An unprecedented standoff between health insurer NIB and St Vincent’s Health Australia has captured headlines for the potential high out-of-pocket costs for thousands of hospital patients.

Perhaps more importantly, it should also raise questions about whether there is room in our health system for rich profits flowing to private insurance companies.

St Vincent’s Health is Australia’s largest non-profit hospital operator with 10 private hospitals on the east coast. NIB is Australia’s fourth-biggest health insurance company.

It was demutualised and listed on the Australian Stock Exchange in 2007 with the usual demutualisation result of much higher salaries for top executives.

Benefit payouts

According to the most recent Commonwealth Ombudsman State of the Health Funds Report, of the “Big Five” insurers, NIB pays out the lowest percentage of contributions as benefits, leaving the biggest percentage for management expenses and profits.

Within those five, there is a marked difference in benefit payouts between the two mutual companies and the three for-profit operations.

The two mutuals – HCF and HBF – respectively pay 87.7 and 87.9 per cent of contributions as benefits for members, the balance going on management expenses.

The three for-profits – Medibank, BUPA and NIB – pay 83.4, 80.9 and 79 per cent of contributions as benefits.

(Medibank and BUPA have the benefit of scale with 27.1 per cent and 24.9 per cent market share. NIB has 9.6 per cent. HCF and HBF have 12.5 and 7.7. BUPA runs as a for-profit company in Australia, feeding its profits back to subsidise its British non-profit parent.)

Public interest

Given the tens of billions of dollars in annual insurance premiums, never mind the federal government’s $7 billion subsidising the industry through the private health insurance rebate, each of those percentage points is a very large amount of money and a matter of public interest.

Industry superannuation funds have demonstrated clearly superior performance of profit-for-members funds over profit-for-shareholders funds – the key difference being the profit margin demanded by shareholders, an expense mutuals don’t have.

All other things being roughly equal – and if private health insurance wasn’t so complicated, opaque and something of a protected species – you would expect mutual insurers to outperform for members compared with what profit-driven insurers do for customers.

The percentage of contributions paid out indicates that is exactly the case, but customers tend to see the marketing campaigns and frequent flyer points offers rather than an ombudsman’s report.

Hard edge

The breakdown in negotiations between NIB and St Vincent’s represents a new hard edge by an insurer out to protect its profit margin – and potentially a spotlight on the mutual versus for-profit difference.

In the first half of the 2023-24 financial year, NIB recorded group underlying profit of $144 million, up nearly 22 per cent, on total group revenue of $1.7 billion, up 12.4 per cent.

It is doing well enough to pay its CEO, Mark Fitzgibbon of the Hunter Valley Fitzgibbon Labor political dynasty, $4.8 million a year.

Fitzgibbon, who oversaw the demutualisation, owns $20 million worth of NIB shares. Before NIB, he had been a local government general manager and CEO of the NSW and national licensed clubs industry bodies.

Fitzgibbon has made headlines before, famously wanting Medicare scrapped and everyone forced to take out private health insurance.

Yet NIB is playing hard ball with St Vincent’s, negotiations breaking down when the insurer told the hospital group it had made its final offer.

Indexation disagreement

Interestingly, the breakdown is over the final year’s annual indexation in a three-year agreement. Within the past year, St Vincent’s successfully reached much more complicated comprehensive agreements with both mutual and for-profit health funds. Indexation is relatively straightforward by comparison.

Also interestingly, St Vincent’s has not been negotiating with NIB, but with Honeysuckle Health, a 50-50 joint venture by NIB and the American managed health care industry giant, Cigna. Cigna posted a $US5.2 billion profit last year on revenue of $US195 billion. ($7.7 billion and $289 billion.)

As the Honeysuckle Health website puts it: “Our dedicated team of hospital negotiators and relationship managers have over 30 years combined experience in negotiating hospital contracts.”

In a statement announcing St Vincent’s was giving NIB 65 business days’ notice, CEO Chris Blake said it was the first time in its 167-year history that negotiations had collapsed.

“There is a crisis in private healthcare in Australia,” he said.

“Over the last five years, more than 70 private hospital services have closed. We’ve now got a major federal government review into the survival of the sector.

“For private health care to operate effectively, health funds and hospitals need to work together, and on an even playing field, for the benefit of our members and patients. That’s certainly the St Vincent’s commitment.

“In the last 12 months, St Vincent’s has negotiated major new agreements with Medibank, HCF and the Alliance group of health funds. As with all negotiations, while they were robust, both sides gave ground to achieve a fair result.

“But nib has given us no choice but to make this call.”

Coverage at risk

Being one of the Big Five gives NIB considerable bargaining power. It would hurt St Vincent’s if nearly 10 per cent of its patients had no private health cover and had to pay full fare themselves.

But in a more genuinely competitive industry, rather than a sheltered workshop, this would be an opportunity for other insurers to grab NIB clients.

A quick, well-advertised campaign to waive waiting periods for NIB clients wanting to swap providers would have an impact NIB couldn’t afford either.

Unfortunately, many NIB customers may not know their coverage is at risk. NIB also operates under the Qantas, APIA, AAMI, GU and Suncorp brand names.

Having said it had made its final offer, NIB now says it’s “committed to continuing negotiations”.

– TND