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26 April 2006

Joint press conference

The Hon Tony Abbott MP
Minister for Health and Ageing

Senator the Hon Nick Minchin
Minister for Finance and Administration

Tony Abbott

Well, ladies and gentlemen, thanks very much for being here. Nick and I have some important announcements to make about private health insurance.

Let me just say about private health insurance, that support for it is one of the signature policies of the Howard Government. As you would know, thanks to the policies of the Howard Government, particularly the private health insurance rebate, coverage has gone up from about 30 per cent to about 44 per cent over the last six years.

Without the private health insurance rebate, private health insurance would be about $1,000 a year more expensive for the average family. So this is a government which is totally committed to private health insurance.

We believe that a sound private health system is a necessary complement to a sound public health Medicare system. So what we want to do is to constantly improve the private health insurance system.

Now, there are two particular issues which we are announcing today will address. The first is, that because of the changes that have taken place to clinical practice over the last couple of decades, there are all sorts of rather important health services which no longer take place exclusively in hospitals, but which are not comprehensively covered out of hospitals by Medicare. That’s one problem.

Another problem is that many people who have a privately insured episode subsequently have the nasty surprise of substantial gap payments, which they did not know about in advance.

So, the key features of the package of measures which we announce today are that the unsympathetic legislation, I believe, artificially restricting what private health insurance will cover, will be liberalised so that private health insurance will henceforth be able to cover anything which will prevent a private hospital episode.

This will be broadly interpreted so things like physiotherapy, podiatry, psychology, dentistry and so on, will be able to come in to what’s currently described as the private health hospital table, which is the guts of private health insurance.

The second difficulty that we’ve got is this ‘don’t ask, don’t tell’ culture about doctors’ charges and while that can’t change overnight, certainly what we will be doing as part of this package of measures is requiring the funds to provide a much wider range of information to their members and to keep the funds honest, we will also have the private health insurance ombudsman, having his own information website that will provide a much wider range of information to members.

I think that the measures that we announce today will make private health insurance a more practical and a more patient friendly product.

Because this is a day for significant changes to the sector, and because the giant of the sector is Medibank Private, we also have a rather significant announcement to make about that. I’d ask my colleague, Nick Minchin, to make it.

Nick Minchin

Thank you very much, Tony. As the finance minister and shareholder minister in Medibank Private, can I confirm the Government’s decision, in conjunction with the changes which Tony’s announced, to seek Parliamentary authority to sell that government business, Medibank Private.

We have had Medibank Private and its status as a government-owned business under consideration for some time. That would come as no surprise to you. Indeed, you would know that we first considered this question seriously back in, I think, 2003, after we had received a report from Carnegie Wylie on a scoping study on the question of the future ownership of Medibank Private. At that time, the business was not travelling well. It had lost a substantial sum of money just prior to my becoming finance minister.

What we decided to do after that first study was to institute a significant business improvement program for the business and may I congratulate George Savvides, the managing director, and the chairman, Peter Kirby, and the board and management, on what has been a very substantial turnaround in the fortunes of Medibank Private as a government business since the institution of that business improvement program that resulted from the first scoping study.

We’ve now received the update of that scoping study from Carnegie Wylie. It does recommend that we should now move to the sale of this government business and that’s what the Government’s decided to do. As I say, it does require legislation and the first thing is to introduce that legislation. There is no good public policy reason for the government retaining ownership of a private health insurance business.

This is - the private health insurance industry - is a competitive industry; it has some 38 funds competing in the industry. The Government’s overwhelmingly primary responsibility is to regulate that industry. It is not appropriate for the Government to be both the regulator of that industry and the owner of, at the moment, the single biggest player in that industry.

It’s a similar argument to the one that we have advanced in relation to Telstra. The Government is seriously conflicted in being the regulator of 38 funds in this industry as well as the self-interested owner of one of those businesses.

So, as I say, the legislation will be introduced into the Budget session. We would hope to complete a sale in financial year 2006/07. We have not made a decision yet on the method of sale. Broadly speaking, the options open to us are a trade sale or a public offering. The Carnegie Wylie report indicated that we could expect similar proceeds from either method of sale.

The question of which method of sale that we pursue will be influenced, in part, by the decision the Government has yet to make on whether or not it will proceed to float its remaining shares, or part thereof, in Telstra. It would come as no surprise the question of whether we have a public float of Medibank Private at the same time, or at a similar time frame to Telstra, is obviously something we need to take account of.

There are reasons, costs, and benefits, on both sides; or reasons for, and against both a trade sale and an IPO. We’ll weigh that up over the next few months, and in the context of decisions we make on ... in relation to Telstra.

This is the right time to move on this business. It has now been turned around. It is ready for sale and in the context of the changes that Tony’s announced, it is time that the Government exited this industry as one of the owners of a business in it, and concentrated purely on its role as a regulator.

I would make two additional points. One, that the Government, as you will see from the press release. is retaining its authority in relation to premium increases. The minister will still have to approve, that is the health minister, will still need to approve any proposed premium increases. Secondly, the Government’s decided that as a result of its decision to sell this business it will be making a substantial increase in the funding we provide to medical research in this country, and details of that decision will be revealed in the budget in two weeks’ time.

Reporter

Minister Minchin, is there a danger, if you (indistinct) a trade sale, that you’d be laying the foundations for a private monopoly, especially if someone as big as example, MBF?

Minchin

Well, obviously, any sale, I don’t want to get too hypothetical about method of sale, but any sale will obviously be subject to the Trade Practices Act, to the ACCC, and of course to the foreign ownership rules this country has in place. They would obviously have to pass muster with those very strict rules.

Reporter

Can you guarantee that given the lower management expenses and scope for expansion that you say the sale of Medibank Private would realise, that that will mean lower premiums for Medibank Private subscribers?

Minchin

The Government’s very confident that, as a result of the sale, there would be less upward pressure on premiums. You must understand that the level of premiums really is a function of payouts and health inflation is greater than general inflation, both with the pressure of demand upon the system and with technological improvements that do add to the cost of providing health services to the community.

This is not a highly profitable industry. It and its premiums, as I say, are a function of the payouts that they must make for services. But we’re very confident that a private business with the efficiencies that can be produced by the private sector will ensure that there is less upward pressure on premiums than is currently the case.

I do want to say that George Savvides, who’s the managing director, and his team have done a tremendous job, I think, in maximising the efficiency of this business within the government sector. But there are things that they cannot do under the yoke of government ownership in relation to the costs of the business, that I think will be available to them as a private sector business and also in relation to moving into other areas of activity that really is not possible for them to do as a government-owned business.

Reporter

What sort of other areas of activity are you talking about?

Minchin

Well, that would be a matter for, you know, future owners of the business; but it’s an insurance business and obviously, new owners of that business would be able to contemplate moving into other areas of activity, in a sense, to spread their own risks as a corporation that as a government-owned business it’s not appropriate for Medibank Private to do.

Reporter

Senator Minchin, what exactly is in it for consumers, given that you might get a billion dollars? What’s in it for them?

Minchin

Well, we believe that, if I go back to Jim’s question, that there will be less upward pressure on premiums if this business, a business which has about 28 to 30 per cent of the market now, is in private hands and run with the much greater efficiency that the private sector can bring to bear on the way the business operates and obviously, the owners of the business will be endeavouring to ensure that they maintain market share, that they maximise their customer base and that, therefore, they keep their premiums as low as they possibly can. And because it’s such a highly competitive business, with 38 funds, that they are able to compete for customers for that business.

So we believe even though, as I say, the current management is doing a great job, a privately owned Medibank Private will be even that much more customer-focused and that much more focused on keeping its premiums as low as possible.

Reporter

So, Minister Abbott, (indistinct) companies to get approval for price rises now?

Abbott

Well, Kathryn, this announcement today is not just about the sale of Medibank Private; it’s also about some significant reforms to the sector as a whole. And these reforms should make it a better product for customers, a better product for patients. For instance, if you can get your chemotherapy out of hospital and your dialysis out of hospital covered, that’s going to be good for patients. If dentistry and physiotherapy and psychology and so on can be covered under what’s currently called the hospital table rather than under the ancillary table, that will be good for patients. So, this is a total package for private health insurance. It’s not simply the sale of Medibank Private.

On the question of the premiums, well, currently, the premiums have to be approved by me. Any premium increases have to be approved by me. That’s not going to change.

We will be making it crystal clear on what bases these approvals will be given and essentially, they will only be able to get a premium increase if it is necessary to cover the cost of payouts, additional payouts to their members or their policyholders or to maintain their capital adequacy. So, certainly, there’s not going to be carte blanche for profiteering in the future, as there hasn’t been in the past.

Reporter

Won’t the expansion in cover for these different hospital areas, I mean, a considerable expansion in the costs being borne by health funds, meaning a higher, an even higher rate of premium increase?

Abbott

Okay. Well, Mark, we are not saying that the funds have to do these things. We are saying that the funds will not be prevented from doing these things by outdated legislation and we believe , and there is evidence from some of the funds to back this up, that if you treat things out of hospital, you are going to have lower costs than if you treat things in hospital. For instance, in hospital dialysis costs about double what home dialysis costs. In-hospital chemo costs a lot more than chemo in an out-of-hospital setting. So, we think this gives them the freedom to provide treatments in the most efficient way while the current outdated legislation forces them to provide treatment in hospital, which is often not the optimal way of doing it.

Reporter

What lower management expenses has Carnegie Wylie identified? Can you give any guarantees about staff numbers, for example, and the number of locations Medibank Private would operate from in the future? And just one other question: Would you be asking Parliament to vote in principle on the sale of Medibank Private, or would they know what your proposal was for a trade sale or another form of sale before they voted on it?

Minchin

Well, the seeking to remove the legislative prohibition on the government selling the business. I think there’s a clause in the National Health Act, which currently prohibits the government selling that business, and we’d be proposing that that clause be deleted from the National Health Act.

The sale objectives will be set out in due course and they will seek to ensure that the customer base continues to be well served, that there is a due recognition of the loyalty of both the customers of Medibank Private and on its staff and, obviously, those who seek to buy this business, I would have thought would be seeking to expand the business. So, I’d like to think, and I think it’s reasonable to expect, that they’d be wanting to expand employment in this business.

Reporter

Would Parliament know about what all of those ... all those objectives were before it voted?

Minchin

Oh, when we move the legislation, that gives the ... that enables the Government to sell it, I would intend to be setting out in some detail the sale objectives and to make it clear what the Government is seeking to achieve.

As I say, we wouldn’t, at the time of the Parliamentary debate, I suspect we’d in a position to say whether this was going to be a trade sale or an IPO. But, certainly, the sale objectives and matters regarding employment and customer base, we would discuss in parliament.

Reporter

When you say that the loyalty of Medibank Private customers will be recognised, does that mean that, as with other demutualisations, which is what this effectively is, that customers will be given shares?

Minchin

It’s not a demutualisation, Jim. It is not in any sense of the word a demutualisation. Sorry...

Reporter

We people, who have subscribed to Medibank Private, have paid the development of a business which you are now, is now fat enough for you to sell.

Minchin

This is not a mutual health fund in any sense of the word. It is a government-owned business. And taxpayers, generally, have borne the risk of running this business for the last 20-odd years, and have had to, where occasions when it has lost money, it is taxpayers who’ve had to provide $85 million only two years ago to ensure the capital adequacy of this business.

Customers of Medibank Private have bought private health insurance policies; they have not bought a stake in the business, they do not own the business. The taxpayers generally own the business and it is taxpayers who will be realising a return on the risk that they’ve taken over the last twenty years in building up this business.

Nevertheless, there is a strong customer base for this and we would want to ensure as the owners of the business in selling the business that we were selling it to an entity, if it’s a trade sale or is a general float, in a fashion that ensured that that customer base was recognised and the loyalty of that customer base recognised, and that we have confidence that they would continue to receive a high standard of service from the company.

Reporter

So how is that loyalty going to be recognised then, and in what form? Lower premiums?

Minchin

Well, you’ll see that as we develop in detail the method of sale, the criteria for sale, the sale objectives.

Reporter

But you would rule out, would you, any recognition of that loyalty by way of shares, is that right?

Minchin

Absolutely, no, we will not be doing so by way of shares because this is not a mutual, it is a government-owned business and that will be reflected in the way in which we sell it.

Reporter

(Inaudible question)

Minchin

Well, we never do speculate about the likely proceeds. I’m sure there are many in the market who will do that for us, but I’m not going to comment on that or add to speculation about it. In relation to T3, well, it’s just a matter of fact that if we do decide to proceed with sale by public float of all of our remaining shares then we, as owners of these two businesses, would not want to be competing with ourselves or cannibalising one sale at the expense of another.

With the exigencies of an election due at the end of next year then, in terms of the time available in this term of Parliament, and the timing of a Telstra sale, then we will need to take account of that in contemplating the method of sale of Medibank Private.

If we do proceed to a public float, or part or all of Telstra our remaining shares in Telstra in October/ November then that will influence whether or not we have a public float of Medibank Private. We’ll need to take account of the appetite in the marketplace for two floats of that kind and the time available to us to engage in two floats of that kind. That will have a bearing on how we sell Medibank Private.

Reporter

Minister Minchin, what is the government’s priorities , is the Government’s priority to sell Telstra prior to the next election or is the Government’s priority (indistinct)?

Minchin

The Government’s policy is to be in a position to sell our remaining shares in Telstra and to sell Medibank Private, but each will be approached discretely. We will first make a decision on whether or not to proceed with the sale of our shares in Telstra. We will sell the Medibank Private business. The method of sale will in part be influenced by what we do with our remaining shares in Telstra.

Reporter

Would it make it more or less likely that the Commonwealth will have to part run ... (indistinct) ... part share ... (indistinct) in order to proceed with the objectives between now and 2007 (indistinct)?

Minchin

No, no ...

Reporter

... these processes ... (indistinct) could make it more likely that part or a substantial part of Telstra ... (indistinct)?

Minchin

Our proposal to sell Medibank Private will have no bearing whatsoever on what we do with our remaining Telstra shares. We will make that decision based on, you know, the regulatory outcomes, the market demand, the advice of our bankers and then proceed.

However, the decisions we make in relation to Telstra will have some bearing on the method of sale of Medibank Private and I would have thought that made some sense. We’re talking about, you know, $24 billion or something dollars in relation to the value of our remaining shares in Telstra without speculating because that’s a list of things, so I can speculate or comment on that. Without speculating or commenting on the actual value of Medibank Private, it’s obviously somewhat less than our current remaining holding in Telstra.

Reporter

Senator Minchin, will all of the proceeds go towards increased funding for medical research? You have indicated in the past that the proceeds from asset sales would go into the Future Fund. So what happens with Medibank Private?

Minchin

The proceeds of Medibank Private would be held on account in the Reserve Bank, which is where we do currently hold our surplus cash. That will enable us to increase our funding of medical research in this country. We’ll effectively augment the budget of the National Health and Medical Research Council. Again, I’m not going to speculate on amounts. That would be a matter for the Budget and no conclusions should be drawn from that as to what we expect to receive from the Medibank Private sale. So the capital will be held on account, as a capital account, cash account. But that will enable us to enhance our funding of medical research.

Reporter

If proceeds won’t go ... (indistinct) as you indicated in the past, that proceeds from asset sales will go into the Future Fund ...

Minchin

I’ve said that sources of funding for the Future Fund are surpluses and proceeds of asset sales, but that discreet decisions we made in each case. We will decide after each Budget what part or all of any surplus goes into the Future Fund in relation to any asset sale. We will make a discreet decision as to what happens to the proceeds. In this case, I am indicating that the proceeds of Medibank Private would not, therefore, be going into the Future Fund. They will be held, as proceeds are now held, with the Reserve Bank and by so doing, that will enable us to enhance our funding of medical research.

Reporter

Thank you. (indistinct) seem to boost the number of people in private health insurance. Have you done analysis of how taking it away is going to affect the numbers of people with no (indistinct)?


Abbott

What we’ve said in today’s announcement is that people who have been continuously in a fund for 10 years will not suffer lifetime health cover penalties. Now, this means that after 2010, people who have been in for 10 years and paying those penalties for 10 years will no longer have to pay them.

Now, we don’t believe that it’s going to significantly impact on premiums because the numbers are in the order of tens of thousands rather than hundreds of thousands and we think this is more likely to keep people in rather than necessarily get a whole lot more people in.

Reporter

So when you said that the (indistinct) numbers are tens of thousands rather than hundreds of thousands do you mean people with, that came…

Abbott

Yes, that’s right. I mean, about 60,000 a year come into private health insurance and they are paying a lifetime health cover penalty.

Reporter

Mr Abbott, (indistinct) hospital cover are you trying to get to the situation where consumers in the future will just buy one private health insurance product for everything rather than having to buy up (indistinct) spreading their cover (indistinct) ...

Abbott

What I’m trying to do is to give patients and the funds more freedom to do what they think makes sense and at the moment there is this artificial distinction between health services delivered in hospital, which are covered by the re-insurance pool and therefore are what people tend to focus on, and ancillaries, which aren’t covered.

Now, this is an artificial distinction, given that an enormous number of ancillary services - as well as a whole lot of things which are now very standard clinical practice in and out of hospital - do actually help to enhance people’s health and therefore keep them out of hospital. So it’s essentially about abolishing an artificial distinction.

Reporter

Mr Abbott, the AMA said that you are obstructing their education process for informed financial consent because you want to push by stealth, I suppose, a system of mandatory informed financial consent. They’ve also threatened to run a campaign against you if you don’t want to do it their way. Which way are you going to proceed on that?

Abbott

Well, I always think it’s best to achieve good outcomes without compulsion, if possible but the important thing is to achieve good outcomes.

Now, everyone accepts, including the AMA, that informed financial consent should be provided in all but rare cases, such as someone turning up unconscious in an emergency department and incapable of providing it.

So everyone accepts this. The sad reality is that about twenty per cent of privately insured hospital episodes involve a gap, at least one gap, for which informed financial consent wasn’t obtained. That’s about 800,000 episodes a year, so this is not an insignificant problem. The average gap is in the order of $700. So we’re talking about significant numbers of large gaps.

Now, we need to do something about this. If the kind of things that the AMA is proposing can make a big, indeed, a dramatic difference in the next 10 or 12 months, maybe we won’t need compulsion. But we really do have to see a very dramatic difference. And if there is no dramatic difference, well, then there will be compulsion.

Reporter

Mr Abbott, is there a decision on the smart card? And if so, will it rule out the National ID card?

Abbott

I think probably it would be best if that matter was left to another time and place.

Reporter

(Inaudible question)

Minchin

The Carnegie Wylie report indicated the, sort of, interest that there would be in a trade sale, sufficient for Carnegie Wylie to recommend, A, that we should sell it and, B, that the trade sale was a real option.

Although as I’ve said, they said we would expect to get a similar, sort of, proceeds from either trade sale or an IPO. And that both were credible and feasible options.

Can I just add before I forget, to avoid any misunderstanding, a whole or partial float of our remaining shares in Telstra would not preclude an IPO of Medibank Private. I don’t want to leave misunderstanding about that. It would be we have to take that into account when we come to make a decision as to the method of sale.

Reporter

Would there be any discouragement of a foreign purchase of Medibank?

Minchin

Not ab initio. Obviously, any foreign purchaser would need to run the gauntlet of our current foreign ownership provisions, the Foreign Takeovers Act, FIRB, et cetera. But not ab initio, no.

Reporter

When you’re talking about, there’ll be new criteria that (indistinct) have to meet in order to get their annual (indistinct) approved each year ...

Abbott

No. I’m talking about clarifying precisely what the criteria will be. Now, there is, so I’m told, some doubt in the public mind and what we are proposing to do is to make it crystal clear, that to get a premium increase, you will have to justify it on the basis of the increased payouts to policyholders or fund members or the need to maintain ordinary prudential requirements.

Reporter

Will you look into the types of payouts that the (indistinct) were giving? Like, if they’re paying a lot of money for gym shoes, (indistinct) say okay, you can have an increase or will there be more rigour than that?

Abbott

Well, we aren’t in the business of telling them with a level of absolute specificity, exactly what they can and can’t do. What we are saying is, that we want them to have more freedom to design policies which are going to produce good outcomes for their policyholders.

Now, I have to say that I think that if a gym membership, for argument’s sake, is something which is going to make a substantial improvement to someone’s health, for argument’s sake, it’s something which has been recommended by cardiologists and if it’s the kind of gym where you aren’t just rocking up and sort of lifting a few weights but you’re actually going to be supervised by someone who is trained, in for argument’s sake, exercise physiology, I don’t think that’s something that should be ruled out.

But it would be up to the funds to make those decisions in the knowledge that everything that they pay out has got to be ultimately funded out of their premium incomes. So they’ve got to make those sorts of decisions on the standard basis.

Reporter

Can I just ask you again about the management expenses issue, Senator Minchin. What sort of lower management expenses has Carnegie Wylie identified, and is there any chance that some or all of the Carnegie Wylie report is likely to be publicly released?

Minchin

We don’t release scoping studies. They do contain commercially confidence information. I don’t think either we or our predecessors have released scoping studies.

The Carnegie Wylie report does look at the potential for lower management expenses. It indicates its optimism that in private sector hands and with private sector disciplines, management expenses could be lowered. It is a public fact that BUPA, one of the five private for-profit funds in the current system does have a lower management expense ratio than Medibank Private or MBF, the other big mutual.

So there is a track record of the private sector of bringing to bear that sort of discipline in relation to management expenses that’s not deemed possible with either mutual or government owned fund.

Reporter

Senator Minchin, you said in a public policy reason (indistinct) Medibank Private in government hands (indistinct) that overwhelmingly, the vast majority of policyholders are opposed to a sale. What have you got to say to those people, and what are you going to give them?

Minchin

I’m not sure upon what you base that rather remarkable assertion ...

Reporter

(Indistinct) every poll has said, both the policyholders and the Australian public don’t want it sold, and you’re selling.

Minchin

My experience of opinion polling, which goes back 30 years, which is you can get any answer you like, depending on the question you ask. And it is easy to manufacture the answer you want. We have, of course, in the political marketplace a self-interested and anti-reform Labor Party and, indeed, hypocritical Labor Party, running around, playing Chicken Little on this, and asserting wildly without foundation that premiums will increase as a result of the sale. If anybody was stupidly to believe the Labor Party then they might say, oh, we shouldn’t sell it.

There is no foundation for that wild assertion by the Labor Party and, indeed, one could have asserted that, I suppose, equally falsely when the Labor Party sold Qantas and the Commonwealth Bank - that airfares were going to increase, or that bank fees were going to increase as a result of sale. There is no foundation whatsoever for arguing that because the business is in private hands, premiums would be higher than they otherwise would be and indeed, I would assert very strongly the reverse of that case.

It is a fact of life in politics in Australia that the public by, you know, you can produce surveys that show bare majorities within the public, from time to time, will say they’re opposed to the sale of government businesses and there are a whole lot of reasons why the public might have those views in relation to particular businesses. But I note that even today, there is a report that the Queensland Labor Government proposes to sell two electricity retailers. Governments are being mugged by reality on this matter. Governments of both persuasions understand that there are risks in governments continuing to run these businesses, that by and large they are better run by the private sector. That’s why the Labor Party sold Qantas and the Commonwealth Bank.

Can you possibly contemplate, here and now in 2006, the government still owning Qantas or the Commonwealth Bank? I don’t think so.

And so the logical and natural thing for us to do, now that the private health insurance industry is well established, has a significant number of players with a wide customer base, the foundation of our 30 per cent rebate, that we now move to the next stage of the government exiting this industry and concentrating on its role as the regulator.

Reporter

Mr Abbott, just on regulation, there’s been some speculation you’d also be looking at a number of issues, including community rating in the broader sense of things, and the structure off the reinsurance pool. Have those been issues that you have looked at, or are still looking at, and addressed or left them for the moment?

Abbott

The Government is totally committed to community rating, and community rating isn’t going to change. There is ongoing discussion with the sector about reinsurance, and the Government hasn’t made any final decision about reinsurance.

Could I just say that, you know, good management of our health system requires governments working closely with the people that are actually providing the relevant services and in crafting the legislation to give effect to the changes that are announced today, we will be talking to the sector and any constructive suggestions that the sector has that are not inconsistent with what’s announced today, the Government will be happy to consider.

ENDS