Medibank Private Limited (MPL) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Medibank 2020 Half Year Results Announcement. [Operator Instructions] I would now like to hand the conference over to Mr. Craig Drummond, Chief Executive Officer. Please go ahead.

Thanks very much. Good morning, and welcome to the Medibank half year financial results presentation. I'm joined today by our executive leadership team, including our CFO, Mark Rogers. Despite some challenges in the first half of 2020, focusing on delivering a better customer experience has continued to deliver growth in our business through improvements in both acquisition and retention. Pleasingly, we saw service NPS continue to improve at both Medibank and ahm. I will discuss the key highlights from the result, our strategic priorities and then hand to Mark for the more detailed financials. I'll close with some comments regarding broader sector reform and the outlook and then take your questions. Let me start with some financial highlights on Slide 4. On a continuing basis in the first half, group operating profit of $218.8 million and group NPAT of $178.6 million were down 20.9% and 9%, respectively. Health insurance operating profit decreased by 20.4% to $224.2 million. Today's result reflects the continuation of the higher claims environment we saw in the second half of 2019. And reinvestment in customer benefits, such as our new Members' Choice Advantage Dental Network. Growth in net claims of 5.9% includes a 5.6% increase in claims expense, an almost halving of risk equalization receipts and a continuation of subdued hospital utilization. The key driver of claims growth was a 6.4% increase in prostheses costs which was responsible for 69% of the increasing growth of hospital claims. This is extraordinary given hospital utilization was only 1.1% for the half. We are continuing to manage affordability in claims through a range of initiatives. These include on track management, payment integrity, including targeted auditing, investing in alternative settings to deliver health care as well as advocating for wider reform of the industry. Front and center of the reform agenda is dealing with the large disparity between the rate of increase in surgical procedures and prosthetic device utilization. While claims management will remain crucial going forward, it has been pleasing to see improved revenue growth, stringent operating cost control and the continuation of policyholder growth of 11,700 resident policyholders for the half. Finally, I'm pleased to announce that we'll pay an unchanged interim dividend to our shareholders of $0.057 per share which is just above our annual target dividend payout ratio range between 75% and 85% of underlying NPAT. Turning to Slide 5, at our FY '19 result, we updated several of our milestones, raising the bar on PHI growth, Medibank Health and our productivity aspirations. Customer advocacy has been and continues to be a focus for us. It's pleasing to see that by focusing on our customers, we continue to strengthen the business. This is demonstrated by our strong service level Net Promoter Scores across both brands and considerably lower PHIO complaints, which is resulting in substantially stronger retention levels. The Medibank brand NPS has made significant improvement over the last 3 years. While we have not closed out the final gap to peers this year, we remain comfortable with inroads that we've made, meaning both brands are performing well. Put plainly, we have not been prepared to simply meet or exceed the advertising dollars spent by competitors and aggregators to meet this metric. Rather, we have pragmatically chosen to make a series of longer-term investments designed to create greater value and choice for our customers. As we transform into a broader health care company, the integration of health services continues to build on our customers' experience. With over 214,000 customer covered check-ins and 1 million health interactions over the past 6 months, we remain on track for these annual milestones. What is pleasing is this activity is firmly embedded in our operating rhythm. APRA data released on Tuesday showed we grew our market share 8 basis points over the past 6 months and continued solid performance across both brands. Medibank brand retention continues to improve, and if recent market trends continue, we are on track to stabilize Medibank brand policyholder volumes by the end of FY '20 and grow in FY '21. We are also on track with our new in-home care milestone to have more than 300 virtual hospital beds by the end of FY '22. These are beds where patients can choose hospital substitute treatment at home where appropriate. As at December 31, Medibank had 247 virtual beds, 73% of which are used by Medibank customers. Last year, we announced a new milestone to organically replace the reported $30 million operating profit for Garrison by FY '22. And while work remains to be done, this milestone continues to be on track. And finally, we delivered an additional $10 million in productivity savings over the last 6 months, on track with our full year target of $20 million. Referring to Slide 6, our strategy remains unchanged: to firstly grow the business by building tangible competitive advantage in PHI; and secondly, to transform the business into a broader health care company which the executive remains focused on. Over the past 6 months, our strategy has been informed by a marketplace that has been focused on implementing one of the largest reform agendas ever undertaken by our industry, meeting the ongoing heightened regulatory obligations and facing into some more challenging financial conditions. This is resulting in less competitor-customer and product investment and an increasing number of PHI funds with financial challenges. The strategic imperative for Medibank is to drive improved customer outcomes, funded by increased efficiency in the delivery of health care services. Medibank's focus continues to be on growing our PHI business organically. But we do, however, remain interested in PHI acquisition, but only in a period of heightened industry stress. Moving to Slide 7, Slide 7 demonstrates our years of transition. Over the 4 years -- the past 4 years, we have invested approximately $70 million in providing greater value, differentiation and better services to our customers. These deliberate initiatives have played a meaningful role in delivering on our Medibank policyholder growth agenda. In FY '20, the initiatives that will drive competitive advantage are: One, our Members' Choice Advantage dental and optical network with the Dental Network saving customers around $10.5 million in out-of-pocket costs since January 2019, and the optical network offering customers better value and the opportunity to earn Live Better points. Two, our priority program which almost 1.7 million customers have taken up recognizes our customers with a tenure of more than 10 years, rewarding them through a one-off giveback in 2018 and ongoing access to enhanced services such as a dedicated service line and support from health professionals when they go to a hospital. Three, our Live Better Rewards program, rewarding customers for making healthy choices, allowing them to earn and redeem rewards, including savings on their premiums. This program has been rated the best reward program of all major fund firms by fund customers in the 2019 Ipsos survey. This is territory that health insurers have not invested in historically, and we believe represents significant opportunity for differentiation. Four, we continue to scale our health promotions and concierge services. This includes rolling out concierge services for pediatric hospital admissions and post-admission support for customers undergoing certain emergency or unplanned cardiac procedures. This is on top of our existing offering for hip and knee, pregnancy and cancer. Five, we're also building competitive advantage through our 180 virtual hospital beds used by Medibank customers, which continue to give them greater choice in how and where they receive care. Six, and finally, our dual brand strategy, which gives us competitive edge and flexibility in changing market conditions and allows us to offer the best combination of product, service and advice to our customers. ahm remains a growth leader in the industry, growing by 16,200 policyholders or 4.2% in the first half. We have implemented all these services while delivering our lowest premium increase in 19 years. We believe that each of these initiatives will add further momentum to our underlying policyholder growth. Turning now to Slide 8, both the public and private health care systems are facing greater pressure as a result of rising health care costs. The future of Australia's health system is dependent on our collective ability to deliver health care in a more affordable and efficient way. Ongoing change is an absolute certainty. Our experience as Australia's largest telehealth provider demonstrates our credentials to play a meaningful role in delivering health care in nontraditional settings. Over the past 6 months, we have continued to need to manage strong growth in contact volumes in our telehealth business. In more recent times, as you know, we have become an early adopter of in-home care. Encouragingly, the federal government is now working towards providing greater incentives for hospital in the home services with the public system, in particular, actively engaged on this path. We know that there is still a long way to go in building meaningful capacity of in-home services, but this shift needs to be accelerated in order to deliver affordable and sustainable care that meets customers' changing demands. We remain focused on extending our work in this area. Over the last 7 months, Medibank, through HSS, has been delivering an in-home care mental health pilot for the South Australian government. So far, approximately 150 clients have been supported to avoid a hospital admission or had their length of stay reduced through the program. These people have been linked into primary care services for ongoing support, and they have had their mental health management skills supported by our mental health professionals within the program. We believe hospital avoidance programs such as these will continue to grow over the next 3 years with interest from both public and private payers and providers. Importantly, Medibank's commitment to quality care was recently recognized in gaining the National Safety and Quality Health Service Standard required for our hospital license, setting us up to become the leading virtual hospital in the country. Expansion of our in-home care capability has seen 4,100 patients utilize hospital-in-the-home or rehab-in-the-home in the first half of which more than 2,500 were Medibank customers. We are pleased to be providing in-home services for other private and public payers, which will provide real benefit to Australians in our health system. In recent weeks, Bupa has signed an agreement to partner with HSS to provide care-in-the-home to their customers as they also look at alternative settings to provide more efficient and effective care to their customers. There remain many opportunities across the country as patients look for more convenience and as payers see clinically safe services at more affordable price that are now widely available in other jurisdictions. Our strategic focus to support alternative settings for delivering care giving customers greater choice and enhancing patient outcomes is progressing. We are continuing to scale reconditioning rehab, infusions and palliative care nationally. We are pleased with our trial with Nexus Hospitals providing Medibank customers a 0 out-of-pocket medical experience joint replacement with an early-to-home discharge where clinically appropriate. While early days, we are looking to expand volumes significantly later this quarter when new doctors come on board, and we extend this trial to a number of other sites nationally. This trial has confirmed our view that as patient needs and demands are changing and health care costs are approaching unsustainable levels, the further development of high-quality alternative care settings such as ambulatory centers, day hospitals and in-home care has never been more important to deliver better outcomes and experience at a lower cost. This is why we are investigating opportunities for the rollout of a 0 or reduced out-of-pocket cost experience to a number of short-stay hospitals across Australia, including in Sydney, Brisbane and Adelaide. In some cases, these participating hospitals need to invest in new infrastructure and equipment to establish the innovative model at scale. As a result, we are considering selectively partnering or co-investing with these hospital operators and doctors to enable a more widespread rollout of the 0 or reduced out-of-pocket cost experience. Initially, this will be for customers seeking joint replacements and other orthopedic surgeries. Over time, we hope to expand to include other major modalities, many of which are routinely being delivered via [ earlier to ] home discharge model in overseas jurisdictions. This would give customers more choice about where they receive their treatment with in-home care support. This shift in the way health care is delivered in Australia is a game changer that is inevitable. I'll now hand over to Mark.

Thanks, Craig, and good morning. This result demonstrates continued improvement in the Medibank policyholder trajectory, good cost control and a strong capital position. However, it also reflects a continuation of the elevated claims environment we saw in 2H '19. Before I go into more detail on the operating performance, I'll make a few comments on the group's profit and loss statement. Profit before tax was down 7.1% with the 20.9% reduction in group operating profit partially offset by a significant increase in investment income. The increase in [ investment income to ] company expenses includes a one-off, $3.3 million benefit from implementing the new leasing standard, AASB 16, partially offset by additional amortization expense for acquisition of HSS. Higher D&O insurance charges were again a major driver of the increase in corporate costs, and the increase in the effective tax rate from 28.5% to 29.9% reflects the mix of income on our investment portfolio. Reported EPS was down 14.3% to $0.065 per share. And underlying EPS, which adjusts for the normalization of investment returns was down 23.2%. Now I'll take you through our financial and operating results in more detail, starting with the health insurance result on Slide 11. Health insurance gross profit was down $83.5 million or 15%, and to $472.3 million, with revenue growth of 2.3%, offset by 5.9% increase in claims expense. This period includes a $22.6 million strengthening of the 30 June claims provision compared to our $10.3 million released 12 months ago. Excluding these provision impacts, growth in claims expense reflects a continuation of the high prostheses costs we saw at the back end of FY '19, and investment in our Members' Choice Advantage Dental network. I will touch on these items in more detail shortly. Turning to Slide 12. Our growth trajectory continues to improve. Pleasingly, in the last 12 months, resident policyholder numbers increased by approximately 20,000 or 1.1% with improvement in both acquisition and retention. The stabilization of Medibank policyholder numbers continues with a 0.7% decline, materially lower than the 1.5% decline 12 months ago. Importantly, Medibank policyholder numbers were down by less than 5,000 or 0.3% in the last 6 months, consistent with our aspiration to stabilize policyholder numbers by the end of FY '20. Medibank retention continued to improve, supported by our Live Better program and Members' Choice Advantage Dental Network. We expect these to aid customer retention and a continuing focus on the corporate segment to support acquisition. In line with FY '19, ahm policyholder growth was 7.9% with strong growth through aggregators this period following the release of reform compliant products ahead of many competitors. Whilst this resulted in the share of acquisition from aggregators, increasing to above 60%, we expect this to closer the 50% going forward. And finally, the level of downgrading, which is the difference between the average rate rise and revenue growth per policy unit reduced to 170 basis points. This reflects continued lower premium increases and favorable mix impacts. Slide 13 covers claims. Growth in net claims of 5.9% includes a 5.6% increase in claims expense and an almost halving of risk equalization receipts with our claims growth continuing below the industry growth. Underlying claims growth, which adjusts for the impact of provision releases was 3.4%, up from the reported 2.1% in the prior period. This is despite resident hospital utilization growth remaining subdued which at 1.1% was only marginally above the prior period. The major driver of increasing hospital claims growth was a 6.4% increase in prostheses costs, with utilization growth above 5% and no price reductions this period. Whilst an estimated $100 million of price reductions became effective on 1 February, the prostheses utilization growing at almost 5x the rate of hospital admissions, something must also be done to address this unsustainable disparity. Increasing dental utilization which more than doubled was the major driver of extras claims growth. And this follows the January 2019 launch of our Members' Choice Advantage Dental Network. This provides many bank customers with additional services with no out-of-pocket charges and is critical to our product differentiation strategy. On Slide 14, you can see the prostheses and dental claims were the major drivers of the 1.3% increase in underlying claims growth, accounting for 60 and 40 basis points, respectively. Importantly, in aggregate, growth in all other claims, excluding medical claims were in line with the prior period. You can also see how prostheses claims growth started to increase in January 2019 but have stabilized in the last quarter. In the second half, we expect underlying hospital claims growth to reduce, supported by the prostheses cuts I just mentioned and further benefit from our claims management initiatives. We expect underlying extras current claims growth to be in line with the first half before returning to more normal levels as the Members' Choice Advantage Dental Network matures. Based on these factors and subject to no new prostheses headwinds, we expect underlying claims growth for FY '20 to be approximately 3%. Turning to Slide 15 and a few brief call-outs and some of the other drivers of claims growth. The reindexing of the MBS schedule from 1 July and investment in our GAAP cover schemes drove the increase in medical costs. Pleasingly, the benefit from our claims management initiatives as well as case mix have partly offset underlying price inflation and resident hospital admissions. Alternative therapies claims grew at a materially lower rate than in prior periods, with recent regulatory changes requiring a number of services to be excluded from our products. And finally, claims growth in the overseas portfolio was largely driven by strong policy unit growth and investment in additional customer benefits. Moving to Slide 16, which covers management expenses. Management expenses fell 9.6% to $248.1 million, with reductions in both D&A and operating expenses. As indicated at the FY '19 result, D&A was expected to fall in FY '20, following the extension of the useful life of key IT assets. This contributed to D&A charges falling by $3.9 million in the half, and are expected to fall by $5 million across the year. Pleasingly, operating expenses were 9.6% lower with approximately $10 million of productivity savings, a number of timing impacts and a lower accrual for incentive payments. We are targeting $50 million of productivity savings across the next 3 years and are on track to deliver our target of $20 million in FY '20. A combination of the reduction in management expenses and growth in revenue has resulted in the management expense ratio falling 100 basis points to 7.5%. And finally, for the full year, we are now expecting management expenses of approximately $540 million with a $5 million reduction from previous guidance, largely driven by the expectation of lower incentive payments. Now turning to Slide 17, where we have shown Medibank Health's performance from continuing operations. The last 6 months have been a period of transition as we exited the Garrison contract and set the continuing businesses up for growth. This included the launch of Live Better and preparing our home care business for expansion. During the period, we invested an additional $1 million in home care capability and $3.6 million in Live Better running costs, noting these running costs were partially offset by $2.5 million of revenue from program partners. Pleasingly, underlying revenue growth, which excludes the additional 2 months revenue this period from HSS and Live Better, was approximately 10%. The increase in management expenses includes the investments I just mentioned partially offset by a $4 million benefit from the restructure we took -- undertook at the end of FY '19. Operating profit was up $0.7 million or approximately $3 million excluding these investments. Operating margin was down 130 basis points with changing business mix the major driver of the falling gross margin. Over the next 6 months, we will continue to focus on the expansion of our home care business and embedding Live Better, both of which will support improving performance as we realize the benefits from increasing scale. And finally, we no longer expect to see the same seasonality in operating profit that we saw in prior years following the exit from the Garrison contract. Looking now at our investment portfolio on Slide 18. Investment income of $38.5 million compared to $4.1 million in 1H '19 with higher returns in both the growth and defensive portfolios. This significantly improved performance in the growth portfolio reflects stronger returns in equities partially offset by softer performance in property particularly in retail funds, which have underperformed the broader property sector. We are in the process of diversifying our retail funds exposure to include office funds. Income in the defensive portfolio was higher, with the impact of the lower RBA cash rate on domestic holdings more than offset by favorable market conditions, in particular falling interest rates on offshore holdings. Underlying investment income adjusts for returns on growth assets relative to our long-term return expectation of [ 1% ] and for credit spread movements. Underlying investment return was 115 basis points above the cash rate, which on an annualized basis, is marginally above our targeted range of 150 to 200 basis points above the benchmark. A few brief comments on the cash flow statement on Slide 19. The movements in working capital were associated with the Garrison contract. The purchase of business line reflects there was no M&A during the period, with HSS having been acquired in late August 2018. The lower income tax paid reflects the timing of tax installments and a large movement in the purchase of investments was due to the rebalancing towards short-dated cash holdings. Moving to capital on Slide 20. Our capital position remains strong with PHI capital at the top end of the target range and unallocated capital in excess of $200 million. This means we are well placed to fund our M&A aspirations as well as consider capital management in the future. Health insurance required capital increased to support revenue growth and other required capital reduced by $42 million following the exit from the Garrison contract. In December, APRA released its first consultation paper on the proposed new PHI capital standard which we expect will come to effect on 1 July, 2023. This was in line with our expectations, and we are encouraged by the possibility that APRA may provide transitional relief for capital instruments issued prior to this date. This will be helpful as we consider the issuance of subordinated debt to diversify our capital from 100% shareholders' funds. Moving on to the dividend on Slide 21. Consistent with 1H '19, the Board has declared a fully franked interim dividend of $0.057 per share which is an 88% payout of underlying NPAT. Given our strong capital position, we expect the payout ratio for the full year to be at or above the top end of the 75% to 85% target range. Finally, on to Slide 22. The operating environment remained challenging, with premium increases continuing to be below health cost inflation exacerbated by prostheses costs growing at an unsustainable rate. Many of the actions we have taken to date whilst effective and they are business as usual and we will need to do more. Achieving our policyholder growth aspiration remains key. However, our focus will increasingly shift to portfolio management which combined with low premium increases is expected to further reduce the level of downgrading. On claims management, we will target our payment integrity investment and resources on areas of higher claims growth. This includes building additional analytics capabilities to better target our ordering approach and embed broader preventative capabilities. We will continue to offer alternative care settings to our customers and to facilitate this, as Craig mentioned, where appropriate, we will allocate capital to accelerate this process. Whilst we are making good progress towards achieving our productivity targets, we will continue to investigate further productivity opportunities and we'll provide an update at the full year result. And finally, we continue to pursue growth outside of our resident health insurance business, including scaling Live Better and our home care business, continuing to invest in our nonresident health and diversified insurance businesses and supported by our strong balance sheet, the option for further M&A. Whilst the last 6 months have been challenging, we remain focused on leveraging our competitive advantages of scale, differentiation and diversification to ensure we are well-placed to respond. We are very mindful of balancing short-term financial outcomes with the long-term health of the business whilst retaining our customer focus. I will now pass back to Craig, who will make some comments on future industry reform and the outlook.

Thanks, Mark, and referring to Slide 24. There is strong recognition from all parts of the health sector that private health care is fundamental to the strength of Australia's health system. And there is equally strong recognition of the current challenges facing the private health care system. They have been explored and explained by parliamentary inquiries, government departments, management consultants, health economists, medical professionals, hospital groups and indeed, insurers. The government has taken progressive steps in implementing reforms, which have had some positive impact on the system. The sharp decline in hospital lives insured appears to be abating with reform and lower premiums. But the challenge remains to ensure that we continue to move with pace and that the known reforms are delivered and delivered quickly. Turning to Slide 25, as an organization, we've taken significant action to address both affordability and participation. We've improved our systems, our services and products to better meet the expectations of our customers. We're targeting $50 million of productivity savings across the next 3 years and are on track to deliver a target of $20 million in FY '20. We've introduced care in the home programs. We understand the critical role of preventative health and well-being and to build a program that is available to all Australians. Our payment integrity program ensures that we aren't paying for things we shouldn't. And we continue to work to find new care settings with reduced or no out-of-pocket costs. In over each of the last 5 years, we have delivered lower premium increases for our customers. While we are confident more reform will eventuate this year, we need a continued focus on the reforms that will ensure that the system is sustainable for future generations of Australians. Additional and meaningful industry change must be government-led. It is only the government that has the policy levers to significantly boost industry participation. Through measures such as restoring indexation to the rebate, making the Medicare levy surcharge more relevant to today's income through a 100 basis point increase or tightening lifetime health cover requirements. Furthermore, government, along with funders and providers have a major role to play in reducing waste and cost from the system. In facilitating broader in-home health care services, government needs to consider MBS funding for telehealth consultation by medical specialists, a broadening of the definition of hospital substitute treatment under the PHI Act and a broadening of the definition of what constitutes a chronic disease management program. Additionally, with more than 10% of hospital admissions and ED presentations coming from residential aged care facilities, greater encouragement of hospital in the home services would take considerable pressure of this growing source of demand for the health system. As a funder, Medibank has been prepared to put our money where our mouth is. We acted in good faith, passing on the benefits of the government's lower prostheses pricing through lower than otherwise possible premiums to our customers. But as we sit here today, our claims data and the APRA data clearly shows that the benefits have not been realized and, in fact, have been circumvented through volume increases far in excess of hospital surgical volume growth rates. With prostheses utilization growth at almost 5x the rate of hospital utilization growth, urgent attention is required. As I've said before, Medibank cannot act alone. The whole of the private health industry must play a meaningful role to ensure that additional reforms happen now. A failure to do so will result in fewer choices for customers with considerably fewer health insurers, private health care providers and a seriously burdened public system given the building federal and state fiscal challenges. The outcome of inaction was clearly articulated by APRA in recent weeks in expressing their concern for the sustainability of the private health care industry if we don't move quickly. Let me conclude on Slide 26 with some comments on the outlook. On the current trajectory, we continue to expect Medibank brand volumes to stabilize by the end of FY '20 and grow during FY '21. We expect hospital and ancillary utilization to remain around current levels for the balance of the year. We expect underlying claims growth per policy unit of approximately 3% for FY '20, management expenses are expected to be approximately $540 million for FY '20. We have made good progress on our productivity program, and we'll provide an update at the full year results as we continue to investigate other opportunities. As a result of the combination of these factors, we are confident that health insurance earnings will be higher in the second half. Targeted inorganic growth for Medibank Health and health insurance remain areas of focus. We expect our dividend payout ratio to be at the top end or above our target range of 75% to 85% of underlying NPAT for FY '20. And we will review our capital management options with our FY '20 results. Our intention continues to remain to aspire to stronger growth in volumes at a reasonable margin. Finally, I'd like to take the opportunity to thank the executive team and everyone at Medibank for delivering this result. I'll now hand over the call for any questions. Thank you.

[Operator Instructions] The first question today comes from Andrew Goodsall from MST Marquee.

Just looking at the savings you're expecting at the full year from management expenses, the first half run rate would indicate that you potentially could do a little bit better. Just trying to understand what is it around that whether you've got some restructured charges or anything else coming through there.

So Andrew, second half management expenses are traditionally higher than the first half. That reflects that we've got tax statements, premium review and the peak selling period when marketing expenses are typically higher. We did call out a number of timing issues in the presentation as well. So we'd expect $540 million expenses unless there's a nonrecurring benefit or expense that comes through that we're not currently expecting.

And just on claims control, just trying to understand sort of trend lines there, just sort of how -- I know you're not going to give away specifics on private hospitals, but just sort of how you're sort of seeing outside of prostheses and so on, how you're sort of seeing that trend line? And I was going through your public hospital savings with the reduction in what you're paying per room, how that sort of might all play to claims trend line?

Sure. So if you step aside from the prostheses price and utilization impacts and medical claims, across the rest of the hospital claims bucket, they are essentially flat versus the prior period. So effectively, what's happening in the claims line is, by and large, prostheses driven. There was some medical claims impact due to the reindexing of the MBS schedule, but we think that's a good investment in reducing out-of-pocket costs for our customers. If you look through our 3% forecast for the full year, that's implying 2.5% underlying claims growth for the second half, which -- that's actually not a bad outcome, given we still think the extras claims during the second half will be elevated. We're expecting the Members' Choice Advantage Dental Network will come through in terms of the total cost over the next 6 months. And you'd be aware that there are $100 million of prostheses cuts that come through from February 1. That's about, in round numbers, $25 million benefit for us across the next 12 months.

And just progress with the public hospital savings.

Yes. So we've seen over prior periods that the claims costs for public hospitals can have some volatility in it. So could we probably need to look through the whole 12 months before we form a firm view on what's going to happen on public hospital costs going forward? The 2 trends we are observing is a slightly lower utilization of private rooms, and we were very overt in the fact that we reduced the private room rate for New South Wales private rooms to bring them back in line with the rest of the country. And we are seeing the benefit come through our public hospital claims payments currently.

The next question comes from Andrew Buncombe from Macquarie.

Just 2 from me, please. Just interested to hear if you're seeing any impact on hospital volumes from the coronavirus so far in the second half '20.

Look, it's premature at the moment to make that call, but we haven't. So I think the answer to that at the moment is it's premature.

And then the second one was just a question on a part of the outlook, please. The comment that you expect the health insurance earnings to be higher in the second half. Just my long-term understanding was that there had always been a skew towards the first half industry profitability. So just if you can give us a bit of color on what makes this time different.

Yes. There's 2 major factors. First, you had a $22.6 million, strengthening of the provision in the first half that won't recur. I mean, obviously, you've got the prostheses savings in the second half as well as the full period impact of the New South Wales private room rate initiative coming through. And you should assume that progressively as we renegotiate contracts with hospitals, the benefit of those come progressively across the 12 months.

The next question comes from Kieren Chidgey from UBS.

Mark, just interested in picking up on the claims inflation for policy outlook slowing to 2.5, 2.6 in the second half, I think you called out the incremental prostheses reforms as one of the factors there. But obviously, that hasn't been particularly helpful over the past 12 months in terms of the results have actually delivered to the bottom line. So what gives you confidence you're going to get that drop-through on these incremental benefits?

Well, we've already got elevated utilization with prostheses. So typically, what's happened is the price cuts have offset the elevated utilization. In the prior period, we had no price cuts and elevated utilization. So we think, as we've seen in the past, the utilization growth that we've seen will be offset by the price cuts. I think one other key to call-out is if you look through the claims trend through the second half of '19, a lot of the headwinds we're currently seeing in the first half of '20 were evident in the second half of '19. So if you roll that forward, it's the uplift 2H '20 versus 2H '19 will be a lot [ more ] moderate than what we've seen in the last 12 months.

Andrew, it will be interesting to see also what happens with -- there's at least 2 government reviews going on in prostheses at the moment. So -- and our understanding is that they will -- they're essentially being fast tracked. So we'll see some pretty -- I think, some pretty interesting response from that before the end of the first half. So thanks, Kieren.

And on the revenue side of the equation, I think you said revenue per policy, up 1.6% on PCP. But you also referred to some initiatives around reducing downgrading going forward. Sort of -- is your expectation that revenue growth per policy may be able to nudge up a little bit as a result of those initiatives or not?

So Kieren, this is the first period we've had no rate rise headwind since I started. So that's a great positive. We are currently running at 170 basis points of downgrading, which is below the industry. And when we think going forward, that anything above 150 basis points isn't going to be sustainable for us. And look, of course, the Medibank policyholder trajectory and achieving the flat policyholder numbers is going to be super important in terms of improving the level of downgrading. We typically lapse at Medibank higher value policies than what we acquire out of ahm.

The next question comes from Matt Dunger from Bank of America.

If I could just go back to the claims growth and on the reserve strengthening, where are you reserving that at the moment in terms of claims growth? Should we expect ongoing reserve strengthening required?

So you always set your claims version at your best estimate. We saw at June 30, the need to strengthen. So we've taken that strengthening plus all other factors you've seen in the last 6 months ended 31 December.

Are you able to tell us what sort of level you're reserving that in terms of claims inflation?

So consistent with the most recent trend over the last 6 months.