Medibank Private chief executive Craig Drummond says there are two pieces of data about movements in health insurance membership that sum up the burning structural problems facing the industry.
In the December quarter 7700 people cancelled their health insurance while, at the same time, 17,500 people aged between 70 and 75 years old took up private health insurance.
Drummond says the conclusions to be drawn from these stats are obvious – a growing number of young people are falling out of health insurance and a cohort with much higher propensity to seek health care is joining the private health insurance system.
The cancellation of health insurance by younger people is an industry wide problem.
Medibank's membership lapse rate has been running at just above 5 per cent for several years.
"These (cancellation) numbers are relatively small and its early days but if we don't do anything to reform the system that trend will continue," he said.
He regularly visits Medibank's call centres where it is possible to hear average Australians talk about the struggle to meet their financial commitments. The complaints usually flood in after the federal government approves another premium increase, as it did this month. Premiums will rise by 4.6 per cent in 2017.
Drummond says there will be consequences for the public health budget if Australians continue to turn their back on health insurance.
The government health budget is rising for a number of reasons but the two biggest are demographic change and rising ill health from chronic diseases.
Drummond told analysts that health insurers were already bearing a much higher burden of the cost of the health system because privately insured patients attending public hospitals were paying about $1.1 billion a year to cover the cost of treatment.
He likens this to a double taxation on private health insurance members.
Drummond expressed his concerns about the health system following the release of Medibank's half-year profit result, which benefited from a significant rise in returns from growth assets.
Medibank only had 25 per cent of its investment portfolio in growth assets but these assets accounted for 55 per cent of the increase in value in the December half.
The core business of health insurance recorded a solid profit margin of 16.9 per cent, down slightly from the 17.2 per cent in 2016.
The latest half was hit by the costs of bedding down and stabilising the company's new IT system called DelPHI and the amortisation of the system.
Medibank is among the handful of public companies that provide profit guidance. The company expects to have an operating profit of $490 million in the year to June 2017, which suggests the sequential second half performance will be flat.
A profit of $490 million in 2017 would be up 17 per cent on 2016. Medibank's earnings per share is forecast to be 16c this year.
The company is committed to a full year payout ratio of 70 to 80 per cent which means the second half dividend will be higher than the first half payment of 5.25c a share fully franked.
Despite Drummond's warnings about the health system needing fundamental reform, Medibank still offers an attractive yield.
