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Sale of Medibank Private

David Gadiel | 11 April 2014

gadiel-davidThe government has announced it will sell Medibank Private through an initial public offering in 2014-15. There is no case for its public ownership. This is a private business paying tax and providing private services that happen to be in the health industry. It operates in a competitive private market in which there are 34 players. Its public ownership is a quirk of the fallout from the abolition of Medibank (the national public insurer) in October 1976.

By selling Medibank Private the government will sacrifice a stream of dividends in exchange for a capital sum that will improve its fiscal position. In the 2012-13 financial year, as a wholly-owned government business, Medibank Private paid an ordinary dividend of $110.4 million and a special dividend of $339.9 million. It provides no public goods and makes no contribution towards public health.

Public goods are those from which everybody benefits but from which nobody can be excluded from using and therefore individually charged. A lighthouse is the classic example. Herd immunity, flowing from immunisation, is a case in point in health.

Everybody benefits from herd immunity. One person's consumption of this gain does not detract from the benefit available to others. People who fail to immunise become 'free riders.' Hence the case for government intervention through immunisation programs for which everybody pays though taxation. Medibank Private clearly does not fall into this category.

In 2012-13 Medibank Private made an after tax profit of $232.7 million, a return equivalent to about 7% on assets and 17% on equity. Medibank Private could hence be described a reasonably profitable company with an acceptable debt to equity ratio (1.21) that may prove attractive to private investors, depending on its issue price.

It is not as profitable as NIB, the only other publicly listed private health fund, now trading on a relatively high price earnings multiple of 19.8. On this criterion Medibank Private could realise in excess of $4 billion. The market nevertheless appears to attach a premium to NIB (its share price exceeds its earnings per share). The government may therefore need to be less ambitious about what it can expect from selling Medibank Private.

Medibank Private is the largest health fund in Australia with 3.8 million contributors. It has been suggested that privatisation will adversely affect competition and precipitate an overall increase in contributions charged to customers. This is a vestigial argument about government ownership as a competitive 'pacesetter.' It used to justify public ownership of the likes of Qantas and the Commonwealth Bank.

Australia now has a competition policy. Health insurers typically pay out 84% of their contributions. Pricing of contribution rates in any case is highly regulated - in most cases largely a product of claims experience plus administrative expenses. The efficiency of Medibank Private and the welfare of its contributors will be in safe hands in private ownership.

David Gadiel is a senior fellow at The Centre for Independent Studies.