Assessment of Private Health Insurance Industry in Australia

The assignment content primarily focuses on Medibank Private, a private health insurance provider in Australia. It discusses various aspects such as the company's purpose and values, financial reports, market trends, and industry analysis. The content also references external sources including academic journals, news articles, and government websites. Specifically, it addresses Porter's five forces model to analyze the competitive landscape of the private health insurance industry in Australia.

Medibank pty ltd
1

Executive summery
Medibank pty ltd is the largest private health insurance (PHI) organisation. It commands
around 29% of the market share. The organisation provides integrated healthcare service
where apart from health insurance the organisation provides complementary services which
account 10% of its volume. The main investment strategy that the organisation as a private
health insurance company applies is the low risk low return investments. Previously it used to
be fully govt owned. The population of Australia is aging and in 2055 the ‘average life
expectancy’ is expected to be 96.6 and 95.1 year for women and men respectively. The
introduction of the technology based services like the tele-health is changing the service
delivery. Considering this long term and innovative approach is needs in the business. Along
with these general risks Medibank pty ltd faces two specific risk factors. One is the loss of
customer because of the affordability matter. To counter this business developed two
different brands. Brand Medibank is a premium service based private health insurance and
brand ahm uses affordability as its position statements. Addressing two different type of
customer based with two different brands helps the business to retain customer. on the other
hand the recent technology up gradation at Medibank's botched is a transition process from
40 year old mainframe system to recent technology. This process has disrupted the customer
service and number of complaints has gone up by 60% on year on year basis. This is a major
risk factor which was considered earlier and may impact the future operation until the work
ends. Considering this Medibank increased customer service spending by $6 m and
introduced 60 more customer service officer to provide better service. The social media
platform is also used to provide service 24*7. A proper governance structure and
management process is there in the organisation and that is helping the organisation to
minimise the risk of the business.
2

Table of Contents
Executive summery....................................................................................................................2
Introduction................................................................................................................................6
Part-1 Developing understanding about the nature of Medibank pty ltd...................................6
Operations of the business.....................................................................................................6
Investments and the activity done in this regard....................................................................7
Financing and the activity done in this regard.......................................................................9
Practices of the financial reporting process...........................................................................9
Part -2 Developing understanding for the nature of industry Medibank pty ltd belongs to.......9
Size of the industry.................................................................................................................9
Growth of the industry...........................................................................................................9
Supply chain structure of the industry.................................................................................10
Market share distribution and significant players in the market..........................................11
Success factor which are critical for the businesses.............................................................12
Part-3 Developing understanding for the legal requirements..................................................13
Regulatory environments and factors...................................................................................13
Format of financial reporting...............................................................................................14
Political and legal environment............................................................................................14
Part- 4 Developing understanding for the business external type environmental factors........15
SWOT analysis.....................................................................................................................15
PEST analysis.......................................................................................................................16
Porter’s five forces...............................................................................................................17
Part-5 Analysing the business risk along with the strategy and objective of the business......18
Expansion and maintaining customer base..........................................................................19
Bad service and use of IT.....................................................................................................19
Part- 6 Performance analysis through the analytical procedure for Medibank pty ltd.............20
3

Premium growth...................................................................................................................20
Management expense ratio...................................................................................................21
Net margin ratio...................................................................................................................21
Part-7 Medibank pty ltd’s governance and management structure..........................................22
Ethics, integrity and communication....................................................................................22
Competency..........................................................................................................................23
Attributes of the people responsible for governance............................................................23
Operating style and the philosophy of the management......................................................26
Conclusion................................................................................................................................26
Reference..................................................................................................................................27
4

Introduction
The businesses are in the dynamic environment and not in any static environment.
Considering these changes in situation, decision taken in this regard may cost the business
with less profit or complete loss. This probabilistic factor is risk for the business (Vose,
2008). In this report Medibank pty ltd is the chosen organisation for development of
understanding of the possible angles of risk identification and evaluation.
Part-1 Developing understanding about the nature of Medibank pty ltd
Operations of business
In current setting the business is providing solution in the field of integrated healthcare. In
one segment the business provides health related insurance and on the other hand it provides
services in the field of health care solutions through the Medibank health (Bloomberg, 2017).
There are health insurance related services like hospital cover, health cover for services of
optical, dental or physiotherapy and others. The organisation also provides insurance for
students and visitors who come from overseas (Bloomberg, 2017). Some tele-services and
health management services are provided to corporate or govt clients through Medibank
health. The services are in rehabilitation field, health and injury management of face to face
nature, management of chronic disease, wellness and web platform based advices, providing
software for the clinical decisions and so on. In Australia Medibank pty ltd have 29% share
and Other than Australian market the organisation has small presence in the Singapore and
New Zealand.
[Source: medibank.com.au, 2014]
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[Source: medibank.com.au, 2016]
These are subsidiary of the business which is owned by the company 100%.
Investments and activity done in this regard
Major investment in management category of business is for capability increment. The
organisation was preparing for Medibank bank re-launch. Investment activity is done in the
business after getting necessary approval from board of directors about ‘Capital management
policy’. Investment activity is evaluated based on factors like risk to return understanding for
different class of asset, appetite for risk, regulatory requirements of APRA, analysis of
liquidity and stability of base of capital (medibank.com.au, 2016). Main approach of
investment activity is low risk and low return approach. It abstains itself from high growth
oriented risk activity in its investment decisions. The property section consists of investment
in building and land worth $24.4 m. Cash and cash equivalent consist of $ 438.7 m
(medibank.com.au, 2016).
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[Source: medibank.com.au, 2016]
[Source: medibank.com.au, 2016]
The levels are
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1- Quoted price.
2- Inputs which are not quoted price.
3- Non market data based observation input of the liability and asset.
Financing and activity done in this regard
One of the major financing decisions that company took in 2014 is the issuance of initial
public offering. In 2014 govt of Australia decided to issue IPO through Australia security
exchange. Before this the major financing route used to be the government funds. The
business had $417.6 m profit which was kept in retained earnings (medibank.com.au, 2016).
Practices of financial reporting process
The ‘Australian Accounting Standards’ is the main statutory processes that were used in
financial reporting. Support of the ‘Australian Accounting Interpretations’ were also been
taken for preparation of financial statement (medibank.com.au, 2014). These processes are in
line with interpretation and reporting of the financial information of the international
standard.
Part -2 Developing understanding for the nature of industry Medibank pty
ltd belongs to
Size of industry
In terms of AUD value the size of market is $20 bn. There are 13.2 m citizen in the country
that are covered by a health insurance (apra.gov.au, 2015). There are around 46.5k types of
services or products in the market; some of which are open and some are close ended.
Growth of industry
From 2012 to 2017 the industry was expected to grow around 6.4% to around $23.8 bn
(Ibisworld.com.au, 2016). The table given below is showing actual growth figure in the
industry of five years. All of figures show that the growth of the industry is faster than GDP
growth of the country and that was 2.4% in 2015 and 2.8% in 2016 (Tradingeconomics,
2017).
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[Source: Ellis et al., 2014]
Supply chain structure of industry
Medical specialist and hospitals are some of the main components of supply chain structure
in the market of private health insurance. Cost of business is high where around 85% of the
premium revenue is accounted for payments of benefits (apra.gov.au, 2015). Uneven
distribution of the hospitals in country with respect to demand is also a factor of difficulty in
supply chain (Christopher, 2016). Concentration of psychiatric and acute hospitals around
capital city area is 77% whereas only 67% of the population is there in the country. This
causes inefficiency in supply chain (apra.gov.au, 2015).
[Source: apra.gov.au, 2015]
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[Source: apra.gov.au, 2015]
Market share distribution and significant players in market
Distribution of market share and other parameters like premium revenue, net margin and
company type is given in below figures. This shows that Medibank pty ltd is market leader in
term of market share but other players have better margin. Nearest competitor is BUPA.
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[Source: Ellis et al., 2014]
Success factor which are critical for businesses
Cost of service is rising in the industry and that is impacting affordability of consumer as
premium is also rising. Considering this, businesses needs to ensure good margin without
losing customers. Considering this an effective negotiation with suppliers would be important
to increase efficiency (Trkman, 2010). Another thing would be to reduce complexity of
product which would help consumers in purchase decision making process. Vertical
integration with supplier would increase efficiency in the business (Trkman, 2010). In recent
time Medibank pty ltd has encounter massive complaint level which is reducing their market
share. An effective service after sales process is one of the important things for success.
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Part-3 Developing understanding for legal requirements
Regulatory environments and factors
Before 2007, ‘National Health Act’ of 1953 was main guiding law for private health
insurance sector. But in 2007, ‘The Private Health Insurance Act’ came into force as first
independent parliamentary Act, dedicated to private health insurance industry (Ginnane,
2007). Regulatory framework was appropriate for development of innovate services and
products in the industry and it also helped the industry to keep them in line with clinical
practices of recent times. Legislation changed the environment of the sector by focusing on
products and service information standard, health related boarder cover, equalisation of risk,
lifetime health cover, re-registration, pricing, and standard for prudential. PHIAC which were
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explained in the Act is one of the independent bodies that were formed to regulate this
industry.
In 2014-15, PHIAC were dissolved and most of the functions were transferred to APRA
(pwc.com.au, 2016). In 2015 the standards for APRA were revised for the governance and
the management of the risk. The main aim of this process was to harmonise the governance
and the management of risk requirements.
Format of financial reporting
Previously the financial reporting was done in accordance with the AASB or ‘Then the
AASB 1 was developing for the first time to incorporate the standards of ‘International
Financial Reporting Standards’ for first time adoption or IFRS 1. In case of the entity of ‘for-
profit’ nature, the following of AASB 1 means following of IFRS 1 (aasb.gov.au,
2015). Medibank pty ltd is s ‘for-profit’ organisation and follows AASB 1. This development
is useful for the delivery of the high quality financial information delivery. The process is
transparent one and cost of the process is less than the benefit acquired.
Political and legal environment
The government for almost last 20 years are providing the subsidy at a rate of 30% for the
private health insurance. There is a continuous rise in the level of premium and that is costing
the govt a large sum of money. In 2016 it cost around $6.5 bn (The Conversation, 2017). The
process is supported by both the Liberal and Labour govt in the country. The subsequent
evidence showed that subside could not stop the fall in the ‘converge’ level which were
already declining from 50% of population to 30% of population in 1998 (The Conversation,
2017). So there is a compelling case of reliving the rebate or the subsidies. In the mean time
the higher cost of the health services are decreasing the profit margin of the business and also
making premium costly and hence unaffordable. Considering this the political and the legal
environment need to change first or the sector would be in deep crisis (Tasker, 2017).
Part- 4 Developing understanding for the business external type
environmental factors
SWOT analysis
Strength- one of the strength of the company is the govt ownership in the company. Prior to
the 2014 the organisation was fully owner by the govt. This ownership structure can provide
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necessary support from the govt side when necessary (Helms and Nixon, 2010). Currently the
organisation commands around 29% of the market share where the total size of the industry is
around $20 bn (Gardner, 2016). The organisation has health profit level of $417.6 m.
Weakness- one of the weaknesses of the company is the growing number of complaints in
the recent times. Current situation is that the organisation is having largest number of
complaints in the industry. Out of this large size around 60.7% came from the customer
account (Gardner, 2016). The alarming situation is that the numbers of claims is up by 60%
year on year basis.
Opportunity- Medibank pty ltd is an integrated healthcare company which has large
presence in the Australian market. The quality of healthcare is high in Australia but the
‘universal healthcare system’ in the recent time is having financial pressure. The sector
already contributes up to 20% in the national GDP (Bartlett et al., 2016). Based on the
current expertise the tele-health related services and telemedicine are the sectors that can be
catered to abroad (Helms and Nixon, 2010).
[Source: Bartlett et al., 2016]
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Threat- there is growing competition in the market where the four big players constitute
around 70% of the market (Ibisworld.com.au, 2016). In recent time the Medibank pty ltd is
having issue regarding the complaints. This has impacted on the market share of the
company.
PEST analysis
Political factor- Medicare is the insurances cover from the public health system which is for
almost all the citizen of the country. But this health insurance does not cover all the aspect
and there the citizen can purchase the private one. The ‘Private Health Insurance Act 2007’
was developed by the govt to incentives the citizen to purchase the private insurance
(Legislation.gov.au, 2007).
Economic factors- the cost of health care is rising in the country and this has put pressure on
the universal healthcare system as well as on the profit margin of the health insurance
provider. The result is the parallel rise in the premium for the insurance and that is impacting
the affordability of the customers ((Yüksel, 2012). In recent time around 9k people decided
get out of the cove for the private hospitals and this is unprecedented in last 15 years (Tasker,
2017). On the other hand the rise in the income of the citizen is 1 to 1.5% whereas the
insurance benefit cost has seen a rise of 5 to 7% (Tasker, 2017). This situation is
unsustainable and may face crisis within next five years if not something is done soon.
Social factors- the standard of the healthcare in the Australia is high along with the high
standard of living. The improved health care is expected to raise the ‘average life expectancy’
by 96.6 years for the women population and 95.1 years for the men population by the year
2055 (Bartlett et al., 2016). The govt is also planning to increase the retirement age up to 70
as more and more number of people remains active longer time. The population of the
country is also aging. Considering these the requirements for the integrated healthcare service
would remain high in the future (Yüksel, 2012).
Technological factors- the technology is changing the scenario of providing treatment. The
introduction of the tele-healthcare and telemedicine based or app based services are some of
the technology based changes in the industry which are providing sources of revenue (Bartlett
et al., 2016). Whereas insurance buying is also getting impacted as the customer now can
compare different companies in the online platform.
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Part-5 Analysing the business risk along with the strategy and objective of
the business
The risk factor is low for the health insurance sector. Unlike the general insurance sector
where the risk and the return factor are high, the health insurance sector focuses on the lower
but certain return (Aven, 2012). The main approach is to increase the premium of insurance
by considering the rising cost of the business so that the level of profit remains steady in the
business.
Expansion and maintaining customer base
The rising level of premium reduces profitability of a large sector of the consumer. This may
create the risk of retaining customer in the business (Akkiraju et al., 2010). To counter this
Medibank pty ltd uses its two brands. Brand Medibank is a premium service based private
health insurance which provides some flexible cover to the customers. Here the main
distribution channels are the company website, call centre, broker and the retail locations, and
arrangements for the corporate. On the other hand brand ahm uses affordability as its position
statements (Ellis et al., 2014).
Bad service and use of IT
In recent times Medibank pty ltd had lot of complaints and had around and 1683 claims. The
increase of complaints was so significant that from quarter to quarter basis it has increased by
23% (Gardner, 2016). PHIO staffs encountered this challenge as the tax was overwhelming.
The main reason of this problem is the technology up gradation at Medibank's botched. This
system up gradation is a transition process from a 40 year old system based on mainframe to
new system. This has disrupted the annual statement of tax delivery of around 4 million
customers. The process cost the company around $150 m. considering the situation the
amount in the prospectus is determined a risk (Aven, 2012). After this failure the customer
service were given top priority. For the improvement process the business has decided to
spend around $6 m, increase in the customer service officer by 20% or 60 in number
(Gardner, 2016). The social media forum is used for the greater engagement with the
customer. This has also provided a scope to connect to customer for 24 into 7 and the
organisation replied to 200000 chat messages in a year. The positive impact of the new
system implementation is expected to be visible in 6 to 12 month period.
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Part- 6 Performance analysis through the analytical procedure for
Medibank pty ltd
Premium growth
[Source: Ellis et al., 2014]
The premium revenue is the main source of income for Medibank pty ltd as 90% volume
comes from health insurance segment for the business. Nearest and largest competitor of
Medibank pty ltd is BUPA with around 26% shares in the market. In this five years figure
different growth rate of different large competitor is given along with the industry average.
The CAGR value would show the geometric average value which is the best representation of
the growth value. Industry average CAGR is 8.1% but there the number for Medibank pty ltd
and BUPA are 6.9% and 7.1% respectively. Other competitors have higher value.
Considering the size of these top two, the growth is little slower because of the larger base
(Penman and Penman, 2007).
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Management expense ratio
[Source: Ellis et al., 2014]
The average management expense ratio for Medibank pty ltd is 9.6%. The same for BUPA
and HCF is 10.05% and 7.3% respectively. Being a large player in the market with larger size
of business this expense for Medibank pty ltd and BUPA is higher than the others. But the
ratio is below the industry average of 9.4% and that is useful for delivering better result
(Healy and Palepu, 2012). Within this time period the increase of premium rate for Medibank
pty ltd is below the industry average (Ellis et al., 2014). This was done to keep the
affordability and cost leadership in the market. But a better performance compared to its
nearest and largest competitor BUPA shows that the company were equally minimising risk
of low premium rate with better efficiency figures.
Net margin ratio
[Source: Ellis et al., 2014]
The greater productivity and operating efficiency also have a reflection on the profitability
figures of the companies. The average for Medibank pty ltd is 4.4% where as the average net
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margin for BUPA and the industry are 5.6% and 4.46% respectively. So the profitability
performance of Medibank pty ltd is close to industry average but lower than the nearest
competitor. Lower level of premium rate is the actual reason of lower margin in the business
for Medibank pty ltd though the company tried to manager operation and productivity
efficiently (Penman and Penman, 2007).
Part-7 Medibank pty ltd’s governance and management structure
Ethics, integrity and communication
The organisation Medibank pty ltd clearly defines their values that need to be followed by the
every member of the organisation in their operation. All of these are communicated and also
presented through their personal website. The values are
Accountability- at the time of delivery they own their action and remain committed.
Customer focus- in this regard they define the treatment given the customer
(Medibank.com.au, 2017). They express their desire to treat the customer as they would like
to be treated by others.
Integrity- this value asks for honesty, openness and transparency in the work.
The organisation also clearly defines their purpose in the business of providing the private
health insurance. The main theme in this part is “For better health”. The points in details are
Better choice- the organisation wants to provide choices in regard to affordability, positive
outcomes and controls (Medibank.com.au, 2017).
Better outcomes- better health related outcome oriented system is advocated by the
organisation.
Competency
For the process of governance and managing the organisation effectively and efficiently the
selection of the top management is important. The selection is done in the organisation
through some appropriate process. In this regard the organisation takes the continuous
improvement approach. The organisation on regular basis provides the development
opportunity for the professional purpose (annualreports, 2014). Proper resources and support
to develop the skill are given to the directors for their performance improvements.
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Attributes of the people responsible for governance
[Source: Medibank.com.au, 2017]
The board members of the organisation are working committed for the success of the
organisation in successfully meeting the responsibility and obligation to the different
stakeholder of the business and the organisation as a whole. The board also take care of the
investor’s expectation in their governance process. The Corporate Governance Council of
ASX recommended some approached which were adopted by the board in their governance
process.
Independence
The board has one chairman and 7 other director from the non executive background
(Medibank.com.au, 2017). This large number of no executive directors means they do not
have any relation with the management and the business, and hence are able to provide
independent contribution to the board. Periodic basis updates of association, association,
relationships and position are given by the directors. The conflict of interest is checked in
time to time (Council, 2007). The non executive directors are able to meet in absence of the
management before the meeting of the boards starts.
Expertise and experience
The experience and level of skills are also important for the effective functioning of the
board. The below table of the skill matrices provides the required expertise and experience
level in the board for the effective functioning in the process of governance. In 2017 the
inclusion of Mike Wilkins is done considering the need of expertise in the operational field of
customer proposition (Council, 2007).
20

[Source: Medibank.com.au, 2017]
Evaluation of performance
The performance of the board, chairman, directors is reported by the Nomination Committee
to the board. The chairman of the committee in the 2017 seek a survey repose from the
directors in regard to risk management, logistics, strategy, operations, directors and
management relationship, and chairman’s role (Medibank.com.au, 2017). This was part of the
board’s internal evaluation. Chairman evaluated the performance of the non exhaustive
directors. All of these are results of the appropriate corporate governance approach in the
organisation (Bhagat and Bolton, 2008).
21

[Source: Medibank.com.au, 2017]
Operating style and the philosophy of the management
In their operation Medibank pty ltd follows five key principals and those are as follows.
Cost leadership in health- the organisation has over 450 network connections with the
hospitals to provide affordable, timely and right health solutions.
Customer centred- this focus is given top priority throughout all its distribution channels.
Excellence in operation- the organisation wants to maintain the simplicity to increase
efficiency of the operation along with investing in the process of continuous improvement.
Growth- for the growth process newer avenue of services is identified (Medibank.com.au,
2017). New filed like the tele-health, pet and travel insurance are recognised and invested.
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Conclusion
Throughout this report different aspect of Medibank pty ltd’s business operation, business
internal and external situation, possible risk, strategic measures, analysis of performance,
governance and management approach were analysed. The private heal sector in Australia is
under pressure.
23

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Appendix:
Porter’s five forces
New entrant threat- top four companies are having 70% of the market share and the
customers are generally loyal. Rising cost of the health care is reducing the margin of the
business. The market is saturated and mature. The market regulations are tight and increase
the cost of business. All of these factors create low threat of new entrant in the market
(Porter, 2008).
Customer power- there are large companies that provides almost similar services with
relatively same cost. So the switching cost of the consumer is low. That is why recent
increasing complaints of Medibank pty ltd has reduces their new customer by 18% in a year
(Gardner, 2016).
Supplier power- the main supplier is the hospitals. These entities are increasing their cost
day by day and that is reducing the margin in the industry (Porter, 2008). Their bargaining
power is high here and to counter that some of the organisation are going for the vertical
integration where the insurer are providing some of the services apart from the hospital ones.
Substitution threat- in the industry there are private and the public health insurance. The
public health insurance covers all the citizens but do not provide all the benefits and that is
why the private insurer is required. But some citizen may choose for only public one.
Competitive revelry- the competition in the market is high (Grundy, 2006). Below figure
shows the stiff market competition among the five large players in the market, in term of their
profitability.
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[Source: Ellis et al., 2014]
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