Dear Pericles,

I'm going to disappoint you I'm afraid. Rather than being “someone who knows whereof they speak” or “Being this close to the business” my only talent is a moderate skill in making my way through a set of figures and a deep desire to protect whatever communal nature or notions of common-weal that is left in our health system.

However I do welcome the debate and hopefully the exchange might help raise at least my understanding of the issues.

To your first point that “43% of the for-profit sector belongs to the government, so it is the taxpayer who receives the dividend.”

I think we both accept that we are one Craig Thompson inquiry from the opposition being in power and according to the big guy “there have been a number of transactions in the private health industry over the last few years that would indicate that it’s worth something around the revenue level which is around $3.8bn”. It will be one of the first things they do, and is anyone betting against Macquarie Bank handling the sale?

You second point was “another 35% of the for-profit sector belongs to BUPA, who do not have shareholders, but bondholders. So the "dividend" is closer to a "cost of funds" equation than rewarding shareholders.”

The difference between a bond holder and a shareholder in this instance is really rather small. Both are seeking to maximise returns while managing risk. Sure the bondholder foregoes potentially large capital gains but is happier that he/she is unlikely to lose the lot.

In fact the UK investment group Tideaway Investment Partners put BUPA as “Tideway Bond of the week (may be the year!)” noting among other things, the bonds had “minimal exposure to European sovereign debt crisis”, from a “sound simple business, relatively recession proof”, returning “8.4% yield for 9 years on investment cost”, with a “potential 37% capital gain on top of yield if called”, which “gives 11% return to call date”.

Cont...

Cont...

Their analyst Peter Dougherty gave four reasons for describing them as good value;

1. There is a very high degree of certainty that an investor will get the principal amount of the investment back. Safety first.
2. The annualised return for a medium term holder can reasonably be expected to be well in excess of inflation. Here 11% p.a. is the base return.
3. In a normalisation of the credit markets, the bond price will revert to 85 / 90 giving an annualised yield for that annual period of circa 20% (15 points of price + interest)
4. The underlying business of the issuer is stable and if for any reason the company did get into trouble it wouldn't be unusual for new equity investors to appear ahead of a default.

http://www.tidewayinvestment.co.uk/bond-v-equities-update.html

Australian health expenditure is helping pay those returns to offshore investors.

I agree with you that “there seems to be no community benefit to having shareholders at all.” it is just I don't see the need for profit making enterprises usurping 'mutual societies'. The one attraction though of bonds rather than shares is the ability of management to look to the long term rather than living or dying by the share price and the detrimental impacts of revolving CEOs determined to make their mark.

I too recognise the benefits of health management, I'm just not as positive that the PHI funds are as fully committed as the government. Where they seem to be concentrating their efforts is toward 'hospital-substitute' treatments which rose by over 400% last year and 'exclusions'. The percentage of policies with exclusions had bumped along at between 3-5% for many years but in 2008 shot into double figures and now stands at over 27%.

Dear Yuyutsu,

A well thought out system but one that doesn't come close to what universal coverage can deliver with far less administration costs. There certainly are countries that could benefit from it but we have an extensive and mutual system that doesn't rely on the benevolence of family, friends and charities. Why should we change?

I think the savings are going to dental.
Welfare reforms in motion.
1.5% medicare levy.
Long overdue, and very good reform.
Lets hope the coalition does not have ideas of upping the GST, and making it broader. [ a whisper ]

Dear Csteele,

"Why should we change?"

Because the current system is corrupt, unfair and coercive.

It's a win-win offer - the only losers are such doctors and health funds which currently abuse their government lobbying powers to get more than than the fair value of their services in a free market.

Nothing requires you to rely on the benevolence of family, friends and charities - if that's your preference, then you may still continue exactly as you do now, with Medicare, a current-style PHI or both. If you don't like, then you don't have to give anything to your family and charities - the beauty is that it is all entirely up to you!

That's not at all disappointing, csteele.

>>I'm going to disappoint you I'm afraid. Rather than being “someone who knows whereof they speak” or “Being this close to the business” my only talent is a moderate skill in making my way through a set of figures...<<

Mine too, so props for coming across as an insider.

I have observed that we are both looking at the same published set of numbers. Also something of a rarity here.

And I suspect that you are absolutely correct in forecasting a Coalition government's sell-off of Medibank Private. As I indicated, I believe this is inappropriate for a Health Insurance business, but its saving grace might be that it would open the way for broader-based investment in health management. Over half their employees live outside the PHI umbrella, after all.

But I must disagree with your assessment of the bond vs. shareholder issue. The analyst's view of the BUPA bond issue is entirely irrelevant to anyone except today's buyers and sellers of the bond itself. Interest is paid at a rate struck at issue time, and does not change through the announced life of the bond. The cost to BUPA - and therefore the business - remains at 6.125% until 16th September 2020, when BUPA has the right to call them at par. Fluctuations in its traded value have zero impact on the cost of funds.

http://www.bupa.com/media/60114/prospectus__330m_bond.pdf

This is an interesting observation:

>>I too recognise the benefits of health management, I'm just not as positive that the PHI funds are as fully committed as the government.<<

What signs have you noticed that the government is "fully committed" to a broader-based approach to health management? What taxpayer funds are being allocated, and where?

Dear 579

So thats how the Coalition intend to make up for $70 b hole in the budget figures. By increasing and broadening the G.S.T.

They won't let that cat out of the bag before they control both houses of Parliament. As was their form with Workchoices.