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   Official Committee Hansard


       Reference: Medibank Private Sale Bill 2006

          FRIDAY, 3 NOVEMBER 2006


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                         SENATE STANDING COMMITTEE ON
                                    Friday, 3 November 2006

Members: Senator Fifield (Chair), Senator Forshaw (Deputy Chair), Senators Carol Brown,
Fierravanti-Wells, Mason, Moore, Murray and Watson
Substitute members: Senator Bernardi to replace Senator Mason
Participating members: Senators Barnett, Bartlett, Bernardi, Boswell, Brandis, Bob Brown,
Carr, Chapman, Conroy, Crossin, Eggleston, Chris Evans, Faulkner, Ferguson, Ferris, Field-
ing, Heffernan, Hogg, Joyce, Ludwig, Lundy, Ian Macdonald, Marshall, Mason, McGauran,
McLucas, Milne, Nettle, O’Brien, Parry, Payne, Robert Ray, Ronaldson, Sherry, Siewert,
Stephens, Trood and Webber
Senators in attendance: Senators Bernardi, Fierravanti-Wells, , McLucas, Moore and
Terms of reference for the inquiry:
  Medibank Private Sale Bill 2006
BUTTERWORTH, Mr Robert, Division Manager, Shareholder and Asset Sales,
Department of Finance and Administration ....................................................................... 77
DEEBLE, Dr John Stewart, Private capacity ..................................................................... 40
GILLESPIE, Ms Margaret, Acting National Secretary, Community and Public Sector
Union ....................................................................................................................................... 57
GINNANE, Ms Gayle Elizabeth, Chief Executive Officer, Private Health Insurance
Administration Council........................................................................................................... 8
MASKELL-KNIGHT, Mr Charles, Principal Adviser, Acute Care Division,
Department of Health and Ageing........................................................................................ 13
MORPHY, Mr Tim, Manager, Corporate Development, Medibank Private .................. 77
O’DEA, Mr John, Director, Medical Practice Department, Australian Medical
Association.............................................................................................................................. 20
POWLAY, Mr John, Ombudsman, Private Health Insurance Ombudsman .................... 1
RAHILL, Ms Alison, National Research Officer, Community and Public Sector Union...... 57
RENWICK, Mr Robin, Branch Manager, Asset Sales Branch, Department of Finance
and Administration................................................................................................................ 77
STAINES, Mr Andrew, Director, Asset Sales Branch, Department of Finance and
Administration ....................................................................................................................... 77
YONG, Dr Choong-Siew, Vice President, Australian Medication Association................ 20
Friday, 3 November 2006                     Senate                                     F&PA 1

Committee met at 8.49 am
POWLAY, Mr John, Ombudsman, Private Health Insurance Ombudsman
   CHAIR—The committee has thus far received eight submissions, all but two of which
have been published. I remind all witnesses that in giving evidence to the committee they are
protected by parliamentary privilege. It is unlawful for anyone to threaten or disadvantage a
witness on account of evidence given to a committee, and such action may be treated by the
Senate as a contempt. It is also a contempt to give false or misleading evidence to the
committee. If a witness objects to answering a question, the witness should state the ground
upon which the objection is taken and the committee will determine whether it will insist on
an answer, having regard to the ground which is claimed. If the committee determines to insist
on an answer, the witness may request that the answer be given in camera. Such a request may
of course also be made at any other time. Any claim that it would be contrary to the public
interest to answer a question must be made by a minister and should be accompanied by a
statement setting out the basis for the claim.
   The Senate has resolved that an officer of a department of the Commonwealth or of a state
shall not be asked to give opinions on matters of policy and shall be given reasonable
opportunity to refer questions asked of the officer to superior officers or to a minister. This
resolution prohibits only questions asking for opinions on matters of policy and does not
preclude questions asking for explanations of policies or factual questions about when and
how policies were adopted. I welcome the Private Health Insurance Ombudsman, Mr John
Powlay. I invite you to make an opening statement if you wish.
  Mr Powlay—I have provided a submission to the committee which touches briefly on the
ombudsman’s role and some of the issues that have been raised in questions and comments to
me regarding the Medibank sale. I will make a short opening statement by way of clarifying
some of the points made in my submission.
   I should firstly say that the ombudsman’s role in relation to the ownership of health
insurance funds is fairly limited. In general, where ownership issues have arisen in the past
the ombudsman’s focus has been very much on protecting the rights of health insurance
members in terms of their entitlements under the Health Insurance Act. Matters of ownership
tend to be matters that are outside the health insurance area and more to do with the
constitution or structure of the relevant organisations. The key role of the ombudsman, as
indicated in my submission, is basically to look at protecting the interests of people who are
covered by private health insurance, particularly in terms of their rights and entitlements to
insurance under the National Health Act.
   Should the sale of Medibank go ahead, the ombudsman will be monitoring the impact of
the sale on consumers. As you would expect, this will mainly take place through monitoring
of complaints and looking at the number of members who have contacted us raising concerns
about their entitlements under health insurance. Obviously there will also be some general
monitoring, and I expect to be in discussions with any organisations involved in the new
ownership of Medibank to require them to provide me with information about the experience
of their members and complaints received directly by the fund. Obviously a key issue will be
the need to balance the objectives of maintaining acceptable service levels and meeting the

F&PA 2                                       Senate                     Friday, 3 November 2006

benefit commitments that the organisation has made. They need to balance that with the
efforts of any new owner to improve the efficiency of the fund, including potentially to obtain
a return for shareholders.
   I note as I did in the submission that there are already significant protections within the
health insurance legislation for members in terms of the approval of premium levels, the
requirement to advise in advance of changes to benefits et cetera. I very much see the
ombudsman’s role as it has been in the past—ensuring that those protections are applied
appropriately in the case of members of Medibank Private who might be affected by any sale.
   I have also provided as part of the submission and referred to in the submission a copy of
my recent State of the health funds report. This looks at the performance of individual health
funds and provides some information which could allow you to compare the performance,
certainly in relation to complaints, of funds that operate for profit versus a fund like Medibank
   I briefly draw the committee’s attention in that regard to the table on page 29 of the State of
the health funds report, which looks at the percentage of complaints received by the various
funds. For the purpose of this comparison, it is most appropriate to compare the two largest
for-profit funds, BUPA and Australian Unity, to Medibank Private. Obviously Medibank is
not comparable with any other fund because of its size, but BUPA and AU are the major for-
profit funds. Members of for-profit funds are less likely to complain about pricing of their
product. That comes through in the ‘all complaints’ figure in that table.
   Also in a previous year I specifically looked at a rating on price complaints and found that,
with both AU and BUPA in particular, consistently there have been fewer complaints about
pricing than there have been with Medibank and the other larger not-for-profits. Members of
for-profit funds are more likely to complain about the level of benefits than members of
Medibank and other large not-for-profits. The level of complaint about service is roughly the
same between both the for-profits and the not-for-profits, although the for-profits have been
   You can see in the table that Medibank has a market share of 28.7 per cent but a 33 per cent
share of service complaints, whereas BUPA has a 9.9 per cent market share and a 10.7 per
cent level of complaints about service. By comparison, BUPA has a smaller amount of
complaints about service. The overall thing to say about those comparisons is that not a great
deal can be made of them. We are talking about individual funds and we are talking about
very small differences to the extent that history and data show us something. That is about all
they show.
   CHAIR—I noticed the submission was made by the acting ombudsman, so I would
assume that you are new to the role as ombudsman?
  Mr Powlay—No. The acting ombudsman was acting while I was on leave.
  Senator McLUCAS—Following the sale announcement in April of this year and then the
deferral subsequent to that, were there complaints registered with your office at that point
about the ownership of Medibank Private?

Friday, 3 November 2006                     Senate                                     F&PA 3

   Mr Powlay—I could take that on notice. My recollection is that there were a small number
of complaints at the time of the initial announcement. It was around a half a dozen or so. It
was not significant. They were general complaints that were in terms of objecting to the
government decision to consider a sale. There was obviously further contact and complaints
from people at various stages as the government announced that it did intend to sell.
  Senator McLUCAS—You have had ongoing complaints from Medibank Private
  Mr Powlay—Yes. It was very small in number—no more than five or six.
  Senator McLUCAS—They were complaints that you can hardly act on, I recognise that.
  Mr Powlay—They were generally, ‘As a member, I object to Medibank being sold.’ The
particular attraction of Medibank to those members was its government ownership. There
were those sorts of general complaints.
  Senator McLUCAS—How do you refer those people to make their complaint to the
appropriate place?
   Mr Powlay—We would generally not require people to put complaints in writing, but we
may suggest in that type of general complaint that it may be appropriate for them to put their
complaint in writing to the government. Nonetheless we would record the complaint and it
was specifically recorded as being for that reason and we will include that in the regular
reporting that we are asked to do for government and the health funds. When we go back to
the funds to report on the nature of complaints that we are receiving, we will include that. We
have certainly included that in discussions with Medibank about their complaints
  Senator McLUCAS—Section 78 of the National Health Act provides a methodology by
which a health fund can move status, so to speak, from a for-profit to not-to-profit or vice
versa. Are you aware of that section of the act?
  Mr Powlay—I am aware of—but not particularly knowledgeable about—that section.
   Senator McLUCAS—You may not want to answer these questions. It is not an issue that
you have canvassed in your submission. Do you think that section provides some protection
for fund members when they are going to move from—in the case of Medibank—a not-for-
profit to a for-profit entity?
   Mr Powlay—My answer would be that I would probably prefer not to give a definitive
view on that without looking more closely at it, but my reaction would be that the section
probably does provide some general protection for members. In my understanding, that would
not confer any additional rights on Medibank members in that situation to what members
might have in any other situation where a fund decided to, say, increase its premiums, to
change its benefits or whatever things that a fund could do that would affect a member. I
could go back and look at it, but I am not aware of anything and I would be surprised if that
section provides any additional rights to members than they would otherwise have in the
normal course of events. Having said that, it obviously is intended to provide protection for
members in that they are not disadvantaged by the change.

F&PA 4                                      Senate                    Friday, 3 November 2006

   CHAIR—You mentioned that the for-profit firms have less complaints about pricing but
are likely to have more complaints about benefits. What are the reasons for the differences
between those two indicators?
   Mr Powlay—It is pure speculation. As I said, what we are talking about is individual
funds. It would basically come down to the management position or the tactical position of
the management of the particular funds. Clearly there has been more of a focus in these
individual for-profit funds on keeping price down rather than necessarily maintaining benefit
level. That is speculation but, having said that, as I said the caveat needs to be that the
differences are very small.
  CHAIR—Your work is essentially quantitative in relation to complaints?
  Mr Powlay—Yes, that is correct.
   CHAIR—Assuming that Medibank is sold, do you feel that you have adequate powers and
adequate resources as ombudsman to investigate and to oversee whether there were
disadvantages to members in a privatised Medibank?
   Mr Powlay—My assessment at the moment is ‘yes’. Obviously that is based on my
assumption about the reasonable behaviour of a new owner. At present, and given my past
experience of dealing with the management of these various funds, I would be confident that
the office has sufficient resources to deal with the issues.
   CHAIR—You mentioned that you would expect to have discussions with the company in
the event of the sale of Medibank?
  Mr Powlay—Yes, absolutely.
   CHAIR—Have you had any discussions with Medibank already, or would you consider
that not appropriate until such time as it is sold and you are aware of the ownership of the
organisation in terms of what a new regime might be like and how you would handle that?
   Mr Powlay—The short answer is no, given that the current Medibank management is not
really in a position to be talking to me about what plans a new owner might have for the fund.
I have certainly had discussions with Medibank around the level of complaints being received
now about the ownership issue, how to handle and record those complaints now so that we
capture the information, and reinforcement of the various protections that are there in relation
to changes to benefits and changes to premium levels.
   Senator MOORE—This is a general question. When we were reading all the information
about that and listening to your opening statement, the particular circumstance that we are
facing was hard to understand because it has not happened at this size before in the industry.
Is that right?
  Mr Powlay—That is correct.
   Senator MOORE—Medibank Private has such a large chunk of the issue that just trying
to work through what the impact is going to be of such a monumental change is what we are
here for.
  Mr Powlay—Yes.

Friday, 3 November 2006                       Senate                                        F&PA 5

  Senator MOORE—I know that there have been some amalgamations, transfers and
changes of other funds. In that sense, over time have there been any kind of historical focuses
on the impact of those changes on clients? Has there been any review of that from your
perspective in the ombudsman’s office?
   Mr Powlay—That is an interesting question. There has not been a formal report or review
of that sort of issue. Although the office has dealt with consumer issues when those changes
have taken place, they have been dealt with in the normal course of business. What reporting
there has been of the ombudsman’s experience and the action taken by the ombudsman’s
office is generally contained within the ombudsman’s annual reports. There were some
specific issues around the Goldfields Medical Fund, and at that time there were
recommendations made by the ombudsman to the ACCC about various matters to do with that
change. By and large, where there have been changes in ownership it has been because of a
particular fund getting into financial difficulty and being in effect rescued or taken over by
another fund and the memberships being in effect sold.
  Senator MOORE—There were memberships actually being saved in that case?
  Mr Powlay—That is right. Ms Ginnane, who is probably going to be the CEO of PHIAC,
would be in a much better position to talk to you about how they have worked.
  Senator MOORE—I must make a note to remember my question.
   Mr Powlay—As I said, Goldfields has probably been the one that the ombudsman was
involved most in. There is substantial information in the annual reports for 2000 and 2001
about the ombudsman’s involvement in that. Other than that my experience has generally
been that it has been a very positive experience for the members who get taken over in these
situations. That is in terms of what we have generally seen as one fund becomes at some
severe risk of financial problems and then another fund moves in. Often the new fund will
provide protections over and above what you would normally expect. It would be like saying
that premiums are frozen for a while or they will not make any changes to those
   Senator MOORE—From your knowledge there will not be an absolutely similar case,
because of the size and also because of government ownership. There has not been something
that we could review as case history in the Australian experience of an operating fund that is
very competitive from the data that we have and it being sold off as a business?
  Mr Powlay—Not that I am aware of.
   Senator BERNARDI—Is there any evidence that a health fund with a larger market share
actually disadvantages consumers?
   Mr Powlay—Before you were in the room, I did talk about levels of complaints looking at
Medibank versus some of the larger for-profit funds. In terms of size within the market,
Medibank stands alone in the health insurance market. If you look at complaints levels, there
is an indicator there that the larger the fund, the more likely people are to complain about
service. It is not a big differential, but there is a consistent indicator that the larger the fund,
the higher level of complaints.

F&PA 6                                       Senate                    Friday, 3 November 2006

   Senator BERNARDI—I was here when you made your comments about that. It was not
specifically about the complaint levels. Medibank, as you say, has a very large market share,
and particularly in some markets it is larger than others. Do consumers have few other options
or is there evidence that people would prefer to have more choice? Is there a misuse of market
power where there is a large market share?
   Mr Powlay—I could not say that I have seen evidence of that. Quite often we will get
allegations of misuse of market power, particularly in the funds dealing with providers, and
that is associated with size and market share. It is often a difficult balance—and it is
something that I talk about with Medibank quite often—between use and abuse of market
power. Clearly with its size, Medibank does have significant market power in dealing with
health providers. It is often a matter of: when do their actions become misuse versus
legitimate use of market power?
   Senator BERNARDI—That is specifically their commercial relationships with health
providers rather than specifically with consumers, is it not?
  Mr Powlay—No. I do not see it with consumers.
   Senator BERNARDI—Could you justify a case that a larger health fund offers some
protection to consumers through increased reserves, or do you find that reserves across the
board are adequate in both profits and not-for-profits?
   Mr Powlay—Again, this is more an area for the Private Health Insurance Administration
Council. My understanding is that there is no concern about levels of reserves with any of the
funds. Even to the extent that there might be, there are more than adequate measures in place
to ensure that members’ interests are protected. In that regard a fund like Medibank is key,
and that is an issue that is worth looking at in terms of the impact of a sale. Obviously the size
of the reserves that Medibank maintains is quite substantial in terms of the total market.
  Senator BERNARDI—Is that a regulatory role?
  Mr Powlay—It is a regulatory role.
  Senator BERNARDI—It is a solvency issue across the entire industry.
  Mr Powlay—It is more an issue for the administration council than for myself.
   Senator BERNARDI—In your submission you talked about premium levels and how
there is a responsibility for the government to approve premium increases.
  Mr Powlay—Yes.
   Senator BERNARDI—You specifically said that Medibank has been compliant with
regard to this. Is there evidence of noncompliance by any other fund? Is it particularly the for-
profit funds, or do they all adhere to the same responsibility?
  Mr Powlay—All funds adhere to those requirements. I am not aware of evidence in the
past of noncompliance.
   Senator MOORE—This is not specifically one that you alone would look after. Of all the
funds that we have in Australia—and you deal with them all—how many of them are fully
Australian owned? Are there any that have international ownership or share ownership? You
can take that on notice. I will be asking other people that as well.

Friday, 3 November 2006                   Senate                                  F&PA 7

   Mr Powlay—Again, Ms Ginnane would be the one to address the question to. To my
knowledge, BUPA is the only one with an international ownership, but I am not clear enough
on the ownership structure. Their ownership may well be through BUPA Australia, so it is
difficult to say.
  CHAIR—Thank you very much for your submission and thank you for attending.

F&PA 8                                      Senate                    Friday, 3 November 2006

[9.20 am]
GINNANE, Ms Gayle Elizabeth, Chief Executive Officer, Private Health Insurance
Administration Council
   CHAIR—The committee welcomes you, Ms Ginnane. Would you like to make an opening
   Ms Ginnane—I would like to make a very brief opening statement summarising basically
what PHIAC does. I should also declare an interest: I have been a member and my family
have been members of Medibank Private for more than 25 years. As the Private Health
Insurance Administration Council is the financial regulator of the private health insurance
industry established under Part VIAA of the National Health Act, our responsibilities are very
clearly set out in that act. In particular, section 82G(1) specifies our responsibilities, which
include: that we ensure health funds remain prudentially sound; establish solvency, capital
adequacy standards and uniform standards of reporting; manage the risk equalisation
calculations which support community rating; require regular reports from health funds about
their financial affairs; and, where necessary, examine the financial affairs of funds where we
have concerns, either financial or governance, and seek an actuarial assessment of the assets
of those funds. We can appoint administrators, impose levies for our own costs and the Acute
Care Advisory Committee, and provide statistics and disseminate information about the
insurance industry. We also register private health insurance agencies and, where necessary,
we cooperate with other regulatory agencies such as APRA, because some of our clients are
also clients of the Australian Prudential Regulation Authority. That is a brief summary that of
what PHIAC is.
   CHAIR—I have learnt something today. I did not realise that you were established under
an act of parliament. Given that you are the Private Health Insurance Administration Council,
I assume therefore that you have no responsibility for Medibank Private?
   Ms Ginnane—Medibank Private is one of the health funds that we regulate. It is the same
as all of the other funds that we regulate.
   CHAIR—Even though it is a government-owned provider, it is treated as though it were a
private fund?
  Ms Ginnane—It is. It is treated the same as all other private funds.
   Senator MOORE—I have two questions and they are both the same ones that I asked Mr
Powlay. My first question is to establish whether there is any case history from which we can
learn in this process. I know that Medibank Private is the largest provider and that it is the
only government one, but it is going through a sale process. That is what we are looking at. I
want to know, from your organisation’s experience of looking at the administration and
finances of funds, whether you have any experience of other mergers, sales or anything of that
nature in the industry from which we can learn in this experience?
   Ms Ginnane—When I came to this industry there were 48 health funds and there are now
37. We have managed a number of organisations out of the industry, but all of those have
effectively been for financial reasons. Most of them have been smaller organisations and have
been either unable to continue because they had failed and were unable to recover their

Friday, 3 November 2006                      Senate                                      F&PA 9

position or because the boards of those organisations, in three or four cases, had made the
decision that merging with another health fund provided a better outcome for their members.
Our experience is really around financial difficulties rather than a change such as this.
   In saying that, where we have dealt with funds in the past, we have, generally speaking,
applied a number of criteria to those organisations, usually on the basis of an independent
report from either an administrator or an actuary, requiring particular actions to take place
over a period of time. The Medibank Private sale is quite different because there is no
suggestion whatsoever that Medibank Private does not meet its solvency and capital adequacy
requirements. We have no concerns about it from a financial perspective at all.
   Senator MOORE—I ask the second question now, and I have a third one for you. The
second question I put to you is about foreign ownership. From your experience, are you aware
if any of the current 37—or even of the previous 48, as they then were—have had foreign
ownership or a large percentage of foreign ownership?
   Ms Ginnane—There is only one health fund registered in Australia that has foreign
ownership. That is BUPA Australia, which is a wholly owned subsidiary of BUPA UK. All
other health funds in the industry are essentially either not-for-profits themselves or are
owned by not-for-profit entities. For example, Australian Unity owns Australian Unity Health
Fund. The parent company is a friendly society. There is very little, and has been very little,
interest in foreign ownership in the time that I have been around this industry, which is now
about 11 years.
   Senator MOORE—That covers a significant history of the way it has gone. Following on,
we talked in estimates the other night about what PHIAC’s role is. Your opening statement did
not actually address what PHIAC believes its role is in this process and in what happens into
the future. For the record, could you talk about your understanding of what role PHIAC will
have in this process of the sale and what is going to happen after that. How will your role
   Ms Ginnane—In relation to the sale, PHIAC has no role. Our role is to regulate the
registered health insurance organisation, regardless of the ownership. As I said earlier,
Medibank Private is one of 37 health funds. It has the same reporting requirements. It has
solvency requirements calculated in relation to its size but on the same basis as all other
health funds. We would treat it no differently after a sale than we would treat it before a sale.
   Senator MOORE—You mentioned that to us the other night, but it is important to have
that on record today.
   Ms Ginnane—We certainly have no role in regulating the ownership of the fund. Our
concern is to make sure—and we and establish governance requirements to do so—that the
organisations are well run and have financial requirements to ensure that they are
appropriately financed.
  Senator MOORE—Is that through a contract between the organisation’s ownership
management board and PHIAC?
   Ms Ginnane—PHIAC establishes prudential standards that they must conform to. As I
said, the issue for us is making sure that organisations that are in the industry are well

F&PA 10                                       Senate                    Friday, 3 November 2006

managed and financially sound. We have a fairly limited sense of humour with organisations
that breach those prudential standards.
   Senator BERNARDI—I have a single question, which I asked of the previous witness.
You commented on the smaller funds that were unable to meet some of their financial
commitments, hence prompting mergers over the last number of years. In your opinion, does
size and market share translate into increased consumer security?
   Ms Ginnane—The prudential standards are designed to deal with the size of the
organisation, so small funds have smaller requirements. They have a correspondingly smaller
risk, but probably a less predictable risk, so our prudential standards require additional capital
for small funds to deal with those less predictable risks. The larger six organisations in this
industry have a much more normalised claims distribution and are less prone to one or two
very large claims having a significant financial affect on them. Consequently, as a proportion
of their total capital, they are required to hold slightly less. But the standards are designed for
basically a five per cent probability of ruin. In any one year, what that means is that one in 20
health funds may breach capital adequacy. There are quite strict standards with a fairly high
requirement for health funds.
   Senator BERNARDI—I am not sure whether you can answer this question but: what is a
large claim for a private health fund?
  Ms Ginnane—We do not see it as claims data, but AHIA published last year one claim in
excess of $350,000. I would have to confirm that.
  Senator BERNARDI—It is a quite significant amount of money.
  Ms Ginnane—They can be significant. They are relatively rare but they certainly can
   Senator McLUCAS—I do not know if you have had an opportunity to read it, and I
certainly have not read it in full, but there was a release of a CRA report earlier this week
from the Minister for Finance and Administration.
  Ms Ginnane—I have not seen it.
   Senator McLUCAS—I understand that CRA report says that there is scope to improve
Medibank Private’s efficiency by a further five to seven per cent. Given that you are one of
the few people who look very closely at the financial statements of all the funds, would you
agree with that observation?
   Ms Ginnane—I am not in a position to comment specifically on those suggestions in that
report. First, I have not read it and, second, I do not necessarily have access to the same level
of information. I would comment that Medibank Private is around about industry average in
relation to its management expenses. It is certainly not above or significantly above industry
average, but then it is also about one-third of the industry, so it seriously affects that average.
There are health funds out there with higher management expenses and there are some with
lower management expenses. It is speculation as to how much, if anything, could be saved.
  Senator McLUCAS—Do you have a role of advising funds when their management
expenses are too high?

Friday, 3 November 2006                       Senate                                      F&PA 11

   Ms Ginnane—Yes. We not so much advise as require them to put in place to us a program
of reduction of those management expenses. At the moment we are monitoring a number of
organisations around higher than average management expenses. Medibank Private is not one
of those organisations.
  Senator McLUCAS—Have you ever had concerns with Medibank Private’s management
   Ms Ginnane—No. They have always been somewhere in the middle of the pack, reducing
  Senator McLUCAS—What would be the consequences if Medibank Private’s assets in
excess of the prudential solvency ratio that you require were not invested but used in other
    Ms Ginnane—I would be speculating as to what the outcome would be. Our requirement
is that they meet capital adequacy, and Medibank Private does that.
   Senator McLUCAS—Let me ask the question another way. Say a fund, however owned,
was to use assets in other ways, such as purchasing another asset or doing something quite
different to the business of operating a health insurance fund. What would PHIAC do if they
observed a fund doing that?
    Ms Ginnane—If the organisation is doing it within the boundaries of the National Health
Act, then we would have no view. Organisations can invest their capital however they see fit.
If it were in breach of the National Health Act, we would require them to rectify the situation.
  Senator BERNARDI—Does PHIAC assess the management expense ratios of the funds
and inquire into those funds simply on the basis of that management expense ratio?
   Ms Ginnane—It is one of a number of issues that we inquire into. The minister is quite
rightly concerned about ensuring that premiums are no higher than they ought to be, where
organisations have high management expenses. Over the past few years PHIAC has
concentrated on those organisations to try to see why and to see if they could be reduced.
   Senator BERNARDI—I have some information that there is quite a significant amount of
private health insurance fraud that adds to the cost of premiums. Do you have a comment
either way?
   Ms Ginnane—One of the difficulties with any insurance industry—and the private health
insurance is no different—is in determining the level of fraud. That said, I know that
organisations do have active programs to try to reduce that fraud. As I said, I am not aware of
the extent of it but I know that it does exist only because I have had a provider try to
perpetrate it on myself and some of my staff. It is mostly provider fraud and often in the
ancillary area. It is difficult to fraudulently claim for a hospital stay. Most of the hospitals and
health funds have quite good processes there. It is more likely to occur in areas where the
consumer and the provider are dealing directly, such as in the areas of dental, physiotherapy
and the other ancillary type areas.
   Senator BERNARDI—It was put to me that funds sometimes do not have the incentives
to reduce or expose more fraud because it adds to their administration costs, reduces their
benefit levels and then their management expense ratio would be substantially higher. It

F&PA 12                                      Senate                    Friday, 3 November 2006

sounds unusual from an economic perspective because the quantum of funds would be
significant, but from a management perspective it makes sense, if you are assessing funds on
management expense ratios.
   Ms Ginnane—The way that we calculate expense ratios is really the premium income over
the management expenses. If you had a low-priced health fund then you would have a higher
than average management expense ratio, but that is not the only measure that we use. We also
look at the cost per person covered and the cost per member. The organisations that we are
looking at in relation to high management expenses at the moment are high on all measures,
so they have high expenses per member. If you have an organisation that does have generally
lower premiums and their management expense ratio appears higher, when you look at those
other measures they are lower, so you can take into account whether or not that is so. I have
also heard that argument and I would suggest that, if the management of an organisation was
showing such a lack of concern for its contributors, sooner or later it is going to be on my
radar and we are going to be looking at it in relation to its governance and its financial
position. There is no doubt that there is cost associated with mitigating against fraud, but
where organisations clearly focus on fraud it is less likely that fraud will be committed against
them because the providers that are likely to perpetrate that know that they are more likely to
be queried by those organisations.
   Senator BERNARDI—In the case of fraud, do you have any evidence whether for-profits
or not-for-profits are better in identifying it?
  Ms Ginnane—I do not.
  CHAIR—Thank you for your attendance today.

Friday, 3 November 2006                      Senate                                     F&PA 13

[9.38 am]
MASKELL-KNIGHT, Mr Charles, Principal Adviser, Acute Care Division, Department
of Health and Ageing
  CHAIR—We have a slight change to the program. The Australian Medical Association has
been detained, so we will bring forward the Department of Health and Ageing. I now
welcome Mr Charles Maskell-Knight. Would you like to make an opening statement?
   Mr Maskell-Knight—Very briefly. I will begin by disclosing that, like Ms Ginnane, I am
insured under a Medibank Private policy and have been for 16 years. Second, for the benefit
of the committee, I will explain the role of the Department of Health and Ageing. In this area
we are responsible for assisting and advising the minister in the exercise of his regulatory
powers under the National Health Act, and the secretary of the department has some powers
of his own under that act. The Minister for Health and Ageing is not responsible for
Medibank. That role is held by the Minister for Finance and Administration as the
shareholder, and it is the Department of Finance and Administration that advises him on
Medibank’s structure, performance and ownership. Our role in the sale process has been to
provide advice to the Department of Finance and Administration on the current private health
insurance regulatory regime. The third thing that I would like to say is that, when the
government announced the sale of Medibank on 26 April, it also announced a range of other
changes to the health insurance regime, including a number that required legislation to
implement. An exposure draft of that legislation was released two weeks ago. Comments are
due on it today, and the Minister for Health and Ageing has signalled his intention to
introduce that legislation by the end of the calendar year.
  Senator McLUCAS—The government has talked about a conflict of interest that it has in
owning Medibank Private. From the Department of Health and Ageing’s perspective, can you
explain what that conflict of interest is?
   Mr Maskell-Knight—I do not know that it is up to me to explain statements that ministers
have made. There could have been a perception at a point where the Minister for Health and
Ageing was the minister responsible for Medibank and also the minister responsible for
administering the National Health Act. That could have been seen as a conflict of interest.
There may still be a perception that there is a conflict of interest between the government
administering the regulation of the industry and the government owning one of the regulated
  Senator McLUCAS—It is a perception, though?
  Mr Maskell-Knight—I cannot speak for what ministers have said.
   Senator McLUCAS—I respect that and understand that. You identified that the
shareholding minister is not the Minister for Health and Ageing. The Minister for Health and
Ageing does have responsibility for the oversight and regulation although the ownership is
quite separate. I am trying to identify where that conflict of interest might be. You have stated
that it is a perception, but I am trying to find out where the actual conflict might be.

F&PA 14                                      Senate                    Friday, 3 November 2006

   Mr Maskell-Knight—Most conflicts of interest are about perception rather than reality. I
imagine there could easily be circumstances where the government might feel that there is a
tension between its role in regulating the industry and its ownership of a fund. If it found out
that a particular kind of industry regulation meant that there would be financial pressure on
the fund that it owned it might find it very difficult to work out what the best course of action
would be.
   Senator McLUCAS—Have you seen circumstances in your time in the Department of
Health and Ageing where there has been use of the fact that we still own Medibank Private or
where the government has used its ownership to change policy settings within Medibank
  Mr Maskell-Knight—No.
  Senator McLUCAS—Does the fact that it is separated out mean that the government does
not use its power?
  Mr Maskell-Knight—Not to my knowledge.
   Senator McLUCAS—How does the sale of Medibank Private resolve a conflict of
   Mr Maskell-Knight—One postulates that the government may find itself in a position
where it is trying to decide how to regulate the industry, having regard to the fact that it owns
a major player in it. If it no longer owns a major player in it, it can make decisions about
regulatory policy based on first principles.
   Senator McLUCAS—Can you identify any time where the government has regulated
differently because it owns the major player?
  Mr Maskell-Knight—Not that I can think of.
  Senator McLUCAS—Neither can I. The regulatory oversight includes PHIAC, most
importantly. What other regulatory oversight does the Department of Health and Ageing
   Mr Maskell-Knight—The minister has quite considerable powers in relation to a range of
things under the National Health Act.
   Senator McLUCAS—Would you like to elaborate on what the minister does in his
regulatory function?
   Mr Maskell-Knight—Given time and a copy of the National Health Act, we could start at
the beginning and go through to the end. The minister has power to disallow rule changes and
premium increases and to determine rules around gap cover schemes, loyalty bonus schemes
and discounts on premiums. The minister has power to determine minimum default benefits
and prostheses benefits. The minister has power to declare what is and is not a hospital or
what is or is not a day hospital facility. He has power to seek to set performance indicators for
the industry, to seek explanations from health funds, to investigate health funds, to seek
enforceable undertakings from health funds, and to revoke their status as a participating
insurer for the purposes of the 30 per cent premium reduction scheme.

Friday, 3 November 2006                      Senate                                     F&PA 15

  Senator McLUCAS—We will leave it there. I did not mean to be giving you an exam in
what you know about the National Health Act. I apologise.
  CHAIR—It was very impressive.
   Senator McLUCAS—Yes, it was very impressive. In your view, has the minister in
exercising those regulatory powers exercised them differently in regulation of Medibank
Private because it is owned by the government?
  Mr Maskell-Knight—In my experience, Medibank Private has been treated exactly the
same as every other health insurer.
   Senator McLUCAS—I am trying to understand what the conflict of interest is. You are
right in that the minister has never treated Medibank Private differently to any other health
fund, so I am at a bit of a loss to identify where the conflict of interest is. I was wondering if
you could help me find that conflict of interest.
   Mr Maskell-Knight—There is a perception, but the perception is that there could be
circumstances in which there would be a genuine conflict.
   Senator McLUCAS—What would they be?
   Mr Maskell-Knight—As I said before, it is not impossible to imagine circumstances
where the application of the regulatory regime led to some jeopardy to the financial wellbeing
of the health fund that the government owns. It would be an invidious position for ministers to
try to make up their minds about which way they went.
  Senator McLUCAS—What sort of circumstance would bring us to that point?
   Mr Maskell-Knight—We can all speculate away wildly, but it would not be inconceivable
if you have a prudential regime that says that this is the regime that health insurers have to
follow and circumstances came to pass where the health industry as a whole was having
difficulty meeting that and the biggest health fund was having particular difficulty meeting it,
ministers might feel tempted to say, ‘If we apply the regime strictly or make the changes that
we might otherwise feel were necessary, then we will have to tip another $100 million of
capital into the health insurer that we own.’
  Senator McLUCAS—That has not happened to this point?
  Mr Maskell-Knight—No, it has not happened so far.
   Senator McLUCAS—That would be due to the quite rigid regulation that we have of
private health insurance in Australia?
  Mr Maskell-Knight—As Ms Ginnane said, in any given year you can expect one out of 20
health funds to run into capital adequacy issues.
  Senator McLUCAS—That would usually be the smaller ones?
  Mr Maskell-Knight—That has been true in recent years. A number of years ago, HBA and
Mutual Community, which were at that stage the biggest health funds in Victoria and South
Australia respectively, ran into significant financial difficulty.
  Senator McLUCAS—What impact do you think the sale of Medibank Private will have
on premiums?

F&PA 16                                       Senate                    Friday, 3 November 2006

  Mr Maskell-Knight—That is entirely a matter for the way in which the new owner
positions the fund.
  Senator McLUCAS—You said on Wednesday that it was speculation.
   Mr Maskell-Knight—Yes. I also said that, if you looked at the performance of the biggest
for-profit fund in recent years, its average increase in premiums has been about one and a half
percentage points lower than the average.
  Senator McLUCAS—Trying to extrapolate that fact to Medibank Private would be
  Mr Maskell-Knight—Indeed.
   CHAIR—You were talking about conflicts of interest and potential conflicts of interest as
being a matter of perception. Is it very difficult to go beyond stating that a conflict of interest
is potential? Is it very difficult to speculate in detail how that might manifest itself?
  Mr Maskell-Knight—Yes, it is.
  CHAIR—Just because it is difficult to hypothesise how it might manifest itself, it in no
way reduces the fact that a conflict of interest is still a potential under the current regulatory
and ownership arrangements.
  Mr Maskell-Knight—That is correct.
  CHAIR—I just wanted to clarify that.
   Senator BERNARDI—Do you have a comment on whether the consumer protection
regulations—such as community rating, portability and those sorts of things—will be
different if Medibank is in private ownership as opposed to being retained in government
  Mr Maskell-Knight—No.
  Senator BERNARDI—There will be no disadvantage from a protection perspective for
  Mr Maskell-Knight—No.
  Senator MOORE—I would like to know whether the department has had access to the
scoping study around the scale?
  Mr Maskell-Knight—I believe some people in the department may have seen a copy.
  Senator MOORE—In the area that you work in, which looks at the issues of private
health in the community, did you have to submit information for that scoping study?
   Mr Maskell-Knight—To give you a full answer I would have to take that on notice. I
understand that we had discussions with the Department of Finance and Administration about
different aspects of how the regulatory regime works at the moment and I imagine that was
fed into the scoping study. I do not believe that we spoke directly to the consultants who
undertook it.
  Senator MOORE—We know that the scoping study was not made public, but I wanted to
put the links together.

Friday, 3 November 2006                       Senate                                     F&PA 17

  Senator MURRAY—Do you think that Medibank at present contributes to an efficient,
competitive and viable private health insurance industry?
  Mr Maskell-Knight—You are asking me to think, and I do not know that I do that readily
about those sorts of issues.
  Senator MURRAY—Do not be smart.
   Mr Maskell-Knight—I am sorry, but you are asking for an expression of opinion. I
believe that Medibank Private is an efficient, well-run fund, yes.
  Senator MURRAY—The explanatory memorandum specifically says:
The Commonwealth’s objectives for the sale of Medibank Private Limited are: (a) to contribute to an
efficient, competitive and viable private health insurance industry;
I do not want a smart answer from you. That would either imply that it is not at present or that
it would become more efficient, competitive and viable if sold. As someone who is involved
with an agency with intimate connections with Medibank Private, I want to know if you think
it does contribute at present to an efficient, competitive and viable private health insurance
industry and whether, if it were to be sold, it would do a better job in that respect?
   Mr Maskell-Knight—The questions about the statements in the explanatory memorandum
should be directed to the department which wrote it, which is not the Department of Health
and Ageing. As I said, I believe that Medibank is an efficient and well-run fund on the
evidence available to us at the moment. It is a matter for speculation about what would
happen were it to be in different ownership.
  Senator McLUCAS—The exposure draft indicates that section 78 of the National Health
Act will not apply to this sale. For the purposes of Hansard, can you explain what section 78
does and why this proposed sale it is exempted?
   Mr Maskell-Knight—Section 78 says that a change to the rules of an organisation must be
notified to the secretary of the department and the minister may disallow them if he believes
that they are not in the best interest of contributors or would result in a breach of the act.
There is an interesting question about how organisations become registered as for-profit funds
at the moment. Arguably, it is by notifying a change to their rules that puts them into that
category. Under the exposure draft, it is proposed that funds, when they register, will have to
indicate whether they wish to be registered as a for-profit fund or not.
  Senator McLUCAS—Can you explain that last bit again?
   Mr Maskell-Knight—Under the exposure draft, funds will be able to apply for registration
as either a for-profit fund or a not-for-profit fund.
  Senator McLUCAS—I understood that, because Medibank Private will transfer from a
not-for-profit fund to a for-profit fund as a result of the sale, the process that the minister
would usually undertake in assessing that shift will not be followed.
  Mr Maskell-Knight—We are getting into some interesting issues about timing and who
does what when to whom. If Medibank Private was to notify the minister that it wished to
change its rules to become a for-profit fund then, until 1 April 2007, that notification would be
considered under section 78. After 1 April 2007, the way the legislation is currently drafted in

F&PA 18                                     Senate                    Friday, 3 November 2006

its embryonic form means that all existing registered health benefits organisations will be
taken to be registered under the new act until 1 July 2008. Before that time, they must seek to
become registered under the new act and, in seeking to become registered under the new act,
they must indicate whether they wish to be registered on a for-profit basis or not.
   Senator McLUCAS—What will happen in the future if a health fund wants to change it
  Mr Maskell-Knight—They will need to notify the Private Health Insurance
Administration Council that it wishes to do that.
  Senator McLUCAS—There will be no assessment then of the benefit or loss of benefit to
members of a change of status?
  Mr Maskell-Knight—There will be no scrutiny of the application, no.
  Senator McLUCAS—What was the original purpose of section 78 of the National Health
   Mr Maskell-Knight—It was put into the act in 1958. I was actually around then, but only
just, so it would take a bit of legal research. Looking at it broadly, if organisations wish to
change the rules by which they conduct themselves, they must seek the approval of the
government. For most practical terms that means the rules that say that you get $100 for
getting your teeth cleaned or you get $2,000 for having a DIG episode number 673 or
whatever the rules are. It also means that the extent to which the rules go to the governance of
the fund and the status of the fund in those changes have to be notified.
   Senator McLUCAS—I read it as being inserted as a protection for members so that a
health insurance fund would not be able to change its status willy-nilly—that there would be
some scrutiny of an intention to change and that the purpose of that scrutiny would be to
protect members. We will not have that protection ability under present proposals.
   Mr Maskell-Knight—Your questions are predicated on the presumption there is
something to protect members from. The act currently contemplates that funds can operate as
either for-profit funds or not. If the act contemplates that, it is difficult to see how a fund
wishing to operate legally under the act, albeit in a different way to what it is doing at the
moment, is something that needs to be protected against.
  Senator McLUCAS—Let us take the example of BUPA. When BUPA went from being a
not-for-profit to a for-profit, there was a process of assessment of the effect that would have
on the members of BUPA. The assessment looked at whether members’ rights would have
been protected. Is that reasonable?
  Mr Maskell-Knight—The BUPA case was interesting. My understanding of it was that
National Mutual already had a small for-profit fund. What happened with Mutual Community
and HBA is that they were in severe financial difficulty and they were merged into National
  Senator McLUCAS—Was section 78 applied at the point of that merger?
  Mr Maskell-Knight—It was done through the Federal Court. I do not think section 78 was

Friday, 3 November 2006                        Senate                                      F&PA 19

  Senator McLUCAS—Maybe BUPA is not a good example to talk through. If any current
not-for-profit fund moves to a for-profit status there is a process that they have to go through.
    Mr Maskell-Knight—I am thinking about this as we speak. I think that section 78 goes to
the rules of the organisation. I am not sure that it goes to the constitution. The extent to which
it covers the rules, meaning that the rules are defined somewhere as the principles for the day-
to-day operation of the fund, then a change in for-profit status is not part of the rules; it is part
of the constitution or the memorandum and articles.
  Senator McLUCAS—I am not a lawyer, but section (4A) says:
Where the Minister is of the opinion that a change that would increase rates of contribution by
contributors would be contrary to the public interest, the Minister may, by declaration in writing,
declare that the change shall not come into operation.
That seems to be a test of whether or not it is going to affect the standing of a member.
  Mr Maskell-Knight—Section (4A) was put in specifically to take account of changes that
were directed to changing the contribution rate. It does not say that if a rule change affects the
contribution rate the minister may disallow it. If any rule change has an impact on the
contribution rate, it is a power specifically directed to changes to contribution rates.
  Senator McLUCAS—I am glad I predicated my sentence by saying that I am not a lawyer.
  Mr Maskell-Knight—I am not a lawyer either.
  CHAIR—Thank you for your attendance today.
                     Proceedings suspended from 10.03 am to 10.17 am

F&PA 20                                      Senate                    Friday, 3 November 2006

[10.17 am]
YONG, Dr Choong-Siew, Vice President, Australian Medication Association
O’DEA, Mr John, Director, Medical Practice Department, Australian Medical
  CHAIR—Welcome. Would you like to make an opening statement?
   Dr Yong—I would like to thank you for inviting us. I direct you to our submission that we
put in. I hope that you enjoyed reading it and were informed by it. I will say firstly that the
private health insurers in Australia historically have not been very competitive and it would be
truly unfortunate if we made them less competitive. For years they have lived behind the
skirts of government, protected by legislation, regulation and barriers to entry. In each state
and territory there are typically only two or three large health funds, which make up about 80
per cent of the market in that state or territory. As such the health funds have been fairly
reluctant visitors to the 21st century on such questions as provision of information to their
members, portability and providing products which their members want. However, now 50
per cent of surgery is done in the private hospital sector and nearly 40 per cent of all
admissions are in the private sector.
  From the AMA’s point of view the government’s support of private health insurance has
been spectacularly successful and is a vital component of our health system. Certainly the
AMA believes that we are well served by the mix of a public and a private system that we
have here. We believe that system provides good health care at a reasonable cost to the
   Medibank Private is a vital component of private financing of health care. It is the largest
health fund and it is the one that exists in significant size in every market in Australia. In our
view privatisation is very likely to lift premiums, for the arguments that we make in our
submission. It could also further reduce competition by reducing the level of competition in
each of the major markets in Australia. We acknowledge there are some benefits in
privatisation but we do not feel that these will offset the return that will be required on the
level of investment necessary to buy Medibank Private, which has net assets alone of nearly
$700 million. We are not lawyers and we know that the government has had the benefit of a
lot of internal and external legal advice. However, we take the simple view that this is a very
regulated market, whatever assets Medibank Private has are a result of the contributions of its
members and these should be returned to them rather than sold back to them. I am happy to
take any specific questions.
   Senator McLUCAS—Thank you for your submission. You make the case quite well to
support your position that the sale of Medibank Private will lift private health insurance
premiums. When you say the sale of Medibank Private would lift PHI premiums, do you
mean just Medibank Private premiums or more broadly?
   Dr Yong—It is pretty clear that it will lift Medibank Private premiums. Given that it is a
large player in the market, we feel that there is a risk that other premiums would have to rise
as a result of market forces. I will get Mr O’Dea to speak a little further on that.

Friday, 3 November 2006                      Senate                                     F&PA 21

   Mr O’Dea—It certainly could be the case that there could be a flow-on. If the largest
player in the market had its premiums increase then the other funds would presumably feel
free to build that into their premiums as well to some extent, unless there was a highly
competitive market to eke it out. In most of the markets in Australia there are two or three big
players and, if you reduce that by one, you are again reducing competition in the market. That
would be the other effect of the sale of a major player like this. If you look at South Australia,
Western Australia or Tasmania, you can see it. We have a chart in our submission.
   Senator McLUCAS—You also make the comment that Medibank Private’s management
expenses are the average or just under the industry average. You would have seen
commentary in the media about a report from CRA that the finance minister released recently.
The prediction is that significant efficiency will be gained in a privatised Medibank Private. It
seems to be in conflict with what you are saying here. Are you saying that you cannot see any
efficiencies that are to be found within the current operation of the business?
   Dr Yong—That calculation is a difficult one to make. Certainly we do not have the benefit
of all of the information that CRA had. We have looked at the very simple figures and
compared what was shown with Medibank Private and all the different health funds together.
Looking at those raw figures, it seems that Medibank Private is fairly average in its
management expenses compared to the others.
   One of the concerns that we have about CRA is that we are not sure that the comparison
that they have made with other health funds is necessarily comparing like with like. There are
some technical points that we can bring up about that. It seems that, on a fairly simple
analysis, it would be difficult to achieve the return on the investment, having to buy an entity
the size of Medibank Private, by management efficiency alone, given that management wise it
is not a particularly bad performer compared to the other funds. Without having to go into
very complicated economic analysis, it seems a fairly simple proposition from the figures.
  Mr O’Dea—The chart I am showing has not been included in the submission. It has
moved around a bit, but you can see that at the present moment the blue line on the chart,
which represents Medibank Private, is slightly below the red line, which represents the
average. This is showing management expenses.
  CHAIR—Is that table in the submission that we received?
  Mr O’Dea—No.
  CHAIR—Would you be happy to table that?
  Mr O’Dea—Yes.
  CHAIR—The committee accepts that to be tabled.
   Mr O’Dea—There are other things that I could say about CRA, but the main issue is that
the return that is likely to be required on the investment to purchase Medibank Private would
be close to the total of the management expenses. You cannot achieve anything through
management expenses. You would have to start increasing premiums or cutting into benefits,
and you cannot do that without some implication on the contribution side. People might
decide to walk to somewhere else.

F&PA 22                                      Senate                    Friday, 3 November 2006

  Senator McLUCAS—You said that your analysis of the CRA report was that they were
not comparing like with like. Can you elaborate on that?
  Dr Yong—I must admit that we have not had a lot of time to look at the CRA report
because it has just been released.
  Senator McLUCAS—Neither have we.
   Dr Yong—However, one of the things that we were concerned about with the CRA
analysis was that we were not sure whether the methodology took full account of the finite
structures of the fund memberships. In other words the demographics of membership of some
of the funds could differ quite significantly, but we are not sure if that has been taken into
account. That has a big bearing on the premiums that they are charging and what return on the
premiums they are getting. There is no evidence that CRA International has taken account of
the fact that there are significant variations in the various health insurance products offered by
the funds. There are vast differences. For instance, looking at Medibank Private compared to
others, the variations are whether they provide no-gap products or known-gap products
compared to other funds. That would make a big difference to the make-up of the membership
and those sorts of factors are important in people deciding which fund they will go with.
There could be big movements depending on the changes in the market as consumers go from
one fund to another looking for the product that they prefer. The other concern we have is that
the level of benefits paid is influenced by the proportions of policies that are front-end
deductible and exclusionary, as well as the proportions of policies that are eligible for no-gap
or known-gap. From the analysis that we have seen so far, it looks like all insurance products
would have been treated as if they were comparable, but they are not. That is why we
concluded that they did not compare like with like.
   Mr O’Dea—What they do say is that Medibank Private is already technically efficient, but
then they make comments about the improvements that could be made whether it is privatised
or not privatised.
   Senator McLUCAS—That is right. Would you imagine that PHIAC would have a role in
trying to find those deficiencies under the current system?
   Mr O’Dea—It would be more the government in terms of the regulation that it has around
there. PHIAC may have a role at the margin. A lot of the suggestions that they make could be
equally true, whether you are a privatised fund or a mutual fund.
   Senator McLUCAS—We have talked this morning about conflict of interest, and the
government says that it has a current conflict of interest in being the owner of the largest
provider of health insurance and the regulator. I am trying to identify where that conflict is
and how that manifests. What is the AMA’s view on whether or not there is a conflict of
interest in the government owning a health insurance fund?
   Dr Yong—It is not something that we have looked at in detail. Where we are coming from
is that we feel that the industry needs to be strong and efficient and should encourage fairly
strong participation in private health insurance. To a certain degree the government’s 30 per
cent subsidy has helped that along. There needs to be a sufficient pool of people in all levels
of health in each fund to be sustainable. The other thing is that there needs to be competition
to drive this efficiency, and competition can drive the management efficiency as well in a

Friday, 3 November 2006                       Senate                                     F&PA 23

fund. Also there should be choice for consumers and portability. If those things are ensured by
each fund, regardless of their level of ownership, then we would say that things are looking
fairly healthy. I am not sure whether or not the government has a direct conflict of interest.
One of the things we have suggested is that mutualising Medibank Private would put it on a
fairly equal footing to the other funds and would end up having the members owning the
fund, as they do in the other entities.
  Senator McLUCAS—That raises the question about who does own Medibank Private.
You have made the comment in your submission that you are doctors and not lawyers.
   Dr Yong—That is right. You cannot make sense of the legal arguments. We have looked
more at a very simple notion that the government did not put much of the money into what are
now the assets of the fund. That is by regulation, and it is important that insurance funds such
as private health insurers do have assets to back up their payments. It is reasonable that the
members have had to put the money in but, given that the members have contributed those
funds, the question is what should happen to them?
  Senator McLUCAS—Are you concerned that in seeking to have a return to investors,
Medibank Private would have to change some of its services, particularly limiting its no-gap
and low-gap products?
   Dr Yong—Our concern is that, in order to get that return on the investment another entity
would make to buy out Medibank Private, there are only a few ways that they can do it. One
is to gain huge efficiencies in management, and we are not convinced that there are huge
efficiencies to be gained. The other one is to reduce benefits. The problem with that is that
may lead to a loss of membership of the fund. Another way to do it is to increase the income
into the fund. There is a limit to how much can be done with non-premium income. There
might be some efficiencies there in terms of investing money more wisely, but it would be
hard to see a fund like Medibank Private not already effectively investing its assets. The
conclusion is that premiums would probably have to go up as a result of the sale.
   Senator MURRAY—I have not seen anything that says the government does not have a
beneficial interest in Medibank Private or is not entitled to dispose of it. The question is, if it
is going to dispose of it, subject to parliament’s view, whether it disposes of it as a mutualised
private entity or as a for-profit corporation. I agree with your judgment as a businessperson. I
would say if you want a return on your investment there are only three strategies that you can
adopt, or a combination of those—you can increase your price, you can cut costs or introduce
efficiencies, or you can increase market penetration. But you have to do those things to
generate a return on investment, particularly where the entity is going to lose the tax
concessions that it presently gets because it is a not-for-profit organisation. Given that the
government has decided to go the non-mutualisation route, it is axiomatic that price will rise.
The question to you is: does that matter?
   Dr Yong—We think it does. Because of the size of Medibank and the reach it has across
the various states and territories, there could be big influences in each market. One of the
things about the market in Australia is that it is very segmented across the states and
territories. As I said, we have provided a chart in our submission that shows that across many
of the states you only have two or three major players, of which Medibank is usually one. Any

F&PA 24                                       Senate                     Friday, 3 November 2006

change to Medibank—for instance, if it ended up being sold to another fund substantially or
another player came in—would make bigger changes in some state markets than in others.
   Senator MURRAY—The logic of that response is that you would argue if it were to be
privatised it should be mutualised, because that seems the most likely to result in a lower
price. Is that correct?
  Dr Yong—That is right.
   Senator MURRAY—As an organisation you do not take a view in a philosophical sense as
to whether something should be private or public. If I understand your submission correctly,
you are more concerned with price and service. Is that right?
   Dr Yong—We are concerned with the viability of the private health insurance market as a
whole. We are concerned that there should be a range of products available and that
consumers should be able to choose between them. That range of products is dependent on a
fairly healthy market. We have some preferences for some types of products, such as known-
gap ones, but, in the interests of our patients who are members of funds, there ought to be a
range that they can choose from and a sustainable market in each state.
   Senator MURRAY—I recognise that you are not lawyers. I assume that you are also not
economists. Economists would argue the opportunity cost argument. The government has said
that it is concerned about conflict of interest issues. If that were true, it would not matter to it
whether it sold it as a for-profit organisation or a mutual organisation. However, if you look at
their objectives for the sale, nowhere does it mention conflicts of interest. But (e) is probably
the real motive. It says ‘having regard to the above objectives to maximise the net sale
proceeds from the sale’. In other words, it is about money. If it is about the money, the
question is: if money is not being used well in one entity, could it be better used in another
entity? In other words, could the sale be made more palatable to somebody like the AMA, for
example, just taking a figure, if it realised $1 billion and that billion was hypothecated into
mental health, dental health or something in the health regime, which meant that you might
have given up something on the one hand but you have gained on another in the health
context? Would this be more palatable to you as a policy if there were a hypothecation—in
other words, if the sale proceeds were directly reinvested back into public health services?
  Dr Yong—That is an interesting question.
  Senator MURRAY—It is my job to ask you.
   Mr O’Dea—In the material the government is talking about putting money into research.
Clearly, from our point of view, if there is a sale it is better that the money stays in health. We
have not covered that in our submission. We have not looked at it and it is very complicated.
From our point of view, it is certainly better that the money stays in health rather than going
into Defence or wherever.
   Senator MURRAY—You have got to be careful of the government’s promises. The
legislation does not hypothecate the money.
   Mr O’Dea—No, it does not. There is mention in the documentation about it being retained
in health, and that would be better than it not being retained in health. We really want to talk

Friday, 3 November 2006                        Senate                                      F&PA 25

about whether Medibank Private should be sold and the implications of that for the premiums
in the private sector. That is the principal decision for us.
   Senator MURRAY—If that is your answer, let us go back over what we have established.
As I understand your evidence, you are not concerned if it were mutualised—in other words,
privatised through a mutualised process—and if the result of that was that there were no
increase in premiums that the product benefits remained broad and that it continued, in the
words of the explanatory memorandum, ‘to contribute to an efficient, competitive and viable
private health insurance industry’. It seems to me that your objection is not to privatisation;
your objection is to the automatic consequence that, if you sell it for profit, it is going to result
in a very significant change to the product.
   Mr O’Dea—If it is privatised someone has got to make an investment. They have to get a
return on the investment. There has been speculation that that could be $2 billion for the sale
with a return of, say, 15 per cent. That is a lot of money that people will want to recover from
that investment. That will be added to premiums. That is the implication—and probably the
worst implication. It is going to be added to premiums. You might be able to save some. You
might get some management efficiencies and you might cut back your benefits a bit, and you
might do a few different things. Basically, that number is a very big number and it is going to
be added to premiums.
  Senator MURRAY—My answer to you is: mutualisation does not have those
  Mr O’Dea—That is right.
  Senator MURRAY—What it does do is reduce the sale return to the government. The
government through a mutualisation process is entitled to recover some premium. There will
be some cost that it is able to recover. At a minimum that would be its equity injection of $85
million. But it would not have the consequences.
  Mr O’Dea—I accept that.
   Senator MURRAY—The effect on the government, of course, is that they would lose
whatever sale price they were going to achieve. The question to you, remembering that the
government has numbers in the Senate, is: if the government is determined to go down this
privatisation route, would it be more palatable to the AMA if that money were directly
hypothecated through legislation back into public health sector services? If you want to give
more consideration to that question, please feel free to put in a supplementary submission in
due course.
   Dr Yong—We would prefer the proceeds to stay in health, and that may be a factor. But
against that we would still have to weigh up the viability for the entire private health
insurance market. The size and the reach of Medibank Private puts it in a unique position
compared with the other health funds. Major changes to Medibank Private could have
consequences all across the territories and states, which may cause big ripples in private
health insurance. That would be a concern to us, because we do feel that the balance between
private and public sectors is important to maintain.

F&PA 26                                       Senate                     Friday, 3 November 2006

   Senator MURRAY—Let me try a different tack with you. One could take the view that the
private health insurance industry is simply a market like any other market in the country. Then
in competition terms the ACCC should make sure that it runs effectively and is fully
competitive. Apart from that, its price should be set by the market and we should have
absolutely no interest in it. Our real emphasis should be on the provision of public health
through taxpayer funds: let the market be as it will and let us invest properly instead of hiving
off the public health responsibility to private health providers. If you take that view, it would
simply mean that it does not matter if it is sold. It does not matter what the price is. It does not
matter what the effects on Medibank consumers are, because that is not the job of
government. Government should be investing much more in public health than it does. Just
for the record, I will state that my party has been very anxious about this for decades,
particularly in mental health, dental health and public health measures.
   Dr Yong—We have always taken a view at the AMA that there should be a balance
between the two sectors and that we have been well served by having the two sectors strongly
coexist. As a philosophy that is where the AMA stands on the point of public versus private
health. We certainly support a very strong public health sector, but we have also recognised
that the private health sector can add to that and provide some choice for some of our patients,
provided that there are sufficient safeguards for patients who cannot afford to get into the
private health sector. Changes in the system now would be very significant, given the amount
of surgery and the amount of service that is provided by the private sector now. I think it
means it is essential that we maintain the private health insurance market as a public good as
much as anything else. There probably needs to be some regulation in there, particularly to
ensure that there is a spread of the burden across the membership, so that people have fair
access to reasonable premiums and access to services.
   Senator MURRAY—Perhaps if I could just repeat, and do so through the chair: if the
AMA as a result of seeing further submissions that have now been published and as a result of
today’s hearing wants to put in a supplementary submission, particularly covering areas you
might not have covered fully, I know I for one would appreciate it. The chair would tell you
by when it would have to be in. Chair, do you have a deadline date for further submissions to
be in by?
  CHAIR—Any time.
   Dr Yong—We would certainly be happy to put a submission in, particularly addressing the
question of what if the government hypothecated the proceeds from the sale into health
related areas.
  CHAIR—The 17th of November.
  Dr Yong—Yes.
   Senator FIERRAVANTI-WELLS—In your submission you make some comments in
sections 2 and 3 on the effect on premiums payable and then you go on to talk about
competition. I wanted to ask you a few questions in relation to that. In terms of simple
competition—of demand and supply—when health insurance premiums rise, surely there are
other factors that contribute to the rise in premiums, for example, the cost of medical
technology and the cost of professional medical staff? Just reading your submission, you seem

Friday, 3 November 2006                      Senate                                     F&PA 27

to place a lot of emphasis on the sale allegedly resulting in an increase in premiums, but
surely other important factors will influence the rise of premiums for any health insurance
   Dr Yong—We are looking at the potential relative rise of Medibank Private vis-a-vis the
other funds. The pressures that you mention of the cost of technology and the cost of care are
issues that will affect all of the funds in a relatively equivalent way so it is likely that that
pressure will be the same across the funds, depending a little on the sorts of products they
offer. They are all trying to capture a fairly broad market. We do not have niche funds that
look after a small segment of the market. In general they try to reach mum, dad, the family,
older people and a lot of the younger people in their membership. What we are saying is there
will be additional pressure on Medibank imposed by its new management to essentially get a
return on the investment. If it is like any other commercial investment, they will need to get
their return fairly quickly, which will mean an immediate pressure on trying to increase the
income from the fund.
   Senator FIERRAVANTI-WELLS—As I understand it, health insurance is already a
competitive market. There are 38 health funds. Obviously, if Medibank Private or any other
health fund increases its premiums excessively, their customers will leave. Would you agree
that is a simple market forces issue?
  Dr Yong—That is certainly true.
  Senator FIERRAVANTI-WELLS—Customers have portability. They can transfer
between funds basically with little loss of benefit and these days there is no waiting period.
Won’t the market put some pressure on premiums?
   Dr Yong—It may do so, but the unique thing with Medibank Private is that it is very big
player across all of the markets, unlike some of the other funds. We do not have a good spread
of the biggest players in each of the states and territories except possibly New South Wales
and, to a lesser degree, Victoria. But in some of the other states and territories, the spread of
the market is very uneven and so the market share that Medibank Private has and its ability to
influence the market is out of proportion to many of the other funds. Despite the fact that
there are lots of funds in the market overall, most are very small and only a few are very big.
The power that Medibank Private has in the market is quite significant compared with that of
the other funds.
   Senator FIERRAVANTI-WELLS—How do its fees compare now? You say it has such
influence. What is its influence?
   Mr O’Dea—I do not have the premium figures in front of me, but I am sure that it would
be not too far away from the average for Medibank Private.
   Senator FIERRAVANTI-WELLS—Coming from a layman’s perspective, you are saying
at the moment it is not having a market effect on the premium but then you are saying that if it
is sold there will be?
   Mr O’Dea—The fact that it is close to the average does not mean it is not having an effect.
I just do not have the figures in front of me. It is 30 per cent of the market; it has got to be
having an effect.

F&PA 28                                       Senate                     Friday, 3 November 2006

  Senator FIERRAVANTI-WELLS—It is 30 per cent of the market now.
  Mr O’Dea—That is right.
   Dr Yong—If it resets its fees, it may well be the market leader in setting the premiums
across some of the markets, particularly when it has a higher market share. It has 30 per cent
nationally but in some cases, like Victoria and Queensland, it is well above 30 per cent.
  Senator MURRAY—Are you saying that its position now is to pressure premiums
downwards and its position in the future will be to pressure premiums upwards? Is that what
you are saying?
   Dr Yong—We are saying that there is a potential for that. We do not have a crystal ball so
we do not know. Based on the fact that the new owners of Medibank Private will have to
service something like a $2 billion debt and get a return on their equity, that is a lot of money
to get a return on.
   Senator FIERRAVANTI-WELLS—You have made certain assertions and I think it is
important that, in making those assertions, you provide to the committee the facts and figures
upon which you rely. I really would like to see some statistics to back up what you are
effectively saying here this morning. If you have some additional material, that would be
  Dr Yong—Yes.
   Senator FIERRAVANTI-WELLS—You are making assertions here and, in fairness,
being the organisation that you are, you ought to substantiate that.
  Mr O’Dea—What particular assertions are you talking about? We have figures in our
submission. I do not know that we need to provide any figures to show that a health fund that
has a 30 per cent market share is going to have an effect on premiums. It is just not necessary.
   CHAIR—There is speculation that it may affect premiums in a different way in the future
from the way it currently does.
   Mr O’Dea—We do have some figures in our submission that we accept and acknowledge
in the submission are assumptions.
   Senator FIERRAVANTI-WELLS—You are saying that they are sufficient to back that
up? If that is your position, that is fine. I want to take you to another point, that is, the
commercial advice to the government in the Medibank Private scoping studies that Medibank
Private can be more efficient in private ownership. Arguably, businesspeople are much better
than governments at running business. If Medibank Private is floated on the stock exchange,
the company will be exposed to the full glare of the market and the pressure to get its costs
down. Surely that is going to be an important contributor in terms of keeping its premiums
down, to continue to make it viable and profitable, but also making sure that people do not
move away from Medibank Private?
  Dr Yong—That is certainly something that will be in the minds of the fund itself, if they
want to keep and possibly grow their market share.
  Mr O’Dea—Its options are limited. It can increase premiums. It can have efficiencies or it
can cut benefits. If it cuts benefits, it exists in a market with other funds that have not and that

Friday, 3 November 2006                       Senate                                     F&PA 29

is going to be a problem for them. If they increase premiums, it is going to be a problem. We
argue the efficiencies in management are miniscule compared with the cost of servicing any
debt. You can disagree with the figures that we have in there, but that is what we say. The
CRA or even the government’s own documents say that it is technically efficient now. I do not
know how much scope there is for it to become more efficient and whether that can be
achieved only by privatisation or whether it can be achieved by mutualisation or other
mechanisms that might be available without privatising fully.
   Senator MOORE—The issue of the government wanting to sell Medibank Private is not
new, it has just been ramped up recently. I am interested in the fact that the government
consults with the AMA on such a wide range of issues to do with health and the health system
in Australia. I am just wanting to know whether this particular issue has been raised with your
organisation in a consultative or negotiating way and, rather than giving a submission to this
very brief hearing at this time, whether there have been some discussions about the concerns
that you have with the government and whether you would such a process and have suggested
that to the government yourselves?
   Dr Yong—No, we have not had specific consultations. We have made some of our
concerns clear to the minister for health, but we have not really been asked to be directly
involved in these decisions. I think that is because this is something that is beyond just the
Health portfolio, which is where we tend to have the opportunity to have that sort of input.
   Senator MOORE—As an organisation, would it be something that you would think would
be appropriate on an issue such as the change in status of Medibank Private? Is that something
that your organisation would appreciate consultations with the government on?
   Dr Yong—We feel it is a central issue for us because of the potential effect that it has on
the whole private health insurance industry, and as providers of medical services that is of
clear interest to doctors. As I said, our organisation is looking really at the viability of the
private health industry as a whole, and our policy is clearly to support that continuing and
being a viable coexisting partner in providing health services along with a strong public health
   Senator MOORE—Do you want to add anything, Mr O’Dea? You come to many of these
inquiries and talk about the work that you do in the AMA. You would do a lot of research in
your role?
   Mr O’Dea—Yes, I have been around these issues for a long time. But I do not think I have
much to add on that. I have not noticed that the government has had an issue with conflict
over these issues—the fact that it was an owner and a regulator. I have not noticed any
conflict, although they have put some small capital injection into Medibank Private, which
you could say is a conflict. Just on the question of communication, we have put out quite a bit
of media release and media comment on this, but we have not really had much of an
opportunity to talk face to face on it. Quite possibly that is due to the fact that it is involving
Finance as well as Health, Treasury and other parts of government.
  Senator BERNARDI—Is it right that the AMA represents doctors and specialists?

F&PA 30                                     Senate                    Friday, 3 November 2006

   Dr Yong—Yes. We represent all doctors and we are probably the only organisation in the
country that can say that we truly represent the breadth of the profession. Most other medical
groups represent a segment of the profession.
   Senator BERNARDI—As part of your role, do you negotiate fees or any interaction
between the private health funds and your constituents or membership?
   Dr Yong—We are not involved directly in setting fees. We believe our membership is free
to set fees as they wish and that is something that they negotiate between them and their
patients. We do have a suggested list of fees.
   Senator BERNARDI—With the benefits paid from the health funds—we have talked a lot
about conflict of interest and I am just trying to clarify in my own mind whether there is a
conflict of interest between your representing your constituency, which is the medical
professionals, and their interaction with health funds. Is it to your advantage to have a weaker
private health insurance industry rather than a stronger one because a stronger private health
insurance industry can be more vigorous in its negotiations with you?
   Dr Yong—We do not directly negotiate with health funds in terms of the premiums that
they set or in fact the rebates that they give to their members for services. In fact, the ACCC
would have something to say if we were involved in that way. Our interest is in having a
strong industry, one that is going to continue to be viable and can afford to give its members
the rebates they need to access the services that our members provide. That is where our
interest lies in all of this. We are not involved in directly negotiating between the funds and
the providers. That is something that they do themselves.
   Senator BERNARDI—Do private health insurance companies negotiate directly with
private hospitals about the cost of services and things?
  Dr Yong—Yes, that is right.
  Senator BERNARDI—Private hospitals are quite often owned by some of your
constituents or members?
  Dr Yong—In some cases, yes.
   Senator BERNARDI—If you have a very strong private health insurance company—an
individual one that has a large market share—can they effectively negotiate a much stronger
  Dr Yong—They possibly can if they are a very dominant fund. As I said, we have pointed
out that the concentration of fund coverage differs from state to state.
   Senator BERNARDI—What you are saying is that a dominate fund could actually work
to your disadvantage?
   Dr Yong—More importantly, it will work to the members’ disadvantage, because at the end
of the day what you see is that sometimes there are concerns by members about the sorts of
services that the fund might provide for them, and they will obviously have to put pressure on
the fund to provide the products that they want.
   Senator BERNARDI—We could disagree on this, and in fact we will have to, because
there are plenty of choices of health funds for people to choose. You have not quite answered

Friday, 3 November 2006                      Senate                                     F&PA 31

this. The point is that a strong health fund that is in a very robust position can effectively
reduce the cost of health care by saying, ‘If you want our patients or our clients to use your
services you have to keep your fees down to this level.’ That is a reasonable supposition?
   Dr Yong—Yes, that certainly can happen, but that is not a competitive market in that case,
because one player has too much dominance. A competitive market is where the major players
all have a chance to compete with each other, and that would tend then to drive some of the
premiums down. It would also probably put some controls on the sorts of charge that
effectively doctors could charge. We do not have a say in how that works between the
providers and the funds. That is something that is dealt with by the hospitals directly with the
funds and with individual doctors in deciding what they want to charge patients.
  Senator BERNARDI—And it operates in a competitive market?
  Dr Yong—Yes.
   Senator BERNARDI—If they cannot reach an agreement, they will open it up to other
  Dr Yong—There are market forces there.
   Senator BERNARDI—There is a slight conflict of interest, in my view. I have some other
questions regarding your submission. You have talked about a potential $2 billion sale for
Medibank Private. Someone would have to borrow the money, effectively, and want a
reasonable return on their investment. I would put it to you that that simple supposition is not
accurate. Last year Medibank Private made over $200 million. If it were to list on a stock
exchange, you would expect it to trade at a price earnings ratio at a minimum of 10, which
would value it at $2 billion. If it was listed, it would have shareholders. There would not be
any major single shareholder, because it would be capped at 15 per cent. How do you draw
your figures that premiums have to rise based on those?
   Mr O’Dea—All we are saying is that if someone is going to invest $2 billion they are
going to want a reasonable rate of return. We say 15 per cent. You might say 10 per cent, eight
per cent or whatever. That is what people want. My superannuation returned 18 per cent last
year. I do not know what yours returned. You can get 20 per cent on lots of investments. You
can get 20 per cent on Telstra, so 15 seems all right to me. If you use those figures and
disclose your assumptions, that is the outcome.
   Senator BERNARDI—You are talking as a private entity. You cannot get 20 per cent on
Telstra. Let us just clear that up right from the word go. It is 14 per cent on the instalment
receipts. If it was a public float, the market would determine what is an appropriate level for it
to trade at, and investors would invest according to expectations of those sorts of returns. We
are not talking about a single person or entity paying up $2 billion to buy it and then saying, ‘I
need to make sure I can get my money back.’ There are plenty of companies that trade at a
price to earnings multiple in excess of 10. They trade at 20 and some trade significantly
higher. In fact, the average in the share market is around 15 as a price to earnings multiple.
There is nothing wrong with the returns that are being achieved, even at a $2 billion sale. I
find your argument a little simplistic in saying that they are going to have to put premiums up
in order to obtain an adequate return.

F&PA 32                                      Senate                    Friday, 3 November 2006

   Mr O’Dea—We certainly disagree about the rate of return. I do not think that there is any
doubt that people want a rate of return on their investment. I do not know how else they are
going to get it unless they put up premiums or cut benefits. To get that you have to really hack
into benefits, and I do not know what will happen to your membership if you do that.
   Senator BERNARDI—They are already making $200 million a year, so they are already
getting a return at the existing rate. If it was valued at $1.4 billion or $1.5 billion, you would
be getting your 15 per cent rate of return.
   Mr O’Dea—Based on one year’s performance you might be right, but if you look back at
the performance of Medibank Private over the years—
   Senator BERNARDI—Let us just look at it recently. There has been quite significant
earnings growth, from a loss position some six years ago to $200 million in the last financial
year and $130 million in the year before, according to my figures for 2004-05.
  Mr O’Dea—I could table this, which has the operating surplus and deficit since 1984-85. I
am advised that it was $130 million in 2004-05. In 2001-02, it was negative.
  CHAIR—The committee is happy for that to be tabled?
   Senator BERNARDI—It has gone from a position of losing money five years ago to
making a profit today without any disproportionate increase in fees, out of balance with the
rest of the funds or premiums. I just make that point. These are the commercial realities that
we have to deal with—not emotive topics. The other question regarding this is about
premiums. We have heard evidence today that the responsibility for approving premium
increases will still lie with the government. It is highly speculative and also not entirely
accurate to suggest that a privatised Medibank Private would allow premiums to blow out
excessively, because they would still be subject to government approval. Do you have a
comment on that?
  Mr O’Dea—I personally do not think the government exercise any restraint at all. What
goes on is a farce. They cannot put a private insurance company into an insolvent situation.
They ultimately have to improve. Maybe you can fiddle around a little bit from one to the
next, but it is not reducing premiums.
  Senator BERNARDI—It is not reducing premiums. We have had a discussion about
medical fraud before.
  Mr O’Dea—I thought it was a discussion about health provider fraud.
   Senator BERNARDI—Yes. We had some talk about allied health professionals and so on.
In that conversation you agreed that there was the opportunity for fraudulent charges against
private health insurers of somewhere between five per cent and 10 per cent of the expenditure.
That is somewhere between $400 million and $800 million per year. That is a particular
opportunity to reduce premiums that we could be more vigorous in pursuing. Would you
   Mr O’Dea—I am not sure how that is covered by this bill. I do not think that there are any
provisions that relate to it.

Friday, 3 November 2006                      Senate                                     F&PA 33

   Senator BERNARDI—You are concerned about the price of premiums, and I am merely
saying that there are a number of factors involved in this. If you have $400 million to $800
million a year being misappropriated from the private health insurance industry, then some
responsibility lies with the people involved in that to reduce the level of premiums. It is not
simply a matter of the government being farcical, as you put it.
   Mr O’Dea—That should be part of the ongoing vigilance. First of all, I reject that this
figure that you have quoted relates to doctors. It relates to health insurers and everything from
inappropriate behaviour right through to fraud by health insurance employees, by employees
of doctors, by other health professionals et cetera. It is a generalised figure. There should be
ongoing vigilance about that at all times, as we indicated to you. But I cannot see how it
relates to this in particular.
    Senator BERNARDI—We are just talking about premiums in general. You have made a
number of comments about the reduction in competition. I am at a loss to see how putting
Medibank Private in the public arena or into different ownership reduces competition. It will
still exist.
   Dr Yong—There will still be some competition. It depends a little on how you end up
selling Medibank Private.
  Senator BERNARDI—Could you explain that to me, please?
  Dr Yong—You are talking about a share market float as the preferred model. There was
speculation previously about whether it would be sold to another health fund or whether it
would be broken up. It depends a little on what happens there.
   Senator MURRAY—You are making the point that it could be sold in a private placing,
providing all those private placements did not exceed 15 per cent; is that correct? You said
that there are a number of ways in which it could be sold. The point you made was that it does
not necessarily have to be sold as a public float. The only alternative would then be that it
would be sold by private placement with the ceiling of 15 per cent, which has been provided.
You could get, say, eight owners, all of which would fall below 15 per cent? Is that the point
that you are making—that that is the alternative to a public float?
  Dr Yong—No. It was more when the government was considering all of the different
  CHAIR—A decision that—
  Dr Yong—Which has been clarified.
  CHAIR—Unless the bill is amended in the parliament.
   Dr Yong—I was going to say, though, there are lots of other pressures on premiums
besides the ones that you have mentioned. Another senator brought up the idea that the rising
cost of technology and so on was going to put pressure on premiums throughout. Certainly
that has been acknowledged even in the CRA report—that in all likelihood premiums are
going to continue to go up in the market generally. I do not understand how Medibank Private
in isolation could resist those premium pressures any better than any other private health
insurance fund could. Our point is merely that it will have an additional pressure that other

F&PA 34                                     Senate                    Friday, 3 November 2006

funds do not have to meet, which is the one of the new owners, whether that is the
shareholders or a larger owner requiring some return on investment.
   Senator BERNARDI—I take your point, but I would suggest to you that there are other
funds that do have responsibilities to get a return on investment at some point as well—the
for-profit funds.
  Dr Yong—They are not the biggest players, though.
   Senator BERNARDI—In your discussion and your evidence today you talked about it
being likely that Medibank would want to grow its market share. Do you recall saying that?
  Dr Yong—Yes.
  Senator BERNARDI—Would you think that an organisation that was seeking to grow its
market share would try to do so by offering better services and lower prices in order to attract
consumers to it?
    Dr Yong—That is a decision that its board has to make, but one of the ways it could do that
is to reduce its premiums—in other words, undercut the market—and provide poorer products
for the members, which will not lead to long-term growth but will get in members in the short
term, and then depend on its market share to drive down prices of the services.
   Senator BERNARDI—Is it not a choice for consumers to determine what level of service
they want and what they are prepared to pay for it? If the service level is not adequate, they
can then, with portability, move across to another fund.
  Dr Yong—Yes.
   Senator BERNARDI—This is just a simple market premise. I just wonder if we are
getting away from the responsibilities and the opportunities that markets provide to people for
   Dr Yong—Markets can provide that kind of choice, provided that there is robust
competition. It will obviously depend on how strong the other funds are in countering those
forces. In particular state and territory markets Medibank is incredibly strong and will be
better able to outlast the competition. You might see a reduction in competition in the long run
in those markets.
  Senator BERNARDI—Let us talk about that for a moment. Its strongest market is in the
Northern Territory. It has around 40 to 42 per cent?
  Dr Yong—Yes.
  Senator BERNARDI—In South Australia, Mutual Community, which is owned by BUPA,
has 40 per cent. Whilst I am a South Australian and not a member of Mutual Community, I do
not feel disadvantaged and I do not think the consumers are disadvantaged by having one
fund with 40 per cent of the market there.
  Mr O’Dea—We are suggesting that if you take out the red bits on this chart BUPA would
have close enough to 70 per cent and MBF would have close to 70 per cent.
  Senator BERNARDI—But how can we take out the red bits? Medibank Private is still
going to exist. It is not taking it out—

Friday, 3 November 2006                     Senate                                    F&PA 35

  Mr O’Dea—Or it might be taken over by somebody else.
  Senator BERNARDI—it would simply change from government ownership to another
  CHAIR—Is that chart 1 in section 3?
  Dr Yong—Yes, that is right. It is chart 1 in section 3 on page 4.
  Mr O’Dea—I am postulating that BUPA might take over Medibank Private in South
Australia in the fullness of time, or MBF might take over in Tasmania or the Northern
  Senator BERNARDI—So it is speculation?
  Mr O’Dea—The same as yours, I suppose.
   Senator BERNARDI—We have actual ownership. There are ownership caps that are in
there for five years at the very least. Anything can happen in a market over that course of
time. We could have a number of new entrants come along into this South Australian market
or indeed the Australian market. I think we just have to deal with the realities—
  Dr Yong—We have not seen them yet.
  Senator BERNARDI—of today rather than speculations of tomorrow or decades away.
  Dr Yong—I guess the reality is that in five years time there will be an opening up and you
may see some consolidation then.
   Senator BERNARDI—Indeed there may be. Maybe you might find a number of smaller
players and we will be better off for it. The public may be better served by having five or six
very, very strong health funds rather than 30, a number of which only have a very small
membership base.
  Dr Yong—It is possible.
  Senator BERNARDI—It is speculation.
  CHAIR—Can I just jump in on one of your points?
  Senator BERNARDI—Please.
   CHAIR—When you were speculating before that a privatised Medibank Private may seek
to undercut the market by offering a cheaper product but offering fewer services or a degraded
product, to the best of my knowledge Mr Savvides is at the moment incredibly keen to
maximise his market share. Why could that situation not happen just as easily now?
  Dr Yong—That they try to increase market share now?
   CHAIR—If they try to increase market share by dropping their price and degrading their
product, why is that any more likely to happen? Yes, it would be a for-profit company but it is
very much the stated objective of the Medibank board at the moment and of Mr Savvides that
they want to increase market share as much as possible. Why would the manner in which they
sought to increase their market share be any different with a privatised Medibank?

F&PA 36                                       Senate                    Friday, 3 November 2006

   Dr Yong—Our submission is that there would be an additional driver in terms of the
requirements of the ownership to get a return. In other words, the profit motive would be an
additional driver to increase the profitability of the fund.
   CHAIR—Regardless of what was driving it though, why would the method of seeking to
increase market share be different? I appreciate that in a for-profit business you are trying to
maximise your profits. Whether it is not-for-profit or for-profit, for a long time Medibank
Private have known that it is the stated intention of the government to sell them. Therefore,
they have been seeking to increase their market share. They have been seeking to increase
their market share just because they believe, I am sure, that theirs is a great company and they
have good products. I just cannot see why necessarily we have that bogeyman there. Surely it
exists now as a possibility?
   Mr O’Dea—It is just a simple proposition that, on top of all the mechanisms available, on
top of all the costs that are coming into this equation and on top of all the new technology and
all that sort of thing, they are going to have to finance the debt or whatever. That is an extra
cost that Medibank Private will have and they will have to build it into their premiums. So,
whatever they do, it is going to be more difficult as a result of this. That is our proposition and
if you do not agree with it, that is fine, but that is what we say.
  Senator BERNARDI—It is not actually debt, it is equity.
  Mr O’Dea—Equity. People still want a return.
    Senator BERNARDI—They still want a return; you are exactly right. But at the current
profit figures, if they were maintained, the return is more than adequate—depending on the
sale price, of course. But, if it is in that speculated range of between $1 billion and $2 billion,
it is more than adequate.
  Mr O’Dea—Yes, based on—
   Senator BERNARDI—It is a 10 per cent or a 20 per cent return, according to which
figure you want to use. It is speculation, but it is based on your figures.
  Mr O’Dea—You need to have a look at the chart that we tabled, because in 2001-02 it is
not and also in 2002-03.
  Senator BERNARDI—Yes, but it is a growing business.
  Dr Yong—It is a very variable business, as the chart shows.
   Senator BERNARDI—Yes, of course, it is a variable business; business is a variable
   Dr Yong—One of the things, I guess, about health insurance is that it is a bit different to
other sorts of markets in that you cannot always just walk away just like that. You are trying
to insure against health costs that you may not be able to see in the future. The feedback we
get from our members when they talk to their patients is that patients are not always aware
that the product they chose at some time in the past actually may not fulfil their health needs
right there and then. One of the problems about that in the past, and something which we have
always been quite vociferous about, is that there was a heavy responsibility on insurance
funds to tell their members what exactly was in the products so that members could make an

Friday, 3 November 2006                      Senate                                     F&PA 37

easy choice. The feedback I think you get from consumers is that it is very hard for them to be
able to choose between plans and health funds because of the very complicated sorts of plans
that are in existence.
  Senator BERNARDI—Why is that going to change if Medibank is privatised?
   Dr Yong—What it means is that it is not that easy for people to just shift whenever the
premiums change here and there and that it is not a completely fluid market; the market forces
do not necessarily influence membership that quickly.
   Senator BERNARDI—We have heard evidence today it is normally a six-month lead time
between the announcement of premium increases and when they are actually brought into
effect; the ombudsman said that this morning or it was in his submission. So there is an
opportunity there. I would disagree. On a final note, you talked about the supposition that
Medibank is actually owned by its members, is that right? You also mentioned you are not
lawyers. Do you have, or are you aware of, any legal opinion which actually states that? The
only legal opinion I am aware of was the one obtained by the government from Mr Tom
Bathurst QC, who said that was not the case.
   Dr Yong—I am aware only of what has been in the press and some of the debate around
that issue. I understand there is some information that the Parliamentary Library put out that is
contrary to that legal advice. Not being a lawyer, I cannot, I guess, make a firm judgement on
the strength of either legal argument. But I am aware that there is currently a debate going on
in the press about this issue.
  Senator BERNARDI—For the record, I think we should show that the Parliamentary
Library prepared that material and it was prepared by the social policy adviser at the
Parliamentary Library rather than a specific legal expert. It was also commissioned by the
Labor Party, which we are very much aware of.
   Senator McLUCAS—I think you have potentially impugned the library in making that
statement. The library, I think all senators will agree, provides impartial advice on all
occasions. Certainly every time I have asked the library to provide me with something, they
provide me impartial and balanced advice. We should be very careful about making
aspersions about who might have requested the advice and what it might have said.
   Senator BERNARDI—Through you, chair, I take your point; I am not casting aspersions
on the library. I am merely asking about the legal bona fides of any information that has been
presented and, to my knowledge, the only legal opinion that has been gained was requested by
the government. It says that the government is the owner of Medibank Private, both legally
and beneficially.
   Senator McLUCAS—You should contemplate on how the library works. Whilst a
document might be provided by the social policy section, I am sure that you will know that
the library works in a very collaborative manner and that there are very skilled legal minds
that operate in the library.
   Senator BERNARDI—Through you, Chair, I can only rely on the advice that I have been
given. The advice is that it was not in any way considered a legal opinion; it was an opinion
of the Parliamentary Library. Hence my question about what legal opinions are available. I am

F&PA 38                                         Senate                     Friday, 3 November 2006

aware of only one, and nothing has been presented to change my view. I am happy to stand
   CHAIR—I do not think that any member of the committee would wish to reflect on the
professionalism of the Parliamentary Library. I do not think that any senator is reflecting on
the professionalism of the Parliamentary Library.
  Senator BERNARDI—I merely make the point that you are not aware of another legal
opinion, apart from discussions that have taken place in the press. I am unaware of that. Are
you, Senator McLucas, aware of any other legal opinion as to who is the beneficial owner of
Medibank Private?
   Senator McLUCAS—I am not a witness at this hearing. I refer you to item 5 in the AMA’s
submission, where they make the point very clearly that they do not have legal expertise, so to
be pushing the witnesses on this point is inappropriate.
    Senator MURRAY—I wish to raise a point of order, because I presume that is what we are
on. I would refer the committee to the Bills Digest No. 47, of 30 October 2006, where it is
quite clear that the brief to the parliament from the library is that there is no question that the
government is entitled to dispose of this asset. There is no question. The issue that they raise
is the issue of compensation, rather than the issue of ownership.
  Senator BERNARDI—I take your point. I have no further questions.
  CHAIR—I was wondering whether either of you have had the chance to read the ACCC’s
submission to this inquiry?
  Dr Yong—I have not read it.
  Mr O’Dea—No.
   CHAIR—I might draw to your attention some points and seek your comment on it from
the ACCC’s submission, which makes the point that:
A share market float of Medibank Private would be unlikely to raise competition concerns if it resulted
in a diversified share register (that is, a large number of small shareholders) ...
It also makes the point that:
However, if a significant health fund proposed to acquire a significant interest in Medibank Private at
any point in the future, then competition concerns might arise under section 50 of the TPA.
I think that is a point that you have made—that there could be competition concerns in the
future, particularly in states where there is not particularly deep competition. It goes on to say:
Post any Medibank Private acquisition, the relevant health fund may have a substantial market share in
certain states and possibly nationally, and the competition implications of this would need to be
considered by the ACCC.
Again, that is a similar point to the one that you have made. The ACCC also said:
It could be expected, in practice, that a health fund would seek ACCC clearance before proceeding with
any such transaction. The ACCC would carefully and comprehensively consider any such clearance
Do I take it from your comments that you are not satisfied that the ACCC would adequately
consider the issue of a substantial lessening of competition?

Friday, 3 November 2006                         Senate                                       F&PA 39

   Dr Yong—I would not want to comment on the ACCC, except to say that it has a central
role in determining this kind of matter. We have looked at it without considering how much
the ACCC would be involved. That is up to the commission and is not for us to say.
  CHAIR—Indeed. You do express concern in your submission that:
If another significant extant private health fund were allowed to purchase Medibank Private, it could
potentially end up with a stranglehold on one or more state markets to the great detriment of consumers
and providers alike.
  Dr Yong—Yes.
   CHAIR—The ACCC is specifically charged with ensuring that there is not a substantial
lessening of competition, so that could only happen if the ACCC did not do its job. Given that
you have that point there, I am just wondering whether you do have concerns about the
current regulatory regime that the ACCC oversights?
  Mr O’Dea—I do not think that we do. That does not mean that they are omnipotent or can
hold back the tides or whatever. They can do the best that they can. We have got every
confidence in them doing the best that they can to stimulate competition in this area.
  CHAIR—I wanted to get your views on that point.
  Dr Yong—One of the things the ACCC cannot do is to create more competition. All it can
do is stop the lessening of competition, and that is a very different factor. Sometimes there is a
danger that the situation would be a fait accompli and there would not be much the ACCC can
do to change the way things have gone.
  CHAIR—I have no further questions.
   Senator McLUCAS—Just for the record, the document that we referred to earlier was
produced by Luke Buckmaster, who is a social policy researcher, and Jerome Davidson.
Jerome Davidson has a Masters of Law and has been admitted as a barrister and practises as a
barrister in Queensland.
  Senator BERNARDI—I will stand corrected on that.
  CHAIR—Mr O’Dea and Dr Yong, thank you for your submission and for participating
here this morning. The AMA’s submission was received yesterday. Do I have the committee’s
approval for that to be published? There being no objections, it is approved.

F&PA 40                                       Senate                     Friday, 3 November 2006

[11.35 am]
DEEBLE, Dr John Stewart, Private capacity
  CHAIR—I now call on Dr John Deeble.
  Senator McLUCAS—Are you sure he is a doctor? I thought he was a professor.
   Dr Deeble—I am a doctor because I retired as a professor as of Christmas. I am a fellow
for life but I am not a professor.
  CHAIR—Welcome. Would you like to make an opening statement?
   Dr Deeble—I hope that the committee has my submission. I am sorry that it came late, but
the invitation was at fairly short notice. Even though one may think about these things for
many years, it is a job to get it all down. I would imagine my submission is probably different
to that of almost everybody else because of some fundamental differences in what the purpose
of health insurance is, how you would judge a good health insurance product and how you
would judge an efficient health fund.
    I would like to say at the beginning that throughout this submission I take things as they are
and not as some framework might suggest that they ought to be or how people think others
ought to behave. That is one thing that a lot of my economics colleagues actually do not do. I
was a professor of economics. They assume that people behave like they think they ought to,
whereas people do not always behave that way. In relation to the proposal, I accept the
government’s present proposals as their plans, in which case they would be floating as a
public float the present Medibank Private Ltd. I have no doubt that some considerations about
potential conflict of interest affected that decision, but they do not arise now. I accept also that
it is probable and very likely that the right to sell would be upheld if it ever got to a court, but
I do not believe that all the consequences of a sale can be dismissed just like that. I think there
is an argument in equity in the interpretation that the Parliamentary Library puts.
    I believe that the opinion from the solicitors is too narrow and too legalistic, particularly at
one point where it says—and it is a key point—that the provisions for a winding-up which
would dictate what would happen to the assets in a winding-up cease to exist because the
relevant provision was repealed in 1992. But it is surely a tenet of law that it is not only the
words of a bill or the action but the interpretation which has to be placed on those, and that
means reading the minister’s speeches and the explanatory memorandum that attach to a bill.
It is clear to me, and I think it would be clear to anybody who read this in an objective way,
that it was not intended in repealing that section—which was repealed because it was seen to
be redundant because no winding-ups or that kind of thing had taken place—to change the
rights of members. So I think probably a case could be mounted convincingly for a loss that
people would suffer if, as a result of privatisation, funds which were being used for their
benefit, which are the retained benefits of the funds of the organisation which were keeping
premiums down, were transferred out, which is possible in a privatised organisation. I think
they would have a case. That seems to me that it would only likely address the net return to
the government; it does not mean that the government could not sell it. I think it has a right to
sell it.

Friday, 3 November 2006                        Senate                                       F&PA 41

   As I said in my report, I was a member of Medibank Private’s board, as it were, for 14
years and I was the health insurance commissioner who knew most about private health
insurance. So in many ways I have had the responsibility for overall policy for Medibank
Private for many of those years with, of course, the management. I think, in fact, it would be
wrong to say that the opinion, which is only an opinion, has any force of law, but I think the
government could sell.
   I have given you the background. Medibank Private was established in 1976 under the first
health insurance charges of the Fraser government. I was actually the economic advisor to the
department of health throughout that period. The government of the day moved from the old
Medibank, which was the first universal scheme, to one which gave an opting-out provision.
The key to that opting-out provision was that for higher income people it would be cheaper to
take out private insurance than to pay the levy, and they set the levy high enough so that they
would get about a 50 per cent opting-out. That was the policy position. There was a lot of
opposition, though, in the community generally to being seen to be forced out of a universal
fund into a private fund. And ‘forced’ did not mean that they were legally forced to go, but it
meant that if they stayed in Medibank they would have to pay more. There was a penalty for
staying in compared to going out, which still applies, or has been re-applied in the last few
years. There was a strike and the strike was not particularly effective, but Mr Fraser and Mr
Hawke agreed on a government fund which people could join and feel that they were not
being forced out of public insurance simply because that insurance was now private, in the
sense that it covered access to private services and the Health Insurance Commission ran it.
    We always interpreted our task as one of giving standard private cover at affordable prices.
We were not there to make profits; we were there to provide a service to people at the lowest
price that we could do that at, but also not just to operate as a commercial operation which
maximised its market but to be concerned with the quality of the health care that people got as
well. I will speak to that again in a moment. It was not just a business to make money for
government; it was established to provide a service. Medibank Private has always operated
under the same rules as any other private fund. It never made a loss, although I notice that
there were a couple of years where we did incur a loss—the diagram there reminded me. But
in some cases they were deliberate because we had made a substantial profit in the year
before. We aimed to keep our free reserves at between three and four months of contributions
and the interest on those went to offset our administrative expenses. That is effectively what
they did. The minimum prudential level which PHIAC requires is two months. So we had a
little more than we had to have, but if we ran up too much we reduced the premiums increase
next year. Medibank Private’s products were competitive but they were not always the same
as those of the other funds.
  In passing, it is probably worth my mentioning here, because it is part of the general debate
on competition, that contrary to a common perception—but not contrary to the experience of
people who have been in this, as I have, for 50 years or overseas academic studies and
experience—health insurance is very income elastic. That is, as your income rises you are
more likely to take it out; richer people are more likely to have health insurance than poorer
people. But it is not very price elastic at all. I can tell you that, in 15 years or so on that board,
we could be five or 10 per cent or more above or below our competitors with no effect on our

F&PA 42                                       Senate                     Friday, 3 November 2006

contributor membership at all. Indeed, if you follow the argument that I make in this paper,
one fund in 2005 for instance—MBF actually—retained out of its contributions $178 for
every person, and another one—which I think was HCF or HBF in Western Australia—
retained $126. And that is $50 a year for every person and that means a couple of hundred
dollars on a premium for a family. No, it does not have any affect.
   People make a decision on their health insurance membership when they join. There is, or
there has been in all that time, almost no transfer between institutions on the basis of price.
Also, all of the funds make it extremely difficult—and this is ordinary commercial practice
which does not only apply to health funds, it applies to almost every other product—or almost
impossible to compare prices directly because that is not what they want them to do. There are
over 300 health products which the consumer cannot match. It is quite impossible to match
the price of one product to another because the product is not the same. That is a deliberate
marketing strategy. The idea that in some sense product differentiation or price differentiation
will result in people moving is a hypothetical construct which is not true. They just do not.
   In terms of the history of Medibank Private, I do not know anything about what their
policies have been since they separated out in 1997. But of course they made a very big loss
in 2001-02. The reason, I think, was they were seeking to increase market share and
underestimated what the demand for services would actually be. This may be sacrilegious, but
that is about the time when they got rid of all of the management which had run Medibank
Private for the past 15 years, and they lost $175 million. Then they made surpluses of $131
million and $203 million in the last two years and got a government injection of $85 million
in 2005.
   I will go through the reasons why our government says it should get rid of Medibank
Private. It says that there is no reason to run a private health insurance fund. I say that it has
got very good reason to interfere in almost every other aspect of private insurance. It regulates
the scope and the content of non-government insurance, it supports it financially to the tune of
several billion dollars through the private health insurance rebate, it structures a Medicare
surcharge system which in effect encourages everybody with more than a minimal income to
actually go private and it assumes the responsibility for approving any premium increases that
are other than routine. That is an extraordinary mixture of government subsidy and
government intervention. I have said, in fact, that the policy interest in private health
insurance is now far greater than ever before. So why would it not include a public presence
in the private insurance market? There are two reasons for that. Once is the conventional one
of competition, not only in financial terms but the fact that it could also lead to the
development products that benefit its members in terms of health, not just money. The second
view, and in my view a much more important one from a policy point of view—and I
appreciate that not everybody will agree on my policy position here—is that Medibank
Private’s presence does affirm the broader public interest in private health insurance. It seems
ridiculous to say that we throw $2.7 billion at it but that we have not got a public interest in it.
   I have always believed that Medicare is a national system of health care financing which
includes the private sector and its insurers. I do not object to a subsidy for private insurance,
provided that it is directed and that it works. The whole system is not just a Commonwealth
scheme of benefits for medical care and public hospital treatment, which is the way Medicare

Friday, 3 November 2006                         Senate                                        F&PA 43

is often portrayed in the popular press and, perhaps, the public mind. The two parts of the
system are complementary in many ways; it is not just a matter of the marketplace, although I
concede that there are a lot of people who have a reason to argue otherwise. I think that poor
coordination between the public and private provision of health care is a major and justified
criticism of the Australian system and I see the continuing emphasis on separating that out
still further as our major policy mistake. Health insurance is not the same as life insurance, car
insurance or home insurance. It supports and gives access to a huge range of technically
sophisticated services and supports a network of professional providers. If it did not, you
would not be asking the AMA. It is in many ways the agent for its members and its operations
affect the type of services they get, and that does not apply to your house insurance.
   The whole thrust of these proposals is to shift Medibank Private Limited further away from
the health service sector and into the general finance industry. I think that if the largest fund
does that then the other large funds will follow and that would make integration of the two
sectors even less likely. Now I know this is a conceptual difference that would probably not
hold with a lot of people, but it does seem to me that it has been a great mistake to pursue
policies that say this is the private sector, which operates in relation to private hospitals and
some ancillary services that the government does not yet cover, and they are rivals and do not
cooperate. If we take Medibank Private out of the health sector effectively and put it in with
the finance industry—I am concerned about the health component, not the other parts of it—I
cannot see that the health component would count for very much at all.
    Then there is a little bit on whether there is a conflict of interest. I say that in the first place
it is a nonsense question; government cannot have a conflict with itself. The fund works under
health department surveillance. While finance might want it to make more profits, they have
to resolve that internally. But there is another point: it is possible that the rules under which
Medibank Private or any other body operates could be framed or administered in a way which
favoured the government fund over its competitors. The non-government funds routinely
complained about that with Medibank Private. That would mean either maladministration or
even corruption, or simply that the parliament enacted laws which did not give every player
the same right to participate. That is okay, but what would the conflict of interest be? The
government is not a trading enterprise. It is entitled to judge the public interest and if it judges
the public interest in a certain way then, if the rules are legal, the remedy is political. I am a
great believer in the political remedy because indeed this is not a question of saying
everybody must have a fair go. The government might genuinely decide that that is not in the
public interest. That does not make it a conflict of interest.
   The government also says that selling Medibank Private would increase competition. I
have said that I do not think it would increase or decrease it. I think on the government’s
present plans nothing would change; it would be the same company in different ownership.
The question then is: how valid is the argument that shifting the ownership to for-profit would
improve the efficiency of Medibank Private and hence the efficiency of the whole health
insurance industry because it is 30 per cent of it? I have to say that I regard the government’s
circulated document from CRA or whatever as being absolutely wrong. I think it is incredibly
bad. But, like most economists are saying, this is what it ought to be not what it is.

F&PA 44                                      Senate                    Friday, 3 November 2006

   What I did—and I hope you can find your way through this in the text—was compare the
six major funds, which are Medibank Private; MBF; HCF, which is in New South Wales;
HBF, which is a Western Australian based fund; Newcastle Industrial Benefits; and the only
for-profit fund which is large enough to be considered to be a competitor. Those six funds
cover 80 per cent of all the members—I said 77 per cent in the submission but it is actually 80
per cent of all members—and hold 70 per cent of all the assets. There are another 32 funds.
One of them has three per cent, two have two per cent and nobody else has more than one per
cent of the market. Reality says that a one per cent market share does not compete with a 30
per cent market share. As I said about Medibank Private, it became the major fund in the
couple of years after its establishment. It gained 30 per cent of the market and never changed.
Neither did the market shares of everybody else. In fact, I started doing detailed research
looking at where the funds where at in 1964. I found that all of the same funds are there and
their market shares have not changed a jot. Ownership of a couple have changed—HBA and
Victorian Mutual Community in South Australia went through AXA and then BUPA, which is
the only sizeable private insurer—but otherwise there has been no change, except for a few
very small ones leaving.
  CHAIR—Dr Deeble, would you mind finishing up on that point? We might then move to
  Dr Deeble—Sorry.
  CHAIR—That is fine.
   Dr Deeble—I have compared the operating ratios and said, ‘What is the correct criterion
for an efficient health insurance fund?’ I would argue that the one that returns the greatest
benefit to members for a given premium is the most efficient fund. It is not the fund that
grows fastest. It is not the fund that makes the highest net profit. It is the one that actually
returns the highest level of benefits. I am taking the consumer’s viewpoint. That is what the
consumer joins the fund for. These funds have all got virtually the same cost of revenue per
person. A couple of the smaller ones which operate in regions are a little bit lower, but
otherwise they are okay. For instance, if you look at the gross profit margin of MBF in that
year, it was nearly 18 per cent. Medibank Private was nearly 14 per cent and BUPA was 15
per cent. Now which one was the most efficient? BUPA made a net profit pre-tax of 7.8 per
cent. MBF made 8.3 per cent; Medibank Private made 4.9 per cent. Which one of those was
the more efficient fund? I would argue that Medibank Private was a better fund than either
  CHAIR—On that point we will move to questions.
   Dr Deeble—I hope you can read the rest of it. The thrust of the rest of the paper is that it is
actually the tax position of the non-profit funds which is the most important point. To put it in
the simplest possible way: to give a return on funds, a for-profit fund has to earn 30 per cent
more because it pays 30 per cent tax. In principle it is as simple as that. It is the tax exempt
status of the non-profit funds which has kept premiums down, not the profit incentive of the
for-profit ones.
  Senator McLUCAS—You were there at the beginning with Medibank Private.
  Dr Deeble—Yes.

Friday, 3 November 2006                      Senate                                     F&PA 45

   Senator McLUCAS—Is there anything about the way that it was established, and the
reasons for its establishment, that would require special consideration being given to its sale
and the consequences of its sale?
   Dr Deeble—I have outlined in the submission how it came into existence. It came into
existence because of two things. There was a lot of angst about a government change that was
forcing people out of a government fund into a private fund and to allow them to do two
things at the same time. This was raised in the Parliamentary Library’s first paper. Even the
name of Medibank Private suggested that this was Medibank but private. That was one thing.
The other one was that the government wanted their scheme to work by being attractive and
the health funds were pitching their premiums too high. I did the calculations on what I
thought Medibank Private would or could do and the premium at which it should run. I
advised the government and they pitched their policy accordingly. All of the health funds said
that they would go broke, that it was terrible. They did not. Not only that, they actually
undercut us when we came on the market. So never believe what people say. It was good
fortune to some extent because I was not absolutely sure, but we were right.
   That was done to put competitive pressure in a certain circumstance where the government
was having a lot of difficulty with the level of cost in the industry and it did force premiums
down. I still believe that should be the purpose of a public health insurance fund: to provide
good cover at the lowest possible premium. If you go through the paper you will find that it
ultimately turns out to be the tax advantage that the non-profits have over the profit makers.
That means to me that if you make Medibank Private a profit-making fund it will have to
either cut down the benefits it pays or put its premiums up. It cannot operate under a profit
situation in the same way that it does now. By the way, I am sure that the $200 million that
was made last year contains a bit of fattening up for the sale.
  Senator MURRAY—You know the wonderful saying that you cannot fatten a pig on
market day. You fatten it before market day.
   Dr Deeble—I come from a farming background. You sell your stock while they are at their
peak because they will go down afterwards. I find it extraordinary, after 40 years experience
in this, that a fund can make a 52 per cent gain in profit in a year. It did that without gaining
membership, because the fund did not grow. There are lots of ways that you can change the
profit outcome, and I know them all. For one thing you can put your advertising off for the
year. Advertising was about 24 per cent of administrative costs. I have not seen many
Medibank Private advertisements on the television this year. There are all sorts of things like
that but also you can force down prices of suppliers and providers with a tough regime for a
while, but I am not certain that it can be maintained. I do not suggest any malpractice or
anything like that, but I would like to see if they could keep the $200 million profit up for a
year or two, because a 50 per cent increase is almost beyond belief, although it only requires
one or two per cent on the margins to do it.
   Senator BERNARDI—You have been around the private health insurance industry for a
long time. Are their profits solely derived from premiums?
   Dr Deeble—No.
  Senator BERNARDI—They have significant reserves which are also invested.

F&PA 46                                        Senate                     Friday, 3 November 2006

   Dr Deeble—It is part of the equity. You hold very substantial reserves for unpresented
claims and premiums paid in advance, which are invested from the moment they have them.
You maximise your investment income by holding almost nothing in cash. Why would you
need cash in a business like this?
  Senator BERNARDI—It is like a general insurer in that case.
  Dr Deeble—In that case.
  Senator BERNARDI—What is the difference between medical health insurance and
general insurance in your view, apart from having different products?
   Dr Deeble—In a general way, it is the question of whether markets work or fail in health.
The health insurance market is no different to the market for health services itself, which is
that consumers are not well informed and rely to a very large degree on the decisions of the
providers. That is the reason for public interest in delivering health care; it is market failure. If
buying health services from a doctor or anybody else was the same as buying Weet-Bix, I
would not have any public interest in doing it at all, but it is not. The ordinary insurance
business does not participate in the industry against which it is insuring. It does not support an
industry, but this does. That is not just the private hospital industry, but the whole of the
medical practice which is outside the public system. It is different in subtle ways that
examinations like this one by CRA have missed. CRA by the way found out—an astonishing
piece of logic, and they have got it in their report—that Grand United, which has 19,000
members, 0.4 per cent of the market, a 24 per cent gross profit margin and a 16 per cent
expense ratio, was a more efficient fund than Medibank Private. What a ridiculous proposition
about a tiny little thing like that, because it made a bigger profit. That is what their computer
program said. If you take 16 from 24 you will get 8, which was more than the 4 per cent that
Medibank made. That is a ridiculous proposition. It is the same ridiculous proposition that
goes through the whole of this. Maximising profit is not what they were there for.
   That is a long answer to a short question. I think it is different, but consumers see that they
are separate. Consumers have come to me many a time and said.’ ‘We haven’t got insurance;
therefore, we can’t get services.’ I say, ‘No, that is not right. In theory you get the services
first and then the insurance covers the cost.’ But they do not see it like that. They see the
insurance as a means of accessing the service. I do not think that that applies to any other
form of insurance.
   Senator BERNARDI—There is a perception amongst the consumer rather than a physical
difference in the business of being an insurer; is that what you are suggesting?
   Dr Deeble—I buy my car insurance, but that does not support the motor car industry. The
thing that the private insurers are doing is dealing with the providers in a different kind of way
altogether than negotiating with them; they are contracting with them. They are supporting
them, too.
  Senator BERNARDI—But car insurance companies do the same with repairs and so on.
They have preferred suppliers, to extrapolate your analogy.
   Dr Deeble—They can, yes. The health funds pay out about between 84 and 86 per cent or
thereabouts, depending on what their gross margins are, of their income as benefits. That is

Friday, 3 November 2006                      Senate                                     F&PA 47

determined by two things: the price of the service and the volume. They cannot do much
about the volume, because that is predetermined—people have used the service. Actually, they
are precluded from running managed care because the government has got a provision that
stops the funds managing care too much. But they can affect the price, and that is bargain
down the business. But, again, it is not the doctors; they cannot do that with the doctors. But
they can do that with the hospitals. Basically the only way that they can push costs down is to
try and push the hospital costs down. At some point that will run into quality problems. Since
private insurance is sold on the basis of quality and access, you cannot push the producers
down to a level where quality and access start to decline.
  Senator BERNARDI—That would not change, though, in a privatised Medibank Private,
would it?
  Dr Deeble—No.
  Senator BERNARDI—It is just a generalisation established across the industry.
  Dr Deeble—No, it is general.
  Senator BERNARDI—Yes, I accept that.
    Dr Deeble—What I am saying is that the opportunities for the so-called efficiencies which
might be imagined are very limited, because it is a big industry that you are dealing with and
it is a politically powerful industry, let us face it. It cannot be pushed around too much by an
insurer, even the big insurer. I think the conversion to a private entity means that inevitably to
get the returns to make a profit it will have to pay tax and that means it has got to earn more.
It is very simple to say that. I have done the calculations here as to what I think speculatively
might be the sale price. I thought about 1.7 or something. It turns out, believe it or not, that
the $200 million that Medibank Private earned was just about right for a sale price of that. So
I thought, well, I could have done that.
  Senator BERNARDI—That is market efficiency.
   Dr Deeble—How sustainable it is I do not know. But that would mean that I would have to
say, no, it does not necessarily mean a premium rise from now.
   Senator BERNARDI—I have one further question. The opportunity, though, would exist
for a privatised Medibank Private to diversify their income stream because it would release
some excess funds that are retained in the company at the moment, and that may therefore—
  Dr Deeble—Earn more.
   Senator BERNARDI—It may earn more and it may put indeed downward pressure on
  Dr Deeble—It could. I know the books reasonably well. You could take about $300 million
out of Medibank private’s reserves and still meet the—
  Senator BERNARDI—Solvency capital adequacy.
   Dr Deeble—solvency requirements. That can be transferred into another business. You
would lose the income from that. That is held in stocks, shares, debentures, all kinds of
financial instruments. Whatever the average return on that is, the return that you get from
another industry, another venture, might be higher. It might be more risky, but it would be a

F&PA 48                                      Senate                    Friday, 3 November 2006

higher return. These are not trustee securities or anything; we could hold them in anything we
wanted to. Nevertheless, they are in relatively liquid form so that you could convert them into
  Senator BERNARDI—It is a management competency issue, then, is it not?
   Dr Deeble—It is a management competency issue. If you can get a higher income out of
the other, then you may be able to have a lower return on capital than a purely commercial
one in the medical arm. But you have to cross-subsidise one from the other. I cannot say
whether they will go up or down, but I think the likelihood of premiums going up is much
higher than the likelihood of them going down.
   Senator BERNARDI—There is a general acceptance that there is going to be an increase
in premiums in the private health insurance industry over time. That is just part of medical
costs. But I think the question we are discussing is whether a privatised Medibank Private is
going to result in higher premiums simply because it is privatised, and we have some different
views on that, obviously.
   Dr Deeble—If I could make a comment that my AMA colleagues would probably not like
very much, and that is about the possibility of a substantial reduction in premiums. By the
way, I am talking about something that is not trivial. I said before that a dollar a week in $20 a
week per person does not matter. People do not even see it. If you want to make a substantial
reduction, then it is a question of managing the supply. That means managed competition of
some kind in the supply chain, which has been something that the medical profession has
been particularly suspicious about, and which I am not entirely certain about, either, because I
think that there is still a question of saying that clinical judgment ought to prevail, and
especially a finance industry based health fund should not be interfering too much in what the
doctors do.
    Senator McLUCAS—I am glad you have had that exchange. I think it is useful to have on
the record. Coming back to the rights of members and the issue that was raised in the
Parliamentary Library brief, do you agree with the findings of the library that members of
Medibank Private have special rights and, if so, how did they appear and how do those rights
sit now?
   Dr Deeble—I think you have to look at this in retrospect and look at the drafting. The
National Health Act is from 1953. That is when the first of the fund registrations started to be
made, when the Menzies government introduced voluntary insurance in 1953, with subsidy. I
think, like many things, the drafting of rights and the concept of what this meant were left out
because it was generally understood and everybody knew what that was. There were no for-
profit insurers. The insurers grew out of organisations like the Hospital Contributions Fund of
New South Wales or the Hospital Benefits Fund of Western Australia, both of which are still
in existence and still operate under the same arrangements. There was no question that they
would ever be for profit and there was no question that their assets would ever be held other
than for the benefit of their members. I am not certain, but I think MBF was effectively that,
though I think it was actually structured with a holding company which was formed by the
doctors in New South Wales, though they did not own it—but they operated it somehow.

Friday, 3 November 2006                      Senate                                     F&PA 49

   I do not think that the rights of the members were ever established in law. So I think one
has to look at what the intention of the legislators was and what the intentions of the
legislators in relation to all of the various acts were. I am not a lawyer, but I have been around
public law for many, many years and I would understand that to be a legitimate form of
thinking by lawyers. And if it looks as though that was the intention of the legislators, then I
think they could establish a right at least to be heard, to say: ‘We have been disadvantaged by
this change which you have made. We have been disadvantaged because the money that was
supporting our health insurance premiums has been taken off to some other enterprise.’ I have
to say that, even though I would be sympathetic to their case, I cannot see any argument other
than that that would hold—that is: ‘You have taken away the money from us as health
insurance people and you have put it into another business.’ I think they could then make
some sort of a case. But, as I say, I am not a lawyer. I cannot predict what the interpretation
would be, but I do think the government, since nobody else has a title to it, undoubtedly owns
the organisation.
   By the way, if it sells the organisation, it is not selling the funds. The way that the actual
money was transferred when, say, BUPA took over the AXA funds was that it was a
transaction between two companies but the actual reserves just transferred over. So the actual
reserves in this case would transfer over, but the government has got a compensation which
has nothing to do with the reserves. It would be able to say, ‘We did not sell the reserves.’
   Senator McLUCAS—It transferred the reserves. I suppose if we were selling a Medibank
Private that was in current deficit situation we would not have an issue, not that we would be
selling Medibank Private in deficit.
   Dr Deeble—It has to be attractive. I would just go back to my argument, which is a basic
argument, that the criteria on which a health fund should be judged is not, to me, its ability to
make a profit, it is its ability to provide a certain level of cover at the lowest cost to the
consumer. So I would say that the fund that made the lowest profit was the better fund, not the
one that made the highest one.
  Senator McLUCAS—It depends if you are looking for a financial outcome or a health
  Dr Deeble—I am not interested in a financial outcome. I could not care less whether the
government gets its $1.5 billion. Certainly in this kind of climate I cannot see why it would
possibly need it. But that is not the issue.
  Senator McLUCAS—Given the time, I am happy to share the questioning, and then we
will come back.
   Senator MURRAY—That is very good of you; I mean that. One of the points you make
very clearly in your long discourse—and that is a commentary on style, not on content,
because I have enjoyed listening to you—is that the private health insurance industry is in no
sense a free market, it is a very managed market. It is a market characterised by high
subsidies, high government intervention, high regulation, very low mobility of customers
between funds and extremely poor customer knowledge because of lack of comparability. In
other words, it is, to use an economist’s term, a most imperfect market.
  Dr Deeble—Absolutely.

F&PA 50                                       Senate                     Friday, 3 November 2006

  Senator MURRAY—That is right, isn’t it, as a summary.
  Dr Deeble—And it is an oligopolistic market—six major funds dominate.
   Senator MURRAY—I am in something of a difficulty in this discussion in that my party
actually took a more free market view of private health insurance in that the Democrats
opposed the private health insurance rebate. We believed that premiums should be set where
they may and that the moneys being spent on supporting private health insurers should rather
be put into public health, and reinforced there.
  Dr Deeble—In general, I would agree with you.
   Senator MURRAY—The difficulty we have, I think, arising from your views is that we
are asked as a Senate committee, as a parliament, to appraise the benefits of the sale in the
public interest, and yet the normal market comparators are not available to us. That is right,
isn’t it?
   Dr Deeble—When people say a profitable industry is a good one, the assumption is that it
is an informed market and that its ability to make a profit indicates that it serves that market
better than the other funds do or the other firms do.
   Senator MURRAY—My point is that, if there are marked market rigidities because of a
lack of mobility, understanding and so on, it is very difficult, then, to compare efficiencies,
administration fee levels and profitability in the sense of retained assets. It is also difficult to
compare products. That is the point that you have made.
   Dr Deeble—I would say that the assumption in a free market in theory is that the most
profitable firms serve the customer best, because that is how they become profitable. In this
case I would argue that they do not because clearly, from the customer’s point of view, if you
say, ‘What do they buy the insurance for?’ they buy it for the coverage. But there are some
firms which do not provide as good a coverage in the sense of, ‘For a given premium this is
the cover you get,’ yet they make a higher profit. So the profit that they make and the growth
that they make and their size do not correlate with the utility of the products to the
individuals, as I would see it. But of course they may not see it like that because they really
do not know.
   Senator MURRAY—Where I am going to with this—I am conscious that the government
has the numbers to push through its legislation if it wishes—is that if the government is taking
a market oriented view and saying, ‘Well, we should not be engaged in the provision of
private health insurance through Medibank Private,’ which has 30 per cent of the market, then
logically it has to review subsidies, tax concessions and also review just how competitive the
market is with respect to choice, the availability of product disclosure statements, information
and so on. I can give you an analogy, which is the superannuation choice regime. Effectively
that introduced a far more market oriented approach in what was a market which was highly
rigidified prior and is no longer as rigid. Isn’t that the logical consequence of the government
stepping out of this particular investment?
   Dr Deeble—If you think of all of the subsidies and benefits the government gives to the
health insurance business, they are really enormous, but it flows through to the providers and
to the people who are supported by private health insurance. There is the rebate. There are the

Friday, 3 November 2006                     Senate                                     F&PA 51

various encouragements that people have to go into it, including their own tax position and
there is the tax exempt position of the health funds. Nearly all but one of them are tax exempt
because in the past it was seen as not to be a business that the private people would go into
because it would never be profitable enough—that is, the for-profits would not go into it. I
agree that if a government then moved its own fund into the for-profit area, it is changing the
balance of that enormously and changing lots of the assumptions that underpinned its
subsidies. Does that answer your question?
   Senator MURRAY—It helps. Let me ask you another question. You have made the very
clear and understandable point that the reserves in a not-for-profit fund become profits in a
for-profit fund and those profits are subject to a 30 per cent tax.
  Dr Deeble—Yes.
   Senator MURRAY—Notionally, if there was a $200 million reserve in the not-for-profit
fund, that becomes $140 million.
  Dr Deeble—It is added to the reserve.
   Senator MURRAY—It is treated then as a reserve. In a for-profit fund, if it was taxed at
the full rate, it in fact reduces from $200 million to $140 million, which means you need a
higher return to get back to that.
  Dr Deeble—That is exactly the argument.
  Senator MURRAY—Yes, I understand all of that and I think that point is well made. But I
want to ask you about another area of tax concession. Are you familiar with the tax
expenditure statement?
  Dr Deeble—Not now. I know what it is but I am not familiar with it.
   Senator MURRAY—It is good that you know what it is. As you know, the tax expenditure
statement records, if you like, indirect tax payments to Australians and Australian entities
which are not provided through the budget process. I think our budget at the moment is
around about $220 billion or whatever and the tax expenditure statement is probably around
$40 billion. It picks up all the superannuation tax concessions, fringe benefit tax concessions,
et cetera. I suspect that if you move a not-for-profit fund to a for profit fund you also lose a
substantial number of not-for-profit tax concessions, which are probably identified through
the tax expenditure statement. You have not had a look at that, have you?
   Dr Deeble—Well, the first impression would be that, obviously, if the tax expenditure
statement does mean that a tax is avoided by companies who operate in the health fund area,
that that is considered a tax expenditure; is that what you mean?
   Senator MURRAY—I suspect that the fringe benefits tax provisions for not-for-profit
health funds might be different from those of a for-profit company, and I want to find that out.
I suspect that the tax concessions which apply to mutual funds, which are for-profit, would be
entirely different from those for a public float. I suspect a number of things. All I wanted to
check with you really in asking you that question is that you have not had a look at that area,
have you?
  Dr Deeble— I have not, no.

F&PA 52                                      Senate                    Friday, 3 November 2006

   Senator MURRAY—I will say through the chair that I have requested the secretariat just
to call up on that area to see whether that can be quantified or whether it is a real concern.
   Dr Deeble—I know that I am taking up your time and you are busy, but to summarise, my
view would be that the benefits from the privatisation would not be sufficient to compensate
for what I would see as the loss of public interest through withdrawing a government presence
in the market. That is the final conclusion that I would come to. I am not saying that
everything would collapse and the world would cave in. The government has got a right to
sell it—if it does, it does—but I would argue against it.
   Senator MURRAY—That is the last question I wanted to ask you, in view of the time. I
thank you; your corporate knowledge and your long experience are of great value to inquiries
like this. I agree that the government has the legal right to dispose of these assets. I am less
convinced that there may not be the possibility of compensation. If I were a buyer, I would
want to be indemnified from that.
  Dr Deeble—I would want to be, too.
  Senator MURRAY—So let us get that on the record.
   Dr Deeble—That is why I said in the end the yield might not be as great as the government
  Senator MURRAY—Because the buyer will take legal advice.
  Dr Deeble—Yes.
   Senator MURRAY—Let us continue with that theme. The Blake Dawson Waldron advice
is summarised in three main premises on page 3 of the library’s brief, and that is, for the
purposes of Hansard, Bills Digest No. 47. They state that Blake Dawson Waldron say that
because the membership of the Medibank Private fund entails primarily a contractual
relationship that can be terminated on two months notice at Medibank Private Limited’s
discretion, that there is an extremely limited framework for any consideration of rights. I think
the great weakness of the legal advice is that they have taken a view of individual rights and
not of collective rights. Because essentially the whole provision of rights and interests in this
respect cannot refer to an individual, they have to refer to a collective or a class. And there is
continuity—a collective continuity—of rights to a body of persons. I think that is both a legal
concept and a policy concept. The point you have made is that the policy concept originally
was to provide for a collective body of persons a kind of certainty, stability and reassurance in
the private health insurance area that they feared they might otherwise lose. That was the
point of your anecdote about the discussions between the former Prime Ministers Hawke and
Fraser; that is correct, is it not?
   Dr Deeble—That is correct. It was in a sense an element of a public good that the
government, by entering into the private market under Medibank Private, would be giving an
assurance to those people who were doubtful about the consequences of the changes that they
made, that they would be provided for equitably and on a fair basis, and not-for-profit.
  Senator MURRAY—Dr Deeble, you are a man of common sense and experience.
  Dr Deeble—I hope so.

Friday, 3 November 2006                     Senate                                     F&PA 53

   Senator MURRAY—You can translate the public good into the collective. Whilst
somebody like Blake Dawson Waldron might be quite right in saying that the membership of
an individual could be terminated almost at whim by the management at two months notice
and therefore their rights have limited tenure, it is an absolute legal nonsense to suggest that
they would do so to all their members or a whole class of their members to prevent them
claiming for compensation; therefore as a legal point it does not stand. That is correct.
  Dr Deeble—I am not a legal person. I would agree with you entirely, but I cannot say. I
mean, I think that the Blake Dawson Waldron advice is ridiculously narrow and probably
wrong, and I am inclined much more to the view of the library.
  Senator MURRAY—I come back to my central point. It is really a question as to your
experience. Have you ever known any public health fund of this kind to terminate the
membership of a whole collective or class of persons? They have terminated individuals, but I
do not know of any such occurrence—
   Dr Deeble—I am not aware of them terminating any individual, except for nonpayment of
  Senator MURRAY—Exactly.
   Dr Deeble—And the nonpayment of premiums has a waiting period which allows them to
re-establish their entitlement. So they can only act on that in accordance with the regulations
   Senator MURRAY—So therefore there can be no extinguishment of rights, because the
class of persons continues.
   Dr Deeble—I am not speaking as a lawyer, and the law may not interpret this in they way I
do. The Blake Dawson Waldron opinion makes a clear point to do with the winding up of a
fund. My first point is that it would be possible to argue in this case that the fund—and a fund
is different from the organisation—of Medibank Private is being wound up and transferred to
a new organisation. That would be true, because the old organisation would not exist any
longer. Even if it were Medibank Private Limited, it would be a different organisation if it
were transferred out of government ownership. If that were the case, and that was so when a
couple of funds went insolvent, the old provisions used to say—and they were there until
1992 when they were removed accidentally in a clearing of redundant clauses—that the fund
had to go through the Federal Court. The Federal Court would see that those members were
insured by somebody else. It would only allow the winding up of the fund if arrangements
had been made, which of course PHIAC and the government would do, for those people to be
covered by other funds so they did not lose the continuity of their insurance.
   My second point is that any net assets that remained—it contemplated winding up only in
an insolvency situation—would go to the other fund in proportion to the members who
moved. So the fund’s assets would go with the members. One of the points that is raised in the
parliamentary paper—and I knew it before they did—is that those provisions on winding up
say something about the rights of members. They were repealed accidentally, as I said. But
Blake Dawson Waldron says that the fact that they were repealed means that the parliament
meant to extinguish those rights. I would argue that, no, you have to interpret that according
to what the explanatory memorandum and the second reading speech say about what was

F&PA 54                                      Senate                    Friday, 3 November 2006

intended. It was not intended to do that. So it did recognise that there was a right to the
reserves if the fund was wound up, but they had to go to another fund. Does that answer your
   Senator MURRAY—It does in part. The point I am making to you is that there is no
precedent for, nor any possibility of, the collective extinguishment of rights in a continuing
body of members.
  Dr Deeble—No. That is correct.
  Senator MURRAY—That is right.
  Dr Deeble—You cannot opt out of your obligation.
  Senator MURRAY—That is right.
  Senator BERNARDI—I have one question. You are appearing here as a private citizen?
  Dr Deeble—Yes.
   Senator BERNARDI—And your submission is your own. But you are also involved with
the Save Medibank Alliance?
   Dr Deeble—Yes. They asked me to be.
  Senator BERNARDI—What involvement do you have in that?
   Dr Deeble—None at all, other than advising them what I think the advice is and what I
think the policy should be. I do not think, on balance, that it should be sold. They do not think
so, but their reasons are a bit different from mine. The submissions are different.
  Senator BERNARDI—That is how I picked it up. There are different submissions.
  Dr Deeble—Yes.
  Senator BERNARDI—I think it is on the record, anyway, that there is a link.
  Dr Deeble—I recognise things as they are rather than what they might be in some perfect
  Senator BERNARDI—Are you suggesting that the Save Medibank Alliance submission
  Dr Deeble—No.
  Senator BERNARDI—You are not making any suggestions on that?
  Dr Deeble—No. I think they should put their case to you.
  Senator BERNARDI—Which they will. I am intrigued as to your involvement.
   Dr Deeble—If the government moves to do this, that is a matter for the government. I
believe in a democratic society.
   Senator McLUCAS—I want to ask some questions about efficiencies and potential
efficiencies. You have made your position clear on the CRA document. CRA suggests that
there is between a five per cent and a seven per cent potential opportunity for efficiencies to
be gained. That is one issue. In a broader sense, do you see any opportunity for efficiencies by

Friday, 3 November 2006                       Senate                                      F&PA 55

privatisation? On the other hand, if it were not to be privatised, are there currently any
opportunities for efficiencies to be gained?
   Dr Deeble—My criticism of the CRA report is the method that they have used, which is
dressed up in all sorts of academic gobbledygook which I know—or should know, anyway.
The methodology they have used there has been misapplied. For the record, I will cite just a
technical thing. They do a scale effect to equalise the smallest and the biggest. That would be
quite true in an environment in which there was a perfect market and each firm’s share of it
was random. But here you have six firms that do 80 per cent and 32 firms that do the
remainder. If you shifted two or three out, you would have the others at less than one per cent
each. They are not a random selection. They are operating in small niche markets in particular
places and areas and with particular interests and histories.
   The CRA treats them all as if they are equal—that is, it gives equal weight to the profits of
an MU, which is one that they say is much better than Medibank Private, though one has 30
per cent of the market and the other one has 0.4 per cent. So their efficiency calculations do
not make any sense at all. Anyway, eventually they do not matter, because the
recommendations that are made for becoming more efficient could be made without ever
looking at the results of the study at all. The paper is remarkable. It spends six pages going
through its history and methodology, a couple of pages on some results which I think are
wrong, and then has recommendations that have nothing to do with the results.
  Senator McLUCAS—They are fairly fundamental problems, I think.
   Dr Deeble—It depends on what ‘efficiency’ means. They have defined ‘efficiency’ as
profit making. You will make a higher profit obviously if you can get your costs down. They
have phrased it in such a way that people would believe that this relates to administrative
expenses. But when you actually go through and see what they are saying, they are not talking
about that. The seven per cent has got to come out of benefits. If you, say, had a
seven per cent improvement in your administrative expenses and administrative expenses are,
say, 10 per cent, then you will save 0.7 per cent overall, and that is nothing. Clearly,
administrative expense savings are not going to make the difference to any fund to any degree
that matters.
   So they have then got to get down their payments of benefits. The only way they can get a
higher gross margin and a higher net margin that is feasible is to pay less out in benefits. Is
that a gain in efficiency for the members? Well, it is if they can force the hospitals to lower
their prices. My argument would be that there is only so far you can go with that, because the
whole attraction of private insurance is that it provides a superior quality of service and better
access. It is access without restriction. If you start pushing down prices so far that starts to get
threatened. By the way, I saw that The Financial Review said that there is plenty of scope
because one of the private hospital groups said they expect 12 per cent growth in profit next
year. Therefore, ipso facto, you can push them down. That is not right, because that would be
a growth in volume, not a growth in cost. The arguments do not hold up.
  Senator McLUCAS—Thank you. I think I am getting the wind-up from our chair.
  CHAIR—Any other questions for Dr Deeble? No. Dr Deeble, thank you very much for
your time and for your insights. We appreciate that.

F&PA 56                                   Senate                  Friday, 3 November 2006

   Dr Deeble—I was going say that this is probably the last time I will ever attend one of
  CHAIR—Never say never. The committee will adjourn for a short break
                   Proceedings suspended from 12.49 pm to 1.07 pm

Friday, 3 November 2006                     Senate                                     F&PA 57

GILLESPIE, Ms Margaret, Acting National Secretary, Community and Public Sector
RAHILL, Ms Alison, National Research Officer, Community and Public Sector Union
  CHAIR—Welcome. Would either of you like to make a statement about the capacity in
which you appear?
 Ms Gillespie—I represent the staff employed by Medibank Private and also the Save
Medibank Alliance.
  CHAIR—Would you like to make an opening statement?
   Ms Gillespie—By way of introduction, the Community and Public Sector Union is the
union that represents the staff employed by Medibank Private. CPSU founded the Save
Medibank Alliance to provide a voice for staff and Medibank members and the broader
community. Under the umbrella of the Save Medibank Alliance, the CPSU has brought
together an informal alliance of health policy experts, concerned health consumers and health
sector unions, and we wish to acknowledge their support here today.
   On page 7 of our submission we list the people involved in the alliance, and also a
statement of principles, which sets out what the alliance stands for and its position, including
opposition to the government’s current plan to privatise Medibank. If committee members
would like to refer to that, it makes our position very clear. Unfortunately, the short notice
meant that many of the people listed there were unable to attend today. But if any of the
committee members would like to contact any of the people listed, I am sure they would be
more than happy to speak to the committee members.
    One of the things I want to cover in the opening address is the human dimension of what is
being proposed by the government. In terms of how the debate has been framed—and there is
always a contest in these matters; we all know that—one can see that there is a vigorous
contest about whether premiums are going to go up post privatisation or whether there should
be compensation for current Medibank Private premium holders or members. The alliance is
of the view is that the public good is something that should frame the debate, and we urge the
parliament and you as senators on the committee to examine the evidence in the light of what
is in the public good.
   We do not believe that Medibank Private is just another asset for a government to sell. We
believe it is a living part of our own health system. We believe it provides very important
ballast in that system and, if you like, it helps keep the whole system balanced and afloat. If
there is a change to Medibank Private, which is envisaged at the moment by this government,
then the whole system is going to change. I think the evidence that you are starting to hear
from various experts is starting to show you that other pressures will start to emerge once
there is a change in the way that Medibank Private operates in the market.
   We believe there are large sections of the community with serious concerns over the impact
of the privatisation, and of course the rising cost of health insurance, particularly those with
high dependence on hospital services. Private health insurance costs roughly three to
four per cent of average family income, and people with chronic illness pay up to 20 per cent

F&PA 58                                     Senate                    Friday, 3 November 2006

of their income on health related expenses. As parents, if we have had a sick child that we
have had to rush to hospital, we know that it would be terrible if we had to think twice before
we went to that hospital if we did not have insurance coverage.
   We believe there is an underlying anxiety in the community about the way the whole
system works. It is very important, we believe, for the whole Australian community that we
have a health system that is actually coherent and works in the best interests of the
community, that is, that the public good is being exercised for the community.
   Multiple sclerosis sufferer and MS Society advocate Mr Robert Pask has said that he and
his wife have cut back on their heating this winter so that they can keep paying their private
health insurance premiums. Robert says he is one of many who cannot afford health insurance
but at the same time cannot afford not to have it. We know there are many people in the
community like that. For many older Australians, premiums would have to double before they
reconsider their contributions to health funds. So three million Australians, we know, are
covered by Medibank Private and hold a reasonable expectation that their fund will continue
to supplement the services provided by Medicare. However, they are now concerned that their
gap and co-payments will increase, premiums will go up as the focus of the company turns to
profit making for shareholders. How do we know this? The results of an online survey on our
Save Medibank Alliance website were even more decisive. I have a hand-up for the
committee that details those results.
  CHAIR—Are you seeking to table that for the committee?
  Ms Gillespie—Yes.
  CHAIR—Thank you.
   Ms Gillespie—For instance, of the more than 1,000 people who filled out our survey,
96 per cent believe the government has not made a case for the selling of Medibank Private.
There are a number of other outcomes of that survey that I would draw to the attention of the
committee: 95 per cent actually wanted it retained in government ownership, 97 per cent said
that existing assets should continue to be returned to members, 97 per cent said it was
important as a member of Medibank that it is a not-for-profit company, that is, that all profits
remain for the benefit of members. Also, 94 per cent thought it was very important that
Medibank is owned by the government and that it operates in all states and is the only
national fund.
   In question 8, we ask: ‘Privatising Medibank will require new laws to be passed in
Parliament. Would the way your local MP votes on this issue affect your vote in a federal
election?’ Some 85 per cent responded in the affirmative there. We also asked them: ‘As a
Medibank member, would you expect a preferential share offer if Medibank was sold via a
stock market float?’ Some 86 per cent responded, yes.
   What we know at the moment is that every cent of any surplus from Medibank Private is
reinvested in the fund for the benefit of members. We also know that Medibank Private’s
market share at 30 per cent is very important in terms of the way the whole system operates,
and I have referred to the way that it operates as ballast in the system.

Friday, 3 November 2006                      Senate                                     F&PA 59

   Of the nine million Australians covered by private health funds, three million are covered
by Medibank Private. It is the leading insurer in New South Wales, Victoria, ACT and the
Northern Territory, and No. 2 elsewhere. The size of the fund and its dominant market
position allows Medibank Private to use its bargaining power to put downward pressure on
the cost of hospital services. In one recent example, Medibank Private entered into a provider
agreement with Ramsay Healthcare that excludes private hospitals from Medibank’s Members
Choice framework if they are considered too expensive, such as Epworth hospital in
Richmond. Medibank Private uses its market strength and rewards private hospitals that
provide cheaper quality services with more business. That is where the competition actually
exists in our system. The balance of power between hospitals and health funds; one provides a
service and the other pays for that service.
   The management of Medibank Private admitted to a 1996 Productivity Commission
inquiry that the interests of members are best served when ‘funds view their members as
shareholders for whom the delivery of lower prices is a dividend’. The only significant for-
profit fund operating in Australia is HBA, part of the UK based for-profit health group BUPA.
For-profit insurers need to provide dividends for investors, and the dividends will need to be
high enough to attract investors to a high-risk low-profit business.
   We need look only at the two-tiered system that operates in America to see the impact on
the community of a health care system where the private sector dominates. Of the 45 million
Americans who cannot afford private health insurance, some 18,000 die prematurely every
year from treatable illness, because they cannot afford health cover, medication or care.
Illness is also the biggest cause of individual bankruptcy. Americans pay a high price for not
having a universal health care system: an unregulated private market where premiums are
increasing at a rate of five times the increase in wages. Premiums for those with the greatest
need become unaffordable because health funds can choose who they cover and the risk of
that potential member. Premiums for men aged 55 to 65 are around $US10,000 per annum.
Younger men pay around $US1,000 per annum.
  We are already starting to hear calls from the private health insurance sector for the
government to change the community rating system, which of course guarantees accessibility
and affordability and is a critical part of the matrix of cost control and premium setting in our
current system. As I said earlier, if there is a change to Medibank Private and the current very
important ballast role that it plays in the system, the whole system will have new pressure
exerted in some of those areas.
   Of course one of the areas that we are extremely concerned about is whether there would
be any changes to the community rating system. I do not think anybody should look at what is
being contemplated at the moment as something that is a one-off. It may be something that
sets a whole range of either seen or unforeseen circumstances to arise in our health system.
Health funds at the moment cannot discriminate between their members on the basis of risk
and they cannot charge different premiums on the basis of age, gender, state of health or
anything else.
   The US leads the world in health care expenditure, at around 15 per cent of GDP, but falls
into the bottom five out of 30 OECD countries on measures such as infant mortality and life
expectancy. As Australians, we can expect to live more than two years longer than Americans.

F&PA 60                                                  Senate                          Friday, 3 November 2006

Do insured middle-class Americans have better health outcomes? No. The Journal of the
American Medical Association reports wealthy Americans fare only as well as working-class
English. Handing the health sector over to private market forces does not necessarily promote
greater efficiency or better health outcomes even for the highest spending nation.
   Does greater choice equal increased competition? That is the government’s rhetoric but,
with 42 health funds, Australians are already spoilt for choice. The reality is that they are
actually confused by that choice. Generally, Australian consumers do not tend to shift between
health funds, and there are three main reasons for this. Firstly, the rules such as waiting
periods are overly complicated. Secondly, the range of health cover on offer is often complex
to compare and shop around for a better deal. Thirdly, a choice of fund is a false choice
because it does not determine the medical services or the treatments available to you. So
consumer choice between health funds does not equate to competition because consumers do
not exercise any collective power and do not actually influence the premiums. It is the
hospital costs that are the biggest driver of premiums. The competition exists between
hospitals trying to maximise their profits and Medibank Private using its market power to
drive down hospital costs.
   Where does this leave all of this? We do not believe there is a single objective measure that
the government has yet provided that can say that Medibank Private will operate more
efficiently as a private entity, and we are urging the Senate to reject the Medibank Private Sale
Bill. We are not alone in our views. I have already outlined the support that we have received
from various people and organisations. Recently, we received a letter from the Rt Hon.
Malcolm Fraser, a letter that I would be happy to read to the committee and hand up a copy.
Malcolm Fraser has given permission for us to do that. It obviously carries a lot of weight
with the Australian public, given that—
   CHAIR—If you could read out the letter, Ms Gillespie, thank you.
   Ms Gillespie—The letter is addressed to Stephen Jones, our national secretary, and it
   Dear Stephen,
    Thank you for your letter regarding Save Medibank. You ask me for my views on the proposed sale of Medibank
Private. When Medibank Private was introduced we believed that, if the Government were actively involved in the
business, we would have a better handle on costs and outcomes than if it were all done by private enterprise. I believe it
would be a great pity if Medibank Private was sold and that it would lead to escalating fees.
   Yours sincerely
   Malcolm Fraser
The CPSU and the Save Medibank Alliance believe the sale of Medibank Private will be
disastrous for all Australian health consumers. We also believe it is immoral and possibly
even illegal—we know that this is contested at the moment—for any sale to be considered
without first legislating on fair compensation for those who contributed to the fund over the
past 30 years. Of course, that is something that is actually missing in the bill before you. We
fail to see how the sale bill delivers on the government’s own stated objective to ensure the
sale treats Medibank Private employees in a fair manner.

                             FINANCE AND PUBLIC ADMINISTRATION
Friday, 3 November 2006                      Senate                                     F&PA 61

   There is actually nothing in the legislation that goes to that stated objective. The example
that I would give you would be redundancy, and that would be particularly if Medibank
Private was actually broken up. There is a whole range of issues in relation to transmission of
business that obviously would need to be taken into consideration. A report by CRA
International tabled this week included that job cuts could deliver lower premiums,
rationalisation of management, call centres and customer service delivery mechanisms. This
is, from our point of view, contrary to Medibank Private’s current growth strategy and
business plan. They increased their staff by 400 in recent years to current levels of 1,500, and
that was in order to offer a wider range of health products. We know that that has resulted in
an increase of 52 per cent in operating profit from the previous year to $200 million.
   I am aware that post that CRA document being tabled, or released by Senator Minchin,
Medibank Private has now sent around an all-staff circular trying to clarify the facts for the
staff. As you could appreciate, that kind of report and the publicity that surrounded it created a
lot of confusion and, of course, concern amongst the staff in relation to the changes that could
be about to be visited upon them in their workplace. The management of Medibank Private
has sought to clarify the facts with staff and to note in writing to the staff that the report is
theoretical, it was conducted without any consultation with Medibank Private and hence it is
not based on any current business plans. I think it is very important in the context of the
current debate to always remember that these 1,500 workers and their families are also having
to look at what their future employment is going to be, depending on the vagaries of what
might happen with this legislation and the sale in the future.
   We certainly have not had time to do any figuring on this but I do know that, when there is
high staff turnover in any organisation, there is a commensurate cost to that organisation.
There is a level of uncertainty among the staff. I have already outlined transmission of
business, redundancy and so on. But also, why would you want to stay there if you think that
there are going to be high workloads and staff cuts? There is a whole range of reasons why
people stay loyal to an organisation. But you can see that in the environment that is now being
created, and with the uncertainty, people would start to question whether they would want to
   Just to sum up, CPSU strongly believe that the privatisation of Medibank will have a
negative impact on jobs, workloads for remaining staff and quality of services. We believe
that the Senate should reject the sale bill to save Medibank Private—for our members who
work there, for the members of the fund and for all Australians, and certainly for the public
good. I will finish my opening remarks there.
  CHAIR—Could I start by asking if the CPSU has ever supported a privatisation?
   Ms Gillespie—I am trying to remember. I do not recall that we actually have. Certainly in
terms of privatisation we do not have a blanket position. We believe it is in the interests of the
public to have a public interest test, which should be applied rigorously to any privatisation.
They are the issues that we have always raised in this place and in public forums in terms of
what would be good public policy in relation to the examination of those kinds of issues.
   CHAIR—So there is no CPSU policy to oppose all privatisations?
  Ms Gillespie—No.

F&PA 62                                       Senate                     Friday, 3 November 2006

   CHAIR—It is just that there has not yet been a privatisation that the CPSU has seen as in
the public interest?
   Ms Gillespie—We know that over the last 20 years or so there has been a raft of
privatisations in the public sector. I think it is very important that in relation to these kinds of
debates—and of course there has been a maturation, if you like, in the debates that have gone
on in the community—we have an understanding of the impact. I would not be confident at
all from the proponents of privatisation that the Australian community actually believes that
they are all good. I think the recent example of the Snowy Hydro scheme is a case in point.
   Ms Rahill—Can I add one more point to that. Just with the specific case of Medibank
Private, one of the reasons that we commenced our survey right at the beginning of this
exercise was to inform our position, and certainly we did not start out with an anti-
privatisation position. We did look at all of the impacts on the jobs and we had a matrix where
we ran a public interest test. It was not our initial position.
  CHAIR—Ms Gillespie may have said this in her opening statement. In terms of the survey
you have tabled, who was that polling?
   Ms Rahill—The survey went out to all of our CPSU members, so mainly Commonwealth
public sector agency staff. It is also being distributed by our alliance members. The various
health sector unions have also provided links to the website in their newsletters and on their
websites. It has also gone out through the Chronic Illness Alliance, and various other groups
have had a link on their website. We have also had individuals who have approached us and
said they wanted to hand it out in the local community. We have provided information packs
and sent those out to the general public, who have been handing them out in shopping malls
and things like that. We got about 500 fax-backs and posted returns. The results that have
been tabled today are just of the online version—people who have logged on to the website.
  CHAIR—It is a mixture of members of the public and members of relevant unions?
  Ms Rahill—That is correct.
  CHAIR—It is a self-selecting survey, it is not a random survey of the Australian public?
 Ms Rahill—It is self-selecting, where the people who have filled it out are actually
Medibank Private policy holders.
  Senator BERNARDI—Are they all Medibank Private policy holders?
  Ms Rahill—Yes, the ones that we collated ticked a box to say that they were members of
Medibank Private. We could have rung them up and asked them to give us their membership
number but, through a trust exercise, if people ticked the box to say that they were a
  CHAIR—So all of these people are Medibank Private members?
  Ms Rahill—That is correct.
 CHAIR—You may be able to assist the committee with this. How many members of
Medibank Private are there all up?
  Ms Rahill—There are 1.2 million policy holders.

Friday, 3 November 2006                      Senate                                     F&PA 63

  CHAIR—How many people completed the survey?
  Ms Rahill—1,500 all up, but the collated results before you are around 1,000.
  CHAIR—So it is not a random survey of Medibank Private members?
  Ms Rahill—No. We do not have access to the membership details of Medibank Private.
  CHAIR—Would it be fair to say that it would have a similar accuracy to a Herald Sun
phone-in poll?
  Ms Rahill—Yes; the results have reflected the various media polls, news polls.
  CHAIR—I mean in terms of its statistical rigour and reliability?
  Ms Rahill—We thought the sample size was fairly good, and what was also useful was we
had a box for comments and we have also attached a small sample of those comments in our
   CHAIR—Ms Gillespie, you do not think that it is an unreasonable extrapolation to say that
the change in ownership of Medibank Private would lead inevitably to an American style
health system?
   Ms Gillespie—It is certainly something that many people are concerned about. One of the
things I stated in my opening remarks is that in terms of the changes in the current system and
the impact that this would have—and I do not think it is going to be a minor impact—it would
be reasonable to believe that there will be further pressure on community rating and the
matrix of cost setting. There has long been concern about how the universal health cover and
health insurance operate in this country and whether it is actually supported in a genuine way
by the government, by the coalition. Some people would take the view—and I would say this
from a personal point of view and from people who we believe have this area of concern—
that this may well be a step in the direction of the American system. I think it is quite
reasonable to raise some of the issues in the American system.
   I will give you an example. This is from a personal experience that I had about two years
ago. I was in America as part of an ACTU study trip. I was witness to a group of minimum
wage workers having a picket outside their workplace to try and get a contract. I was very
keen to understand why these people were taking this action. So I started asking them: ‘Why
are you doing this?’ One man, with a very bad set of teeth, said to me, ‘Because it means that
I will get health insurance.’ One of the critical things in America is that if you get a union
contract you will get health coverage as part of that contract. Of course, one of the things as a
trade union representative that I am very clear about in my own mind, and we are very clear
about in terms of our own members, is that we do not want to have to be standing out on
pavements in a couple years time trying to get, as part of a contract in one of the places that
we represent, health insurance as part of that bargain. We do not want to go down that track.
We are very clear about that and we will do anything and will campaign to oppose that
happening in our country.
   CHAIR—No-one in the government is advocating an American style health system here,
so you can be reassured about that. If Medibank Private was privatised, given the important
role you say a government owned health insurance provider has in the health insurance

F&PA 64                                       Senate                    Friday, 3 November 2006

system, would you advocate that Medibank Private be renationalised by a future government,
that it be purchased back?
   Ms Gillespie—No, not necessarily, because, firstly, you would have to examine what state
the whole system was in. It would be naive to think that, once there had been such a major
change in such a significant part of the health industry, you would not have to re-examine
what is the best way of protecting the public good again. That may well be what you are
talking about, but usually it is very difficult to go back, and that is why we believe this is such
a serious issue that the bill should not be passed. We believe it needs far more consideration
than what has actually occurred at the moment.
   CHAIR—I was just curious: if having a government owned health insurer is so important
and so significant for the private health insurance sector, would you be advocating
   Ms Gillespie—It is scrambled eggs. You would have to see what was the best public policy
that you had to apply in the situation at the time.
   CHAIR—Policy eggs can be unscrambled. All it takes is an act of parliament to do so. It is
just a piece of legislation. We could even abolish the GST simply by an act of parliament.
   Senator McLUCAS—I thank you for your submission. As an observation, I think your
question No. 8 might explain why the government has now deferred the sale until after the
next election, given the indication of the people who have filled in your survey that it will
impact on the way people will vote. I would like to go to the staff notice that has appeared
that you handed up. Who did that come from within Medibank Private? Who posts these
notices on the intranet?
  Ms Gillespie—I am not aware of who did that. What I do know is that it was circulated by
management to all staff, and—
  Senator McLUCAS—It did come from senior management though?
  Ms Gillespie—Yes.
  Senator McLUCAS—I think it is interesting to note there that they say that CRA report
was not conducted with any consultation with Medibank Private as well.
  Senator BERNARDI—Could we get a copy of the staff notice that Senator McLucas has
been referring to?
  Senator McLUCAS—Has that not been handed up?
  CHAIR—If you have a copy of that and that could be tabled?
  Ms Gillespie—I do not have another copy. Perhaps Senator McLucas could put hers—
  Senator McLUCAS—Shall we table this document?
  CHAIR—Yes, please. Is that the will of the committee? Thank you.
  Ms Gillespie—My apologies; I did not realise that that had not occurred.
  Senator MURRAY—Again, like other witnesses, you can make a supplementary
submission, if you wish, and attach other information.

Friday, 3 November 2006                     Senate                                     F&PA 65

  CHAIR—The 17th is the closing date for supplementary submissions, but earlier if
  Ms Gillespie—Thank you.
   Senator BERNARDI—I have a couple of questions. There are 1,500 staff at Medibank
Private. How many of those are members of your union?
  Ms Gillespie—I could not actually tell you. It would be less than 50 per cent. That is as
accurate as I could be.
   Senator BERNARDI—So you do not actually know how many of the staff are members
of your union?
  Ms Gillespie—I did not clarify that before I came here, I am sorry.
  Senator BERNARDI—Could you have a guess?
  Ms Gillespie—As I said, it will be under 50 per cent, somewhere around probably
40 per cent.
  Senator BERNARDI—Perhaps you will get back to us on notice. I would appreciate it. In
your submission—and you have mentioned this in your initial statement—you talk about
some of the benefits that are accrued that you are worried about for the staff of Medibank
should a privatisation go through. You mentioned specifically leave?
  Ms Gillespie—Redundancy.
  Senator BERNARDI—What other concerns do you have?
   Ms Gillespie—It will depend on the nature of the sale in terms of how we would protect
the interests of members. At the moment we are actually in negotiations for a new certified
agreement in Medibank Private, and of course we are looking at trying to protect the interests
of the members in this kind of environment. Of course—and I may well ask you, Senator, in a
rhetorical way—the government stated that it was one of its objectives to protect the interests
of the staff members, but we cannot see in the legislation anything that actually directs it. So
if you could direct me to that part of the legislation, then we would obviously have a look at
whether that actually is taking care of any issues that our members have raised.
   Senator BERNARDI—I think that legislation protecting employees is quite obvious for
all, and Medibank Private would have to operate under exactly that same scenario. The
concerns that have been raised with me at the very least have related to superannuation
   Ms Gillespie—I was going to say to you that we have recently been part of very strong
representation in relation to the Telstra sale and staff who are members of the closed CSS fund
who are going to be directly impacted by the closure of Telstra who want to remain in that
fund. But to date we have not had any success in relation to that. They are some of the issues.
  Senator BERNARDI—Perhaps we could confine ourselves not to Telstra but to
Medibank. I have been advised there are 40 employees that are part of that Commonwealth
Superannuation Scheme, the closed fund, and a further 290 in the Public Sector
Superannuation Scheme. Does that sound about right to you?

F&PA 66                                      Senate                    Friday, 3 November 2006

  Ms Rahill—Yes.
  Ms Gillespie—That would be right, yes.
   Senator BERNARDI—I am also advised that the same policy with regard to the
superannuation entitlements will be applied to those people as was applied in the privatisation
of Qantas, CSL and other government instrumentalities, exactly as is being done with Telstra.
Do you have any objection—
   Ms Gillespie—Which is, as I understand it, that they would have to leave their fund and go
into whatever the fund was of choice. One of the problems you have with CSS et cetera—and
I do not know the accurate amount at the moment—is that if you are in CSS you might be
getting the equivalent of 23 per cent from your employer in terms of contribution. It is very
different if your business gets sold and you end up probably on nine per cent and you are
maybe in the last couple of years of your working life. You can see why an employee would
want that interest protected.
  Senator BERNARDI—But all the superannuation that is currently accrued within the CSS
and the PSS is fully protected, and—
   Ms Gillespie—But that is not the issue. If you are going to continue to work you have now
got a substantial cut in terms of what your superannuation is while you are continuing to work
for that organisation. Let us say I am a Medibank Private employee and I am in CSS and I
have been getting that money. The next day, Medibank Private is sold. I walk into the same
workplace the next day and, all of a sudden, I am getting nine per cent, not 23 per cent, from
my employer.
  Senator BERNARDI—The nine per cent is the defined minimum. But is it not subject to
negotiation between Medibank Private and the employees, this decision as to what
superannuation should be paid?
   Ms Gillespie—It could be the subject of industrial negotiation, but it would be my
experience that normally the employer—particularly if we are talking about a for-profit
environment—is going to be offering the legal minimum. Do you think that they should not
be offering the legal minimum?
   Senator BERNARDI—Continuing on with this, I was really quite surprised by your
submission, actually, because of what it says you are opposed to. I have to tell you that it is
pretty consistent with what this government is actually supporting. I would like to touch on
that. You are opposed to any changes that allow health funds to increase premiums without
the health minister’s approval. There are no proposed changes that I am aware of for that to
  Ms Gillespie—That is very reassuring.
   Senator BERNARDI—We are in agreement there. You also talk about any increase in
premiums that are unrelated to the provision of cost-effective health care, such as higher
salaries for executives or costs that exceed industry norms. I have to say that I find it a little
unusual that you advocate on one hand some employees deserve special benefits and yet
executives do not who run the organisation. I just find that slightly conflicting. Every special

Friday, 3 November 2006                     Senate                                     F&PA 67

benefit afforded to an employee is a cost to the running of the business and may reflect on
increased premiums. That is an observation. I do not know if you have a response to that.
   Ms Gillespie—We have seen some privatisations where there is a lot of money suddenly
paid to the chief executives. I believe that with the Australian public, from any of the surveys
I have ever seen, it is not a very popular pastime, if you like, to support CEOs taking big
amounts of money from whether it is a company or a privatised government asset. People
look very dimly on that in the Australian community. That does not mean that we would not
be arguing for a fair day’s pay for a fair day’s work.
  Senator BERNARDI—I suppose it is a matter of some discussion, is it not, about what is
an appropriate remuneration for a chief executive of a major company? I have been advised
by email—and I would like to get this on the record—that 3.3 per cent of the Medibank
workforce is actually a member of your union. Is that wrong?
   Ms Gillespie—We must be going broke if that is the case. Why would somebody by email
be able to tell you that? Where is the advice from?
   Senator BERNARDI—That is what I have been advised. You are saying that that is not
  Ms Rahill—Probably it is the decimal place. It is probably around 30 per cent, 33 per cent.
  Senator MURRAY—So the dot is in the wrong spot?
  Ms Gillespie—It is not three per cent.
  Senator BERNARDI—Interestingly, you would be happy to say 30 per cent, whereas
before you were saying 50 per cent.
   Ms Gillespie—No, I did not. I said it would be under 50 per cent. I was trying to be
accurate. We talked about coming back to you. But what I will say is that I told you before we
were in the process of negotiating a certified agreement in that workplace. What we have to
do under current laws is to actually get the support of the majority of workers in the
workplace before we go and negotiate an agreement. I can tell you that we have the support of
the majority of workers in that workplace to negotiate an agreement, and that is a very
important threshold in terms of the support for the union in that workplace. It does not mean
everybody joins because, as we know, under the current laws it is very difficult, and it has
been made very difficult, for unions to operate and to recruit in a workplace. They are some of
the ramifications of the current laws and the settings. I know we are not here to talk about
that. But if you want to start talking about it I am quite happy to.
  Senator BERNARDI—I just make the point that people are free to join unions if that is
what they choose to do.
  Ms Gillespie—That is right.
   Senator BERNARDI—We have to bear that in mind. In your opening submission you
made an acknowledgment that market forces are effectively driving down prices or the cost of
private hospital treatment.
  Ms Gillespie—No, I do not think I said that. If I did I did not mean to. What I was talking
about was the role that Medibank Private plays in the market, if you like, because it—

F&PA 68                                       Senate                     Friday, 3 November 2006

  Senator BERNARDI—Ensures competition?
   Ms Gillespie—Thirty per cent. It is actually able to exercise that leverage. If you refer
back to Malcolm Fraser’s letter, what he said was that when Medibank Private was introduced
the coalition government believed that if the government was actively involved in the
business ‘we would have a better handle on costs and outcomes than if it were all done by
private enterprise’. I guess to a certain extent from our point of view that is still operating
today. Although I did not hear all of Dr Deeble’s evidence, he seemed to be of the same view.
   Senator BERNARDI—How, then, is a privatised Medibank Private that still perhaps
retains 30 per cent of the market going to become a less effective force in lobbying for lower
prices from health care providers?
   Ms Rahill—We believe the flexibility of the bill still opens the door on a trade sale at a
later date. So if, in fact, Medibank Private was broken up then it would not have the same role
to play as a national fund. It is the only national fund currently, and it is using that 30 per cent
of market force in competition with the hospitals.
   Senator BERNARDI—Could I confirm that your opposition is to Medibank Private being
broken up? If it were sold as a whole to an individual entity, it would maintain, possibly
increase, the ability to keep hospital costs down; would you agree?
   Ms Rahill—How the future operators run the organisation is difficult to answer. One of our
issues is that underlying all of this will always be a focus on the bottom line and the
shareholder dividends, and the points that Dr Deeble made today about having to pay
company tax and all of those additional costs will possibly change those relationships.
Another point Dr Deeble made was: is that sort of pressure on hospitals sustainable to deliver
those sort of 52 per cent increases in operating profits? It is all fairly unknown what will
happen under a new board or a different organisation.
   Senator BERNARDI—Short of a trade sale, the concentration of market force, by your
own evidence and the evidence we have heard earlier, will keep pressure on private hospitals
to keep their prices as low as possible?
  Ms Rahill—The change in ownership from public to private does not in itself increase
competition. That was one of the points we were trying to make.
  Senator BERNARDI—It will not increase competition?
  Ms Rahill—Just by a change of ownership it will not increase competition.
  Senator BERNARDI—And it will not decrease competition, by virtue of the number of
participants. But it will allow more effective market forces, because it will be run along a
much more commercial operation?
  Ms Gillespie—That would be if you actually had a market. We have already heard that the
market is anything but an ordinary market.
   Senator BERNARDI—It is not an ordinary market, but we have 40 participants in it. If
Medibank Private is the be-all and end-all of health funds, it beggars belief how any of the
others continue to exist.

Friday, 3 November 2006                       Senate                                     F&PA 69

  Ms Gillespie—I do not think we have said it is the be-all and end-all. We are saying it is a
very important player and it is ballast in the system.
  Senator BERNARDI—It is an important player.
   Ms Gillespie—And it actually operates very effectively from what we can see—that does
not mean it could not be better—in the public good. What we are saying is that there is going
to be a change in the matrix just by the sheer nature of changing the ownership structure of
that organisation. We are not trying to make overblown claims here; we are just trying to
contribute from our point of view to the general dialogue and debate in the community, and
obviously with parliament, in terms of how to come to grips with what is being proposed.
   Senator BERNARDI—Just to confirm other points where we are in agreement, there is no
proposed challenge to community rating. I think that was one of your concerns. That is there.
In terms of increases, there is an annual increase. There is no proposal, as the chair said, to
talk about a two-tiered system, as they have in the United States. Also, on the trade sale, in
whole or in part, to any of the three other biggest health funds, on the record the government
has indicated quite clearly that it intends to pursue a private float. That is its preferred course
of action. We understand what you say about the bill. But a trade sale would allow other
market participants to become stronger. By having stronger market participants they can
effectively keep health care costs down.
  Ms Gillespie—We may have to find out.
  Senator BERNARDI—We may. Anyway, thanks for that. I will look forward to finding
out just how many of the Medibank Private members are members of your union.
   Senator MURRAY—Ms Gillespie, unless there is a Snowy River type revolt in
government ranks, they have the numbers to pass this bill. So we should therefore presume, if
you accept the first step, that it will pass out of government hands. My view is that, if it was
mutualised, the government would get a low return, but nothing much would change.
Although it would be in private hands it would be in the members’ hands and nothing much
would change. However, if the government’s principal intention is to make money out of this,
then we have to look at the sale. You can look at a public float or a private placement, where
there might be some dangers. One of the things I want to explore with you is that, if it is going
to be sold for the high return, do you think the first step should be to offer it to the members?
   I want you to write down some figures. You have told us there are 1.2 million members of
Medibank. We will accept that for this purpose. Let us assume the government wanted $1.8
billion. An offer to each of those members of a shareholding would cost each member $1,500.
You would probably have to do it on a right of first refusal approach so that those who did not
want to spend $1,500 would give up their right and those shares would go into the general
market. But if that happened it would mean that the members of Medibank would have the
option to own their own corporation or entity and operate it as they saw fit.
   I cannot quite understand why that option should automatically be excluded. I am not
suggesting you exclude it, but it seems to me there is an automatic assumption in the
government mind that, if it were to be sold, it needs to be sold either in a private placement to
the highest bidders, which takes it out of the hands of members, or that it should be a public
float. I would have thought those who have greatest claim are members of Medibank, or that

F&PA 70                                       Senate                    Friday, 3 November 2006

they should have the greatest claim. How do you react to the idea that, if they are going to sell
it, members should have the right of first refusal and should have the option to own their own
   Ms Gillespie—It is morally enticing, isn’t it? I think it is. I guess I should admit to the fact
that I am actually a member of the fund. So I am doing the figures and thinking, well, could I
have a share in that? Yes, I could. But I think the reality is—and Alison can correct me if I am
wrong—the government has skirted around what might happen. There has been such a cloud
around this whole compensation business and what the legal rights are. I am not going to
claim that I have any greater insight than any legal minds might bring to bear to the whole
vexed issue that is being raised about compensation. But I can see where you are coming from
in terms of that being a position that would appeal to people. In terms of what people said in
our survey, they were asked:
As a Medibank member, would you expect a preferential share offer if Medibank was sold via a stock
market float?
Eighty-six per cent said, yes.
   Senator MURRAY—So they are effectively asking for the right of first refusal. A
preferential placement can be phrased in many ways. But a right of first refusal means that
until such time as you have refused the offer it is your entitlement. I read this as the
government wanting to get out of this business and wanting to make as much money as it can.
  Ms Gillespie—It depends on the motive, doesn’t it, really, in terms of what—
   Senator BERNARDI—The profit motive exceeds the moral conscientious objection now,
I think.
   Ms Gillespie—I have no crystal ball. I have a lot of respect for Senator Minchin. Our
union has had very good dealings with him over superannuation. But I cannot pretend to
actually understand what his motives are in terms of the sale, or the government’s.
   Senator MURRAY—And even if that was his motive it is not an improper motive. We
might disagree with it, but the idea that you should make a couple of billion for the people of
Australia through a sale is not a reprehensible one. I do not impute a bad motive. What I am
concerned about are two things: the effects of this in terms of market behaviour and public
policy and what we have discussed as the public good, and the members of the fund. That is
how I would summarise it. My feeling is that, if the government is going to sell it, the issue of
members’ rights and entitlements is put to bed if in fact they are given right of first refusal and
if it is not an open market offer—in other words, it is pre-priced and people know exactly
what they are accepting or rejecting. Is it possible—I hesitate to ask you because I am sure the
CPSU is not a hugely rich organisation—to test these propositions a little more with a
representative sample of your members and come back to us?
  Ms Gillespie—We certainly intend to continue to campaign around this issue, regardless of
whether the legislation passes through parliament or not. It is quite clear that there is not
going to be a sale until 2008, so post the election.
  Senator MURRAY—Unless the legislation tells the government of the day—because it
might not indeed be a Liberal-National government, it might be a Labor government—that it

Friday, 3 November 2006                          Senate                                         F&PA 71

must offer first to the members on a right of first refusal basis, there is no guarantee it would
do that. What you have done is given me an instinct with your 86 per cent figure that they
would be interested in taking a share, but—
   Ms Gillespie—I think all you can draw from that is that that is something that group of
people said. You are right—we will certainly test those ideas further because we need to
continue to check what people’s views are, but we do have limited resources in terms of being
able to reach people and draw people’s views. Certainly the alliance would do everything it
could, as well as the CPSU, but again we have limited resources with which to reach people.
If we have any information we would certainly make it available to you. When do you think
that you would need that?
   Senator MURRAY—By 17 November. I am just cutting right to the chase. All the
government wants out of this is a pot of money, and if we found a means to give it to them
that was of least angst to the members of Medibank, then I think we should have an open
mind on these matters.
  Ms Gillespie—What I can tell you is that, as a member, one of those people that you would
be asking, I would rather keep it at the moment—this is where my head is at—as a
government owned entity for the public good.
   Senator MURRAY—I understand that.
  Ms Gillespie—I do not see that that result was any different in terms of the survey that I
handed up to you.
   Senator MURRAY—I understand that. I am simply saying to you the numbers in this
parliament may mean that your first wish is not fulfilled. If that is not fulfilled, what is your
second wish? That is really what I am asking you. I want to read you something that I think is
worth putting into this discussion we are having. On page 11 of the Bills Digest brief it says
the following:
As expressed in the Research Brief, it is arguable that members of Medibank Private could be entitled to
compensation if the terms of any sale do not adequately account for their right to the benefit of fund
assets. It was not asserted in the Research Brief, and is not asserted here, that this means that Medibank
Private is owned by its members, or that members could block the sale.
I happen to agree with that. It is essentially saying the government can dispose of its assets.
The members cannot block the sale, but they do have a right and entitlement to the assets. If
you have that residual right, if I may describe it that way, or a continuing right, one of the
ways in which it is secured and made very tangible is in fact to add to it a shareholding right,
which is what we are discussing here.
   Ms Gillespie—It is obviously an option. Obviously we have not seen the government’s
own legal advice. In the public domain I think the library document has been incredibly
important in terms of the debate and its capacity to help shape politicians’ views as well as
those of the general community. It does appear, if you were to take the library’s research paper
view, that the members cannot block the sale, but they may be owed compensation. I would
prefer to get our own legal advice in terms of where that would take people and what claims
they could make on the government, but I also think that the government is alive to this. I
think that this is a very thorny issue for the government.

F&PA 72                                       Senate                    Friday, 3 November 2006

   Senator MURRAY—I think there is a negotiating position for you here. Let us assume
your organisation were able to marshal the resources to mount a claim for compensation; that
represents a risk to the government of the amount that is claimed. We could calculate that
risk—and I have not, but let us assume it was $200 million. By selling it cleanly to the
members, you will get rid of that threat. You do not have to indemnify any buyers because
part of the condition of offering it to the members is in fact that those matters are cleared up.
What I am really requesting of you in this discourse is to go away and think about this to see
if you can get some viewpoints from the members of Medibank about which you can advise
us. It is recognising that your first option is that there would be no change.
  Ms Rahill—Yes. Thank you very much for that.
  Ms Gillespie—Thank you.
   Senator MOORE—In light of having to announce this morning that I was a Medibank
Private member, just for the record I should also say that I am CPSU member.
  Senator MURRAY—Six strikes and you are out.
   Senator MOORE—I am sure it can happen. Thank you for the submission. I just want to
ask a couple of questions; I will be asking similar questions of Medibank Private when they
come. It is about information sharing and knowledge on this issue because, as we know, the
proposal to sell Medibank Private has been around a long time. The actual timing of it has
varied a bit, but the concept that this was on the agenda is one that, for those of us following,
is no surprise. I am still a little worried about the lack of awareness of people who are
members of Medibank Private and also in the wider community of what it will mean, how
they will be affected and just the kinds of questions and answers that we have been playing
around with in the committee. I would just like to firstly get some information from the point
of view of the union which has many more than 3.3 per cent of members in the organisation
and, secondly, from the community alliance that you have set up in terms of this awareness
aspect and the kinds of questions that people are asking.
   Ms Gillespie—Thank you. Ms Rahill might want to assist me with this. In response to the
kind of questions that we got, we put together a number of fact sheets, particularly in August
of this year. One of them is about health funds facts and figures. That sets out what Medibank
represents in terms of the industry—3 million members, 1.4 million contributors, et cetera—
an industry profile, a story about premiums, federal government interventions and the 30 per
cent government rebate increase in 2005. It is a whole set of objective facts so that people will
start to see what the issues are in the whole sector because it is very confusing. It is a bit like
superannuation—your eyes might glaze over and that kind of thing. I am quite happy to hand
this up for the committee to look at.
   Senator MOORE—It would be very useful for the committee to know what you are
talking about.
   Ms Gillespie—There are questions of equity. People living in rural areas miss out on
benefits because there are fewer private hospitals compared to in the cities. Lower income
earners are less likely to have private health insurance, so they gain nothing from massive
government expenditure. There is a whole range of those kinds of things. The rebate was
introduced to shorten waiting lists and to improve health care delivery, but there is no actual

Friday, 3 November 2006                        Senate                                      F&PA 73

evidence that this has actually occurred. It directs people, of course, to the website. There is
also another sheet which deals with questions over the sale of Medibank. The questions go to
what is happening with the sale of Medibank: ‘Why have I not heard about this?’, ‘Why is the
government selling Medibank?’, ‘When is the sale going to happen?’, ‘What will happen to
Medibank’s assets?’, ‘What will happen to premiums?’, ‘Will privatisation benefit
consumers?’ and those kinds of things. We have actually put together a raft of that kind of
information as well as another document about the sale to shape the future of Medibank. They
were put together in August.
   I think that recently a lot more things have come out, so obviously these things need to be
continually updated. In terms of from August to now, we have actually been able to attract a
lot of interest and started to educate people around the issues but, of course, the timeframe is
quite concentrated, as Senator Murray has kindly pointed out to us, in terms of how much
longer we have to actually be able to generate interest. I think one of the critical points is that
as soon as the government announced that it had put the actual sale off to 2008 you could see
that the interest in the media at least started to dissipate and it is the media interest, of course,
that helps to drive the community learning about these things.
  Senator MURRAY—You have this time or no time.
  Ms Gillespie—Yes.
   Senator MOORE—One of your earlier responses was about the fact that you have
experience with government entities that have gone through a transmission of business,
whether it is a full privatisation or a restructure or whatever. I do not want to put words into
your mouth, but I would hope that it would be that that experience leads to the importance
that you put in having this information discussed now before it is actually done. Would you
like to make comment about whether that is a blanket statement in terms of getting
information and debate going before the decision is finalised?
   Ms Rahill—Certainly the objective of setting up the campaign was to increase awareness
in the broader community. One of our concerns was that, from the announcement made by the
government in April and the subsequent budget allocation to the sale, the media coverage had
been confined up until that stage to the business pages. It was very much dominated by
private health insurance sector voices debating the merits of a trade sale versus a share float.
We were certainly concerned about that. The issues of public interest and impact are: is it a
good health policy and how does this impact on health consumers? That was one of our key
objectives of the campaign. I think, given the high concentration of media coverage, it did end
up being on talkback radio and in the tabloid newspapers and things like that. We believe that
we contributed to shaping some of that debate and providing a voice for consumers.
   Certainly the email responses and letters that we have received from the general public
revealed that they had not heard of this and that it was a big surprise. People said things like,
‘I have been a member of Medibank for seven years. I am shocked and appalled that this is
the first I have heard of it.’ They were some of the first comments that came through when we
put this information out. It certainly demonstrated that there was a void of information. As far
as we were aware, Medibank Private considered this was the business of the government and
not their responsibility to inform the policy holders of the impact of the sale, given that there

F&PA 74                                      Senate                    Friday, 3 November 2006

were so many variables being tossed around for about six months—whether it would be
broken up or floated and all of those kinds of things. It was quite difficult to speculate on the
direct impact that that would have because up until recently even the issue of moving to for-
profit had not been clarified by the government. I certainly think there has been an increase of
awareness but, as Ms Gillespie suggested, I think that writing to policy holders should have
been done. You would not have received anything from Medibank Private telling you. That is
where we sit with the consultation.
   Senator MOORE—There is a fair bit on the website as well. It is one of the joys of being
able to bring it up straight away. I was hoping there would be a bit more but there is not. One
of the things that we have been struggling with today is the fact that the decision is going to
be made. But the impact of that decision is subject to a great deal of speculation. We have
almost got into a debate about whose speculation is bigger than everybody else’s speculation.
But that is the nature of the game. Within that are you aware of any source of information that
people can go to to ask the questions that you have been raising about what could be the
impact on premiums, and will there be more competition? Those are the kinds of threshold
issues which everybody is interested in and speculating about. Are you aware of any
information source that has been made available to anyone in the public who is interested that
says where they can find this out and who is going to talk to them about it?
  Ms Gillespie—Other than us and the academics who have agreed to assist us, I am not
aware of anywhere that people can go.
   Senator MOORE—I am very pleased that others see the information internally. I have
asked Mr Savvides about this. Allowing for the fact that this discussion in its limited way has
been going on in the media, I am concerned about the people working in the organisation and
the way that they are finding out what is going on. They may be hearing information about
their workplace and have no idea where it came from. As the union who has coverage in the
area, have you been informed what the communication strategy is internally to keep the
workers aware and to give them the kind of support they need because this decision is being
made around them but not by them?
   Ms Rahill—As far as I am aware Medibank has not let us know what their communication
strategy is, but obviously from our members on the ground we do receive copies of the
internal newsletters and the monthly newsletters. On the intranet, as far as we are aware, there
is quite a detailed Q&A for staff, which has provided, I suppose, more points of debate
amongst the membership as well in regard to what happens in a share float and that sort of
   Senator MOORE—That is stuff you do not often talk about unless it really impacts on
you. I asked similar questions of Telstra about what was happening with the internal
discussion there, because it is particularly difficult when your job and your future are being
talked about by other people. I was keen to get that on record. I know that you did answer
some questions from Senator Bernardi about transmission of business and people’s
entitlements. I know that we have been told the actual implementation will not happen until
2008. At this stage of the discussion is there any process for discussion about what will
happen to people’s jobs, salaries, career paths and that kind of thing? Has there been any
formal discussion about that with the union?

Friday, 3 November 2006                      Senate                                     F&PA 75

   Ms Gillespie—To be quite frank, I think it is probably too early, because you do not know
what is going to happen with the sale and what shape it will be in. There are so many
variables it is very hard to be clear with people about what will occur. I think one of the things
that are certain is that there is a higher amount of uncertainty for the people involved.
   Senator MOORE—Particularly when the media puts things out about the possibility of
job losses being one of the economies which could be made, which is always—
  Ms Gillespie—Headlines can create a lot of pain in these workplaces.
   Senator MOORE—I will be asking the Medibank Private people this as well. My
understanding is that not only is Medibank Private a particularly large segment of the private
industry in Australia but it is also one that covers the widest geographical area, so there are
likely to be Medibank Private locations or employees right across the country, which may or
may not be the case in some of the other funds. This has a particular impact when you are
talking about small offices of one or two people in a place like Gladstone or somewhere like
that. Are you aware of any particular issues raised by those people?
   Ms Rahill—There are over 100 retail centres. We have had feedback that they certainly
appreciate having the information that we are sending them rather than just relying on the
internal views of management about the sale. I think, particularly given the levels of anxiety
around the sale, that we are able to communicate with even that geographically diverse group.
   Senator MOORE—I have another speculative question which is possibly unable to be
answered absolutely. It was my own experience, having a public sector background, that there
was a particular attraction for people in the public sector if they had private health insurance
to being members of Medibank Private. It was a historical linkage that there was that process.
Are you aware whether that is still the case—whether a higher percentage of people in
government employment still happen to take up their membership of private health insurance
with Medibank Private?
   Ms Rahill—Yes. For example, in the Medicare collective agreement there is a provision
for a discounted rate for Medibank Private membership. That has led to a huge number of
Medicare staff also being policy holders. There is also the issue that the very high level of
Medibank Private members here in Canberra possibly reflects that it is popular in the public
sector as well.
   Ms Gillespie—I know that for many years and when I first became a member the union
ran a special discounted membership with Medibank Private. So over the years public
servants have obviously been encouraged to become members. I do not know whether there is
a higher than normal level, but—
   Senator MOORE—For a number of people who do have private health insurance, one of
the attractions of choosing Medibank Private was that it had the government link. That is a
historical aspect. It is something you cannot measure. But in terms of that being one of the
factors for people when they chose this form of coverage, and now that that particular factor
is going to be removed—I am being speculative again—that may have some impact.
   Ms Gillespie—It certainly came out in some of the comments—and I think we have
included those at the end of our submission and in the survey—that people were very clear

F&PA 76                                    Senate                   Friday, 3 November 2006

that they really liked the feeling that it was government backed. That was a very important
part to that in terms of membership.
  Senator MOORE—The same aspect is held in Queensland, for instance. The Queensland
Teachers Union has a health scheme and there is a great ownership in that process. Thank you.
  CHAIR—Thank you.

Friday, 3 November 2006                      Senate                                     F&PA 77

[2.26 pm]
BUTTERWORTH, Mr Robert, Division Manager, Shareholder and Asset Sales,
Department of Finance and Administration
RENWICK, Mr Robin, Branch Manager, Asset Sales Branch, Department of Finance
and Administration
STAINES, Mr Andrew, Director, Asset Sales Branch, Department of Finance and
MORPHY, Mr Tim, Manager, Corporate Development, Medibank Private
   CHAIR—Would the Department of Finance and/or the Medibank Private representatives
like to make an opening statement?
   Mr Butterworth—I will say a few words by way of introduction. The purpose of the bill is
to facilitate the sale, but it has been drafted with a view to minimising the legal and
commercial risks of the sale process. Its main effect will be to remove the legislative
prohibition on sale under the Health Insurance Commission (Reform and Separation of
Functions) Act. It is also designed to clarify the application of the National Health Act 1953 to
the conversion to the for-profit process that Mr Maskell-Knight spoke to you about earlier
today. It will facilitate the assistance of the company and the board through the sale process
and provide them with the assurance they need. It will provide a clear process for the
conversion of Medibank to for-profit status. It will put in place ownership restrictions to
provide an extended period of stability post-sale. It will also put in place certain
Australianness provisions. The bill has been informed by exhaustive consultation and is
consistent with the proposed amendments of the National Health Act that Mr Maskell-Knight
spoke of earlier today. There has been considerable speculation about a range of legal issues. I
would just like to put on the record that we are in no doubt about the integrity and veracity of
the bill. Thank you.
  CHAIR—Thank you very much. Senator McLucas?
  Senator McLUCAS—Can we start by asking the department why they did not make a
   Mr Butterworth—We did not feel that it was necessary. We feel that the government has,
through its press releases and public announcements and by presenting the bill and the
explanatory memorandum, sufficiently explained the purpose, the nature and the policy
objectives the government is seeking to achieve.
  Senator McLUCAS—Thank you.
  Senator MOORE—Did we get a letter that told us that? I have not seen it, but I am just
checking. Did we get a letter which says, ‘We do not believe, because of blah, blah, blah, that
we need to put a submission in’? I am cool if we did, but—
  Senator McLUCAS—It does not say quite all of that, but there is a letter.
  Senator MOORE—Did it say that?
  CHAIR—Not exactly.

F&PA 78                                      Senate                    Friday, 3 November 2006

   Senator MOORE—What did it say? Sorry; you can keep going, but I want to see the
  Senator McLUCAS—Mr Butterworth, it is not the first time, as I am sure you would be
aware, that questions around the sale of Medibank Private have been discussed in the
Department of Finance and Administration. Can you give us an understanding of when the
potential sale has been discussed within the department over time?
  Mr Butterworth—I believe the initial scoping study that I am aware of was undertaken in
  Senator McLUCAS—And prior to that?
  Mr Butterworth—My experience certainly does not go back any further than that.
  Senator McLUCAS—Do any of the officers have—
   Mr Renwick—The department regularly reviews its GBEs as to its ownership of those
GBEs over time. That may have occurred before the 2002 scoping study but, again, I was not
involved at that stage in any review.
   Senator McLUCAS—Had the department requested legal advice about the potential sale
prior to the Blake Dawson Waldron legal advice?
   Mr Butterworth—The department has taken a range of advice on a range of issues from
the initial scoping study through to the current period. I do not wish to be any more specific.
   Senator McLUCAS—I do. I was wondering if you could provide us with copies of legal
advices that have been received historically about the potential of the sale of Medibank
   Mr Butterworth—We do not issue copies of the scoping studies or advice that helps
inform those scoping studies. There is a serious issue of the waiver of legal privilege should
we do so. What I can say is that we have not received any legal advice that places us in any
doubt about proceeding with sale.
   Senator McLUCAS—I understand that you are talking about this particular discussion
that has led to where we are today. What I am trying to understand is whether over time the
Department of Finance and Administration has sought legal advice about a potential sale of
Medibank Private and, given that the Blake Dawson Waldron advice has been tabled in the
Senate, it seems reasonable for me to ask for previous advices that the department has
  Mr Butterworth—The decision to table that advice was carefully considered by the
minister, and he decided to release it. We are not in a position to confirm or deny that there are
any further advices or offer them to you, I am sorry.
   CHAIR—You cannot refuse on the basis of legal privilege to provide such advice, but you
are certainly at liberty to refer the matter to your minister for advice if you choose to do so.
   Mr Butterworth—I believe that at Senate estimates the minister has offered a similar
reply that he is not willing to do so, but I am happy to refer it to him again if you wish.
  CHAIR—Thank you.

Friday, 3 November 2006                     Senate                                     F&PA 79

   Senator MURRAY—The witness’s response is unusual. It is quite common for a witness
to say that there have been further advices but to refuse to indicate what those advices are on
the basis of policy reasons or advice reasons. It is very unusual in my experience for a witness
to refuse to indicate whether there have been any other advices.
   CHAIR—I think that the witness, when he previously answered a question from Senator
McLucas, had indicated that there were previous legal advices but that he was initially citing
legal privilege as a reason for not providing those.
   Mr Butterworth—Yes. I confirmed that we had taken a range of advice on a range of
commercial and legal issues to inform earlier scoping studies, but the government has taken
the view that those scoping studies should not be released.
  CHAIR—That is true. So you are confirming that there are those and you are going to seek
advice from the minister as to whether anything can be done?
  Mr Butterworth—Yes. Thank you.
  Senator McLUCAS—We are almost talking at cross-purposes, I think. Mr Butterworth
was referring to advices leading up to the scoping study done in 2002—is that right?
  Mr Butterworth—I am referring to advice that has informed scoping studies, both the
2002 scoping study and the more recent one.
   Senator McLUCAS—I am actually asking for information about legal advices that would
have been procured. I think you said that you are not prepared to confirm whether or not this
has occurred. I am talking about historically, over time. What has been happening for the last
10 years, say, in terms of work on the potential sale of Medibank Private in the Department of
Finance and Administration?
   Mr Butterworth—As I said earlier, I cannot speak with any authority about the period
before 2002, but we have taken advice on a range of legal and commercial issues since 2002
to inform at least two scoping studies.
   Senator McLUCAS—Can I ask you to ask your minister if we could have a copy of legal
advices procured by the Department of Finance and Administration since, say, 1996 around
the question of the sale of Medibank Private? If he says that he is not prepared—you have
said that he has indicated in estimates that he is not going to release that; I was unaware of
that—then I would like to ask you if you could provide me with the dates that legal advices
around the sale of Medibank Private have been received?
  Mr Butterworth—I am happy to relay that question.
   Senator McLUCAS—Thank you. If you cannot release the actual legal advice itself, I was
wondering whether you could provide me with a summary of the advices that have been
received over that, let us say, 10-year period? Is that reasonable?
  Mr Butterworth—I am happy to take that question on notice and refer it to the minister.
   Senator McLUCAS—Did Mr Alan Briggs, who is the former first assistant secretary of
the social security division, provide advice to the government that there was no legal basis to
proceed with the sale?
  Mr Butterworth—I am not aware of that.

F&PA 80                                     Senate                   Friday, 3 November 2006

   Senator McLUCAS—I wonder if you could take that on notice and provide information to
the committee on that issue?
  Mr Butterworth—Certainly.
   Senator McLUCAS—Thank you. Mr Morphy, earlier today we were talking with
Professor Deeble—I think we have talked to every witness today about this—about your
profitability or not, and discussions have centred around this graph which I am sure you
  Mr Morphy—It is an underwriting result over the course of time.
  Senator McLUCAS—I am not a financial person. Is it a profit-and-loss chart?
  Mr Morphy—I have not seen it exactly, so I am not sure.
   Senator McLUCAS—Essentially, it describes the operating surplus or the operating
deficit over time. Dr Deeble indicated that the loss in 2001-02 was at a time when Medibank
Private was seeking increased market share and that there was significant changed
management at the time. Would that be a reasonable explanation for that loss?
   Mr Morphy—I think there was a lot going on at that time. It was immediately post
lifetime health cover and, as you would be aware, the industry grew enormously over that
time. It was a period when the new people that came into the industry could then claim, so
there was a lot of volatility in the market at the time and that performance very much reflects
that. Medibank there suffered a considerable loss and it has concentrated on building its way
out of that since.
  Senator McLUCAS—Your surplus in 2004-05 is quite significant?
  Mr Morphy—2005-06.
  Senator McLUCAS—And 2005-06. Sorry, what was that profit number again?
  Mr Morphy—Our profit number in 2005-06 was about $200 million.
   Senator McLUCAS—Dr Deeble indicated that there were some questions about the
sustainability of that profit over time. Can you give the committee an understanding of why
you have done so well in recent years?
   Mr Morphy—Certainly what we have concentrated on over the last few years is driving
down premium growth, which has allowed us to build our membership growth, which has
allowed us to build our profits, and we have done that through concentrating on being an
efficient purchaser of health services and just broadly promoting the fund.
  Senator McLUCAS—What were your advertising costs in 2004-05?
  Mr Morphy—I do not have those numbers with me. I can find that out and table them for
   Senator McLUCAS—I wonder if you could give us your advertising costs from 2000-01
through to the current time?
   Mr Morphy—Certainly aspects of that will be commercial-in-confidence. The amount that
funds spend on advertising is something that they hold very close to their chests. To know

Friday, 3 November 2006                     Senate                                     F&PA 81

what your competitors are doing exactly in that space would be very competitive, sensitive
information. To the extent that I am able to do that, I certainly will.
  Senator McLUCAS—What extent will that be then if it is commercial-in-confidence—
   Mr Morphy—I would have to look at the numbers and see exactly what I could
appropriately disclose. I could not make a commitment right now, but I will certainly examine
the question and come back to it.
  Senator McLUCAS—Let me phrase it another way, because I think you will come back
and tell me that it is commercial-in-confidence. Have there been changes—
   Senator MURRAY—Just to clarify, I find that odd. I mean, the price at which you buy
your advertising might be commercial-in-confidence, but the fact that you have advertised is a
public matter and the quantum should not be withheld from this committee. So what I would
ask you through the chair is to please be careful that you do not overstretch the bounds in your
response because that which is already publicly available should be made available to this
  Mr Morphy—I understand that, and I certainly will consider it.
  Senator McLUCAS—Given that it is probably possible that you can give me your total
spend on advertising over those five—
   Mr Morphy—What I could certainly could give you is publicly available information that
tracks spending in the industry. That is a public document, so I could certainly provide you
with that.
 Senator McLUCAS—When you say spending in the industry, do you mean spending by
Medibank Private?
  Mr Morphy—By all funds in the industry.
  Senator McLUCAS—No, that is not what I am looking for.
  Mr Morphy—It would break it down. It would have an estimate of what Medibank
spends. I could provide you with that.
  Senator McLUCAS—Who constructs that document?
   Mr Morphy—It is tracked by various media agencies as to how much is being spent by the
industry. I could certainly provide you with that.
  Senator McLUCAS—Is it fairly accurate?
   Mr Morphy—To a degree. Exactly that degree and the subtlety behind it are something
that funds—indeed, all businesses—guard very carefully in terms of a commercial matter. I
could certainly provide with you the publicly available information.
  Senator McLUCAS—That would be good, thank you.
  Mr Morphy—I will do that.
    Senator McLUCAS—Anecdotally, has Medibank Private over the last five years changed
its purchasing of advertising?

F&PA 82                                     Senate                   Friday, 3 November 2006

   Mr Morphy—Medibank has certainly become over the period since the loss a lot more
active in promoting its brand and promoting its services.
  Senator McLUCAS—Has there been growth in spend?
  Mr Morphy—There has certainly been increased activity and increased spend in that area.
  Senator McLUCAS—On an annual basis?
  Mr Morphy—On an annual basis.
   Senator McLUCAS—So are you suggesting that Dr Deeble’s comments about the success
in 2004-05 being related to a decreased advertising spend are not correct?
  Mr Morphy—No.
  Senator McLUCAS—I will have a look at the figures and see what they say. I will defer to
someone else and come back later.
  Senator MOORE—I will not be asking Finance anything. I just want to ask a couple of
questions that I put to Mr Savvides on Tuesday evening. I want to know about the
communication strategy both within Medibank Private for its own staff and also in a wider
aspect. I am particularly interested in finding out how Medibank Private is communicating to
people about what is going on
   Mr Morphy—I was aware of your questions to Mr Savvides, and I understand he is
preparing some material.
  Senator MOORE—Okay. I thought he was going to give it to you to bring today.
  Mr Morphy—No, he is going to put it through the Senate estimates process, but I certainly
can make some general comments if that is of assistance to you.
  Senator MOORE—Yes, and do it both ways.
   Mr Morphy—In relation to staff we have an extensive infrastructure to staff
communications. It involves staff forums which are face-to-face. We have a phone link
process where we can have phone calls with our staff; we have a staff Q&A process where
staff can ask questions; we have an intranet process where we post information and staff can
obviously read it; we have a publication called FYI where we group together key issues and
put that out as a publication through the business; and we have an email campaign that is
actually called ‘From George’s Desk’, where Mr George Savvides updates people on any key
issues that are in the business. So it is a very extensive process of staff communication.
   Senator MOORE—I will continue with staff awareness. We have found there is always
significant staff interest when major restructurings happening in a workplace become public.
The potential sale of Medibank Private has been around for many years. In the last 12 months
there have been various opinions—it is going to happen, no it is not—and now it is going to.
Staff are interested in that aspect and also in what is going to happen to them. I am trying to
get a sense of whether or not this has caused significant interest and discomfort for staff.
   Mr Morphy—It certainly has caused interest. Obviously there has been a lot of media
about it and the Medibank commitment from management has been to keep staff fully
informed of what is going on so they fully appreciate the implications. As much as possible

Friday, 3 November 2006                       Senate                                     F&PA 83

we provide them with all the information we can. I would not say I have sensed any anxiety
about the process itself, but certainly we are very much committed to keeping them fully
informed of the process.
  Senator MOORE—I take the point of anxiety about the process. It has not been my
understanding, having people come to visit me, that there is not anxiety about their security
and their future. Am I getting an unusual response from people?
   Mr Morphy—Certainly issues have been raised and the commitment from management
has been to deal with those through effective communication as fast as possible. My sense is
that people have been very much satisfied with that internally. That is the position we are
   Senator MOORE—From the visitations to me and so on, I am surprised that you would
say that people are satisfied with the process. I take the point that they may well be satisfied
with how you are handling it internally, but my wider question was: is there a sense amongst
the staff members of Medibank Private of some sense of insecurity about their futures, about
what is going to happen to them, when the sale goes through? If you say there is none of that,
I would take that point.
   Mr Morphy—I would not say there is absolutely none but it certainly is not something
that we are aware of as an issue in the business.
   Senator MOORE—Okay, that is fine. We had an earlier discussion about the release of the
CRA report that became public this week, which was then picked up by the media. As usual,
only bits were printed, but the bits that were printed talked about possibilities of savings in the
process directly linked to job loss. Was there no reaction amongst staff to that?
   Mr Morphy—I was not actually there in the office for that moment, but I assume that staff
would have been interested in that statement. Through our internal communication process we
responded to that straight away to clarify that that certainly is not what the report said and it
certainly is not the intention of Medibank Private to do that. Hence the issue was effectively
   Senator MOORE—I am just interested because in my part of the world, which is
Queensland, staff felt strongly enough about their concerns about there being a possibility of
job loss to contact local politicians of all flavours.
   Mr Morphy—Obviously I cannot comment on communications outside Medibank, but
certainly the issues you are raising—
  Senator MOORE—Your statement is that staff are satisfied with the process and it was
  Mr Morphy—Yes.
  Senator MOORE—As a member of Medibank Private—and I have asked this question a
couple of times—I am interested about how I can know what is going on and what feedback I
have. I have checked the website and there is a copy of three media releases. Is that it?
  Mr Morphy—In terms of member communication?
  Senator MOORE—Member communication.

F&PA 84                                     Senate                   Friday, 3 November 2006

   Mr Morphy—No, there are a number of elements that we are using to inform members.
Initially, we did use our rate change letter, which is a communication that goes to all
   Senator MOORE—I spoke about that the other day. My own experience of getting rate
change letters is that I expect them regularly because rates only go up, so they come with the
Medibank logo and they go in the bin. That is my experience and I will put that clearly on
record for people to know.
  Mr Morphy—We put a lot of effort into writing those letters. We have an IVR process
where if people ring our call centre they can—
  Senator MOORE—Can you tell me what IVR is?
  Mr Morphy—It is a voice recognition process. You listen to a series of messages and if
you want to listen to more information about the sale you can.
  Senator MOORE—So, when you ring up and you want something, one of the options is:
do you want to know more about the sale?
   Mr Morphy—Yes. We have call centre scripting. We have obviously provided all our staff
with a series of Q and A information that is available to us about the sale. So the call centre
staff have that scripting. We use our website as another way of informing people of any
information that is appropriate. We have also prepared a little flyer that can be provided in
retail centres.
  Senator MOORE—When you are there, sure.
   Mr Morphy—If people want information they can talk to staff and if they actually want to
take something away and reflect on it we would give them that flyer. We would also mail that
to people if they actually wanted something in writing to look at.
   Senator MOORE—So if you contact the corporate area the invitation on the website to
get the facts could be one of the responses?
   Mr Morphy—I am not sure if that is on the IVR, but certainly if you spoke to a call centre
representative they would make that available to you if the member—or anyone, actually—
wanted that further information.
  Senator MOORE—As more becomes clear, these things will be updated?
   Mr Morphy—Yes, and that has actually been updated twice. The two key decisions that
the government have made that have impacted on that were the decision to sell and the
decision about the method of sale. They are the two points in history where we said we
needed to update that.
   Senator MOORE—One of the things that Mr Savvides was going to go and find out for us
was the numbers of contacts that had been made by people wanting information, but that will
be coming back through the Senate estimates process.
  Mr Morphy—I do understand he gave you some numbers at the Senate estimates.

Friday, 3 November 2006                     Senate                                     F&PA 85

  Senator MOORE—He said there were a few. He looked behind him and said he was
going to get some more information. It was quite small, he said, and he was just going to go
away and double-check.
  Mr Morphy—Okay. That can certainly be done.
  Senator MOORE—I am looking over there to see whether I have doubled up. We have
done this before, you see.
   Senator BERNARDI—I just had a look at your annual report. For the benefit of Senator
McLucas, your marketing expenditure in 2005 was approximately $28.5 million and in 2006
it was approximately $36 million.
  Mr Morphy—Yes.
  Senator BERNARDI—I think that will go some way to answering the question on notice.
   Mr Morphy—I took the senator as wanting further breakdown of that detail, which is
something that, as I said, can be provided through public figures but certainly detail beyond
that is commercial in confidence.
  Senator BERNARDI—Anyway, it is there.
  Senator McLUCAS—The marketing figure is more than your advertising figure—is that
what you are telling us?
  Mr Morphy—There are different components to it, obviously.
   Senator BERNARDI—I raise that because I think the suggestion was put up earlier that
the advertising expense, or marketing—however you like to describe it—has been reduced
significantly to boost the profit.
  Senator McLUCAS—That is what I was testing.
  Senator BERNARDI—It is not verified by those figures that were in the annual report.
  Mr Morphy—That is correct.
   Senator McLUCAS—That is a total marketing figure. I think Professor Deeble was
talking about advertising spend.
  Senator BERNARDI—I will leave it as it stands. You may have heard of the questions I
had of the union giving evidence just before about the rate of participation of your workforce
within the union movement. We had some different figures. There was some suggestion from
my adviser that it was as low as three per cent. Do you happen to know how many—
  Mr Morphy—I can quickly take advice on that and come back to you if you would like
me to answer that.
   Senator BERNARDI—I would appreciate that. That would be good. Mr Butterworth,
there are legislative restrictions on what Medibank Private can do in its current form and as to
the business they can operate in, I understand. Is that correct?
  Mr Butterworth—Yes.
  Senator BERNARDI—What exactly are those restrictions?

F&PA 86                                           Senate                        Friday, 3 November 2006

   Mr Butterworth—If Medibank wished to make a significant strategic shift in direction,
they would need to seek the Minister for Finance and Administration’s agreement to that, they
would need to consult and they would need to take into account the government’s views—for
instance, if they wished to move into a new line of business or take on a significantly high and
new risk. They would be examples of occasions that would require reference to the
   Senator BERNARDI—So there are some limits to their ability to diversify into other
products and services that may be of benefit to their members. Is that right?
  Mr Butterworth—That is correct.
 Senator BERNARDI—This would change under the proposed bill and the privatisation of
Medibank. Is that correct?
   Mr Butterworth—If I could just be more precise, they are restricted at the moment. Sorry,
this is referring to the fund. Under the National Health Act:
(2) An organization must ensure that payments from the health benefits fund conducted by it are used
only for the following purposes:
  (a) to meet the liabilities incurred in relation to the coverage of the contributors;
  (b) to make payments to the Health Benefits Reinsurance Trust Fund;
  (c) to make investments for the health insurance business;
  (d) if the registered organization has been established for profit—to distribute profits generated by
      the conduct of the health insurance business to shareholders in the organization;
  (e) any other purpose that is directly related to the health insurance business.
   Senator BERNARDI—To paraphrase it, they are restricted from providing a number of
services that may be of potential benefit to their policy holders.
   Mr Butterworth—They are both restricted under the National Health Act and restricted in
a general way by the fact that they are a government business enterprise.
   Senator BERNARDI—If they cease to be a government business enterprise, these
restrictions would not apply? Am I drawing a long bow?
   Mr Butterworth—They would have a broader range of business opportunities open to
  Senator BERNARDI—That may benefit their members?
  Mr Butterworth—Yes, both directly and indirectly.
   Senator BERNARDI—I will go back to Mr Morphy. You have expanded your product
range a little bit: you do travel insurance now.
  Mr Morphy—Yes, that was one of the first steps in diversifying our product portfolio.
  Senator BERNARDI—Is that marketed directly to your members or is it marketed to the
general public?
  Mr Morphy—To both. In fact, it was a strategy to broaden our appeal beyond just our
member base, to try to engage nonmembers in the broader business.

Friday, 3 November 2006                       Senate                                     F&PA 87

  Senator BERNARDI—Has it been well received in the marketplace?
   Mr Morphy—It has been very successful. We have been incredibly happy with the results
of that.
  Senator BERNARDI—I read an interview in which Mr Savvides said over 20,000
policies had been written.
  Mr Morphy—That number is now out of date but, yes, it had achieved that and it has been
very successful.
  Senator BERNARDI—I presume it is a commercial operation.
  Mr Morphy—Absolutely.
   Senator BERNARDI—That diversification of the business would support the profit
statements that came out.
  Mr Morphy—Absolutely. That is the intention, to broaden the income stream and profit
base of the business.
  Senator BERNARDI—Is that helping to limit premium rises?
   Mr Morphy—It will. The problem, as Mr Butterworth referred to, is that we are very
restricted in what we can do in that regard but, absolutely, if it were rolled out more
extensively that is absolutely the intention.
   Senator BERNARDI—I just noticed in the last two years you have made significant
profits, obviously—$130 million and $200.1 million, I think—and your premium increase has
slowed quite significantly over the last two or three years, hasn’t it?
   Mr Morphy—In the last two years there has been a series of increases in the premium
  Senator BERNARDI—What do you attribute that to? How did you do that?
   Mr Morphy—By bringing down the premium growth we have made ourselves more
competitive, which has allowed us to expand our membership base. A greater membership
base means greater income and a more competitive fund. We have also concentrated on being
a better purchaser of health services. By doing that we also put downward pressure on
premiums. It becomes a circle, if you like. It becomes self-fulfilling.
  Senator BERNARDI—Do you find that people will swap funds to get a lower premium?
   Mr Morphy—That is a driver. It is about looking at the broader value proposition, the
benefits that you offer in your products and the price that you charge. It is about putting all of
those things together. It is a very competitive market and, if we are not sharp on price and
sharp on product features, we will lose members. By the same token, if we improve in those
regards, we will gain members.
   Senator BERNARDI—We have heard today a number of different points of view. We
have heard that, if you are a private enterprise or a for-profit enterprise, you are going to be so
consumed with making money for your shareholders that you are going to have to put
premiums up.

F&PA 88                                     Senate                   Friday, 3 November 2006

   Mr Morphy—I would argue, and certainly our experience has been, that driving premiums
down is exactly how we have been able to grow the membership base and grow the profit of
the business. The experience to date has been the exact opposite of what you said, and it is
certainly how we would see it going forward.
   Senator BERNARDI—Let me assure you you will not get any disagreement from me on
that philosophy. I was just interested in whether I was on my own in that belief.
  CHAIR—Certainly not.
  Senator MURRAY—Are you telling the committee that you guarantee lower premiums on
behalf of Medibank Private Ltd?
  Mr Morphy—What drives premiums in the market is the cost of health services that we
purchase on behalf of our members.
  Senator MURRAY—I heard your pitch. I just wanted to know whether you were
guaranteeing lower premiums. You are not doing that?
  Mr Morphy—I certainly cannot do that.
   Senator BERNARDI—I would like to get on the record again that we acknowledge there
is going to be premium growth in the private health insurance industry going forward. It is
about what level that growth is going to continue at. I do not think that anyone can guarantee
lower premiums, but certainly a more competitive environment will limit premium increase
going forward.
  Senator MURRAY—Sell it to me cheaply and I will drop the premiums.
  Mr Morphy—The basis of competition operates on the fact that, if we can keep better
control of premiums than our competitors, we will be more competitive; we will be able to
grow the fund and grow the membership. That is the focus of the business. I would like to
come back to your earlier question in relation to CPSU membership. All I am able to
comment on is those people that pay their union dues through direct debit. They are the only
ones that we are aware of. Currently we are aware of about 50 people out of the 1,500
employees being union members.
  Senator McLUCAS—To clarify that, the only information that you have is about those
people who use direct debit from their pay.
  Mr Morphy—Yes. That is all I can comment on.
  Senator MOORE—That is probably where the 3.3 per cent came from.
  Senator BERNARDI—Yes. Mr Morphy, you mentioned that it is a competitive
marketplace out there. There has been some discussion about the idea that people cannot
compare health fund with health fund, or apples with apples, because it is too complex and
complicated for them. Do you have a comment on that?
   Mr Morphy—In a former life another role that I held at Medibank was head of marketing,
and I can assure you that it goes on constantly. It is a very competitive market and there is a
whole range of initiatives by all funds across the markets to allow people to do exactly that—
that is, compare products. Certainly the health insurance ombudsman has a key task of
allowing that to happen. That dynamic has improved incredibly over the last five years, so I

Friday, 3 November 2006                    Senate                                    F&PA 89

would say, yes, people do compare products and people do switch. They now have full
portability. Those dynamics of competition are at their most intense now than they have ever
been in the history of private health insurance in Australia.
  Senator MURRAY—I accept that. The question is: could they improve more?
  Mr Morphy—I am sure there is scope for improvement. If you asked the health insurance
ombudsman, I am sure he would suggest ways that can be done. I understand it is government
policy as well to look at ways in which that can be done. I would say that it is as effective
now as it has ever been.
   Senator MURRAY—Could I ask if you could on notice provide the committee with
statistics of portability, consumer knowledge, switching and the sorts of things that you have
just mentioned?
  Mr Morphy—Of that type of behaviour?
  Senator MURRAY—Yes, the market being flexible and dynamic.
  Mr Morphy—Yes.
   Senator BERNARDI—I have a question in relation to the entire industry. There has been
a slight trend towards preventative health benefits to stop people from getting sick. Was this
driven by Medibank Private initially or was it driven by the for-profit sector or the not-for-
profit sector?
  Mr Morphy—It is a general industry phenomenon. If we invest in people’s health and
wellbeing, we can look to have a healthier group of members who will not claim. It is
something that Medibank is exploring, as are all health funds—profit and not-for-profit.
   Senator BERNARDI—I noticed in South Australia it seemed to be driven initially by
Mutual Community, going back through the years. I wondered whether it was the for-profit
sector that was driving it in the interests of attracting new policy holders.
   Mr Morphy—I cannot comment on that—I am not directly aware of the details—other
than to say that Medibank is and has been committed to exploring that space as well.
   Senator BERNARDI—How do you respond to the concerns about staff cuts and changes
that may happen if you enter as a for-profit entity?
   Mr Morphy—It certainly is not the intention. I would say, to the contrary, that the concept
of diversifying the business and developing more products for our members is probably
having us look at the absolute opposite to that—that is, investing more in our staff generally
and certainly in their skills. My comment would be that it would be the exact opposite.
  Senator BERNARDI—Is your business revenue about $3 billion?
  Mr Morphy—Our revenue is about $3 billion.
   Senator BERNARDI—The chief executive is not perhaps remunerated as competitively
as he may be in other industries. I think Mr Savvides’ package is about $500,000 in direct
payments, according to the annual report.
  Mr Morphy—I am not aware of those details and I am certainly not a remuneration expert.

F&PA 90                                                  Senate                             Friday, 3 November 2006

   Senator BERNARDI—I saw it in the annual report and I raised it because there was
suggestion earlier that, if you became a for-profit entity, the executives would simply try to
fatten their own purse a little bit—that being my terminology.
  Mr Morphy—I cannot see scope for that.
  Senator McLUCAS—Did it say that was something that could happen?
   Senator BERNARDI—I do not recall the exact word, but it was ‘could’, ‘would’ or
   Senator MURRAY—That draws me to the usual analogy with the Prime Minister’s salary.
I think it is ridiculous that the head of Medibank gets paid more than the Prime Minister. I
will not suggest they swap jobs.
  Senator BERNARDI—Are you saying that the Prime Minister is underpaid?
  Senator MURRAY—Absolutely. Are you or your colleagues responsible for the
explanatory memorandum?
  Mr Butterworth—Yes.
  Senator MURRAY—I want to draw your attention to item 11, which is the
Commonwealth’s objectives for sale. There are five of them, (a) to (e). Can you tell me why
removing conflict of interest issues is not part of the Commonwealth’s objectives for the sale?
Why were conflict of interest problems omitted?
   Mr Butterworth—Arguably they are covered by the first objective of ‘to contribute to an
efficient, competitive and viable private health insurance industry’.
  Senator MURRAY—You know I am not going to buy that. Was it an oversight?
  Mr Butterworth—And, item (d):
  • to minimise any post sale residual risk and liabilities to the Australian Government;
   Senator MURRAY—I am not pursuing this line of inquiry just to get under your ribs, as
enjoyable as you know I might find that. As you know, the specific phrase ‘conflict of
interest’ and its motivation for the government getting out of Medibank Private has been
constantly used over many months and perhaps years. Do you acknowledge that?
  Mr Butterworth—I listened to the evidence this morning. I do not feel that I have much to
add to the comments of Mr Maskell-Knight, who said that there is an inherent conflict in the
Commonwealth owning the fund and regulating that fund.
   Senator MURRAY—That is not my point. My point is that the minister and indeed other
members of the cabinet in discussing this matter have used the phrase ‘conflict of interest’. I
would have thought it is a valid argument, which one might or might not agree with and one
might qualify, but it is certainly a valid argument. I am very surprised that it is not explicitly
in the objectives for sale. Were you instructed to leave it? Did you not consider putting it in?
Why is it not there?
  Mr Butterworth—The sale objectives we have here are the ones that we have in the broad
consistently used for previous asset sales. They have been tailored slightly to the

                             FINANCE AND PUBLIC ADMINISTRATION
Friday, 3 November 2006                    Senate                                  F&PA 91

circumstances of Medibank Private, but I am not aware that the issue was considered in the
way that you are suggesting.
   Senator MURRAY—I will ask you directly: do you consider one of the objectives for the
sale to be to rid the government of its conflict of interest?
  Mr Butterworth—Yes.
  Senator MURRAY—Moving on to the issue of the actual sale, can you tell me whether
any of the following are explicitly ruled in or ruled out? I know some of the answers, but I
would like them on the record. Firstly, is mutualisation ruled in or ruled out?
   Mr Butterworth—The government has announced that they will be offering the shares in
the company through an IPO.
  Senator MURRAY—That would rule out mutualisation. Is a public float ruled in or ruled
  Mr Butterworth—An IPO is a public float.
  Senator MURRAY—Is a private placement ruled in or ruled out?
  Mr Butterworth—The government has announced that they will be offering shares by
way of an IPO.
  Senator MURRAY—Is an offer to Medibank members ruled in or rule out?
  Mr Butterworth—Medibank members would be free to participate in an IPO.
  Senator MURRAY—Is the IPO announcement in the legislation or in the general policy
announcement of the government?
   Mr Butterworth—The legislation provides the scope for an IPO. The government has
indicated in its public announcements that it will be pursuing the sale as an IPO.
   Senator MURRAY—Therefore, if the parliament wanted to give the government
maximum flexibility so that it can choose any one of a range of options—in other words, not
limited at all—for instance, mutualisation, public float, private placement, offer to the
members, the parliament would need to amend the legislation? Is that correct?
   Mr Butterworth—I would have to carefully consider that question. The legislation has
been written with a particular intention. I am not confident that I could give you that
assurance at this point.
   Senator MURRAY—I would like you to come back to the committee on it. If the
committee accepted the broad proposition that the government should dispose of the asset
and, if the committee accepted that item 11(e), Commonwealth objectives of the sale, was a
proper objective, namely, ‘to maximise the net sale proceeds from the sale’—I am not
foreshadowing anything—the committee might choose to maximise the options available to
the government post 2008 rather than minimising them to an IPO. You can see that an IPO is
limiting and not expanding. For the purposes of Hansard, Mr Butterworth is nodding. I would
ask you to take it on notice if you are not able to answer today and come back to the
committee. If the committee wishes to go that route, we would need to recommend
amendments to the legislation.

F&PA 92                                         Senate                      Friday, 3 November 2006

  Mr Butterworth—I will take that question on notice.
   Senator MURRAY—I will go to the question of compensation possibilities. I can
anticipate your answer, which would be perfectly proper, that you will not reveal advice or
discussions that you have had in that matter. But this issue is in the public domain and it is a
matter for consideration. I accept the view of the library’s advice, which I read into the record
earlier as expressed on page 11:
it is arguable that members of Medibank Private could be entitled to compensation if the terms of any
sale do not adequately account for their right to the benefit of fund assets. It was not asserted in the
Research Brief, and is not asserted here, that this means that Medibank Private is owned by its
members, or that members could block the sale.
I accept the government not only has the right to dispose of the asset but has the ability to
dispose of the asset subject to parliament’s finding, which is essentially the position of the
department. So what is left of the issue is a potential class action with respect to
compensation. I assume there will be a class action rather than individual members. My
question to you is: is it possible to compute the level of compensation that could be sought? I
am not asking here for a hypothetical. I am really asking: in view of your experience within
DOFA in the sale of assets where these issues are raised, are there aspects or areas to which
compensation claims such as these might focus—for instance, the total level of surpluses or
the total break-up value of the fund? Is there a standard kind of area to which these claims of
compensation can be directed?
   Mr Butterworth—I will say before answering that that it is certainly our strong view that
Medibank Private contributors will not be entitled to compensation on the sale. The
government’s legal advice is clear that Medibank Private contributors do not own an interest
in the fund.
   Senator MURRAY—What I am trying to compute here is the level of risk. If I were the
buyer, I would get my own legal advice and then I would seek to get you to indemnify me
from a risk, and that is therefore a cost to you, because it either results in a lower sale price or
a higher sale price with a potential risk. You would want to calculate the risk. The way in
which you deal with that is perhaps to cap what risk you agree to expose yourself to, but as
soon as you do that and you nominate a figure you are telling anybody who is going to sue
you what figure to target. As a seller, my preference would be not to indemnify them, to tell
them that it is their risk and put that into the contract, but that may affect the price. I have not
raised this with you in a hypothetical sense; I have raised it in a real risk sense. I understand
that the government thinks it is on firm ground, but I have heard that from many defendants in
courts. Are you able to assist the committee at all? One of the things that the committee might
need to take into account is, regardless of what we think the risk might or might not be, how
the Commonwealth should deal with any risk, notional or otherwise?
   Mr Butterworth—The entire process of preparing for a sale of a government asset is
focussed on minimising those risks. We think that the process we have gone through reduces
those legal and commercial risks to the minimum. We are confident of that position.
  Senator MURRAY—Can you answer this question? If you cannot, can you take it on
notice? If the committee was of the view that the government should not indemnify for

Friday, 3 November 2006                      Senate                                     F&PA 93

compensation, would that mean that the committee would need to recommend that the
legislation explicitly specify that?
  Mr Butterworth—I am happy to consider that question.
  Mr Staines—From the legislation that is drafted at the moment, any liability for the
Commonwealth arising out of the sale process itself would lie with the Commonwealth.
  Senator MURRAY—It would lie with the Commonwealth?
  Mr Staines—Yes.
  Senator MURRAY—Exactly. That means that you have accepted that there is risk. You
might be able to, but I doubt you will want to, quantify that risk.
 Mr Butterworth—Again, we have researched this issue. We have drafted this legislation.
We will approach the process between now and the sale with a view to minimising that risk.
We do not think that risk is significant.
  Senator MURRAY—Why is that clause in the legislation?
   Mr Staines—It is a standard provision in a range of sale legislation. We understand that it
arises from the Historic Shipwrecks Act 1976, and that is why they call it the historic
shipwrecks clause.
   Mr Butterworth—It was first used in that act, and it has proven to be a firm legislative
favourite ever since.
   Mr Staines—It effectively removes any argument that the bill or the act could be invalid as
a result of any minute possibility of acquiring someone’s property. It does not go to the merits
of the case, it goes to the validity of the act.
   Senator MURRAY—I have heard about that before and I have seen it before.
Nevertheless, it is an acceptance at law that, if there is a liability for compensation we, the
Commonwealth, will be liable. My view is that what we have are competing viewpoints here.
Yours, which is no risk, but, by the way, we have a clause in the legislation that says that we
are liable anyway. The one says that there is a risk. If you are going to accept your standard
clause, is there an objection or a resistance to capping the liability?
    Mr Staines—It would be unusual in that we do not consider that there would be liability,
as we have mentioned. I should also mention that what we have done in the drafting of that
clause for this bill is to also make sure that the risk lies with the party best placed to manage
it. There are circumstances in which Medibank Private would be the party to which other
parties would need to seek compensation. Specifically that would be for actions after the sale.
What the bill seeks to do is to place risk where it is best placed.
  Mr Butterworth—I will add that this clause has been used in the Telstra Corporation Act
1991, the Australian National Railways Commission Sale Act 1997, the National Rail
Corporation Agreement Act 1992, the Australian Industry Development Corporation Act 1970
and the Commonwealth Serum Laboratories Act 1961.
  Senator MURRAY—I would accept that with respect to the sale of some of those areas
you would not have received buyers without that risk. For instance, with the Commonwealth
Serum Laboratories, if somebody had done something serious with their products 10 or 15

F&PA 94                                         Senate                     Friday, 3 November 2006

years before, there would have been a problem. Let me try a different direction. Blake
Dawson Waldron says in item 5(f) on page 3:
For this reason, the Commonwealth will not be liable to pay compensation as suggested in the Brief.
They have given us this guarantee. Do you think we should add an amendment to this bill that
says, if there is any claim for compensation, Blake Dawson Waldron is liable? You are
convinced this advice is good, so let them wear the responsibility if it is not. What do you
think of that?
  Mr Butterworth—I do not think they would find that acceptable.
  Senator MURRAY—Therefore, they have no faith in their brief? Is that what you are
saying to me?
  Mr Butterworth—No, I am not saying that at all.
   Senator MURRAY—That is what it says to me. If somebody says that they will not be
liable to pay compensation, let them put their money where their mouth is.
  Mr Butterworth—I am saying that they have staked their reputation on that advice.
   Senator MURRAY—So later on, in five years time, when the Commonwealth is hit with a
class action for $200 million, we are going to remember that the reputation of Blake Dawson
Waldron was wonderful? Do you see where I am going with this? Neither you nor I can
forecast the future with the cleverness of lawyers or courts. I have seen dozens of legal briefs,
some to my cost and some to my benefit, which have been very firm in their opinion and have
been wrong, and so have you.
   Mr Butterworth—We have been conscious of certain risks. We have been conscious of
the potential for risks. We have gone through a very thorough process. We have taken the best
advice. We will continue to apply the sale processes with a view to minimising those risks.
   Senator MURRAY—You are not at risk. Blake Dawson Waldron is not at risk. The buyer
is not at risk. But the taxpayers of Australia are potentially at risk because you are going to
give the buyer an indemnity. That is what is happening. Is that right? If there is any risk, it is
to the taxpayers of Australia, is it not?
   Mr Butterworth—The Commonwealth as the vendor is accepting that risk at the end of
the day.
   Senator MURRAY—I am sure we understand each other. It is my view that there is a way
around this and that is that, if the offer was made directly to the members of the funds, by
accepting the offers all possible claims of compensation would be done away with. I explored
this earlier in the hearing and no doubt your officers have heard it, so I am not going to go
through the argument again. Can you tell us, or is this a matter of policy advice, the reasons
the government has explicitly dismissed the idea of asking the members to purchase this
entity outright?
   Mr Butterworth—The government has taken the view that the objectives that it outlined
for the sale are best served through an IPO process—a general one rather than one confined to
the members.

Friday, 3 November 2006                          Senate                                       F&PA 95

  Senator MURRAY—Let me test that. Paragraph 11(e) of the explanatory memorandum
... having regard to the above objectives, to maximise the net sale proceeds from the sale.
Without telling me what the figure is, because you do not have to, I assume that the
government has a likely market realisation figure in its mind. Is that right?
   Mr Butterworth—We are very loath to speculate on the proceeds of asset sales for the
valid reason that it might influence the outcome in a way that we do not want.
   Senator MURRAY—I am not suggesting that you tell us on the record. Is your answer
that you have not thought about that or that you would wait until such time as you were about
to sell it and then do a scoping study?
  Mr Butterworth—The scoping study considered, among other things, the best way to
approach the sale with a view to maximising the objectives, to get the best outcome. The
government has considered a range of options in that context and has formed the view that an
IPO is the best way to proceed.
   Senator MURRAY—I am afraid I have some inside knowledge and some thinking as to
the figure. I think it is possible to do it differently. The remainder of my questions would be
policy questions, which are difficult for you to answer, but if I could ask you through the
chair, if as a result of this discourse or anything else in the hearing the department or the
minister is of the mind to put in a submission to us, I would be interested to see whether we
have influenced your views at all.
   Mr Butterworth—I can relay that invitation. Can I also add to my earlier answer on the
issue of conflict that the objectives do not deal explicitly with the conflict, but the resolution
of the conflict of interest is an outcome of those objectives.
   Senator MURRAY—I accept that. I am surprised that the actual phrase was not used.
  Senator McLUCAS—Just going to the CRA report, which you attached to the letter, when
was that commissioned?
  Mr Butterworth—It was on 16 October we think. We will correct that if it is wrong, but it
was in that time frame.
  Senator McLUCAS—What was the motivation? What was the rationale? Why did we
need someone to investigate the scope for further productivity improvements and analyse the
  Mr Butterworth—There had been some public discussion of this issue. We thought it
would assist to have some expert advice.
   Senator McLUCAS—Why did we use CRA?
   Mr Butterworth—They provided similar analysis to us earlier and we knew that they had
the expertise, the capability and the background to provide that advice to us.
   Senator McLUCAS—You would have heard Dr Deeble’s comments this morning about
the robustness of the methodology of this document. He is a doctor of economics and
probably the person who understands the health insurance industry the best in Australia. How
do you respond to his commentary?

F&PA 96                                     Senate                    Friday, 3 November 2006

   Mr Butterworth—Economics is a very broad church and there is room for a wide range of
opinions about the right form of analysis and the applicability of results. I think that is a
symptom of healthy public debate. It did not trouble me. It did not remove my confidence in
the advice that CRA provided.
   Senator McLUCAS—Did you look at other companies’ expertise in understanding the
private health insurance sector?
  Mr Butterworth—In this context?
  Senator McLUCAS—In making a decision about who would do this analysis. Private
health insurance is a very different market from other markets. We all understand that now.
Finding some financial entity or an entity like CRA that would have some expertise in it
might have been a bit trickier than just saying: ‘They have got a bunch of economists. We’ll
ask them.’
   Mr Butterworth—They are economists who are held in high regard and have considerable
knowledge of this industry. There may well be other economists who have similar knowledge
of this industry, but we were persuaded that they did have that knowledge and we have been
satisfied with the result.
   Senator McLUCAS—Dr Deeble made the comment that comparing a small provider of
private health insurance with something like Medibank Private is something along the lines of
‘absurd’—he did not say that word.
   Mr Butterworth—My econometrics is a little rusty now, but my reading of the CRA
report and my acquaintance with the methodology that they have used is that they were
certainly aware of the influence of scale on the results, and indeed that was one of the
variables that they sought to control in the modelling that they did.
   Senator MURRAY—Dr Deeble and I had a discussion about econometrics and I said that
he could talk to me in the econometrics but I would reply in the English.
  Senator McLUCAS—Does that mean that I do not ask for an explanation of the table on
page 10? No, I am not asking for an explanation.
  Mr Butterworth—Thank you; I am very grateful.
   Senator McLUCAS—The AMA made the same comment, though. They thought that the
methodology was flawed. This is the ‘apples and apples’ comment that Senator Bernardi was
talking about as well. Have you tested this with other economists? The only other economist
that has looked at it is Dr Deeble, and he seemed pretty critical.
   Mr Butterworth—It was not peer reviewed, but I am sure it is getting a wide readership at
the moment and we will no doubt have plenty of comments on the veracity of the
methodology. That is probably one of the reasons why CRA chose to be quite explicit, to the
extent that they were able, about the methodology—so that other people could do that. As a
close reading of that report will reveal, they are quite aware of the range not just in terms of
size but in terms of other factors that will influence the result. They are quite aware of the
diversity of this industry. With any methodology there is a limit to the ability of the
econometrics to fully capture and understand that, but that is a common issue in these sorts of
analyses and we respect the professional standards CRA has brought to that.

Friday, 3 November 2006                       Senate                                     F&PA 97

  Senator McLUCAS—The element that Dr Deeble was surprised about was that a
company called GU would be competing with Medibank. Is GU a very small entity?
  Mr Morphy—I understand that it is.
  Senator McLUCAS—Is it located in one state?
  Mr Morphy—I understand so.
  Senator McLUCAS—Is it a very different operation, to yours?
  Mr Morphy—In terms of scale, yes, it is.
  Senator McLUCAS—Scale, geography, products?
  Mr Morphy—It is a smaller health fund, yes.
   Senator McLUCAS—I am not going to try to do an analysis of the methodology of the
CRA report. The point, though, that needs to be defended a bit more is why this is robust. I do
not think that has happened here. It might happen in the financial papers. Mr Morphy said that
there is a five per cent to seven per cent efficiency savings identified in your organisation.
Was Mr Savvides a bit upset when he saw that?
   Mr Morphy—I have not had the opportunity to discuss the paper with him and I have not
actually read it myself. I have heard a lot of commentary about it, but I have not had the time
to read it so I cannot comment.
   Senator McLUCAS—Mr Savvides has been coming to Senate estimates on health for a
long time and telling us how Medibank Private is very efficiently run. Is that the view of
Medibank Private?
   Mr Morphy—Certainly. The greater efficiencies that we see going into the future would
be being able to use our existing network to sell other products. That is where we believe the
greatest efficiencies are set to be gained.
  Senator McLUCAS—Like what?
   Mr Morphy—The example given earlier was travel insurance. We believe that there is a
whole range of other products that could be sensibly sold under our brand to our members
using the existing infrastructure that we have. By its very definition, that will drive substantial
efficiency from our prospective.
   Senator McLUCAS—Is it correct that under the current legislation, for you to diversify in
that way, you would have to get permission from the minister?
   Mr Morphy—Under the current legislation and the current ownership—and my technical
understanding is limited—the Commonwealth Constitution places limits on what we and our
direct ownership are able to do, so in that regard we are very limited in how we can explore
diversification. Certainly that is something that we would look to do if we were privatised.
  Senator McLUCAS—What is the process if Medibank Private wants to go into the fishing
business or something? I am deliberately saying something that is completely unusual.
   Mr Butterworth—It would raise a number of questions. The very simple answer is that
the company would need to make a business case. The government would need to very
carefully consider whether the new venture was consistent with its objectives for that

F&PA 98                                      Senate                    Friday, 3 November 2006

business, whether the company had sufficient capital, whether the government was
comfortable in taking on the additional risk, if any, of being in that line of business and indeed
whether that business case would reasonably give rise to the government having any conflicts
of interest when regulating the fishing industry. All of those things would be carefully
considered, and I would think the company would need to make a fairly powerful business
case to go into fishing.
  Senator McLUCAS—It is not impossible under the current legislative regime for
Medibank Private to actually pursue a diversification strategy, whether it is fishing or
something else?
   Mr Butterworth—It is not absolutely impossible. It would be a rigorous process and all of
the things I have outlined and probably a range that I cannot remember would need to be
carefully considered.
   Senator McLUCAS—Any business looking at diversification would go through a similar
sort of process of looking at the risk and looking at the potential financial benefits. So a
sensible process would be pursued. So it is not impossible for Medibank Private in the current
structure to pursue a diversification strategy?
   Mr Morphy—Other than to the extent to which the Commonwealth ownership and the
legislation that we are established and regulated under prohibit us from doing it, no. The
comments that Mr Butterworth has made would then be considerations beyond that. It would
be extremely difficult. I cannot imagine how we would ever—
  Senator McLUCAS—How did you get into travel insurance?
  Mr Morphy—We went through a rigorous, detailed, long process.
  Senator McLUCAS—Exactly. We have done it once, so we could do it again.
  Mr Morphy—That was very much seen as the baby step, if you like, in proof of concept.
  Senator McLUCAS—It is possible. Where are the five per cent to seven per cent savings
going to appear? You have explained to Senator Moore that you are not going to cut staff.
   Mr Morphy—That is not the intention at all. I cannot comment on the five per cent to
seven per cent. I have not read the report in detail and I cannot comment on that at all. In
terms of the general question about where efficiency savings would come from, the use of our
existing infrastructure to sell other products and services to our members, which hopefully
broadens our membership base in and of itself, would also lead to efficiencies as the
infrastructure is being used to do more, hence the efficiency gains.
  Senator McLUCAS—I am surprised, Mr Morphy, that you did not read the report. It has
been in the press for two days.
  Mr Morphy—I am aware of it, but I have not had an opportunity to sit down and review it.
  Senator MOORE—But some people in your organisation have? You cannot say with
authority that in your organisation people have read the report?
   Mr Morphy—I am certain people have read the report. To what extent the report has been
read and analysed, I cannot comment. I am not aware of that. It certainly has been released in

Friday, 3 November 2006                     Senate                                     F&PA 99

our business and I am sure that people have looked at it. But to what extent I cannot comment.
I have not had the ability to review it in any detail.
  Senator McLUCAS—The CPSU talked to us before you arrived. They said that a staff
notice was promulgated in Medibank Private yesterday that says that CRA’s report was
conducted without any consultation with Medibank Private. Is that correct?
  Mr Morphy—That is my understanding, yes.
    Senator McLUCAS—How did they get an understanding of the operation of the business
if they have not even talked to them?
   Mr Butterworth—They used publicly available statistics on the performance of all health
   Senator McLUCAS—They had no discussions with Medibank Private about what its
strategy would be to grow the business, so to speak? What Medibank Private is saying about
how it is going to grow its business is very different from the observations in the CRA report
about how they are going to find that five per cent to seven per cent saving.
   Mr Butterworth—The study was not a forensic examination of the Medibank Private
business. It was an examination of efficiency within the industry with a view to establishing,
in colloquial terms, what the efficiency frontier of this industry might be.
   Senator McLUCAS—When CRA says that they can rationalise management, rationalise
call centres and rationalise the customer service delivery mechanisms that, in my view, means
reduction of staff. That is how that reads to me. We know now that Medibank Private is not
going to reduce staff, so how could they make an analysis that says, if you do these things,
you will achieve savings of between five per cent and seven per cent?
   Mr Butterworth—The CRA had access to previous studies of MPL. They also have
extensive knowledge of the industry. They sought to indicate what the potential efficiency
savings may be for a firm in moving from where they happened to be to best practice. They
sought to indicate a range of things that Medibank Private could look at and do to get closer to
that frontier.
   Senator McLUCAS—How do they know that Medibank Private is not currently best
   Mr Butterworth—They were able to assess from the public statistics and their knowledge
of the business where Medibank Private sits at the moment. Those tables towards the back of
the report indicate the results.
   Senator McLUCAS—That is working on the basis of comparison. I am no economist
either, but the way I look at it is that those tables say: ‘We think Medibank Private is not as
good as GU because your profit margin is not as high per member as GU’s.’ Professor Deeble
said this morning that it was just ridiculous to compare them.
  Mr Butterworth—My understanding is that is not a very sophisticated description of the
  Senator McLUCAS—I am sure it is not.

F&PA 100                                       Senate                     Friday, 3 November 2006

   Mr Butterworth—CRA sought to use data across the industry to establish what might be
best practice, taking into account a number of characteristics of funds. They sought to place
Medibank in that scheme of things and measure the degree to which Medibank might need to
improve its efficiency to get to best practice. Getting to best practice is not easy. It will require
time and effort and focusing on a range of things. To help explain those results, CRA sought
to indicate some of the things that the company might need to look at to effect that change.
   Senator McLUCAS—In terms of trying to make a comparison, you said that CRA looked
at characteristics of funds. What elements did they use to compare other than the profit
   Mr Butterworth—I would have to refer to the paper to improve my memory. I will see if I
can quickly find it for you. Towards the bottom of page 8 the report says: ‘Adjustments: the
differences in operating environment.’ Over the page, it includes the size of the health
insurance task as measured by the number of policies the health fund administers and the
number of persons covered. The health of the insured population is measured by a variable
that takes the value of one if a health fund received payments under the HBRFT. I cannot
remember what HBRFT stands for, but it is the redistribution mechanism.
  Senator McLUCAS—Can you point to me where you are reading from?
  Mr Butterworth—It is from paragraph 35. I probably should not take up the time of the
committee reading that out for you, but that is an account of the elements that they tried to
control in their analysis.
  Senator McLUCAS—As we said, there will be discussion about the methodology that
CRA undertook by people far more talented than I.
  Mr Butterworth—It may actually be paragraph 39.
  Senator McLUCAS—I have one final question. What attempts are there in the bill to deny
members access to compensation and to shift the responsibility to future shareholders of
Medibank Private? This is following up on Senator Murray’s question about compensation.
  Mr Butterworth—Is this about the shipwrecks clause?
  Senator McLUCAS—It is about the potential for compensation and where that potential
compensation bill will lie in the future. I take your point about you thinking that there will not
ever be one. But what elements are there in the bill that will, firstly, deny members access to
compensation and then shift the responsibility to future shareholders of Medibank Private?
    Mr Staines—If there is any liability that arises in relation to the sale as a result of the
operation of part 2 of schedule 2, which is the sale scheme, that lies with the Commonwealth.
If the Commonwealth were to in any way extract a dividend prior to sale and there was in any
way a liability, that would rest with the Commonwealth. If the company following sale was to
somehow extract a dividend such that compensation became payable, the company would be
liable, since it would have had the benefit of the dividend. If there is any liability—which it is,
once again, not accepted that there would be—as a result purely of the company converting to
for-profit, then the company would be liable because it is the one that would put that process
in place.

Friday, 3 November 2006                       Senate                                    F&PA 101

   CHAIR—Mr Morphy, you were talking before about the theoretical capacity for Medibank
Private as it currently is to diversify. That is a theoretical possibility, but there are, as Mr
Butterworth indicated, additional steps which Medibank is required to go through to do
something that is a bit different from its current operations. Am I correct in summarising what
you were saying as, yes, it is a theoretical possibility? It is a theoretical possibility for me to
become a brain surgeon, but it is not going to happen. It is a theoretical possibility for you to
diversify in a more fundamental way, but at the moment it is not really a practical possibility?
   Mr Morphy—I agree. I would also say that it goes beyond the theoretical. To the extent
that we are owned by the Commonwealth, there are absolute restrictions on what we can do.
  CHAIR—As in raising capital?
  Mr Morphy—Not just raising capital. Under the constitution we are limited to things that
we can be involved in. Beyond those absolute restrictions, then you move into Mr
Butterworth’s world of the theoretical restrictions, which are, at a minimum, incredibly
  Senator MURRAY—I suspect that your constitution would limit the activities that you
can indulge in as well?
  Mr Morphy—Our constitution works such that we have to go to our minister to get
approval to do anything beyond running private health insurance.
  Senator MURRAY—Normally a company constitution restricts the areas in which the
company can operate.
  Mr Morphy—That is correct. Ours works exactly like that.
   CHAIR—I did not want to have the impression left that you could in fact do almost
anything that you wanted. There are practical and real difficulties. This might be a question
that is more appropriate for the Department of Finance and Administration. When looking at
the sale of Medibank Private, did the department of finance look at the situation in other
countries that have private health insurance providers? How many countries that have private
health insurance providers have a publicly owned private health insurance provider? Clearly,
Cuba and North Korea do not have a private health sector. They just have a government health
sector. They have no private health insurers. Did you look at freer economies around the
world where there was a private health insurance market and, if you did, can you tell us
whether there are other countries that have a private health insurance market where there is a
government owned private health insurance provider?
  Mr Butterworth—We are not experts on the private health insurance market.
  CHAIR—Just to see what the situation was elsewhere?
  Mr Butterworth—Our advisers looked at international experience with a view to giving
us advice on sale issues. I really cannot go any further unless my colleagues have any
  Mr Renwick—Beyond examining how the various insurance companies overseas work,
we did not go into any further detail.

F&PA 102                                     Senate                    Friday, 3 November 2006

   Mr Staines—The discussion on the international regimes was a difficult one given the
differences in the regulatory environments.
  CHAIR—I have no doubt.
  Mr Staines—We are not aware of any large government owned providers operating on the
same basis as Medibank Private.
   Mr Butterworth—We were told at various points by various people that it is very difficult
to draw international comparisons and to form a view about things such as likely sale
proceeds, because every country seems to regulate this industry in very different ways.
Indeed, the outcomes that have been achieved either through historical precedent or the
interaction between historical precedent and current regulatory environments are so diverse.
Mr Morphy might have a better knowledge of this than I do.
   Mr Morphy—It is difficult to make an international comparison, but there are different
health systems that have a degree of similarity about them. Ireland is one that is often cited as
an example to examine. I understand that they are looking at a very similar proposition in
terms of a privatisation of a major player. South Africa and Canada have some similarities.
They are things that we are generally aware of.
   CHAIR—There is not an OECD survey or study that you are aware of that details the
situation in, say, OECD countries?
   Mr Butterworth—I am not aware of one, but I am happy to ask people who might be
better informed to see whether we can find something for you.
  CHAIR—If you could, to the extent that the department does have knowledge or
awareness, that would be helpful.
  Mr Butterworth—I am sure our health colleagues would be able to.
  Mr Morphy—I have just been made aware that there is an OECD report that we can make
available for the Senate.
  CHAIR—I thank the Department of Finance and Administration and Medibank Private for
your attendance today. I declare this hearing closed.
                              Committee adjourned at 3.55 pm


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