Drummond was in the running for the CEO role last time around, which went to Thorburn in 2014. Some say he may be up for a fresh challenge after proving himself as a listed company CEO, having told people in the past running NAB would be a dream job.
That risk that Drummond may be enticed into another CEO job (with no obvious successor at Medibank) is likely to only add to the view among a small, influential group of investors that Medibank Private is racing against a ticking clock.
The insurer is due to report its half-year results on Friday, and shareholders are hoping the company will continue to report improving market share, customer satisfaction and, of course, profits.
Best defence a strong share price
So why is there this sense of urgency if Medibank Private is heading in the right direction?
In part, it’s the usual dynamic of investors wanting to spur management and the board to do more, faster.
In the case of Medibank Private, that’s amplified because the group’s strict share restrictions, which prevent any one shareholder from owning more than a 15 per cent stake in the company, are due to expire at the year end.
This paper’s Street Talk column reported last week a potential bidder has amassed a stake via a swap through Deutsche Bank.
The health insurer has appointed defence advisers Macquarie Capital and Bank of America Merrill Lynch to prepare it for any approaches.
But as any investment banker will tell you, the best defence is a strong share price.
And while the narrative around Medibank Private is solid – market share is improving, profits are improving and dividends are being paid – some investors believe the company should be thinking bigger and far more ambitiously.
As the biggest health insurer in the country, Medibank has a lot of data on its customers. It has about 1.8 million policy holders (that’s compared to 24.6 million population, of which less than half have private health insurance of some description) with an average life of about 6.5 years, which mean it has data and interactions with a far larger proportion of the population.
And it’s been relatively slow to move into using that understanding of the healthcare systems and how its customers use it.
Management have probably been focused on delivering improved service and systems, critics say, but question whether chairman Elizabeth Alexander could have been pushing the board harder to nut out some strategic options.
(There’s been a slow-burn push against Alexander, who was re-elected for another term two years ago but committed to leaving at the end of this term. Alexander has been Medibank director since October 2008, and was appointed chair in March 2013, when the company was still government-owned.)
Medibank moving forward
Medibank isn’t entirely standing still. By mid-2019, it will roll out its Live Better app, which will reward customers with healthier lifestyles (yoga, running, more sleep) with cheaper hospital or extras premiums. Members can also reduce their hospital excess or increase their extras limits.
That’s along the lines of what Hong Kong-based fund Janchor Partners’ John Ho, a Medibank shareholder, forecast when he spoke about the fund’s view of how the Australian healthcare system and insurers should develop in 2016.
At the time, he said the system would focus more on treating problems and towards enhancing a person’s well-being, and would likely over time move more to a fee-for-outcomes instead of a fee-for-service model.
As well as its app, Medibank has expanded into travel, pet and life insurance, and broader health services, such as offering care in people’s homes rather than in hospitals, which is a much cheaper option.
But Medibank’s strategy is still fairly nascent compared to some of the offshore health insurers, such as speculated predator US-based United Healthcare, which invests more than $US3 billion ($4.2 billion) each year in data and technology.
While it’s the strategy – or more precisely the pace of it – that’s of concern to some investors, sell-side analysts are more fixated on the potential impact on regulation if Labor wins the federal election.
If it wins, Labor has said it will cap health insurers’ premium increase at 2 per cent a year in a bid to reduce the number of people who are choosing not to buy private health insurance because of the rising costs.
It’s that risk that explains why so many analysts have underweights or neutral recommendations on the stock.
Morgan Stanley, for example, says even factoring in benefits from tighter hospital contracting, payment integrity measures and cuts to its marketing spend, Medibank’s net margins will likely fall from about 8 per cent in 2019 to 5.4 per cent in 2022 if Labor’s planned reforms are introduced. That’s at the bearish end of the spectrum.
Put another way, the broker says if all else is equal, every dollar of revenue lost from a 2 per cent cap falls straight through to the net margin.
Morgan Stanley does say it expects Medibank will be able to offset some of the dollar losses with other measures, including better use of technology, more at-home care, tougher contracts with hospitals and more. The broker notes regulated profit pools make up about 90 per cent of group earnings.
How Medibank might be positioning itself to respond in a 2 per cent cap environment is likely to be a key point of discussion at this week’s results. Particularly as there seems to be a gap between Morgan Stanley’s bearish view and others in the sharemarket.
Broadly, the counter-view is Medibank margins won’t be as impacted as the analysts are forecasting.
Partly that’s because the larger insurers are cushioned from the impact because of their cost base. But there’s also the view the cap could trigger industry consolidation that would benefit the larger players.
A 2 per cent cap would likely hit smaller players harder if there is a challenging year – say a fall in investment income – and those insurers may be unable to keep operating. That could potentially see Medibank and possibly BUPA buy these smaller operators and grow their market share.
More market share would also allow the health insurers to push back even harder on the hospital operators, and conceivably, margins may not be as impacted as the analysts are forecasting. On some estimates, Medibank should expect dollar gross margins to even rise in a two per cent environment, as they are gaining market share and have renegotiated with major hospitals to cut costs.
Medibank is at an interesting inflection point with so many uncertainties around the stock. But that hasn’t put off Schroders Investment Management, which this year emerged for the first time as a substantial shareholder. The big question is whether the strategic, regulatory and management uncertainties will delay or accelerate a potential bidder showing its hand.