suite. We have launched a new product suite in the market earlier this year, and a range of other services that are designed to improve that ongoing value proposition of the private health insurance product. For us, that is pretty much a business as normal activity and we will continue to pursue it.

Senator CORMANN: Are you looking at focusing on offering cheaper hospital products that may be available for those members who wish to downgrade their level of cover?

Mr Sammells : We have realigned our new product suite earlier this year to provide members with a really clear choice as to what level of cover they are looking to buy. They can buy everything from a very basic hospital product through to our premium product that covers everything, and on the way through there are three tiers of products that they can choose. Members can make a really transparent selection.

Senator CORMANN: Are you aware of the Deloitte research which has projected that 1.6 million people over five years will drop their private health cover?

Mr Sammells : I have seen that research in the public domain.

Senator CORMANN: And 4.3 million would downgrade their cover? What is Medibank’s assessment of that research?

Senator Wong: That is not a question for Mr Sammells.

Senator CORMANN: It goes directly to their core business.

Senator Wong: No, it does not. You can reasonably ask Mr Sammells, as you have been, about their planning and their approach to any possible changes in their operating environment for the reasons that you outlined, but what you are asking him to do is to comment on someone else’s work and give an opinion. That is not a matter for him.

Senator CORMANN: Let me assist the minister. Mr Sammells, have you done your own research inside Medibank Private or have you commissioned any research of your own into the impact of proposed changes to the private health insurance rebate on your membership?

Mr Sammells : We have not commissioned any customer based research.

Senator CORMANN: Have you done your own internal research?

Mr Sammells : I would not call it research.

Senator CORMANN: What would you call it?

Mr Sammells : Some internal modelling, which is always fraught with difficulty, because the core change that legislation contemplates is means testing the rebate to income. As you may well appreciate, the income level of our members is not data that we hold. With the best will in the world our actuaries do some work on this stuff, but it is not a perfect science, as you would understand.

Senator CORMANN: Modelling is never a perfect science and actuaries always have to go on the basis of the best available information. Consequently some conservatism comes into their conclusions. With all of those provisos, what does your internal modelling show in terms of the impact of the proposed changes in private health insurance rebate on your membership?

Mr Sammells : Our best educated guess to ourselves, with all the caveats that I will talk about, that is, it is a guess, an educated guess but it is a guess all the same, would be that potentially approximately one per cent of members may in fact lapse on their product and give away private health insurance as a result, and there may be another cohort of members who may, as you have already suggested, try to downgrade their product and go from our top hospital to a medium hospital-type product. That is the sort of thinking that we have. I would really like to think that those members who are impacted should this legislation be passed look seriously and evaluate their private health insurance product and hopefully see enough value to retain it.

Senator CORMANN: Of course, that is always the aspiration. But you say one per cent of your membership would lapse and then others would be expected to downgrade. Do you have a percentage on how many you would expect to downgrade?

Mr Sammells : I think my best guess there would be somewhere in the range of about 2½ per cent of the membership might downgrade their product in some way, shape or form.

Senator CORMANN: You said your membership is about 3.7 million, most of whom have hospital cover. So one per cent would be about 37,000; 2½ per cent would be close to 70,000, and that is just Medibank, is it not?

Mr Sammells : I would express caution about those numbers, though. That 3.7 million is really lives under cover rather than policies held. If I take the example of a family membership, they might have one hospital policy, but there will be a husband, wife and kids on that policy. If I were to translate percentages to policies I suspect about 15,000, being that one per cent number, may in fact decide to give away their policy, and a further 38,000 potentially might consider downgrading, but as I have said—

Senator CORMANN: That is in terms of policies, but of course we are interested in people. You said one per cent of your members and roughly 2.5 per cent of your members, and that is presumably taking into account that some policies are single policies and other policies are family policies. You would have made assumptions around all of these elements, would you not?

Mr Sammells : That is correct, yes.

Senator CORMANN: When did you do that research?

Mr Sammells : It is not research. It is internal work. Over the past probably six weeks or thereabouts.

Senator CORMANN: We have a tax forum later in the year, which is not a summit, and so your modelling is not research. I understand. When did you conduct your internal modelling?

Mr Sammells : Over the past six weeks.

Senator CORMANN: So that is quite fresh off the press, then; quite recent?

Mr Sammells : Yes.

Senator CORMANN: Did anyone within the government or a department or an agency recommend or direct or ask you to conduct this sort of modelling?

Mr Sammells : No, it is purely of our own volition.

Senator CORMANN: But have you communicated that research to the government?

Mr Sammells : No, we have not.

Senator CORMANN: Well, now you have.

Mr Sammells : Absolutely.

Senator CORMANN: How many resources do you allocate to this internal modelling, which is not research?

Mr Sammells : I have a team of actuaries. This is just part of the work that they would normally do. It is not like we have added new resources or a new team. This is a business-as-usual activity for us.

Senator CORMANN: As you have pointed out, the research was not able to take into account income levels of Medibank members, so you would not be able to tell how many of your members fall into a tier 1, 2 and 3?

Mr Sammells : No.

Senator CORMANN: Would it be fair to say that your estimate is a conservative estimate, because you have not been able to overlay the actual financial impact?

Mr Sammells : If I look at general publicly available data from the tax office, for example, and I take the view that our population of members is not dissimilar to the average of the Australian population, I suspect about—I do not know—15 per cent to 20 per cent of our members may fall within the bandwidth of impacted people. But as a matter of fact, as we do not have that data, I cannot say who may fall within which tier of the change.

Senator CORMANN: Are you able to provide a copy of your modelling in relation to the impact of the private health insurance rebate changes?

Mr Sammells : I am happy to take that one on notice.

CHAIR: Thank you, Mr Sammells and officers, for appearing before us. We will see you in the future, no doubt.