The real risk for nib - the Domino Affect

Things have been relatively quiet since St Vincent's issued its termination notice last Friday with nib Health Funds. This is probably a good sign that both parties are back at the negotiation table and trying to work through their respective differences. Generally, it is a show of good faith that you do not continue active media engagement while actively negotiating, so it looks like some basic rules are back to being followed by both parties.

It also shows that the strategy by St Vincent's may have been far more effective than any insurer would like to admit.

Over the past week, I have had several calls with investment groups and industry analysts trying to understand what this termination could mean for nib and how it may impact the share price. While there is never any simple answer to this, I think the trading markets understand that generally, a termination can bring with it positive financial performance for a health insurer, at least over the short term. This can be seen in how little impact this has had on the nib share price, with it only trading around 15 cents lower per share a week after the termination. It also perhaps shows the market's assessment that the termination will likely be resolved before October.

So why, then, would nib be so keen to return to the table? Especially after what can be seen as a very aggressive approach by St Vincent's with no option afforded to nib to resolve the termination before it hit the media? After having already weathered the bad press from this, why rush back into negotiations, especially when the market has not significantly reduced the nib share price?

The answer is the Domino Effect. At the moment, nib is dealing with a singular termination with a significantly large hospital group. The real fear is that other hospital groups may use this opportunity to threaten or actually terminate agreements if nib does not agree to pay them more than currently agreed upon.

Given the current challenges in viability for the hospital sector, and the significant challenges small and medium-sized hospital groups face in achieving favorable outcomes from health fund negotiations compared to their larger peers, it makes sense for these hospital providers to be opportunistic when a termination becomes public.

This domino effect could be catastrophic for a health insurer. One of the primary value propositions of Private Health Insurance is access. If an insurer suddenly finds itself with a significantly smaller hospital network than competitors, while also enduring a media campaign from multiple organizations targeting its sales and member retention simultaneously, it could take the insurer years to recover.

In all well-managed termination events by health insurers, the Domino Effect is one of the most critical risks to manage. It is also one of the hardest to predict and the most complex to resolve. One of the best ways to mitigate this risk is to resolve the termination quickly, even if this means the insurer pays more than what it sees as a fair value increase to the other party.