Should the Government Privatize Medibank - Case Study Example

Running header: Medibank Student’s name: Instructor’s name: Subject code: Date of submission: Should the government privatize Medibank? Introduction: Dating back to 1976 when it was established by the Fraser Government via its health insurance commission, Medibank has been the Australian government owned private health insurance. The company is currently the largest health insurance provider in the country offering its services to 30% of the market or more than 3.6 million people. The aim of setting up the company was to provide competition with the existing private for profit health funds and hence bring down the cost of health insurance. Despite its being government owned, it has largely operated as though it were a government private enterprise since the year 2009 and it pays dividends and taxes under the regulatory regime that governs other private health funds (Nicholas, 2013). Despite its initial purpose of establishment being to keep insurance premiums at low level, calls for its privatization have existed since 2006 when the Howard coalition government announced plans for privatizing it in 2007 subject to its winning the elections. However, as the Howard government lost the elections, the company was not privatized with renewed pledges for its privatization surfacing back in 2010 by Tony Abbott but again the idea never saw the day as Abbott was defeated in the election. It was until 26th march 20147 that the government through its finance minister made public its plans to sell Medibank through an initial public offering during the 2014-15 fiscal period. But why privatize Medibank despite its initial goals of establishment? Reasons for privatization Many people including Medibank as an institution has welcomed the government plans to privatize it. On its website, Medibank states that it welcomes the decision of privatization by the government as this is seen as a way of driving more competition in the sector which would result in better value and health outcomes for all. Others have stated that the decision to privatize was long overdue since the Medibank has been operating as a private company anyway (Ben, 2006). In other words, Medibank has not really served its purpose and hence it should be privatized to enhance performance and efficiency. On the other hand, the government sites a number of reasons why it would want the company to be privatized. Its case for privatization as including the need to contribute to a competitive, viable and efficient private health insurance sector as well as Maintaining service and quality levels for the company customers who include regional and rural Australians. Among the reasons why Medibank should be privatized would be both budgetary and economic. Budgetary justification for privatizing Medibank When announcing plans for privatization on winning incase they worn elections in 2010, Abbott claimed that the process would contribute $44.5 billion which much far above its then book value of $1.6 billion. This was realistic however since Medibank had been on a profit making trend with annual profits being as high as $200 million much of which was paid out to the government as dividend. Despite this, the company had been noted to operate below its capacity. For instance, the much smaller NIB had a shareholder capitalization of $1 billion despite its being quarter the size of Medibank (Medibank.com, 2014). Though it may be argued that privatizing Medibank would deny the shareholders (government) an ongoing stream of dividend, it should be noted that as a public finance measure, this would be a prudent way of bridging the government’s budgetary gaps. Furthermore, privatization is expected to result in more efficiency which would mean more and more earnings to government through increased taxes and dividends (Richard, 2011). Economic reasons why Medibank should be privatized There are many reasons why governments involve themselves in business in economic terms. However, no such a reason seems to apply for Medibank. Despite its being the largest private health insurer, this has not contributed to its becoming a market leader. The principle reason by the Fraser government in 1976 was bringing some level of discipline to the sector through increased competition. However, such form of government intervention has given rise to the national competition policy while the government has strong regulatory mechanisms for capping health insurance increments if need be. In this regard, the case for bringing discipline and competition to the sector does not arise. Furthermore, it can be said that the establishment of the company was only political since the government saw an opportunity in establishing a popular scheme that could at least appease some voters by maintaining the company as Medibank and a publicly owned entity despite its role having changed (Onsleen, 2014). This is part of the reason why there still remains a lot of public opposition to the company’s privatization. However, to improve efficiency and hence profitability in addition to providing the government with the much needed financial resources, it would be prudent to privatize the company. It would be expected that the funds realized from privatizing Medibank would be invested in infrastructure projects that enhance productivity. As such, one would expect that the $4 billion expected to be realized from privatization will outweigh the net present value that is expected of future dividends. Though the opposition has claimed that government stands to lose in terms of annual dividends of $500 million, an analysis of the company’s year 2013 financial report shows that the company realized a profit before taxation of $330 million which means that the tax rate being 30%, the company made a profit after tax of $231 million (The economist, 2014). It is known that dividends arise from profits and hence the claim of the government losing $500 million annually in terms of dividends is completely misplaced and exaggerated since the government only earns less than that level in dividends. Looked on a social economic perspective, it is expected that the returns from alternative infrastructure projects funded from the sale would outweigh the expected dividend growth (Philip, 2014). It should also be noted that some opposition for privatization arises from the need to maintain discipline and competition in the sector. This is especially so since Medibank being the country’s private health insurer competes directly with a big range of other private insurers. In other words, there is already enough competition in the sector and hence competition concerns against Medibank privatization do not arise (Jabez, 2011). With market forces operating and since the company is not exiting the market but rather changing in terms of management, the new investors would find it hard to adjust the company’s premiums upwards as this would mean losing customers to the competitors. Is there a case for not privatizing Medibank? As stated above, it is highly likely that the decision to privatize Medibank will be met by a lot of opposition from the public owing to the perceived benefits of the company being in government hands. To the common man, insurance premium rates would go up owing to privatization of the company. As such, this is a political threat even to the government which risks losing its voters. It should be noted however that public attitudes towards privatization are just a visceral response not based on rational consideration of the economic benefits that would arise if Medibank is privatized. The public may not understand why some activities are better handled by the public sector while others are better handled by the private sector (Ian,2014). Whether to privatize or not should be based on the need to realize public good. For instance, the government should engage in business where the private sector is unable to efficiently provide or as a natural monopoly where the only room that exists is for a single supplier in the entire market. Such is the kind of government involvement in business seen in roads and water sectors, public transport as well as provision of other public utilities. The government also becomes the favorite initial investor in such big projects as the high speed rail or the national broad band network although when established, such projects may go to private ownership as is the current case with Medibank. However, there is no justification for Medibank remaining in government’s hands based on these factors. However, despite these arguments for privatization, those opposed to it argue that privatizing Medibank is shallow based on simple ideas about reduction of public debt while supposedly bringing in efficiency from private sector in a bid to improve performance of the overstaffed and under capitalized government enterprise (Johannes, 2013). But why should the government itself reform Medibank instead of privatizing it? The public sees everything wrong in selling the assets they own collectively through government in a bid to fund budgets/current financial outlays. However, such arguments are based on past bad government privatization decisions thus driving out such a good opportunity for privatizing Medibank. Conclusion As has been noted, the initial reasons for establishment of Medibank were to bring competition in the sector thus enhancing discipline and efficiency. It should however be noted that these reasons are no longer relevant as the market forces of demand and supply should ensure this. Furthermore, the national competition policy exists to curb bad business practices while the government has many ways of ensuring premium increases in the sector are curbed. Those opposed to the privatization have thus been found to do it for political reasons only. As such, it is my opinion that the government should go ahead with privatizing Medibank so that the benefits outlined above can be realized. References: Nicholas, F2013, Hanging on to Medibank is a national health hazard, Sydney Morning Herald, Retrieved on 3rd May 2013. Ben, P2006, Election fight over $2 billion Medibank plan, Herald Sun, Retrieved 3rd May 2014. Medibank.com, 2014, Privatisation of Medibank, Retrieved 3rd May 2014, from; http://www.medibank.com.au/about-us/privatisation/ Onsleen, L2014, Privatizing Medibank makes sense, Retrieved 3rd May 2014; from; http://www.macrobusiness.com.au/2014/03/privatising-medibank-makes-sense/ Philip, T2014, Medibank private sale tantamount to theft, says founder, The Canberra Times, Retrieved 3rd May 2014. Richard, D2011, AWH saga taints privatization, Retrieved 3rd May 2014, from; http://www.afr.com/p/opinion/awh_saga_taints_privatisation_NxlWUUJm5AlYy0KQA5tOpN Ian, M2014, Privatizing Medibank: Good business hamstrung by bad politics, Retrieved 3rd May 2014, from; http://theconversation.com/privatising-medibank-good-business-hamstrung-by-bad-politics-13526 Johannes, B2013, Government principles for operation of government owned enterprises, London, Rutledge. The economist, 2014, Privatization and nationalization, Retrieved on 3rd May 2014, from; http://www.economist.com/topics/privatisation-and-nationalisation Jabez, M2011, Privatizing business, London, Rutledge. Read More