Private health insurers such as Medibank Private Ltd (ASX: MPL) and NIB Holdings Ltd (ASX: NHF) could face more pressure on their profit margins as increases in private health insurance premiums fail to keep pace with healthcare costs.

Medibank Private and NIB are two of Australia’s largest private health insurers, responsible for 3.7 million and 1.6 million customers, respectively.

Private Health Debacle

Each year, health insurers such as NIB receive approval from the Australian Federal Minister for Health to increase the fees they charge to customers, known as the premium.

The premium is the money that companies such as NIB and Medibank receive from customers to cover their costs and pay a dividend to shareholders (if appropriate).

The following Rask video explains the key insurance terms:

For the year of 2020, Medibank and NIB have received approval to increase premiums by 3.27% and 2.9%, respectively. Both insurers claim this is their lowest premium increase in more than a decade and reflects their commitment to keeping costs low.

Medibank Chief Customer Officer, David Koczkar, said: “As pressure on household budgets continues to rise, we understand that the affordability of private health insurance remains one of the biggest issues for our customers, which is why we have worked hard to deliver our lowest premium increase in 19 years.”

NIB CEO, Mark Fitzgibbon, said: “We are very mindful of the growing concerns from consumers regarding the value and affordability of private health insurance which is why we’ve worked extremely hard to deliver the lowest premium change in 17 years.”

While this all sounds great for private patients, the reality is the cost of healthcare — for insurers and the Government — is rising faster than the premium increases. In other words, the fee charged to provide health cover isn’t keeping pace with costs.

“Despite overall inflation remaining subdued in Australia, the cost of healthcare is increasing a lot faster, with medical and hospital services CPI at 3.8%,” Mr Koczkar said via a media release.

Koczkar says the costs for many different procedures and medical equipment is causing significant inefficiencies in the healthcare system. For example, “Prostheses account for more than 13% (or around $2.1 billion) of total benefits paid for hospital cover in Australia.”

Koczkar says a private health insurance company can pay up to three times the amount for the same medical device compared to the public system.

“Governments, healthcare providers and the private health insurance sector need to continue to work together to deliver greater value and affordability for Australians and to ensure the private health sector remains sustainable.

The central point of private health insurance is to reduce traffic at public hospitals by encouraging Australians to pay, typically, a few thousand dollars each year in premiums. In exchange for taking up health cover, there are tax offsets and rebates available.

According to the latest quarterly statistics from APRA, the number of private health insurance policies was 6.69 million, up from 6.64 million in September 2018.