Is private health insurance unaffordable?

Craig Drummond, the CEO of Medibank, talks about reforming private health insurance to stem the flow of people dropping out due to it becoming unafforadble

Is private health insurance unaffordable?

Ross Greenwood: I want to take you to private health care. This is a big issue for many Australians. As we age, our need for health care rises. Therefore there is a significant burden on the state governments, on the federal governments, and on individuals themselves. What do you do? Cut back the health care services? That doesn’t seem to be the option. Do you actually put more emphasis on private healthcare? Of course, you do because then the individual is hoping to pay for it themselves.

The problem is, with the rising cost of the operations and the procedures that carried that and insured by the private health operators, there is also significant competition. Then there is the case whereby people start to drop out. Generally, it’s healthier people who drop out, less healthy people stay in, the risks go up so, therefore, the premiums start to rise. It is really not a particularly healthy recipe.

Now, Craig Drummond has been on the job as a Chief Executive of Medibank Private for one year now. Coming from an investment banking in a banking background, he knows very well the dynamics of this industry and he’s worried. He’s on the line right now. Many thanks for your time, Craig.

Interview: Craig Drummond, Chief Executive of Medibank Private

Craig Drummond:  A pleasure Ross. Ross, good evening.

Ross Greenwood: Good evening too. Can you just explain having been there and observed it. You can say firsthand being with such a large private health insurance, you’ve got a situation where you’ve got technology issues, you’ve got cost issues. It is incredibly complex to try and also focus on that shareholder who also wants a return from your organization.

Craig Drummond: Look at this, Ross. The fundamental issue with any company today is, of course, we need to put our customers first. If you look after the customer and do a great job for customers, then shareholders will be rewarded in due course. The issues you’ve raised are real and that is that health costs in our system are running between 5 and 6% per annum increase per annum. When you’ve got wages and incomes generally growing at 1 to 2%, this gap’s opened up. Now, you might say, “Why are costs in the system running at 5 to 6%?”

Well, medical healthcare inflation is running somewhere around 2 to 2.5 % and the balance is volume growth. Okay, where’s this volume growth is 3 to 3.5% coming from? Well, it’s coming from a range of areas obviously as you’ve indicated. One is demography we’re aging so we’re using the health system more frequently. Secondly, we have as we’ve discussed before, like many Western countries a chronic disease management chronic disease problem, diabetes, is the issue that’s often raised from this perspective.

I may have mentioned to you Ross in the past that, for example, 2% of Medibank’s customer base accounts for about 35% of our claims. There’s an issue in the chronic, the way we manage as a society, the chronically ill and we must do a better job both preventative and in the way, we deal with those chronically ill people.

Ross Greenwood: Do you believe the system now needs a radical transformation because otherwise, if we continue to go as we are that those costs, that formula that you’ve just explained to me, will go on on a never-ending basis? The truth is, more people will drop out. You’ve even been with customers doing focused groups and lights in the last little while. Their stories are basically that they can’t afford it.

Craig Drummond: I think there’s no question that the way we’re running, we are getting ourselves in an unsustainable position. Can I just say though that the quality of the care that’s being dispensed in Australia is first-rate? Anyone that goes to have a procedure recognizes that the quality of what we do in this country both in terms of the quality of the medical care and the hospital care is first-class.

However, what’s happening? I’ve just come back from a trip overseas looking at health systems around the world, what is happening in other countries is there are a lot more procedures, the less complex procedures being done out of the hospital setting. We still do a lot of our procedures today in hospitals. Now, the hospital care that we provide today is first-rate.

I’m not going to, in any way, shape or form, say anything other than its first-rate but I’ll give you an example. In Australia, approximately 80% of hernia operations are done in hospitals with an overnight stay. In most other jurisdictions around the world, 20% of hernia operations are done with an overnight stay in the hospital and 80% are done as day surgery.

Now, there is also this issue of we call an industry ‘low-value care’. That’s where the clinical outcomes from certain procedures in some cases somewhat questionable. Knee arthroscope, some forms of lower back surgery, and a range of other procedures that could either be done either in a different care setting, a less expensive care setting or indeed in some cases, not at all.

Now again, it’s not Medibanks right to question the medical profession or indeed the care that is being dispensed. All we’re really pointing out is that if as a nation we continue to make the choices that we are, costs will continue to increase at that 5 to 6% rate.

Ross Greenwood: Can I make an observation to you though, Craig?

Craig Drummond: Sure.

Ross Greenwood:  You mentioned knee surgery, knee operations there. If I’m an Orthopaedic Surgeon say for example, who does knee operations and I make my money out knee operations, then the system that I would have would basically encourage my patients to come to me to have that knee operation if you get my drift. In other words, I’m wondering whether the system is actually upside down because the people who are at the coalface who are making their living out of it, basically have to work.

If they say, “No don’t go there. Go over here.” As you say, I’m sure ethically they do the right thing. Surely, if you are a person who does shoulders or knees or something like that, you need to be operating those shoulders or knees. You would be encouraging yourself and your patients that that may very well be the best outcome. It might not be the only outcome, but you’d be encouraging them to basically go and take the surgery.

Craig Drummond: Compared to an extent Ross, I know the majority of what is done in this train system is done for a very good reason. However, we do have a system in our country where we have a fee for service. It does, therefore, in some cases, it instincts[sic] volume.

In other countries around the world, and I’m not saying that we need to get in this path, and I’m not saying that other countries have better system necessarily than us, all I’m pointing out is in some other countries around the world, there is a bit of a trend towards providing fee bundles or capitated payments for specific procedures limiting the cost. Now, again, there are many complications with this.

For example, more complex surgery where we don’t want disincentive the medical profession from doing more complex surgery. Sometimes, more complex surgery in order to take it on, it is longer, it’s more complex ,it takes more resources, and costs more but all we’re really pointing out is, we do need to and we are having as a system, have to have a closer look at the payment system that we have, the locations that we’re dispensing care as I said. We, also in the private health insurance industry, need to look at our own cost and we are doing that.

Now, we will make a commitment when we come out with our results on the 25th of August to look pretty hard at our own costs. We’ll give some numbers to the market at that point in time, but there’s also a reform that the government, the current Minister, Minister Hunt is well and truly down the path on things like prosthesis where we know that there are some opportunities to save some money in the prosthesis area that we will pass on.

We have said we’ll pass on a 100% of that benefit whatever benefit we get we’ll pass 100% back to customers.

Ross Greenwood: Then you would have also heard from your customers as you were speaking with them in these past few months. You surely would have heard about the complaints about the gap. The gap seems to always be the real hurdle between what is the scheduled fee and what ultimately the individual has to pay to make up for the cost of that procedure. That, of course, is always a nightmare because if I’ve got private health insurance, I fully expect that the vast majority if not all of the procedure, will be paid for by the private health insurance. This is part of the education that many consumers I don’t think have really got a full understanding of.

This is part of the education, that many consumers I don’t think have really got a full understanding of.

Craig Drummond: Ross it’s a really good point. Again, this is where the insurance industry including Medibank needs to continue to do a better job at getting information in the hands of consumers on their mobile devices. For example, before they go and have a procedure because what ultimately happens for people on top hospital covers, we pay the very vast majority of the cost of someone’s stay in hospital but often there is a gap on the medical services that are dispensed.

Now, that gap will come down to making sure prior to having a procedure, that the individual concern the patient understands what that cause is likely to be and the gap is likely to be before the procedure is undertaken and they’re given options around how they may deal with that gap. For example, one option is to look at the insurer’s no-gap schemes and is your medical professional, is your surgeon participating in that no-gap scheme.

Ross, I completely agree with you that the out of pocket expenses that now are being incurred are painful for a lot of our customers and as I say collectively, the industry, both providers and the insurance need to do a better job at making sure that at least there’s the awareness about what those costs are likely to be and what are they in relation to.

Ross Greenwood: Just the final one, not long after you went into the job, they were significant IT problems at Medibank Private. You’ve spent significant amounts of resources and actual shareholder’s money to try and get that up to scratch. Where are you with that?

Craig Drummond: Ross, I’m very pleased that that seems like a Dorothy Dix question but I’m–

Ross Greenwood: It’s not. It’s not because it was a real problem. The tax office has got it, you had it, that’s big organizations and I know it’s a frustration for people when the sites don’t work.

Craig Drummond: I’m very pleased to say that we have a 99.8% of that tax bracket now in the hands of their customers. We’ll have the balance done, very small number done by this week. That compares with clearly a what was an acceptable situation last year where it wasn’t until we got into August where we got all of our text statements delivered. I’m very pleased with where we’re at.

As of today, I’m thankful for all the hard work that people like in– And some many bankers have done.

Ross Greenwood: All right, I’ll tell you what that’s one of the toughest jobs in this country and will continue to be so, because of many of the dynamics of that business. You just heard Craig Drummond explain. Now, it really is a very tough job but if you’re a patient who’s going to hospital then, of course, you’re going to be frustrated if the system does not work for you or indeed, if the system becomes too expensive for you.

That’s something that’s going to be addressed on early at the individual company’s point of view, the insurance company’s point of view, but also right the way back to the State Government and the Federal Government as well. Craig Drummond as always, great to have you on the program.

Craig Drummond: A real pleasure, Ross. Thanks for having me.

Other previously published articles emphasising health insurance.

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10-07-2017 Efficiency and Competitiveness of Superannuation – Kelly O Dwyer

08-06-2017 Money Minute – June 8 2017 “Flat, Not Fizzy”

30-05-2017 ACCC takes health fund NIB to court – Rod Sims

18-05-2017 Wage growth stalls – Paul Dales Capital Economics

10-05-2017 9News: Federal Budget 2017-18 Preview

10-05-2017 Mathias Cormann – Budget 2017

03-05-2017 Genworth profitability remains strong

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13-04-2017 Overhauling the Insurance industry

11-04-2017 Super for Home Deposits – Craig Kelly MP

03-04-2017 Money Minute – March 31 Cyclone Debbie

23-03-2017 Does travel insurance cover terrorism?

20-03-2017 9News: Insurance prices are on the rise

09-03-2017 What are the insurance implications when your home is standard at sea?

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