Media releases

June 12, 2002

Medibank Private makes changes to increase efficiency

New Medibank Private Managing Director George Savvides has moved decisively to restructure the company and re-focus corporate strategy to address problems of emerging poor financial performance, which has become evident since late last year, recent volatility in benefit payouts, and public concern about recent private health insurance premium increases.

Mr Savvides, who took the role on an acting basis in mid-April, said the fund's strategy will move from market share growth to concentrate on a three-pronged strategy of member retention, reduced management expenses and on containing the growth in benefit outlay costs.

A two-month internal management review has resulted in the adoption of a new organisational structure which upgrades its focus on relationships with health care providers, on benefit outlays management and on cost containment with a view to creating the capacity to reduce the level of future premium increases.

A flatter corporate structure includes new executive leadership positions in Sales & Retail, Benefit Management and National Customer Care divisions reporting to recently recruited Chief Operating Officer Simon Blair, a long-time Australian health industry specialist who joins Medibank from the World Bank.

Mr Savvides said that the management of benefit outlays - an annual activity worth almost $2 billion - and provider relationships were previously managed within three separate Medibank business units without a specific executive-level accountable manager. These activities will be brought together in the new organisational structure.

The health fund will also reduce its overall management and specialist professional and technical ranks by 118 positions as part of a cost-reduction program designed to reduce the pressure on future private health insurance premiums. No staff reductions will occur in the Medibank retail branch network.

Recruitment to fill a number of other currently vacant positions has also ceased, with approximately 35 unfilled positions being removed from the Medibank organisational structure.

Customer contact positions will not be affected, to ensure Medibank's three million members are not inconvenienced by the organisational changes. Medibank Private remains committed to strengthening its retail branch network. A new retail store design concept will move into test phase in September, with roll out soon after, designed to improve face-to-face customer service. The fund will also review the location of its retail stores and other customer contact points to ensure customers receive the type of service they want at the most convenient locations.

Mr Savvides said Medibank was acutely aware that its recent premium increases, the first after a three-year premium freeze, had caused public and member concern.

"Our recent rate rises still leave us well below industry average on price. But we are conscious of the price-sensitivity of private health insurance and are determined to reduce costs and better manage soaring benefit outlays to help minimise future increases," he said.

A key to this is a significant investment we are making in new information technology capability.

He said Medibank had been working on its costs since late last year, reducing its management expense ratio or MER - - the cost of running the business expressed as a percentage of premium income - - from 12.7% for the year ending June 2001 to 10.6% forecast for this year, with plans to go below 10%, which is at the leadership end of private health insurance (PHI) industry averages.

But continuing volatility in benefit outlays has meant costs must continue to be reduced even further, leading to the difficult decision to reduce positions not directly involved in the day-to-day support of the core private health insurance business.

The jobs to be cut are mainly in Medibank's Melbourne corporate office but a number of positions in other states are also being made redundant.

"We are paying out $37.1 million a week in member benefit payments compared to $31.5 million per week a year ago and this amount continues to increase," Mr Savvides said.

But innovation, not cost cutting, would hold the key to Medibank's long-term success as a PHI leader.

As an example, working closer with providers and with regulators to assess opportunities to allow Medibank to pay its members health bills for health care outside hospitals, when appropriate, such in the last days of prolonged treatment, is one type of innovation in step-down care which has excellent prospects for reduced costs but improved patient care.

Mr Savvides paid tribute to Medibank staff, including those the company finds itself reluctantly unable to keep, for their ideas and input during the review period.

"I have spoken to about 1000 staff all over Australia in recent weeks and have been deeply impressed with their passion to improve the company's performance, their commitment to trying their best for customers and the ideas they have offered on how we can continue to improve our company," he said.

He said the internal strategic cost review had begun before Medibank had known about the Federal Government's recent announcement of a scoping study into the possible sale of the private health insurance fund. The focus on performance is even more relevant now.

Mr Savvides, a former Managing Director of Sigma Pharmaceuticals and Smith + Nephew, was appointed as a non-executive director of Medibank in September 2001. In April this year he was asked by Medibank's Board to take up the role of Managing Director on an interim basis pending recruitment of a permanent Managing Director.

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