A recent Fairfax media interview with Medibank Private Ltd (ASX: MPL) boss George Savvides offers some interesting insights into what was unquestionably the hottest IPO of 2014.
Mr Savvides pointed out that Medibank shares were definitely priced at a premium to the rest of the market – making his job more challenging – and described the recent decline in the stock as a 'reality check', saying:
"The half year reconfirmed this is a business that has a positive trajectory, but it doesn't have a vertical climb like a rocket."
(Contributor Ryan Newman covered Medibank's anaemic half-yearly results back in February)
Even more interesting were Mr Savvides' comments on upcoming reforms to the healthcare system.
He stated that 33% of Medibank's claims came from just 3% of the insurer's customers – individuals with multiple chronic diseases.
Medibank's CEO believes that these patients should be treated for free by the public health system, as this would reduce costs across the board for the majority of health insurance customers.
It's hard to argue with that, and considering that the Australian Productivity Commission recently recommended that health insurers like Medibank and NIB Holdings Limited (ASX: NHF) play a greater role in preventative medicine, it's easy to see where future savings could be achieved.
Targeting a reduction in chronic disease is one of the biggest ways the Australian healthcare system –and health insurers – can save money going forwards.
In my earlier article I pointed out that it is substantially cheaper to convince kids not to smoke than it is to treat smoking-related illnesses in later life, and the same principle can be applied to other conditions like obesity and tooth decay.
What's more, given that rises in insurance premiums are regulated by the government, reductions in claim expenses are an equally viable way of increasing earnings to shareholders.
As health insurers edge closer to becoming actual providers of services, it's no surprise to see inducements like discounted gym memberships being offered to insurance customers in an effort to reduce their claim risk.
Fortunately for shareholders, health insurers look set to win from reforms to the healthcare system – but the same is not true for other companies like Sonic Healthcare Limited (ASX: SHL).
