St Vincent's Hospitals and nib Health Fund - A Dangerous Game of Chicken

St Vincent's Health's Termination with nib Health Fund is an example of an intentional strategy well executed (so far) but will it work?

Yesterday St Vincents Health broke with a long tradition of partnership when the St Vincents Health Group CEO, Chris Blake, issued nib Health Funds with a termination letter. As soon as October this year, this will mean that nib members, should they attend any of the 10 St Vincents Health Hospital around Australia would face significant out-of-pockets at a time when many Australians are struggling to even pay the bills.

Over the past 18 months, I have supported various hospitals and health funds around negotiation strategies and termination approaches while managing the implications of these events. In watching this termination unfold, a few critical things are obvious:

1. This is an intentional and well thought out Strategy by St Vincents and, so far, it has been well executed.

Termination posturing is nothing new to large scale and complex negotiation. In-fact many hospital providers will raise the risk of termination during negotiation as a defined strategy to extract as much price consideration as possible.

What is interesting is that, from the outside, while this may have featured in the negotiation discussions, it is clear that the rapid move to termination has caught nib and it's buying group Honeysuckle Health by surprise. While nib / Honeysuckle Health may have been expecting a termination letter to be sent, it is clear they were not expecting the aggression from St Vincent's in pairing this with a well thought out media attack in parallel.

In most initiations of termination, both parties will generally take a week to try and resolve the negotiation before public announcements. This gives the Health Insurer time to resolve the issue before brand and reputational impact occurs - which hurts sales and retention - and reduces the operational impact of an announcement for hospitals who need to manage patient and doctor expectations when publicly announced.

2. This has been in the planning by St Vincents for weeks if not months

Having a clear negotiation strategy, understanding how you intend to manage the lifecycle of the negotiation and implementing it aggressively is critical to getting the outcomes needed. This isn't easy.

It takes deep commitment and buy in from executive leadership and your board. It requires significant investment in time, effort and resource to be ready to activate a termination that, if your primary negotiation strategy works, will hopefully not be needed. It also takes courage to stay on plan and execute when you know the consequential cost to your internal and external stakeholders, patients and doctors.

Everything in how St Vincent's has executed it's strategy points to weeks ,if not months, of planning for a termination event. This may not have been initially specific to nib, rather over the past 12 months St Vincent's has likely had to initiate negotiations with various health insurers and, as part of all of those discussions, termination would have been a potential outcome.

Having a play book for termination is critical in the current climate, having one that is actionable though, points to a level of maturity which indicates St Vincent's either has previously nearly triggered a termination, or made a decision weeks before that this would be the best approach to extract their targeted indexation increase from nib.

3. They picked the right target, and at the right time

An enquiry into hospital viability by the Minister of Health's offices, a publicly listed a company who relies on share price as a measure of success and the start of investor reporting season......

There are no coincidences here. A very large and public termination with nib, as the health insurer heads into reporting season with investment analysts, is intentional. St Vincents not only wants to hurt sales for nib but is also hoping to negatively impact nib's share price.

nib traditionally reports its full year results to the market in August each year. That will be just before the termination takes effect in October. More importantly, industry analyst who are critical in deciding what nib shares are worth over the coming months, will be watching this with baited breath and will be trying to predict how it will impact the forward value of the company.

Aside from Medibank, nib is the only other listed Private Health Insurer who faces these sensitivities. Given both parties point to a protracted negotiation leading up to the termination, this indicates that St Vincent's made this aggressive decision weeks ago, but has had the maturity to prepare and launch the termination at the best time to hurt their opponent.

So, what does this all mean?

Does this all mean that St Vincent's will win this battle and nib will capitulate? History indicates that the odds are more generally in the favour of the hospital provider in events like this. That said though, they face a mature business who is positioned well in marketing strategies and can't afford to be seen as losing by the share market.

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St Vincent's also faces a significant challenge in the geography of where its hospitals are located. St Vincent's Griffith is the only regional hospital where nib members have no other option. All other hospitals are in areas where there is strong hospital competition and significant options for not only patients but surgeons to move to. If the termination stretches on, St Vincents may find themselves very quickly in a war of attrition as other hospitals try and use this event to poach high revenue surgeons from the hospital group.

Ultimately this is a game of brinkmanship and, so far, St Vincent's is showing all the signs of having caught nib flat footed and under prepared. How the following weeks and months progress will be critical if they are to succeed from this approach and, as anyone involved in a termination will tell you, it is not an easy road ahead.

More troubling for St Vincent's is if nib decides that it doesn't really need them in it's networks. Losing coverage for nib members, especially in NSW, will make doctor retention against it's competitors almost impossible. Ultimately, if this works it could mean a long term win for the hospital operator with the reward of revenue security. If it loses though, we could see the first true major group be brought to it's knees and go insolvent.