Healthcare at the crossroads

Despite shrinking public health care the private market is contracting, finds RICHARD BRADDELL, leaving Southern Cross in a quandary.

With two-thirds of the health insurance market, 900,000 customers and a $33 million surplus to boot, Southern Cross does not look much like an organisation in crisis.

But while its market dominance and financial security are beyond question, the society has not been immune to market forces and uncertain Government policy which have forced an ever-increasing proportion of health funding on to private insurers.

In a decade in which Government funding of health has dropped from 80 per cent to 70 per cent, private insurers have more than doubled their share of the health bill to more than 8 per cent, much of that to pay for elective surgery, of which more than 40 per cent is now done in the private sector.

To cope, premiums have gone up, causing many members to reconsider the value of health insurance. As a result, membership of private health schemes has dropped from more than 50 per cent of the population in 1990 to less than 37 per cent now.

If market share was the only measure, Southern Cross would have nothing to worry about since it has remained steady at 65 per cent. But as the chief executive, Roger Bowie, says, the perverse interaction between Government and private health provision has caused the overall market to shrink, even as the Government would like people to take more care of themselves.

"It's a benign form of adverse selection. The young and the healthy get no value and pull out," he says.

While last year's $33 million surplus is impressive, it comes after three difficult years when profit never exceeded $7 million, despite premiums going up 12.5 per cent a year on average. Since Southern Cross is a not-for-profit organisation, it should not matter that surpluses have been small, except for the fact that they have happened as premiums rise and membership declines.

The premiums are now settling, and the cancellations are reducing, helped by a no-claims bonus that will in itself eat into future surpluses.

That leaves Southern Cross wondering about its future. One response is to demutualise, a prospect it has considered and rejected. But it is a reflection of the concern it feels about the demutualisation issue that it invited a former regulator with the British Treasury, Rosalind Gilmore, to New Zealand to help with its internal debate.

Unsurprisingly, Rosalind Gilmore is a great fan of mutuals, although she sits on the board of one of the world's largest listed insurance groups, Zurich Financial Services. To Rosalind Gilmore, it's a case of vive la difference, with mutuals and publicly listed insurers each contributing useful disciplines to the market overall.

Apart from the obvious advantages of not having to pay dividends, or tax for that matter, mutuals should be closer and more responsive to their customers, she says.

"Because the value system is community based, they do tend to have reasonably risk-averse strategies and to be able to take a long-term view because they are not dominated in the same way by year-to-year shareholder value which can distort short-term decisions."

But like public companies, they can lose touch with their origins and, just with public companies also, they can become sloppy in their governance.

Rosalind Gilmore says the best way round this is to ensure they have clear goals and are accountable in a measurable way.

In this regard, Southern Cross has done a great deal to lift its act, with the last annual report providing a level of financial disclosure typical of a public company.

In addition, the group has endeavoured to be more accessible to members who, for the first time, can appoint a proxy to represent them at the annual meeting.

Nevertheless, Mr Bowie believes the future for Southern Cross lies in being much more than an indemnity insurer. That is the case already since its associated trust runs the country's largest chain of private hospitals. But he argues for a future in which Southern Cross along with other friendly societies form a bridge that integrates public and private medical provision and closes the growing gap between public and private funding.

At the heart of the integrated approach is a desire to consolidate a mish-mash of funding streams ranging through Government, ACC and private sources with the intention that best-practice medicine be delivered to the community at large.

To support the argument, Mr Bowie waves a diagram of present health-funding arrangements, the complexity of which would confuse the receivers of Equiticorp.

"It's the perverse way the public and private health systems work together which got me thinking about total risk management," Mr Bowie says.

"It just didn't seem to me to be a very viable or fulfilling business environment. So we are doing what all organisations do when they are confronted with a crisis. We go back to basics and we look at what we are going to be."

The blueprint Southern Cross has mapped out is typified by a joint venture it has established with the Marlborough Health Trust, a community group including medical practitioners which began out of concern that the local hospital could be lost.

Persuaded by Southern Cross that much more could be achieved by looking at the region's entire health requirements, the joint venture was set up 12 months ago with the intention of organising and contracting provision of services through a number of providers.

It still requires Health Funding Authority approval to be activated, and that seems unlikely in the short term.

In the meantime, Southern Cross has moved on with another part of its integrated health-care strategy through Fusion, a joint venture with insurer Royal & SunAlliance and injury rehabilitation manager GMV to contest the workers compensation market when ACC withdraws on July 1.