News National The advice that scuttled the Medibank sale

The advice that scuttled the Medibank sale

Twitter Facebook Reddit Pinterest Email

In 1981 the Fraser Government was mulling the idea of selling Medibank Private amid concerns that the health insurer was struggling to remain solvent.

According to confidential cabinet documents, the deliberations on a possible sale were conducted through a special cabinet committee chaired by Fraser’s industry minister, Sir Phillip Lynch.

The committee, popularly known as the Razor Gang, was reviewing ways to abolish government agencies and reduce public spending. Its official name was the ‘Committee on Review of Government Functions’.

Throughout March 1981, Sir Phillip and the two other members of the committee — Dame Margaret Guilfoyle and John Howard — were conferring with legal and financial advisers in three government departments on whether the Commonwealth actually owned the health insurer.

• Will selling Medibank push up health insurance premiums?

The advice given to them effectively scuttled any plans they had to offload Medibank Private.

Experts in the Attorney General’s Department, the Australian Government Actuary and the Department of Health, advised the committee that the Commonwealth did not own the assets of the health fund even though its operations were being managed through the Health Insurance Commission, a public authority.

The high level advice was recorded by the committee in a confidential memorandum on 19 March 1981: “The Commonwealth does not in any legal sense have equity in the Health Insurance Commission or in its assets.”

On 24 March, the Razor Gang committee recommended to cabinet that the proposed sale of Medibank Private be abandoned.

Malcolm Fraser
Former Prime Minister Malcolm Fraser. Photo: AAP

Policyholders in focus

Apart from extinguishing a potential source of revenue for the Fraser government, the legal advice had far-reaching implications for the way the HIC commissioners and executives understood their responsibilities towards policyholders of the health fund.

Throughout the 1980s and 1990s, the HIC asserted in official publications that the beneficial owners of the fund’s assets were its policyholders, not the Commonwealth.

When rumours began circulating in 1988 that the Hawke Government was contemplating a privatisation of Medibank Private, the chairman of the Health Insurance Commission, Fred Millar, asserted in the authority’s annual report that the Commonwealth had no beneficial rights to the fund’s assets.

“Medibank Private is a non-profit organisation based solely on its contributors’ funds. The Government has no financial interest in Medibank Private’s assets and reserves. Medibank Private’s assets and reserves are the property of its contributors. As no financial gain or other benefits would accrue to the Government or to contributors from the sale of Medibank Private, it is difficult to establish any commercial justification for its privatisation.”

Mr Millar’s comments should not be construed as the self-serving rhetoric of a protective bureaucrat. In the 1980s, Mr Millar was among Australia’s pre-eminent corporate lawyers. His legal expertise, which he deployed with devastating effect in various corporate roles, earned him directorships on a swathe of companies including a famous stint as the chair of TNT Limited.

Millar’s attitude to the fund’s ownership continued to reverberate long after he left the commission. In 2004, the directors of the entity now known as Medibank Private Limited echoed his precepts about who were the beneficial owners of the fund’s assets.

“Medibank Private is a not-for-profit Government Business Enterprise, with the sole purpose of providing high quality, excellent value private health insurance to our almost three million members. Medibank Private must earn sufficient returns to be financially sustainable, and build reserves to weather volatile, unforeseen circumstances that may adversely impact member claiming. No dividends are paid and all of Medibank Private’s financial resources are directed to member benefits.”

Medibank architect: ‘sale unlikely’

The cabinet documents confirm the views aired by Professor John Deeble, the architect of Medibank Private in 1976 and a former board member of the Health Insurance Commission. In an interview with The New Daily, Professor Deeble questioned whether the Abbott Government’s proposed sale could proceed.

“The question of ownership in 1976 wasn’t raised because it was never considered that the government owned Medibank Private,” says Deeble.

“The working understandings of the Health Insurance Commission in my period on the board was to work for the benefit of policyholders. We saw ourselves in a custodial role. We couldn’t sell it. We saw ourselves as trustees.”

Apart from $10 million of seed capital that was later repaid, the Federal Government did not make any capital commitments to Medibank Private before 2005. For more than 30 years the fund relied on the contributions of members to meet its capital requirements. It was a self-funding business.

John Howard
John Howard

The split

In 1998 the Howard Government corporatised the fund, which had the effect of separating it from the Health Insurance Commission. Under the restructure, the Commonwealth became the sole shareholder in the business, acquiring 100 shares for which it paid $100. No shares were offered to policyholders despite the fact that they continued to hold beneficial rights to the assets.

The 1998 restructure, which was overseen by the then health minister, Michael Wooldridge, resulted in net assets of almost $300 million being transferred to the balance sheet of the new corporate entity. While the government’s rationale for the restructure was to eliminate the unfair competitive advantages enjoyed by Medibank Private through its co-location of branches with the public insurer, Medicare, a senior manager of the private insurer claimed in September 1997 that there were also other objectives.

Medibank Private’s general manager at the time, Ken MacDougall, told the House Community Affairs Legislation Committee that “embedding public ownership” was part of the government’s intent for corporatisation.

“The other point that I need to make in terms of the government’s policy was that it was a clear decision; that it was not aiming to ‘privatise’ Medibank Private; and that it wanted this legislation to ensure that government ownership of Medibank Private was embedded in the legislation.”

Who owns it?

Debate on whether the government is the sole owner of Medibank Private might hinge on whether the 1998 corporatisation created a new set of ownership arrangements, where the Commonwealth through the Federal Parliament installed itself as the sole shareholder for consideration of only $100.

This possibility is one which has caused former directors of Medibank Private such as Professor Deeble to describe the present privatisation proposal as flawed and unjust. Prof Deeble believes that policyholders’ interests were not properly taken into account when the corporatisation occurred in 1998.

“No, I don’t think they took into account the interests of policyholders in the restructuring,” he says. “They only saw them as customers – the policyholders haven’t been properly treated for many years.”

In 2005 the Howard Government injected $85 million of fresh capital in the business and received 85 million new shares.

Fair enough.

But the question that remains unanswered is, why did policyholders miss out on shares in 1998 when $300 million of surplus assets belonging to them were transferred to Medibank Private Limited?

It’s a brutally fair question to ask the current government in light of the Fraser Government’s contrasting view of its legal obligations to the fund.

National Archive of Australia
National Archive of Australia

George Lekakis has been a finance journalist for 20 years, working at the Herald-Sun, the Australian Financial Review and Alan Kohler’s Eureka Report. He currently teaches investigative and business journalism at Monash University.

View Comments