Private health insurers having a rare moment in the sun

For an industry that is meant to be in a death spiral and is enduring a worldwide pandemic, private health insurers are enjoying a rare moment in the sun.

While the undeniable pressures of younger members dropping their cover and older members claiming more treatments do still have the industry locked in a particularly unpleasant vice, the COVID-19 pandemic has had an unusually beneficial effect on the industry.

Now that the Federal Government has effectively banned non-essential elective surgery for a considerable period of time due to the pandemic, the private health funds have had one of the very big taps draining money out of them turned off.

Premiums keep rolling in while elective surgery halts

Meanwhile, the health insurance premiums from 13.6 million Australians continue to roll in, albeit without the mandated increase to premiums on April 1 that most of the funds have decided to delay for now.

While at some stage you would expect the elective surgery tap to be turned back on and for the backlog to have increased, the private health insurers will still be in a much better financial position than usual.

Shares in the big listed players Medibank Private (ASX: MPL) and NIB (ASX: NHF) are down this year but compared to the rest of the share market they are floating in an ocean of serenity.

Private hospitals effectively underwritten by Federal Government

Private hospitals – which are locked in a symbiotic but unhealthy and highly competitive embrace with the private health funds – have also been effectively underwritten by the Federal Government for the duration of the pandemic despite losing a big chunk of their business due to the lack of elective surgery.

Keeping the private hospital intensive care units open in case they are needed during the pandemic was obviously a top priority, as was keeping the private hospitals staffed and ready for COVID-19 patients.

Only a few downsides for private health insurers

There are some downsides for the private health insurers from this crisis as well – but not many.

Young customers who have lost their jobs are likely to jettison health insurance well before other expenses such as food and shelter.

Older customers who face paying a hefty premium rise if they drop their cover and resume it later on as part of the lifetime health cover loading are less likely to ditch their fund unless it is absolutely crucial.

To get around those problems some of the insurers are offering financial relief for some of their customers who have lost their jobs, are underemployed or have contracted the virus.

It is not a huge sacrifice for the insurer given the strictly limited number of extras and surgery that are still covered.

Even so, such programs will not come close to soaking up the welter of premium income that continues to roll in even as the major expenditure of elective surgery disappears.

Profits could be rising fast

Some research by Macquarie found that a fall in claims of just 20% could create a net profit of $1.18 billion for Medibank, compared to Macquarie’s previous estimate of $385 million based on claims growing 4.1%.

That is not a pie in the sky figure, depending on how long the pandemic lasts.

At a time when the profits of many companies are falling fast or at the very least will be highly unpredictable, it is quite ironic that the global pandemic has caused a strong profit boost for the private health insurers.