Medibank Private Limited (MPL) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Medibank HY '21 Results Investor and Analyst Teleconference. [Operator Instructions] I would now like to hand the conference over to Mr. Craig Drummond, Chief Executive Officer. Please go ahead.

Good morning, and welcome to the Medibank Half Year 2021 Financial Results Presentation. I'm joined online by our executive leadership team, including our CFO, Mark Rogers. I'm pleased to report that our company has emerged strongly from the disruption caused by COVID-19. Today, we have delivered a high-quality result underpinned by strong policyholder growth across both brands, a stronger Medibank Health result and ongoing vigilance on management costs. We've seen a real shift in Australians prioritizing their health and well-being, given COVID and heightened pressure on the public health system. As a result, the private health insurance proposition has become more compelling for many Australians, including those who were previously uninsured. Medibank remains focused on differentiating and growing our PHI business through leveraging our dual-brand strategy and continuing the transformation into a broader health care company, which we are making good progress on. Today, I'll take you through the key highlights from our results, a change to one of our milestones, reflecting a bolder policyholder growth ambition, our strategic priorities and cover the recent Myhealth investment in some detail. I'll then hand over to Mark for the financials, to provide an update on our outlook, and we'll then take your questions. Starting on Slide 4. We are pleased with this result. Group operating profit up 16.6% to $255.2 million and group NPAT up 26.8% to $226.4 million. COVID continued to impact both premium revenue and claims expense, with our customer support measures, including the April 1, 2020 premium increase deferral, reducing revenue by $109 million, and operating profit by $10 million this period. Mark will discuss the claims liability. However, we remain confident that we are adequately provided for post to COVID recovery. We will continue to assess the deferred claims liability due to COVID every 6 months. Any permanent net claims saving due to COVID will be given back to our customers through additional support in the future. Pleasingly, despite COVID, we've stayed vigilant on costs, keeping our management expenses flat with an MER of 7.5%. Furthermore, despite the impact of COVID on Suspensions, we are particularly pleased with our policyholder growth. In the first 6 months of FY '21, we have grown policyholders by 49,000, including 17,600 for the Medibank brand. This is the first time we have grown the Medibank brand in any 6-month period since 2013, and this trend has continued into February. The operating profit of Medibank Health was up 41.4% to $18.8 million, reflecting the broader trend towards adoption of telehealth and clinical home care services, both accelerated by COVID. More favorable investment markets have resulted in net investment income increasing by 86.5% to $71.8 million. Finally, the Board has determined to pay a fully franked interim dividend of $0.058 per share, which is a 79% payout ratio of underlying NPAT. Turning to Slide 5. Pleasingly, we are on track to deliver on our milestones. I'll first speak to our health insurance growth milestone. We've shifted our previous target of total policyholder growth of approximately 2% to now in excess of 3%, including an expectation of growing the Medibank brand by approximately 1% during FY '21. The change to this milestone reflects the encouraging policyholder result I touched on earlier, and the confidence we have to be bolder in our growth ambitions. As we have previously discussed, one of Medibank's best growth options is to grow our existing business at a faster rate. Encouragingly, over the last 12 months, we have grown the equivalent of the membership base of the 13th largest player in the market, which includes market share growth of 28 basis points for this half. As at February 13, our total policy -- our total year-to-date policyholder growth stood at 2.7%, excluding the net impact of suspended policies. I'll now take you through the progress on the other milestones. Customer advocacy is in great shape, as shown by our service NPS, which is above target for both Medibank and ahm, with both brands at record highs. While we report on our service NPS, I did want to highlight that our group customer NPS or brand NPS is also at record highs. Furthermore, we've seen a strong improvement relative to our competitors, which is consistent with the market share gains I just spoke to. We will provide an update on employee advocacy at the full year, with surveys to date indicating we remain comfortably above our targets. The health and well-being milestone is also tracking very well across the areas of education, prevention and support. Health and well-being promotion remains a key differentiator, and I'll talk to some of our main programs on Slide 8. We are above target for our in-home care milestone, which is why we will review this milestone at the full year result. Our target was to reach more than 300 virtual beds by June 30, 2022. With a significant uplift in volume, we now have 384 beds. This growth has largely been driven by a significant increase in rehab in the home for total joint replacements. While some of this growth is COVID related, there is no doubt that pandemic as fast forwarded delivery of health care outside the traditional hospital setting. We are also on track on our Medibank Health milestone. The business has benefited from higher demand for telehealth and clinical home care services through the COVID environment. We expect this trend to be ongoing. And finally, on productivity, we are on track to deliver our full year target of $20 million. Now to Slide 6. Given the current momentum in the business and with our milestones on track, there are no material changes to our strategy. We remain focused on growing our private health insurance business at a faster rate and continuing our transformation into a broader health care company. In terms of priorities, continuing to differentiate our offering through leveraging our dual brands, giving customers a more personalized health and well-being experience and scaling our loyalty offerings will remain key. We will also maintain focus on improving health care value and proposition relevance for our customers. Our priorities will be centered on giving them more choice and working with stakeholders to reduce waste, lower costs and provide a better patient experience. Supporting this will be our lowest premium increase in 20 years that comes into effect in April. Our third strategic pillar is centered on expanding the offering for customers and growing the business. Whether it be expanding our diversified insurance offering; the building of a scaled, short-stay surgical offer or our investment in the fast-growing Myhealth Medical Group, management is today more focused on investing in and growing our existing PHI and health services businesses at a faster rate. This growth will likely remain organic for PHI in the short-term and a combination of organic and modest M&A for health services. Now to Slide 7. As I touched on earlier, growing PHI participation reflects the sharper focus on health and well-being in the community and lower premium increases throughout the COVID period. Across the industry in the 6 months to December 31, 2020, participation increased 26 basis points to 43.86%, which is the strongest growth since 2014. This growth has come from a range of age groups with a strong recovery in the under 30s. Given the economic uncertainty and likely slowing population growth, it would be premature to conclude that participation decline of recent years has definitively bottomed out. But it's an interesting shift, particularly when the new-to-industry customers made up 70% of our joins over the half, up from 63% 12 months ago and 81% of our joins were under 40 years of age. And of course, the probable further deterioration in public elective surgical waiting list over the next few years will likely also have a reinforcing impact. But it isn't just changing consumer behavior as a result of COVID that has led to our policyholder growth. Over the past 3 years, we've invested more than $50 million in research, design and development of our digital capability. Our digital platform, in addition to data analytics, has made a real difference compared to those funds who have not made a similar investment. This half, 32% of acquisitions in the Medibank brand came through digital channels compared to 22% in the first half of '20, supported by a better digital joins experience. Ultimately, however, the turnaround has been driven by the flexibility, competitiveness and high-quality proposition offered by our dual brands, which positions us to appeal to all customer segments. It is no accident that we have seen a significant improvement in customer retention, with retention in both brands improving by approximately 30% over the past 12 months. This has been aided by the application of learnings between the 2 brands, such as insights from Medibank's focus on proactive cover reviews and retention activities. Also supporting retention is the ongoing integration of Live Better and increasing awareness and participation in the health services and support we offer. Our customer support during COVID has also played a part. And although around 9,000 policies remain suspended, the majority are expected to reactivate. Finally, just getting the basics right has been central to getting policyholder growth going. One example is that Medibank and ahm complaints now account for less than 20% of industry complaints, which is a step-change improvement on recent years and indicative of where we are operationally today. Moving to Slide 8. Something we take very seriously is how we are, in part, responsible for the future of the health care system in Australia. And that's why we are very focused on our role of improving the long-term value and relevance of private health care for our customers. This is where our strategy of transforming into a broader health care company really comes into play. Through building a broader health and well-being offer and enabling more choice, we continue to push the envelope of what is considered a traditional private health insurer. Over the half, we have had a record 1.7 million health interactions with our customers, while Live Better really resonated in a challenging year as reflected in sharp NPS uplifts for active participants. Furthermore, we launched new health propositions to help customers navigate complex areas such as pregnancy and mental health. And for customers preparing for or recovering from a hospital stay or treatment, volumes in our personalized health concierge service are twice what they were 12 months ago. Today, more and more Australians want a health system designed to fit them, And that's what we're working toward delivering, whether it be in primary and preventative health care, short-stay programs, clinical home care or access to virtual care such as telehealth and digital triage. Our clinical home care strategy is now adding significant value to thousands of customers. An uplift in demand for rehab in the home was partly driven by COVID, yet also partly driven by changing consumer preference. Now they have the choice. We saw the same dynamics in our remotely delivered cardiac rehabilitation program. The My Home Hospital joint venture between Calvary and Medibank is delivering home-based acute care to public patients across Metro Adelaide on behalf of the South Australian government. This is an innovative example of a sustainable alternative to a traditional hospital setting and will inevitably have great relevance for all Australians. Our short-stay model of care is gaining traction with our no gap joint replacement pilot expanding to 6 regions. It is giving more customers, where clinically appropriate, the choice to recover and rehabilitate in the comfort of their home. Customer feedback continues to be positive, while to date, the number of bed days per episode has halved. We also continued to see increased demand for virtual health over the half. Our telehealth team has now handled approximately 340,000 calls through various government COVID support lines, which is in addition to the more than 2 million calls we typically handle each year. All of these programs are customer-centric, designed to improve experience and the value and relevance of private health care. They are having a real impact for our customers. Now on to Slide 9. Our recent announcement of a $63 million investment for a 33.4% noncontrolling interest in Myhealth Medical Group is strategically significant. Primary care is the gateway to the health system. We believe opportunity exists for Medibank to bring our strong consumer, digital and data knowledge, and understanding of health care to the fast-growing Myhealth, so the business can strengthen its capacity to improve patient engagement, preventative health care and uplift hospital avoidance in Australia. Approximately 2% of Medibank's customers account for 1/3 of our annual hospital claims, and we simply must do a better job at managing the health and well-being of all Australians with chronic conditions. More preventative health care can only result in better outcomes for patients and the health system overall. Importantly, GPs and Myhealth management will own the majority of Myhealth Group, and we'll continue to manage the day-to-day operations of the clinics. Furthermore, GPs will retain full clinical autonomy. Myhealth founder, Dr. James Liang, and all current doctor and management shareholders are retaining their shares in the Myhealth Group. The prevalence of chronic and complex health conditions is growing significantly. 1 in 2 Australians have at least 1 chronic condition and 3 in 5 aged over 65 have more than one. By investing in Myhealth, the GPs can, over time, do more preventative care and better manage chronically ill patients. So more people will avoid the inconvenience of costly hospital stays, which will ultimately help keep premium increases low and keep costs down for the entire health system. This investment aligns to our existing doctor-led partnerships and the programs we are delivering to our own customers as well as on behalf of governments and other health insurers. Turning to Slide 10. With Medibank returning to growth, now is the time to be bolder by driving harder in areas, we know will make our business stronger and more competitive as others are challenged. We continue to maintain 3 core areas of focus in FY '21, accelerating growth and scale in PHI, new products and services and building and scaling partnerships and investments. I will briefly expand on a few of these before handing over to Mark. We will continue to improve the consistency and personalization of experience for our customers, which has come a long way. We are doing a better job at getting the basics right, but there remains a big opportunity for us to take another leap forward and do an even better job. Secondly, we will launch new products and services to our customers. A recent example of this is the ahm car and home insurance. And finally, we will pursue more partnerships and investments in health care. Currently, we are in advanced discussions with several well-known partners to expand our short-stay and no-gap offerings. Then scaling these opportunities across the market remains critical as we have done with rehab in the home. Medibank is now very well placed to continue to win in the market and grow the business. The time to be bolder is now, given the challenging market conditions for all participants. I'll now hand over to Mark.

Thanks, Craig, and good morning. Our business has emerged strongly from the disruption of COVID. And in the last 6 months, we've made further progress on our milestones of increasing policyholder numbers, becoming more productive and growing Medibank [indiscernible]. Importantly, a strong balance sheet has enabled our recent investment in the Myhealth primary care business, and we are well placed to fund further organic and inorganic growth. Before I go into more detail on the operating performance, I'll make a few comments on the group's profit and loss statement. Throughout the presentation, I will focus on the reported financial position, but we'll call out particular COVID impacts where important. Profit before tax increased 26.4% to $321.9 million, with group operating profit and investment income up 16.6% and 86.5%, respectively. On some of the other line items, the increase in other income and expenses was due to the prior period, $3.3 million double AASB16 implementation benefit. The modest reduction in corporate costs reflects ongoing expense management and specified intangible amortization reduced as these intangible balances start to run off. And finally, reported EPS was up 27.3% to $0.0.83 per share. And underlying EPS, which adjusts for the normalization of investment returns, was up 13.4% to $0.074 per share. Turning to Slide 13. The COVID pandemic has continued to impact both premium revenue and claims expense in the resident health insurance business with a net cost of $10 million this period. Our customer support measures reduced revenue by $109 million, including $92 million from the deferral of the April 1 premium increase to October. Although 9,000 policies remain suspended, the majority of these are expected to reactivate and not materially impact revenue. Cost claims increased this period as a result of the returning lockdown, they were still $112 million below our pre-COVID expectation. This resulted in a $99 million benefit to the profit statement, largely offsetting the cost of the customer support measures, and a $13 million increase to the liability for deferred claims. In ancillary, we saw some services that were deferred last year undertaken, with claims $14 million above our pre-COVID expectation. And in hospital, outside of Victoria, underlying claims growth was modestly below our expectation of 2.5%. The liability for deferred claims has increased to $310 million, with a $54 million reduction for ancillary, offset by $67 million increase for hospital. In ancillary benefit limits from Medibank policies expired on December 31, and the remaining $9 million liability is for ahm policies where limits expire on June 30. In hospital, $102 million increase were largely Victorian claims deferrals this period, was partially offset by a $35 million benefit from reducing the claims deferral expectation to 85%. This change follows a clinical assessment of procedures that have now been canceled and an allowance for policies that are expected to lapse. We remain confident we are adequately provided for the eventual recovery of these deferred procedures. And finally, whilst COVID has not had any material impact on our other businesses, we will continue to monitor this closely. On Slide 14, we've shown some more granular data on private hospital claims for the 5 months to November. You can see that total Victorian claims are down 15%, reflecting the impact of the second lockdown, whereas outside of Victoria, in aggregate, claims are up 2%. The experience outside of Victoria has been mixed, with growth in surgical claims, which account for approximately 60% of private hospital claims, up 7%. In contrast, nonsurgical claims are down 14%, with the most notable declines across rehab psych and respiratory specialties. And the softness in these nonsurgical claims was a key consideration in our decision to reduce the hospital claims deferral assumption to 85%. Turning to Slide 15, which covers the health insurance result. Health insurance gross profit was up $33.1 million or 7% to $505.4 million, with revenue growth of 0.3% and a 0.8% reduction in net claims expense. Looking through provision impacts in the prior period and the $10 million COVID impact this period, gross profit was up 3.5% to $515.8 million. On this basis, which is more representative of the underlying trend, gross margin remained at 15% and operating margin increased 20 basis points to 7.7%. Turning to Slide 16. In a world that has been impacted by COVID, the PHI market has proved resilient as customers focus on the health and well-being and increasingly value the existing choice that PHI membership provides. Customers are increasingly considering the strength of their insurer and showing an aversion to change. And these factors have favorably impacted the policyholder trajectory in this period. In the last 12 months, policyholder numbers increased by almost 48,000 or 2.6%, and reflects stable or improving acquisition and retention rates across both brands. Adjusting for suspended policies, policyholder growth was 3.1% and is in line with our FY '21 growth aspiration. Despite the temporary closure of the Medibank retail network in Victoria for much of the period, the acquisition rate was up 10 basis points to 5.6%, with particularly strong growth in the new-to-industry segment. The standout metric is the approximately 30% improvement in customer retention and reflects the external environment, our ongoing focus on customer service and the benefit of increasing product value and differentiation. And finally, the level of downgrading was 83 basis points and demonstrates the benefit of continued low premium increases, portfolio management initiatives and favorable mix impacts. With this result, likely aided by the deferral of the April 1 premium increase for 6 months, we are aiming to maintain downgrading in the vicinity of 100 basis points going forward. Turning to Slide 17. Reported claims expense was down 1.8% and net claims expense, which includes risk equalization, was down 0.8%. Adjusting for the $99 million reduction in claims due to COVID, gross and net claims expense were up 1.7% and 2.6%, respectively. Risk equalization was a $17.8 million payable this period compared to an $8.4 million receipt in the prior period. This reflects that our claims growth continues to be below industry growth and lower claims paid this period, particularly in the Medibank brand with the customer demographic, typically means we have a strong risk actualization of recovery. Whilst this impact will progressively unwind as claims recover, going forward, we expect to be a net payer to the risk equalization pool. Underlying claims growth, which excludes provision and COVID impacts, was 2.6% and is in line with 2H '20. Underlying hospital claims growth of 2.5% was marginally below 2H '20, and includes the benefit of modest prosthesis price reductions. And in extras, following investment in the member's choice advantage dental network in the prior period, underlying claims growth reduced to 3.1%. Continuing to actively manage claims expense, without impacting the customer value proposition, remains a key priority as is agitating for further necessary prosthesis reform. Pleasingly, based on comments in the October federal budget, the Department of Health now has a definitive mandate and time line to implement further strategic prosthesis reform. Craig will touch on this in more detail shortly. Turning to Slide 18, and a few brief call-outs on some of the other drivers of claims growth, which were subdued or negative across most categories due to COVID. Claims in public hospitals reduced following changes to private room rates in the prior period and softer prosthesis claims growth reflects the price reductions I just mentioned. In ancillary, there was negative growth in most services, including a 7% reduction in other modalities due to lower ambulance usage. And finally, claims growth in the overseas portfolio was largely driven by mix impacts and an increased level of services used during the pandemic. Moving to Slide 19, which covers management expenses. Our productivity agenda and increasing scale resulted in the management expense ratio adjusted for the revenue impact of our customer support measures, falling 20 basis points to 7.3%. Management expenses were up a modest 1.1% to $250.8 million, with operating expenses up $2.7 million and flat noncash costs. We continue to focus on tightly managing these noncash costs so as not to dilute our productivity efforts. The increase in operating expenses includes higher incentive costs from the unusually low-cost in the prior period, with cost inflation of approximately 2% more than offset by $10 million of productivity savings. These savings continue to come from technology modernization, business simplification and process improvement. We are on track to deliver $20 million in productivity savings in FY '21, and expect management expenses for the full year of approximately $530 million. Over the next 6 months, we will continue to assess further productivity opportunities, including those that result from our experiences during COVID, and we'll provide an update at the full year results. Turning to Slide 20. During the last 6 months, we've been able to leverage investments made in home care capability and the Live Better health and well-being platform to deliver strong operating profit growth. The external environment was also largely favorable with increasing take-up of paid delivery in the home and focus in the community on health and wellbeing. Revenue was up 13.2%, with strong growth in the home care and telehealth divisions, partially offset by subdued demand in travel insurance sales. Pleasingly, a combination of improved operating efficiency and increasing scale resulted in the gross margin improving by 80 basis points. Whilst management expenses increased by $2.8 million, this was largely due to inflation and the full period impact of investments made during FY '20. Expense growth of 6.9%, was materially below the rate of revenue growth, resulting in a management expense ratio improving 170 basis points to 29.7%. As a result, operating profit increased 41.4% to $18.8 million, and operating margin improved 260 basis points to 12.9%. With this positive momentum and the opportunity to realize further benefits of scale, we are on track to deliver on our FY '22 organic operating profit growth milestone. In addition, the 33.4% economic interest in the Myhealth primary care business will be equity accounted for in this segment, and provides another strong avenue to growth. Looking now at our investment portfolio on Slide 21. In line with favorable markets, investment income was up almost 87% to $71.8 million, with increased returns in both growth and defensive assets. Significantly higher income in the growth portfolio reflects stronger returns in both domestic and international equities, and a positive return in property compared to our loss in the prior period. Income in the defensive portfolio was also higher. The benefit of narrowing credit spreads more than offsetting a $7 million reduction in interest income due to the lower RBA cash rate. And based on the current level of the benchmark, we expect a further $1 million reduction in interest income in 2H '21. We've retained a target allocation to growth in defensive assets of 20% and 80%, respectively. And our infrastructure portfolio allocation is now fully funded. Outside of this target allocation, we also hold approximately $300 million of cash to fund claims deferred due to COVID. The underlying investment return, which adjusts for returns on growth assets related to our long-term return expectation of 8% and for credit spread movements, was up 130 basis points above the cash growth. On an annualized basis, this is above our targeted range of 150 to 200 basis points above the benchmark and reflects the historic low level of the RBA cash rate. Turning to Slide 22. Our capital position remains strong, with the PHI capital ratio of 13% at the top end of our target range and unallocated capital before the investment in Myhealth of $205.2 million. During the period, health insurance required capital increase to support revenue growth. And the increase in other required capital largely reflects the investment in a Sydney Private Hospital. Importantly, inadmissible assets reduced by $8.6 million, reflecting ongoing disciplined capital management. Following a delayed due to COVID, APRA has recommenced consultation on the proposed new PHI capital standard, which is expected to apply from July 1, 2023. We are well placed to implement this new standard and expect that when the detailed requirements become clearer towards the end of this calendar year, this will be a further catalyst for industry consolidation. Our strong capital position and the potential to issue subordinated debt, means we are well placed to fund further organic and inorganic growth as well as consider capital management in the future. Finally, the Board has declared a fully franked interim dividend of $0.058 per share. This is a 79% payout of underlying NPAT. However, for the full year, we expect the payout ratio to be towards the top end of our 75% to 85% target range. In conclusion, whilst the last 6 months have been challenging, we are pleased to have been able to support our customers when they've needed us most. Our investment in technology, digitization and people have been critical to our business resilience and set us apart from many of our competitors. Whilst it is likely the business will continue operating in an environment where premium increases are below private health cost inflation, we are prepared for this. We will continue our recent policyholder growth trajectory by leveraging the strength of our 2 brands, remaining focused on customer retention and being prepared to invest for growth. Leveraging our market-leading claims management capabilities across hospital contracting and payment integrity innovation as well as allocating more capital to preventative health and alternative care settings will also be critical. A combination of increasing scale and our productivity agenda, means we are well placed to create capacity to invest in growth as well as further improve the management expense ratio. And finally, our strong capital position, means we are well placed to fund further M&A in Medibank Health and consolidation opportunities in PHI that will undoubtedly arise. I'll now pass back to Craig who'll make some comments on private -- on future industry reform and the outlook.

Thanks, Mark. Now to Slide 25. COVID had a disruptive impact on the health system, but it has also demonstrated the importance of Australia's dual public-private approach to managing health care. The strength and flexibility of our health system during carved has proven why it's the envy of many countries. That said, the financial sustainability of the system will inevitably be questioned in a post-COVID world. Ongoing reform will remain an imperative. Welcome regulatory changes were made during COVID to make the health system more efficient and patient centric, including wider use of e-prescriptions and telehealth service. We've also seen an accelerated shift towards the adoption and delivery of more clinical in home services. This has highlighted the quality of clinical outcomes and the value of these programs to more people. A trend that must continue post pandemic to help balance the impacts of our aging population. And we know from our surveys, our own surveys, 4 in 5 Australians would now consider receiving care at home instead of in hospital since the onset of COVID. And this level has been stable for the past 9 months. Furthermore, early awareness of potential short-stay surgical options for clinically appropriate customers has seen very significant inbound interest. While we are well placed as a business to meet such changing demands for health services, it has never been clearer that the broader health system has to change. Future has to be more investment in primary care and preventative health. Government budgets will remain stressed for many years to come. So the public hospital system will remain under significant funding pressure. We will unquestionably see more digital triage in community and home-based clinical services, a broader focus on hospital prevention strategies for aged care, mental health and chronic patients, and inevitably, a stronger push to more flexible health care such as short-stay surgery, telehealth and broader clinical home care. Keeping the private health care system strong with access to the capital to invest in system change will be essential. In order to do that, let's discuss some of the required reforms. Turning to Slide 26. Medibank has been a proactive advocate for reform for many years because we know the right reforms will result in better patient-centric care, lower cost and more customer value aligning with the triple aim of Healthcare. Most recently, we have made submissions to the Commonwealth Health Department in support of significant structural reforms to the prosthesis lease and for the implementation of a second wave of private health insurance reforms. We are encouraged that the Commonwealth Health Department is considering the effectiveness of the LHC and risk equalization, and it's evident that potentially major changes are being considered to the prosthesis list for early 2022, changes that can and should eliminate the unnecessarily higher prices for medical devices in the private system. And we are consulting with the Commonwealth Health Department on the potential to make home and community-based care more sustainable through private health insurance. It is likely that these reforms will be announced in the current year for implementation in calendar year '22, in part to support lower than otherwise premium increases. There is positive momentum around reform, but more needs to be done to build participation through incentives, such as stopping any further erosion of the rebate and by ensuring those that can afford private care do so and are removed from the public purse through increasing MLS. Medibank is keen to work with all stakeholders to enact the necessary reforms to ensure system sustainability. But reforms to support higher levels of preventative care, clinically appropriate alternatives to hospitalization, lowering waste and encouraging higher participation in private health care continue to be urgently required. Finally, moving to Slide 27 and the outlook for the remainder of the financial year. I want to reiterate that Medibank has emerged strongly from the disruption caused by COVID. We supported our customers and our people, and we did so without receiving any COVID-related government subsidies. Our current focus is to capitalize on the momentum in our business and further accelerate our PHI growth while continuing the transport transformation into a broader health care company. We aim to increase market share and achieve total policyholder growth in excess of 3%, including an expectation of growing the Medibank brand by approximately 1% during FY '21. Our underlying drawing rate growth or increase in annualized average net claims expense per policy unit for the second half of '21 is forecast to be in line with the first half of '21 or approximately 2.6%. We are targeting $20 million in productivity savings in FY '21 and an additional $30 million between '22 and '23. Management expenses are expected to be approximately $530 million for the full year. The dividend payout ratio is expected to be towards the top end of our target range of 75% to 85%. Targeted inorganic growth for Medibank Health and health insurance remain areas of focus. And as I said earlier, any permanent net claims savings due to COVID will be given back to our customers through additional support in the future. Before I close, I just wanted to take the opportunity to thank the executives online today and everyone at Medibank for their role in delivering another good result. And finally, you will have seen today, I've announced my retirement from Medibank effective June 30, 2021. It's been an absolute pleasure to lead this organization, and I couldn't be proud of how well placed we are to continue to serve our customers and grow the business. As Chairman, Mike Wilkins, told the market earlier, he and the Board will now begin a process to appoint a new CEO and will consider internal and external candidates. I'll now hand over the call for any questions.

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

Just looking at the write-back of the $99 million related to the COVID-19, obviously, that was -- a large piece of that was ancillary. But just on the hospital piece, you've sort of taking a lower stance on -- sorry, on the hospital piece, but most of that was nonsurgical. Do you have a view on what the surgical would look like as well? And what have you been seeing to date? I guess it's longer-dated. Just what sort of trends you've seen to date?

Yes. So Andrew, we've seen outside of Victoria, which you are -- I think we should focus the assessment given Victoria is lagging behind the rest of the country. We saw surgeries recover around 7% relative to pre-COVID levels. So -- and that's pretty uniform across most categories of surgery, probably slightly better recovery in overnight than same day. I think if you look geographically, the recovery rate has probably been faster in Western Australia and South Australia, given they were less impacted by COVID shutdowns.

Would that surgery rate align with pay provisions? Or would that be above or below your expectations?

Andy, we're really comfortable based on that rate with the level of provision we have.

Okay. So provisioning, it sounds like sort of on track now?

Look, I think we've got an 85% deferral currently. We're really comfortable with that, but I can't discount in the next 6 to 12 months, if Victorian claims don't recover as quickly as we're expecting that we won't need to reassess that percentage.

Okay. Terrific. And first, just one for Craig. Firstly, all the best on your retirement. Congratulations on that move and what you've achieved to date. But we're just going to flick across to the short-stay opportunity. Just trying to understand how much sort of market opportunity or capacity that you see there? And where price expectations are to get into that market? And whether you'd consider greenfields or turnkey sort of opportunities in that space?

I'm just going to make one opening comment, Andrew, and thank you for your remarks. And then I'll pass to Andrew Wilson, who's steering this program for us. I think there is significant opportunity. And I would say, the momentum shift we've seen in the last 6 months is more significant than we had expected in terms of the inbound interest we're getting from partners, including doctors. But Andrew, I'd pass to you.

Thanks, Craig. Yes. Look, I think, really, our strategy here is to really drive that change towards, as Craig alluded to, a change that our customers are really looking for, which is more care -- less care in hospital and more care at home. And I think we're looking -- we're essentially looking at all of those options, both in terms of making further targeted investments in either existing or potentially new assets, but also working with a number of strategic hospital partners to embed that model within existing hospitals, existing facilities. So our aim is to get scale and really make the change towards shorter length of stay for -- where appropriate, for appropriate modalities happen soon as we can.

And maybe just to close out, would you see the prospect of a presence in every major city and including places like Canberra as well?

Yes. Well, we're a -- Medibank is obviously a national brand, a national business. And so I think we want this option available to customers wherever we can around the country. So a national network makes really good sense. We're now in 6 regions. So making very good progress this year towards that outcome.

Our next question comes from Sean Laaman from Morgan Stanley.

It's Megan here on for Sean. Just my first question would be around that lower rehab benefits paid out during the half, down 22%, but surgery, up 7%. Just keen to get your thoughts on what is driving that trend? Obviously, it must be some uptake from the rehab at home offering. But just trying to understand how permanent any of that potential saving is?

Megan, so I guess the underlying thematic is patients and particularly, older patients during COVID, don't want to spend an extended period of time in hospital, and that's why both psych and rehab, which have some of the longest length of stays, have been the most impacted in the nonsurgical space. It's hard to tell whether rehab levels ever recover to where they were pre-COVID. It's clear that patients are able to be dispensed or just go home and have their rehabilitation done at home. And it's clearly patients that would have otherwise been put into rehabilitation that haven't during COVID. So it's hard to tell whether we ever recover to the levels in terms of rehabilitation admissions we had pre-COVID. But there's clear evidence now that, that's probably unnecessary.

Got it. And my final question would just be around the cost basis changes. Can you just remind me on what you're thinking about potential savings there?

Well, I think the industry is -- Megan, the industry talked about sort of $0.5 billion as probable, whether all of that is realized is another -- is up for debate. But I think there's at least $0.5 billion of benefit potentially that would go straight through to customers in the form of a lower premium uplift. And I suspect, like a lot of these deals, it will get done over a transition period. So don't bank that all in 1 year's premium, but put it in a number of years.

And Megan, I'll just add one comment. It's clear that posthesis is still inflationary to hospital claims growth. Utilization growth for prosthesis was about 300 basis points above utilization growth for private hospital admissions. Now that's down about half of what it was this time last year, but it's still definitely inflationary to our underlying claims growth hospital.

Your next question comes from Andrew Buncombe from Macquarie Group.

Just 2 quick ones from me. The first one, it looks like your margins in the students and workers business are relatively flat versus prior periods. That's obviously quite different to peers. Can you give us a bit of color as to why you think Medibank is performing better in that space? And how we should be thinking about those margins in the shorter term?

So I think we've got a slightly more skewed to overseas students than some of our competitors. And so a lot of those students have still been onshore and continue to manage their policies. We have had some mix impacts. So we have had some mix impacts. However, typically, our students are -- our first year students have a lower claims ratio than students in the second and third year. And so the lack of first year students have had an impact. But we have done well in migrating some of students that have been coming off their policies into their visitors and workers -- new visitors and workers portfolio products, which has been quite helpful to the margin.

I think the other point is -- 2 other points, I'd say is, firstly, we've been able to flex the cost base pretty substantially. So it's not just a top line issue. It's also how you manage your costs. And secondly, the point I'd make is, I think our international business is less than 5% of our PHI revenue. So it's a relatively small business, but it has -- it's an area where there's perhaps a question mark short term.

Sure. That's helpful. And then just my other question. Previously, you've been talking to replacing the Garrison earnings by FY '22. But post the recent acquisitions, should we expect those targets to be updated in the near future?

Yes. So Andrew, the milestone is an organic target. So you should see the Myhealth contribution being in addition to that, Andrew. And very round numbers on an FY '22 basis, and bearing in mind, the Myhealth investment will be equity accounted, so we'll take out an after-tax profit number into the segment. We'd expect in really round numbers a $4 million of contribution in FY '22 from Myhealth.

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

On the 3% -- over 3% guidance for policyholder growth, you seem to have achieved much of that in the first half. What are you assuming around last year that you're expecting those to revert to higher levels?

Let's -- we might ask David to comment on that.

Yes. Look, I think we've got strong momentum in the business for both brands, but we are currently in the middle of a premium review period that falls on from the adjustment we made also just 6 months ago. So there's -- and it's a naturally be time for change in the market. Another factor that will -- we need to understand is the continuation of the strength of the new to industry. Again, that's a big part of usually Q4. So there's a couple of big movements to -- that are quite volatile. But as I said, the momentum in the business continues to be strong.

If I put the numbers in context, the 3% is excluding the suspension. So at the end of January, you'll see in the table, we're at 2.6% or at 2.7% by the middle of February versus that in excess of 3% target for the full year.

Okay. Just on the risk equalization payment that you're making. The industry statistics seem to imply that gross margins remain under some pressure for the industry. What are you seeing in terms of claims experience versus the rest of the industry that's seen you pay into the risk equalization pool?

So we're definitely running -- our underlying claims growth is definitely below the rest of the industry. And I think I will attribute that to 2 factors. It's our, let's say, market-leading claims management capabilities across hospital contracting and payment integrity. But also, we are growing the ahm policyholder numbers at a quite a fast rate. So in that double digit. And they are lower coverage policies with a very young cohort. And that's not only impacting our claims relativity to industry growth, but also that -- on the other side of the equation requires us to make a contribution to the risk equalization pool. The other big pool that I make is that brands like Medibank that typically recover from the risk equalization pool, they're going to be disadvantaged during a period of low claims payment like we had in the half, and we'd expect that to recover in the second half. And across the whole spectrum of risk specialization, I'd see potentially a very modest tailwind from -- when the RE pool normalizes going forward, Matt.

Mark, I think the other interesting point that's probably worth explaining was that we actually saw the Medibank fund get younger. Do you want to just...

It's a very interesting point [indiscernible]. So definitely, over my 4 years at Medibank, I've not seen the fund -- the Medibank fund was growing by about 0.1 to 0.2 years per year. With the strong growth in new-to-industry for Medibank and particularly, the under 40s, the brand -- the Medibank brand back book reduced its age by 0.1 years. So it's not material, but it's important going forward to try and mitigate any aging effects in the book.

[Operator Instructions] Your next question is from [ Kieren Suji ] from [ Jaden. ]

I've got 2 questions. The first one on downgrading, very good outcome there. It's a very substantial improvement on [indiscernible] and a bit on second half '20. Just wondering what's sort of giving you the confidence that you can maintain that around the 100 basis point level as we roll into a more normalized year for pricing? Obviously, you had the deferral of rate rises benefiting that, I guess, this period. Why do you think you can hold that sort of circa 100 basis points as we move forward?

So Kieren, we get confidence on the back of the Medibank policyholder trajectory. So that's really important in terms of the downgrading impact. And you've seen progressively our downgrading outcome improve as the Medibank policyholder trajectory has improved. Portfolio management initiatives are very, very important. So we've got a well embedded right cover program in the organization where we have an equal number of conversations about customers upgrading their cover to what contemporary [indiscernible] now as we do customers having conversations about downgrading. But I just think at the moment, Kieren, people have an aversion to change that they didn't have 12 months ago. They see the prospect of going to hospital potentially being higher. And they're less inclined to increase their excess to $750 compared to what they were 12 months ago. Now we've made a 17 basis point adjustment to reflect the fact that we do think this current downgrading figure of 83 basis points was slightly flatted by the deferral of the premium increase for 6 months. So that's our current best estimate of the impact, rolling the premium increase for April 1 will have.