Health insurance is a tricky business, and as hard as Medibank Private Ltd (ASX: MPL) and NIB Holdings Limited (ASX: NHF) try to get it right, I bet they'd be the first to tell you that there's plenty of room for improvement.
First, the equal pricing scheme, regardless of health status, means that healthy people's insurance premiums are effectively being used to pay the medical bills of less healthy people. That places an unequal burden on certain parts of the population, notably young people who reportedly prefer eating smashed avocado on toast to safeguarding their future.
Second, as any 15-year-old retail worker will tell you, discounts can have a disproportionately big effect on demand. When the price drops, all else being equal, the hurdle to seeking healthcare becomes lower. This is great, as it allows early diagnosis and preventative treatment, and theoretically is cheaper in the long run. Yet there's no doubting that demand for health services is growing, with Medibank and NIB both reporting that demand for services, not the cost of said services is the primary driver in rising healthcare premiums.
Third, I wonder if the insurers are contributing to this themselves by offering freebies such as a free scale-and-clean as part of their annual policies. Done right, it's basically a small up-front cost that reduces the likelihood of expensive treatment down the track. However, it does also encourage regularity in demand for healthcare services which – as a primary driver of rising insurance costs – is also one of the big reasons that customers are lowering their coverage or dropping out of private health insurance entirely.
Foolish Takeaway
There are many moving parts in the health insurance industry, and each depends on several others to a greater or lesser degree. This makes it necessary for investors to take a long-term time frame, so they can evaluate changes in the industry over time. It also makes price an important consideration. Medibank and NIB have great businesses, but both are fully valued at the moment, in my opinion.
