Proposed changes to Private Health Insurance: Impact on NIB

The Federal Government recently proposed changes to private health insurance, which is expected to result in up to $1 billion of claims savings over the first four years of operation. This is mainly through a reduction in prices paid for medical devices and prosthesis. The measures are designed to simplify and homogenise the products across providers. It will also allow discounts for customers aged under 30 in order to encourage them into private health insurance. The discounts are 2% for each year a person is insured under the age of 30, up to a maximum of 10%.

The two ASX-listed private health insurance companies, Medibank (ASX: MPL) and NIB Holdings (ASX: NHF) have rallied in anticipation of the changes.

NHF, with a younger customer base, is well positioned to benefit from discounts. This is because the sharpest decline in the number of people with private health insurance is in the 20-30-year-old group. Further, NHF’s brands and products are targeted towards this customer demographic and its willingness to engage with third party channels (i.e. comparison websites and social media) should aid its appeal to the younger demographic.

Other measures, such as the introduction of 4 hospital categories and 3 General classifications with minimum policy requirements for each; and enhancing the privatehealth.gov.au website in order to aid product comparisons, are potentially negative, as these could lead to higher levels of product commoditisation, increased churn and price competition.

The impact on NHF’s earnings is likely to be neutral, as the likelihood of lower premium rate increases following the release of the proposed changes is likely to be offset by lower claims. With NHF now trading on a 1-year forward P/E multiple of ~23x, the market is likely to focus on the earnings outlook for FY18. Where NHF has provided guidance for a decline in underlying operating profit of up to 2.5%, reflecting the impact of expected margin contraction in the core Australian health insurance business in FY18, as well as additional investment in new ventures and technology. The proposed changes are not expected to impact FY18 guidance.

 

John Haddad is an equities analyst with Fairmont Equities

Sign up to our newsletter. It comes out every week and its free! You can leave your email with us via the form on the right-hand side of this page.

Disclaimer: The information in this article is general advice only. Read our full disclaimer HERE.

Like this article? Share it now on Facebook and Twitter!