Chapter 2 - Key issues
2.1
As with most proposals to privatise or sell government owned entities,
the government's decision to sell Medibank Private has attracted a range of
comment, albeit not the same degree of controversy which has attended some
recent sale decisions.
2.2
In evidence to the committee on the bill, concerns were raised in
relation to Medibank's ownership and the government's right to sell it, the
impact of the sale on Medibank's performance and the private health insurance
market, protection of members and employees and the 'Australianess' provisions.
2.3
The committee has also taken account of concerns raised by the Scrutiny
of Bills Committee report on a certain aspect of the bill.
2.4
Before examining these issues in turn, the committee notes the two main
reasons for the government's decision to sell Medibank. The first is the lack
of a sound public policy ground for the continued public ownership of a private
health insurance provider in a mature and competitive market. As a related
point, the Special Minister of State, the Hon. Gary Nairn, identified the
possible conflict of interest which arises with a government-owned business
operating in a market substantially regulated by the same government.
Privatising Medibank removes such a risk.
2.5
The second reason for the sale is the importance of maximising
competition in the private health industry with the consequent benefit of
containing premiums.[1]
Selling Medibank is expected to improve industry competition.
The question of ownership
2.6
The committee notes that some policy holders are of the view that
Medibank is a unique public entity given that a significant portion of its
financial reserves are derived from people who purchase policies. A number of
opponents of the sale have questioned whether Medibank Private is the
Government's to sell. Others have argued Medibank Private members possess
rights which may stand in the way of the sale or entitle them to compensation
in some form.[2]
The committee considers these arguments misunderstand a number of points.
2.7
Medibank Private Limited is a public company listed by shares registered
under the Corporations Act 2001. In this regard, it is no different to
any other public company trading in Australia today, except that all 85 000 100
shares in the company are legally and beneficially with the Commonwealth.
Ownership of, and responsibility for, Medibank was demonstrated most recently
in 2004, when a capital injection of $85 million was made by the Commonwealth
to bring the capital structure of the company in line with industry practice.
2.8
On the question of members' (or contributors') rights, the Department of
Finance and Administration told the committee:
... Medibank Private contributors will not be entitled to
compensation on the sale. The government’s legal advice is clear that Medibank
Private contributors do not own an interest in the fund'. [3]
2.9
The government sought from Blake Dawson Waldron independent legal advice
on the ownership of Medibank Private, as well as the Commonwealth's right to
sell. The advice makes plain that the Commonwealth owns Medibank Private, and
subject to the enactment of amendments contained in the bill before the committee,
is free to sell its shares. Blake Dawson Waldron also considers that both legal
and beneficial ownership of Medibank Private vests in the Commonwealth, thereby
removing any right of claim by contributors against assets held by the company.[4]
2.10
This point deserves emphasis. A member of Medibank Private pays a
premium in return for a product, in this case coverage against prescribed medical
expenses. Medibank Private invests the premium revenues, generating a surplus
that is used to make payouts to members as and when claims are accepted. The
assets comprising the Medibank Private fund do not belong to the contributors.
Nor do they belong to the Government. Although the Commonwealth owns Medibank
Private, the assets comprising the fund are held by the company as an
independent legal entity and not by any shareholder.
2.11
Unlike Medibank Private, some health insurance providers operate as 'mutual
funds', whereby contributors buy an interest in the assets of the provider in
addition to their insurance policy. The contributor becomes a part owner in the
insurer itself. The rules which exist for each insurer make their status clear.
Medibank Private has many contributors, but only one shareholder.
2.12
Members have a straightforward commercial relationship with Medibank
Private and can in no way consider that their premiums are buying them a stake
in the company or in the fund. To claim otherwise would be to say that a
customer in a shop believes that, in buying an item across the counter, they
are also buying the shop. This is clearly not the case.
Competition and market effects
2.13
A common concern of those opposed to the sale has been that privatisation
would lessen Medibank's ability to continue providing competition in the
market, particularly through being a 'price setter'. Opponents of the sale have
also questioned the nature and extent of possible efficiency gains resulting
from Medibank's sale, as well as the associated impact these would have on
Medibank's competitiveness with other funds. Dr Deeble argued the potential
benefits were purely hypothetical and there was little evidence to support
claims of increased efficiency. This was because, he said, the number of
comparable 'for profit' health funds was small and thus the competition effects
of the sale would be limited.[5]
2.14
On the other hand, Dr Deeble also concluded that under current proposals
competition was unlikely to be affected adversely by the sale. The Australian
Competition and Consumer Commission also supported this view.[6]
2.15
It needs to be noted that Medibank Private is already a market pace
setter in efficiency and innovation.[7]
Of particular note has been Medibank's success in negotiating with health
providers on the basis of its bulk buying power.[8]
This has brought gains for members in the form of contained premiums and served
as a model for other private health insurers in the way they approach their
business. Medibank Private is also highly competitive in terms of the ratio of
revenue it spends on management, its member retention, and its very high market
share.[9]
2.16
There is no reason why this should not continue under private ownership.
Indeed, it is difficult to imagine a circumstance where future owners would
risk their investment by running the company less competitively than its
current managers.
2.17
A report by CRA International into the impact of privatisation on
Medibank Private and health premiums found that efficiency gains are achievable
and could bring down premiums. In summarising the results, the report stated:
A privatised Medibank Private would be able to actively and
flexibly pursue all opportunities to achieve available efficiency improvements.
On the basis of our modelling results we suggest that privatisation has the
potential to allow Medibank Private to achieve additional efficiency
improvements equal to 5 to 7 per cent of its existing costs. Approximately 1
percentage point of this efficiency gain would be required post-privatisation
to allow Medibank Private to earn a pre-tax market rate of return on assets.
The 4 to 6 percentage point residual could be applied to lowering real PHI
[private health insurance] premiums.[10]
2.18
CRA is not alone in reaching these conclusions. Mr George Savvides,
Chief Executive Officer of Medibank Private, has publicly acknowledged the
possibility of even greater goals being achieved by the business under a
different ownership model.[11]
Other commentators have speculated on the possible benefits for Medibank
through its expansion of business operations, both within the health insurance
and in other insurance and financial markets.[12]
The devolution of the business from government to private hands is the most
efficient and successful method of achieving this type of expansion.
2.19
The sale of Medibank Private will also reduce the administrative burden
on the business, as it will not longer be required to comply with the
obligations befalling Government Business Enterprises, including extensive
additional reporting requirements. This will enable Medibank to compete on an
equal footing with other health insurance providers which are not subject to
these obligations. It would also free Medibank Private to concentrate on its
core business: the provision of competitive, efficient health insurance.[13]
2.20
Taking the above factors into consideration, the committee is satisfied
there is no basis for concluding that competition between funds will be
adversely affected by the sale. On the contrary, equalising the status of Medibank
Private with other providers in the market promises to enhance competition and
keep downward pressure on premiums.
The protection of members
2.21
The sale will not result in any reduction in the surety of the insurance
product sold by Medibank Private. The capital adequacy and solvency provisions,
which all private health insurers must meet, remain untouched by the bill.
Medibank Private will be no less safe and solid than any of its competitors.
2.22
A raft of other measures and safeguards will also continue to protect
fund members. The Minister for Health has wide-ranging powers in relation to
health funds, all of which are directed at protecting the interests of policy
holders. Mr Maskell-Knight, from the Department of Health and Ageing, listed
some of these powers:
The minister has power to disallow rule changes and premium
increases and to determine rules around gap cover schemes, loyalty bonus
schemes and discounts on premiums. The minister has power to determine minimum
default benefits and prostheses benefits. The minister has power to declare
what is and is not a hospital or what is or is not a day hospital facility. He
has power to seek to set performance indicators for the industry, to seek
explanations from health funds, to investigate health funds, to seek
enforceable undertakings from health funds, and to revoke their status as a
participating insurer for the purposes of the 30 per cent premium reduction
scheme.[14]
2.23
The quality of the insurance coverage offered by a privatised Medibank
Private will remain protected. The committee received from the Private Health
Insurance Ombudsman a submission which made his role in safeguarding members'
rights clear. Any consumer dissatisfaction with service standards after the
sale would likely result in more complaints to the ombudsman. The ombudsman is
empowered to investigate complaints and report or make recommendations to funds
following an investigation. The ombudsman may also report to the minister or
the department on the conduct of a health fund. The ombudsman, Mr Powlay, noted
the government's undertaking to maintain levels of service for policy holders
in rural and remote Australia, and reported his intention to closely monitor
the sale process to ensure standards of service in the bush were maintained.[15]
2.24
The ombudsman also reminded the committee that significant protections
are in place to monitor increases in health premiums. Mr Powlay said that he
had applied these protections appropriately in the past and that he would
continue to oversee their application in the future.[16]
Furthermore, the ombudsman submitted that his office has sufficient powers and
resources to carry out this role.[17]
2.25
Ms Ginnane from the Private Health Insurance Industry Administration
Council (PHIAC) echoed the ombudsman's remarks when she said the council would
continue to apply the same level of scrutiny to a privatised Medibank Private
as it has received under Commonwealth ownership. Ms Ginnane left the committee
in no doubt as to the rigour with which her office carries out its responsibilities:
PHIAC establishes prudential standards
that they [private health insurance funds] must conform to. As I said, the
issue for us is making sure that organisations that are in the industry are
well managed and financially sound. We have a fairly limited sense of humour
with organisations that breach those prudential standards.[18]
2.26
The committee notes the important role played by the Private Health
Insurance Ombudsman and the Private Health Insurance Industry Administration
Council in monitoring the conduct of health funds, especially in relation to
increases in premiums. Along with extensive regulatory protections, these two
offices will continue to provide a high degree of oversight and protection for
members of a privatised Medibank.
The protection of employees
2.27
The Community and Public Sector Union/Save Medibank Alliance expressed
concern that the sale of Medibank Private would lead to reduced security for
Medibank employees.[19]
The committee appreciates that the prospect of changed ownership may be unsettling
for staff but believes the union's concerns are unfounded.
2.28
For one thing, the bill presages no dilution in the entitlements and
protections currently afforded Medibank's employees.
2.29
As described above, Medibank Private Limited is a public company limited
by shares and existing employees work for this entity. The mere fact of
Commonwealth ownership makes no difference to the legal position of its
employees. Nor would the transition of ownership to private hands. Indeed, the
restrictions which the bill places on foreign ownership and on the maintenance
of Medibank's health insurance business provide safeguards which, while
possibly not restricting commercial decisions in the long term, serve to
protect against radical implementation of any changes in the short and medium
term.
2.30
Medibank Private's representative at the committee's public hearing
reassured the committee that employees were being kept abreast of developments
with regard to the sale. Mr Morphy, manager of corporate development for
Medibank, said that:
In relation to staff we have an extensive infrastructure for
staff communications. It involves staff forums which are face-to-face. We have
a phone-link process where we can have phone calls with our staff and we have a
staff Q&A process where staff can ask questions; we have an intranet
process where we post information and staff can obviously read it; we have a
publication called FYI where we group together key issues and put that
out as a publication through the business; and we have an email campaign that
is actually called ‘From George’s Desk’ where Mr George Savvides would update
people on any key issues that are in the business. So, it is a very extensive
process of staff communication.[20]
2.31
The committee notes these measures provide appropriate channels by which
staff can keep themselves informed and also raise any concerns or questions
they might have about the implications of Medibank's sale.
'Australianess' provisions
2.32
The bill imposes restrictions to ensure the company must remain
incorporated and managed in Australia and not be broken up. No one shareholder
(including associated entities) may hold more than 15 per cent of the company,
and the majority of board members must be Australian citizens.
2.33
These 'Australianess' provisions protect against a variety of avoidance
measures; interest in a share, for example, is very broadly defined and
includes any legal or equitable interest whatsoever.[21]
Enforcement mechanisms are provided in the form of remedial orders to be issued
by the Federal Court of Australia.
2.34
These restrictions on ownership and control cease to apply after five
years.
2.35
The committee considers that this period will give Medibank the time it
needs to establish itself as a fully independent and equal player in the
market, while at the same time lending stability to protect the interests of
members and employees.
Scrutiny of Bills Committee findings
2.36
The committee notes Alert Digest 13/06 arising from the deliberations of
the Scrutiny of Bills Committee in which that committee raises concerns about
the uncertainty which could arise were the Government not to sell all its
Medibank shares in the short term.[22]
The Scrutiny of Bills Committee also expresses its concern that, as they stand,
the provisions may trespass unduly on personal rights and liberties. It goes on
to express its preference for a time limit for the sale to be set, and seeks
the minister's advice whether this could occur.
2.37
The Minister for Finance and Administration responded to the issues
raised by the Scrutiny of Bills committee on 20 November. In his letter,
Senator Minchin explained the timing of the sale had yet to be fixed. He said
market conditions are an important factor in timing the sale to optimise the
outcome and should be left for the minister to determine.
2.38
The committee understands the basis of the Scrutiny of Bills committee's
concerns and agrees the practises which the committee promotes should be
observed in general. However, this committee also accepts the minister's
reasoning and concludes that, in this instance, the most practical course has
been taken.
Recommendation
2.39
The Committee recommends that the bill be passed unamended.
Senator Mitch
Fifield
Chair
Navigation: Previous Page | Contents | Next Page