Medibank Private Ltd (ASX: MPL) is set to go to war against the nation's largest private hospital operators as a result of what it claims to be 'poor hospital care'.
As highlighted by the Fairfax press, Medibank Private, which is Australia's largest health insurance business, is taking a stand against unnecessary pay-outs which result from below-standard care, including unplanned patient readmissions in the weeks following surgery together with a list of 165 "highly preventable adverse events."
The insurer has already taken a stance against Calvary Health Care which Medibank claimed was unable to live up to its quality and affordability standards and now it may target Ramsay Health Care Limited (ASX: RHC) and Healthscope Ltd (ASX: HSO).
According to Fairfax, Medibank's Dr Andrew Wilson, who is in charge of managing negotiations with the operators, believes that Ramsay and Healthscope account for a large proportion of the $40 million in unnecessary costs given their sheer scale. Indeed, the pair are Australia's two largest private hospital operators with more than 110 hospitals combined, putting them high on Medibank's target list.
What this means
Medibank Private listed its shares on the ASX late last year in a move that reaped the Commonwealth government an incredible $5.7 billion. While there was plenty of excitement in the months that followed its initial public offering (IPO), that excitement has since worn thin with the shares trading back at $2.06 – down from a $2.49 high.
Indeed, the insurer is under enormous pressure to reduce costs and improve efficiencies to justify its still-lofty share price, with investors demanding results sooner rather than later.
In order to achieve this however, Medibank needs to reduce its total patient outlays compared to the premium revenue it generates, which it hopes to achieve by gaining more favourable terms with the hospital operators themselves. In turn, this should allow it to lower the price of its insurance products to become more competitive against rivals such as BUPA, HCF and NIB Holdings Limited (ASX: NHF). This should help it stem the outflow of customers seeking cheaper alternatives.
The problem is, Medibank is now seen to be using its sheer size almost as a bullying tactic. Given that it represents such a large portion of the private health cover sector, losing Medibank would almost certainly have a negative impact on overall patient admissions and company profits.
Still, Medibank's Dr Wilson remained adamant that the driver isn't about cost reduction, but "primarily it is (about) better outcomes for our members", as quoted by Fairfax.
Should you buy Medibank Private?
As previously highlighted, Medibank Private hasn't been the raging success early investors had hoped it would be thus far. Indeed, cost reductions will be achieved over a period of years, not months, and the high stock price suggests investors may still expect solid results in the near term.
Medibank Private could still be a good investment in the future but at today's price, it certainly doesn't seem like a compelling buy. Investors would be better off looking at some of the market's promising alternatives and waiting for a more attractive price to buy Medibank Private.
