Sharechat Logo

The Shoeshine Column: Southern Cross keeps rivals underfoot

Friday 1st September 2000

Text too small?

Life begins at 40 or so they say. The Southern Cross Medical Society passes the milestone this year and its birthday present was to have been its largest rival, Aetna Health New Zealand.

Sadly, even birthday boys have to stand up to the scrutiny of the killjoys of the Commerce Commission, who last week cancelled the party.

As the combined entity would have had, Shoeshine understands, 80% plus of the health insurance market the commission's decision to refuse clearance hardly seems surprising. The surprise is that Southern Cross bothered to apply in the first place.

But its decision throws light on much more than just market shares and competition law. The issues cut deep into the muddled realm of how the country's ever-growing health bill is to be paid so the report should make interesting reading for new Health Minister Annette King and her cabinet colleagues.

Southern Cross is by far our biggest private sector healthcare provider with about 63% of health insurance premium payers and 13 hospitals. It' size is attributable partly to the fact it has been around for longer than any of its rivals, but beyond that opinions differ.

The society would argue its market share is testament to its miraculous efficiency and low costs which enable it to keep premiums down. It also makes much of its friendly society "not for profit" status and the very high proportion of premium income this allows it to pay out on claims.

Its competitors reckon the "not for profit" bit is a load of hogwash - where do the funds come from to build hospitals if there is no surplus after paying for costs and claims?

The argument is semantic but financially it doesn't matter - friendly societies are in any case exempt from paying tax on profits. What's more, having no shareholders, they don't have to pay dividends either.

Its rivals, who do pay tax and may also have to pay dividends, have argued for years that it's virtually impossible to compete. Until Southern Cross' friendly society status, which, they say, it has done nothing to earn, is revoked by act of Parliament, the health insurance playing field will be tilted like - well, Mount Aetna.

All this, one would have thought, would have stirred the free-market ministers of the past three governments into instant action. That it didn't encourages the cynical view that ideological integrity and the desire to get re-elected don't always sit well together.

Successive reports have recommended the society's friendly status be revoked - all have been ignored.

There's little doubt if Southern Cross were forced to pay tax it would have to bump up its premiums, annoying the best part of a million members who have already seen prices climb over the past decade. The beneficiaries would have been the mostly foreign shareholders of the society's competitors and, perhaps, their clients.

So what can the private insurers expect from our new government?

Shoeshine's call to Ms King's office failed to elicit any response, which could mean something or nothing.

On the face of it a centre-left government should be bad news for private insurers as it strives to keep election promises to lift the quality and availability of public healthcare.

Pitchforking money into the service doesn't seem to be on the agenda, yet. The Budget lifted the health vote only 4%.

But medical care, its practitioners point out, is about the only area in which technological advances are making services steadily more expensive. Somebody's going to have to pay for it all.

Back to the commission's decision. In turning down Southern Cross the commission found the slew of health insurers entering the market in recent years had made hardly a dent on the society's market share. Even Aetna had mostly bought, not won, its customers.

The investigators also looked at the probability other health insurers would constrain a dominant merged entity from lifting prices. Most of these are broad financial services groups which said health insurance was so low-margin they couldn't be bothered with it if they didn't need to bundle it with other types of insurance to offer a one-stop service.

The inference is clear - obliging Southern Cross to foot it on the same commercial basis as its competitors would level the sector's playing field and at least potentially enable it to shoulder a greater share of the burden of the country's health bill.

Last year, according to the Health Funds Association, the private health insurance industry contributed $554 million or 9% of total health expenditure.

But as things stand the proportion of the population willing and able to insure themselves has declined steadily, from 51% in 1990 to 33% in 1999.

Southern Cross would no doubt argue that if it were forced to raise premiums again more people would leave. But a level playing field would encourage existing players to market more aggressively and offer cheaper packages.

It all depends whether you believe keen competition delivers lower prices and higher-quality services.

As for Aetna, Southern Cross has gone back to the commission with a deal to buy only the systems and the First Health and PrimeHealth public sector management contracting operations. If that goes ahead, what happens to Aetna's insurance arm? If it doesn't go ahead, Aetna's US parent may have to look again at the local management's buy-out offer, which has already been rejected.

  General Finance Advertising    

Comments from our readers

No comments yet

Add your comment:
Your name:
Your email:
Not displayed to the public
Comments to Sharechat go through an approval process. Comments which are defamatory, abusive or in some way deemed inappropriate will not be approved. It is allowable to use some form of non-de-plume for your name, however we recommend real email addresses are used. Comments from free email addresses such as Gmail, Yahoo, Hotmail, etc may not be approved.

Related News:

Mandatory farm plans scorned as 'tick box' exercises
Kiwi dollar firms on weak US retail data, capped by rate-cut expectations
17th October 2019 Morning Report
SkyCity hoses down union claims over potential job losses
OPINION: Fair Payment Agreements and 'swallowing vomit' - the lot of the CTU
MARKET CLOSE: NZ shares gain; Restaurant Brands climbs on upbeat outlook
NZ dollar stalls after Bascand's rate cut comments
Bascand says RBNZ will consider changing bank capital proposals
Affordable electricity key to decarbonisation - Genesis
Graeme Hart trims global packaging empire with US$615m asset sale

IRG See IRG research reports