Medibank Private Limited (MPL)

From the 1st of April 2016 the department of health has approved a 5.64% increase in premiums for MPL; this is good for shareholders but not great news policyholders. Rates increase for private health providers ranged from 4.94% up to 5.69%. This increase in premium to policyholders is expected assist in revenue growth.

However flat growth in policy numbers and with 1%-1.5% of policy holders continuing to either downgrade their policy or increase their excess will limit any growth in revenue. The recent announcement has seen the price of MPL spike.

In times of a poor economy and high unemployment we can expect people to take a closer look at their expenses and exactly what they are receiving for the money paid. Recent figures form iSelect indicate that one in four member have thought about cancelling their policies, one in six have taken the next step and changed health funds looking for a better deal and one in ten have changed their policy within their existing fund. They go on the say that 28 per cent of Australians have considered dropping their policy.

With Medibank Private currently trading above our price target of $2.15 and the private health sector seeing increase demand for services by the older population, at the same time younger policyholders who are looking for a better deal will opt out completely. This will limit any revenue growth. Private health insurance at present is relaying on the Department of Health to increase premiums and therefore revenue.

Given current price spike on the back on the premium increase it would make sense to take profits on this company.  It is a sector to continue to watch but perhaps it is safer on the side lines for now.