Tony Abbott Prime Minister: Medibank Private Members must get shares in demutualisation
by Medibank Private Members must get shares in demutualisation · 3,243 supportersPETITION UPDATE
But wait Medibank Government theft gets worse, Ben Potter AFR Uncovers fully the Progressive Govt and administrative theft of Medibank Private from members
Medibank Private Members must get shares in demutualisation30 Sep 2014 — Medibank sale raises members’ rightsJohn Deeble AO, now retired founder of Medicare and Medibank, says before the conversion of Medibank to a for-profit from a not-for-profit, ‘there was an arguable case that the members had rights in the reserves that had been built up from the contributions of the members.’ Photo: Andrew TaylorBEN POTTERIn the four years since the Rudd government converted Medibank Private into a profit-making insurer, the Commonwealth has peeled off $1.366 billion in dividends and taxes. Profits after tax for Medibank Private have totalled just $964 million, and the he alth fund’s net assets have been whittled down from $1.72 billion in 2010 to $1.4 billion at June 30.The Commonwealth’s haul amounts to a 16-fold return on the $85 million it put into Medibank, and revives an old debate over whether any prior rights of the 1.8 million members to the net assets have been trampled in the process.The Abbott government has kicked off a sale process aimed at pulling in as much as $4 billion to help cut federal deficits. Lazard Australia – whose directors include former Labor prime minister Paul Keating, former finance minister Lindsay Tanner and former Victorian treasurer Alan Stockdale – is advising the government.The position of members – whose contributions have overwhelmingly funded Medibank Private since 1976 – was widely debated when the Howard government tried to sell it in 2006 .By contrast, the conversion of Medibank to a for-profit from a not-for-profit barely raised an eyebrow when the Private Health Insurance Administration Council (PHIAC) approved it in 2009.That was crucial to the question of whether the members are entitled to any share of the residual earnings – $1.3 billion at June 30 – in a sale now. Before, “there was an arguable case that the members had rights in the reserves that had been built up from the contributions of the members,” says John Deeble AO, the now retired founder of Medicare and Medibank.GATE SHUT FOUR YEARS AGO“There would at least have had to have been some sort of provision or legal ruling about the ownership of those reserves.”But when Medibank became a for-profit fund, “I don’t know whether those reserves were extinguished”, Deeble tells The Australian Financial Review.Lawyers say any case for compensation for members is a lot weaker now than it was in 2006, if indeed there was a case then. Years have passed and Medibank has paid a huge volume of dividends and taxes to the government.As far as the government is concerned, that gate shut four years ago.Medibank’s path to for-profit status – and eventual privatisation – was smoothed by a series of legislative changes and decisions by the government and the fund.They followed a script suggested by a parliamentary library opinion published on September 1, 2006 – shortly before the Howard government pulled the sale – while rejecting its conclusions.The opinion found Medibank’s then 1.3 million members were entitled “to the benefit, through their memberships, of the fund and associated assets”.“These are valuable rights,” the authors said. The net assets at the time were $848 million. Under the laws of the day, “the members are entitled to share in the benefit that this net asset position will bring to the fund” – less the $85 million government contribution – they found. Their finding that Medibank was a not-for-profit fund was crucial. In the absence of local precedent, the authors consulted The Ownership of Enterprise by Yale law professor Henry Hansmann. They found that Medibank was not a “mutual” – a customer-owned organisation – but a government controlled “non-profit”. It was “effectively without owners”.RIGHTS WERE SPLITOwnership rights were to be determined not by who had contributed capital – mostly the members – but by those who enjoyed the right to control the organisation and entitlement to residual earnings. Those rights were split; the Commonwealth controlled the organisation, but the members had rights to the residual earnings. The authors deduced those rights from a legislative scheme in which the registered organisation and its not-for-profit fund – and the assets of each – were kept strictly separate.The National Health Act provided that profits could only be distributed by for-profit funds.The Act said: “In making any decision, or taking any action, relating to the application, investment or management of the assets of the health benefits fund conducted by it, a registered organisation must give priority to the interests of the contributors to the fund.”Medibank’s own words reinforced the point. “Medibank Private is a non-profit organisation based solely on its contributors’ funds. The government has no financial interest in Medibank Private’s assets and reserves. They are the property of its contributors,” chairman Fred Millar said in his report for 1988.The 2004 annual report said: “As a not-for-profit organisation, every dollar of profit is retained within the fund for the benefit of members.”The Commonwealth – via its ownership of Medibank, the holding company – controlled the fund. But the members had statutory priority in any dealings with the residual earnings of the fund, the opinion said.The Commonwealth was free to sell its shares in Medibank, but might also be liable to compensate members if in doing so it compromised their rights.The terms of the sale would be crucial. If the Commonwealth sold Medibank to a for-profit buyer – or the public – with full ownership of the assets, it might have to compensate members. If it sold to a not-for-profit that agreed to preserve members’ rights, it wouldn’t be liable.CONTROVERSIAL OPINIONThe opinion was controversial. Public floats of mutuals such as AMP Society, NIB and NRMA had yielded share windfalls averaging in excess of $1000 and as much as $6600 for longstanding members. Finance minister Nick Minchin rejected it. He whistled up an opinion from national law firm Blake Dawson Waldron over the weekend.Published on September 4, and endorsed by top Sydney silk Tom Bathurst, it came to the opposite conclusion.The Commonwealth owned all the shares in Medibank, which owned the assets of the fund. The members had no more rights or interest in those assets than buyers of car or house insurance.There were statutory, contractual and fund rule prohibitions preventing Medibank from distributing its profits to shareholders, but they did not deprive the holding company of beneficial ownership of the fund assets, nor create equitable ownership rights in the members. Neither did the requirement that Medibank give priority to the members in dealing with the assets deprive it of beneficial ownership – the rules of statutory interpretation required clear words to strip ownership rights.Membership – the purchase of health insurance – only created contractual rights, Blakes said. Members had an enforceable right to health insurance benefits, and the right to have the fund administered according to fund rules, if they paid their premiums. Medibank could enforce its rights against members who did not comply with the rules, refuse more than 12-month premiums, and terminate a member’s health insurance contract on two months notice at its discretion, provided it gave reasons.Beyond those contractual rights, membership did not confer additional rights to benefit from the assets of the fund, such as the right to compel Medibank to reduce premiums or deal with the assets in a particular way.As a non-profit, Medibank couldn’t distribute any surplus to shareholders. But if it changed its status to a for-profit, and the fund restrictions on distributing the surplus were removed, it would be free to do so. The requirement to give priority to members in dealing with the assets would not prevent it, as it was clear this could be done while still giving priority to the interests of members.WHEELS KEPT TURNING BEHIND SCENESOfficially the sale was off – but behind the scenes the wheels kept turning. The government pushed the Medibank Private Sale Bill through Parliament. The parliamentary library authors had their right of reply. They said the Blakes opinion ignored the legislative scheme – which gave health insurance fund members a higher status than other buyers of other insurance – and mocked “lifetime cover” and “community rating” principles. It would be “alarming” to long-term members who always paid their dues and complied with the rules, they wrote.In hindsight, the parliamentary library opinions showed the government and Medibank what they had to do to safely sell the fund without the risk of having to give the members any more than a sweetener – such as a discounted allocation. They rejected the conclusion, but they also took out insurance by skirting around the pitfalls it outlined.In the Medibank Private Sale Act they provided for the fund to change its status to a non-profit and distribute profits and capital to shareholders. They amended the National Health Act so that funds “conducted for profit” – rather than those just “established for profit” – could distribute profits. That got over the problem of Medibank Private having been set up as a non-profit in 1976. They stipulated that “it is immaterial whether the profits were generated at a time when the organisation was not conducted for profit”. That resolved any scruples about distributing residual assets built up over the 30 years, during which the funds assets could only be dealt with by giving “priority” to the interests of members. In the Private Health Insurance Act, which took over regulation of health funds from the National Health Act, they got rid of that annoying provision altogether.The new act provided only that a fund’s assets be dealt with in certain specified ways, but said nothing about the interests of members. It did provide for the Private Health Insurance Administration Council (PHIAC) to approve a non-profit fund’s conversion to a for-profit fund if it “is satisfied . . . that the conversion scheme would not in substance involve the demutualisation of the insurer”.All that remained was to convert the fund to a for-profit. In 2009, Medibank asked PHIAC to approve the change. PHIAC advertised for public submissions, as required, and received eight, including just one on the question of demutualisation. It took legal advice from Sydney silk David Jackson, on the narrow question of whether change to for-profit status amounted to demutualisation. The answer was “no”. On July 2 it approved the conversion.Medibank adopted a new constitution, which omitted a clause stipulating that in a winding up, any surplus property “must not be paid to or distributed among shareholders but must be paid to one or more registered health benefits organisations nominated by the minister”. Most people probably did not appreciate the significance of the change, a person familiar with the process told the Financial Review.‘COMPETITION CONCERNS’Lindsay Tanner was finance minister in 2009, and is not involved in Lazard’s work on its sale. He said in an email his departmental and legal advice had made clear the government was the owner. “The decision to change Medibank into a tax-paying and dividend-paying entity was driven by competition concerns and the need to enable the organisation to make acquisitions in . . . to become a more proactive force for better health outcomes for members.”Other key players didn’t comment.Elizabeth Alexander, chairman of Medibank Private and a director in 2009, and George Savvides, the long-time managing director, were not available to say what independent advice the board took to safeguard the interests of members. The company was unable to produce any independent reports. Shaun Gath, chief executive of PHIAC, wouldn’t comment. In their defence, most business folk would opt for the opinion of a marquee law firm over that of two parliamentary library researchers. And Medibank remains comfortably solvent.Medibank seems to have fallen into a governance black hole. It was neither a public company, where rights and duties are clear, nor a mutual. The guidelines for Commonwealth government business enterprises were drafted with conventional enterprises – such as Telstra pre-sale – in mind. They don’t mention members, or policy holders, or contributors. The directors and the government relied heavily on the disputed Blakes opinion. But for insurance they removed every obstacle identified in the parliamentary library opinion along the way.Earlier talk of sweeteners – discounted or reserved allocations – for members had evaporated by last week’s sale announcement.The author is a Medibank memberThe Australian Financial ReviewBY BEN POTTERBen PotterBen is a senior writer on national issues and competitiveness based in Melbourne.Stories by Ben PotterBlack times for coalRegulators need independence, says StevensHome loan limits may not work: RBAHigh dollar could double unemploymentShareTweet
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