The war between health insurer Medibank Private Ltd (ASX: MPL) and healthcare providers just turned ugly with hospitals accusing the insurer of strong arm tactics that risk the quality of care for dying and chronically ill patients.
This war isn't just one for Medibank, although the country's largest insurer has arguably the most to lose or win if it can get hospitals to agree to some big cuts to what they can claim for treatments.
This is an issue that is dividing experts on the value of Medibank's shares with the naysayers thinking the stock is worth less than its initial public offer price of $2 due to its lack of growth options from a heavily competitive insurance market and escalating payments to hospitals that are growing at twice the rate of inflation.
Stocks like Medibank which trade on a 2015-16 price-earnings multiple of over 20x shouldn't be hampered by such constraints.
Medibank's only other listed rival, NIB Holdings Limited (ASX: NHF), is no doubt facing the same headache although its expansion via acquisitions to other related industries should (in theory at least) give it some diversification benefits.
Medibank, which is staying focused on private healthcare insurance, recently cut Catholic hospital operator Calvary Health Care from its list of approved hospitals after the two parties failed to reach terms.
Calvary is taking its fight to the court of public opinion through a report by the Australian Financial Review which quotes the hospital as saying Medibank's unreasonable stand will force the most needy patients onto the struggling public hospital system.
The hardline stand by Medibank is a high-wire act that could backfire if the stoush draws a public backlash, or worse it becomes politicised.
However, I think this is one battle that Medibank could win if its public relations machine is worth its salt.
The fact that one of the bigger operators, St Vincent's Health Australia, agreed to Medibank's terms show that hospitals can still be financially viable even under stricter claim conditions.
You only have to look at the relatively strong margins of listed hospital operators like Ramsay Health Care Limited (ASX: RHC) and Healthscope Ltd (ASX: HSO) to see more evidence of this, which makes you wonder if their margins will come under pressure from the claims push-back from insurers – but that's another story.
Medibank does not want to pay for patient readmissions within 28 days of a procedure and wants the right to refuse payment for what it calls highly preventable events such as patients taking a fall while in the care of the hospital.
Private hospitals have to renegotiate contract terms with private insurers every two years.
But one potential side effect of Medicare's tough stand is to lead to consolidation of smaller hospital operators as there's general sympathy for the need to control skyrocketing healthcare costs and it seems it's the bigger and better managed hospitals that are best placed to meet the challenge.
It's not only shareholders of Medibank that will be closely watching this space to see if the stock is worth closer to $2.50 instead of $2, but other private insurers as well.
