Medibank promise has a golden lining

In the wash-up of the federal budget there are plenty of legitimate and not-so legitimate complaints about broken promises. But Medibank Private is not one of them. It will remain in public hands as promised.

Many expected the Government's changes to the private health insurance rebate, and these will put a financial strain on profits for all the industry participants - including Medibank Private. So a public sale is out of the question.

But the conversion of Medibank Private from a not-for-profit entity to a for-profit, government-owned business means that an enterprise that was valued at up to $3 billion a few years ago will have just one shareholder - the Government.

The corporatised Medibank Private will be liable for tax, which will be paid to the Government, and dividends, which will also be paid to the Government.

But the real golden egg is the reserves held inside the business.

Last year Medibank Private held $1.2 billion in retained earnings. The Government cannot get its hands on all of these because as an insurance company Medibank Private has to retain reserves at a statutory level to pay claims. But the remainder will be up for grabs.

We're going to see a lot of legal debate about who owns these reserves. The subject was brewing in 2006 when the Howard government embarked on its plans to fully privatise Medibank Private. And the same issues were dealt with when other not-for-profit or mutuals, like the NRMA and AMP, were monetised.

The National Health Act says a non-profit organisation cannot distribute, but must retain, all of the assets of a health insurance fund. But a for-profit organisation can use its assets in any way it chooses, including payment of dividends and transfer of assets, as long as it retains prudential solvency.

It's a classic win-win for the Government - the voters are happy as long as Medibank Private remains in Government hands because they feel that their

premiums won't be affected and competition levels will be safe.

The Government says the safety net will not be compromised and decisions on dividends paid to the Government will be set in consultation with the Medibank Private Board to ensure they have no impact on premiums.

Legwork at the time that the Howard government proposed full privatisation turned up different ways that the government could get its hands on the reserves - not necessarily through dividends but also as a kind of return of capital.

In the meantime, the rest of the private health care industry is figuring out how to deal with the new position of the goal posts after they shifted on Tuesday.

The Government scrapped the private health care insurance rebate for high-income earners and capped the program for some middle-income earners.

Those thinking of opting out of private medical insurance face a nasty stick: the Government will increase the surcharge for the non-insured to 1.5 per cent. This is supposed to stem any potential flow out of the insurance sector and to keep middle- and higher-income earners off the public health drip, so avoiding additional strain on the public hospital system.

But there is a problem with this argument. The privately insured need only keep hospital cover to avoid the higher surcharge. And they could well recoup any money they might lose from the rebate by dropping such extras as optical, dental, physio or even pilates. These are the health insurance products with the higher margins - the products on which the insurers really make their money.

If at some stage many years down the track a government of any persuasion decides to fully privatise Medibank Private the interim work will have been done. It will be a government-owned organisation, just like Telstra and Qantas all those years ago. And there won't be any question over who will receive the proceeds of a sale. It will be the legal owners - the government.

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