Correct Tosh

Health funds’ windfall spurs cashback call: $1.8bn gain from elective surgery ban

Australian Private Hospitals Association chief executive Michael Roff says the government must provide greater oversight on how health funds return Covid-led savings. Picture: AAP

• EXCLUSIVE

  JARED LYNCH

  REPORTER

  @jaredm_lynch

  
• 8:30PM JANUARY 10, 2022
• 49 COMMENTS

The nation’s private hospital body has resuscitated its long-running feud with health insurers after recent bans on elective surgery sent their shares soaring, demanding the federal government formalise a mechanism to return a profit windfall to policyholders.

A jump in margins for the largest private health insurers – including the ASX-listed Medibank and NIB – has already left the sector with a 212 per cent rise in profit compared to 2021, and prompted the competition regulator to put the industry on notice.

The Australian Competition & Consumer Commission, in late December, told private health insurers not to underestimate savings made from the cancellation of elective procedures due to the pandemic – and therefore cut the amount of cash they had to refund to their policyholders.

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Suspending elective surgery in Australia’s two biggest states is expected to bolster the profitability of health funds, given the amount of benefits paid is expected to fall as Omicron rages.

Shares in Medibank, Australia’s biggest health fund, jumped as much as 6.2 per cent to $3.60 on Friday before settling at $3.55 on Monday. Rival NIB rose as high as $7.22 before easing to $7.02.

The pandemic has already fuelled a dramatic rise in net profits across the private health insurance sector, totalling $1.8bn last year, official figures show.

While the Australian Prudential Regulation Authority told health funds they needed to set aside enough cash to fund a backlog in claims, Australian Private Hospitals Association chief executive Michael Roff said the expected rebound in surgery had failed to materialise.

He said the government must provide greater oversight of how health funds returned Covid-related savings.

“There needs to be some formal government monitoring of health fund balance sheets to determine how much money they’re collecting that they thought they’d pay out – and how do we actually ensure that that gets back to members,” Mr Roff said. “To date, there’s been no process and it’s been less than transparent.”

Heath funds have returned Covid savings to members in various ways. Not-for-profits such as Perth-headquartered HBF have given members cash. ASX-listed Medibank has instead deferred its annual premium increase of 3.1 per cent for five months.

HBF chief executive John Van Der Wielen said he supported a mechanism to determine how Covid savings were returned to policyholders and this would help enhance trust across the sector.

“There could be small funds that have had no savings, and so I don’t think everyone should be giving back cash. People should give back cash if it’s there to give back, and as an industry I’d like to see us unite and have one transparent calculation,” Mr Van Der Wielen said.

“That could be the Institute of Actuaries overseeing the calculation, APRA, or it could well be the ACCC. But I think (we should open) the books up so that we know what should or shouldn’t be refunded because the danger is once you pay it out in dividends, you certainly can’t get it back to policyholders.

“Transparency and trust from our industry is critical, and I would be supportive of independent reporting of the calculations.”

Medibank chief executive David Koczkar said deferring premium increases would return about $135m to members. To be eligible, a member must stay with Medibank for the next five months or have held a policy for the past five months.

“This latest give-back continues our commitment to return any permanent net claims savings due to Covid to our customers, and takes our total financial support package to around $435m – the biggest in our history,” Mr Koczkar said.

NIB, which will increase premiums by 2.66 per cent this year, is also considering delaying the rise to return Covid savings.

NIB managing director Mark Fitzgibbon said: “It’s possible the increase could be deferred for likely three months, depending upon developments, especially in relation to our claims experience and risk equalisation commitment.”

But hospital sources have criticised returning savings via deferring premium increases, likening it to the airline industry, which was forced to ditch credits in favour of refunds at the start of the pandemic after the ACCC stepped in.

ACCC deputy chair Delia Rickard said she supported the health insurers returning Covid-created profits via credits or direct payments but was concerned the funds were being “too conservative”.

Ms Rickard warned insurers they must include more than just their “deferred claims liability” – the cash they set aside to fund delayed surgery – when calculating Covid profits.

“The deferred claims liability is not a proxy for total profitability from Covid restrictions, and nor was this ever the intention when financial regulators directed insurers to create a deferred claims liability,” Ms Rickard said last month.

“The ACCC notes that insurers can exclude the value of claims that were missed due to Covid restrictions and are not expected to materialise later, eg dental ‘clean and scale’ services, when calculating their deferred claims liability.

“We expect insurers to return all benefits from procedures that were not performed and are not expected to be performed later. This may be particularly applicable to extras treatment and geographic areas that were subject to extended lockdowns.”

APRA’s latest data revealed net margins across the entire private health industry rose from about 2 per cent to 7.2 per cent in the year to September 30, citing stronger profitability.

“(But the) increase in profitability in September 2021 reflected weak margins coupled with negative investment returns during the height of the pandemic in the previous year,” APRA said in its latest health insurance industry statistics.

JPMorgan analyst Siddharth Parameswarann said forecasting profit margins for this year would be difficult. “The industry had seen pressure on APRA reported margins in FY20 from previous rate (industry average) increases of 3.25 per cent in 2019 and 2.92 per cent in 2020.

That pressure disappeared due to a sharp drop in claims during the Covid-19 pandemic, which makes calculation of true underlying margin trends difficult,” Mr Parameswarann said in a note to investors late last year.