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Economist who designed original Medibank discusses sale of Medibank Private.

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Sunday, 9 April 2006



PETER MARES: After three years of toying with the idea, the federal government has confirmed that it will sell Medibank Private, the country’s largest health insurer. Finance Minister Nick Minchin can see no good reason for the health fund to stay in public hands. Critics can see no good reason to sell it.


Health economist Professor John Deeble was the architect of the original Medibank, the universal healthcare system introduced under Gough Whitlam, and in 1976 he helped to convince Malcolm Fraser to set up Medibank Private as a government-owned insurer.


John Deeble, what was the original rationale for Medibank Private?


JOHN DEEBLE: Hello, Peter. Well, Medibank Private was set up as a guarantee, mainly actually to the trade unions, led then by Bob Hawke, that if people were not going to have access to the then Medibank they could join a government fund; they were not to be forced to join a private health fund. Now, that’s the circumstances but also it was seen as a way of guaranteeing, through a government authority, health insurance, without frills, but at the minimum cost and in the interests of the contributors.


PETER MARES: So in a sense it was to keep competition in the market with private sector insurers?


JOHN DEEBLE: Yes, and it was to set a standard that would be the standard to which the private insurers would have to adhere.


PETER MARES: And are those things still relevant, in your view?


JOHN DEEBLE: Absolutely. I can see no public interest in selling Medibank Private. There is no government money in it. The government provided in 1976, I think, $11 million so that it could start up with some reserves so it was sound from the start. And that was repaid in the early 1980s. I was a director of Medibank Private for 17 years while it was run by the Health Insurance Commission.


During that time we operated to provide insurance at the lowest rate that was possible. We paid no dividends to the government. We held reserves that were financed by the members’ contributions but we did not attempt to make a profit beyond the maintenance of satisfactory reserves.


PETER MARES: But didn’t all that change in 1998? I mean Medibank Private then was separated from the Health Insurance Commission; it became an independent wholly government-owned company, a government business enterprise, and as we know, under the Howard government, government business enterprises are expected to behave just like a private business. How is it now different from any other medical fund?


JOHN DEEBLE: I am not privy since … well, I left the Health Insurance Commission in ’99. I don’t know how Medibank Private has behaved since. I am not privy to those details. But it was still true that having a government-owned health insurance fund did several things: first of all it guaranteed that (a) standard was available and that standard would not be overpriced. And it seemed very important to me but may not be important to the government. It was emphasised that private insurance was a part of the Medicare system. It wasn’t outside, it wasn’t a competitor with Medicare; it was part of the system. Now, this is temptation to say Medicare is the public hospitals and it’s nothing to do with private insurance but in fact it is or has got something to do with private insurance as well. For all of those reasons I think that the retention of Medibank Private is in the public interest and the sale is not.


PETER MARES: Medibank Private holds hundreds of millions of dollars in cash reserves, obviously as it needs to do in order to cover any future payouts. Who does that money belong to?


JOHN DEEBLE: Well, the government has a legal right. The only two shares in Medibank Private are owned by I think the Minister for Finance and the Treasurer but I am not certain about who is the nominal holder.


PETER MARES: But essentially the government owns the company?


JOHN DEEBLE: Essentially the government owns the company and there are no other shareholders. That’s because it was never set up as a mutual fund like, say, NRMA was where there was a legal title to the reserves by the previous members. But there is a moral entitlement. Those reserves have been built up by the members of Medibank Private—the customers; they weren’t the customers so much, they were the members—and the government is now proposing to sell those reserves and take it. In effect it’s taking out the reserves that are there for itself and some buyer is going to have to put them back; alternatively you can see it as selling the reserves. But either way it wasn’t government money in the first place.


PETER MARES: So if they are going to sell Medibank Private, as the government has said it will, should policyholders get something from the sale? Should they get shares in the new private company or should they get some kind of payout in recognition of the contributions they have made?


JOHN DEEBLE: I think in practice it’s almost impossible to do that because a number of people who contributed to those reserves may be not even alive now. You can’t distribute reserves—you can’t easily do it—according to length of membership. So in practice it would be very difficult to do an NRMA type sale. It’s not easy to see how any of the sale options really work equitably for everyone.


PETER MARES: There are some key questions about the nature of the privatisation too and one option under discussion is a trade sale which would presumably mean an existing private insurer would snap up Medibank Private, which has about 30 per cent I think of all policyholders in Australia. Now, wouldn’t that lessen competition in the market for private health insurance?


JOHN DEEBLE: Well, it’s certainly the one that would probably maximise the price because what the government really would be selling … I mean, selling the reserves is not really all that relevant. They are worth what they are worth. There’s no profits or gains to be made from those.


You were selling the Medibank Private name and that private name carries a number of people with it and it is worth something commercially. And it is worth more probably to another health fund than it is to anybody else. The difficulty w ith that is that Medibank Private is the dominant insurer. It’s 30 per cent but in places like Western Australia, the Northern Territory and I think to a lesser extent South Australia, if the resident funds were to buy Medibank Private—well there are really only two dominant funds in those places.


PETER MARES: So if Medibank Private was bought up there’d only be one?


JOHN DEEBLE: There’d only be one and that would create a….


PETER MARES: A monopoly [inaudible].


JOHN DEEBLE: A monopoly, yes, absolutely. Now, you could imagine a New South Wales fund buying a share of Medibank Private or buying Medibank Private in Western Australia if it was broken up like that because it might give them an entry into Western Australia without it being the dominant fund. There are all sorts of permutations but you would have to look at every case, and I can’t see that it could be done easily nationally. It could be done on a state-by-state basis, which means not selling Medibank Private but selling all its little bits.


PETER MARES: Another alternative is an overseas buyer: an insurance company or someone from overseas coming in. Is that simply not attractive enough in profit terms?


JOHN DEEBLE: I think the latter. You see, most of the major health funds in Australia, beside Medibank Private, are not for profit. It’s not unique; there are some small profit-making funds but most of them are not for profit. Now, if Medibank Private was to be sold to a big insurance company then in fact they will want a return. If they pay a billion dollars—which I don’t think the government will get a billion dollars by the way—but if they pay the billion dollars they would want a commercial return on that and that means they’d want to get about 15 per cent at minimum a return on their capital for $150 million a year. Now, that is going to the owners.


Medibank Private made a profit of that sort of order or a surplus of that sort of order last year but that money went to the reserves. And it wouldn’t need to make a profit of $150 million every year because that would mean the reserves would grow enormou sly. In all of the time that I was there, if we made a profit one year that would push their reserves up beyond the reasonable level, we didn’t charge as much the next year. But a commercial buyer would want it all the time. That seems to be the problem.


Now, there is one thing the government can do, and evidently is thinking about doing, is widening the market for health insurance by allowing the health funds to go into ‘out of hospital’ insurance, which is now the purview of Medicare. And if they did that then they would probably widen the market and it might be more attractive but they would have to do it by compromising with the universality arrangements of Medicare.


PETER MARES: Professor Deeble, thank you very much for joining us.


JOHN DEEBLE: Thank you.


PETER MARES: Health economist, Professor John Deeble, one of the architects of Australia’s universal healthcare system and a former board member of Medibank Private.