Medibank Private Limited (MPL) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Medibank Private Limited FY '21 Results Investor and Analyst Conference. [Operator Instructions] I would now like to hand the conference over to David Koczkar, Chief Executive Officer. Please go ahead.

Good morning, and welcome to the Medibank 2021 Full Year Financial Results Presentation. I'll begin by acknowledging the traditional owners and custodians of the land on which I join you from today in Prahran, home of the Wurundjeri people of the Kulin Nation. I pay my respects to Elders past, present and emerging, and I extend my respects to all Elders on the lands on which we work and live. I'm delighted today to present my first set of results as Medibank's CEO. I'm joined online by our executive leadership team, including our Group Executive CFO and Group Strategy, Mark Rogers. We have delivered a high-quality result underpinned by strong policyholder growth across both brands, our highest-ever customer advocacy, growth in Medibank Health and ongoing focus on management costs. This result is a clear demonstration that focusing on our customers' needs and being disciplined in how we run our business delivers strong results. More and more people are continuing to prioritize their health and well-being and see more value in private health, given the uncertainty around COVID and heightened pressure on the public health system. Our investments over the last few years have enabled us to step up and provide broader support to our customers during this period while accelerating our growth at the same time. In doing this, we are becoming a health company, playing our role to help sustain quality health care in Australia. Today, I'll take you through the key highlights from our result, our refreshed growth strategy and an update to our milestones, reflecting our priorities for FY '22 and our longer-term aspirations. I'll then hand over to Mark for the financials, provide an update on our outlook, and we will then take your questions. Starting on Slide 4. Customers are at the heart of everything that we do, and this ongoing focus has led to improved advocacy and retention, driving our financial performance. Over the last 12 months, our Medibank and ahm brands achieved their highest-ever service NPS scores, underpinning our improving customer retention results. Our customers are also continuing to embrace our new digital-led channels with around a 25% increase in customer interactions through our self-service channels this year. Today, more than 15 million people in Australia are in lockdown, and the situation is changing rapidly. What is certain is that across our country, our needs are changing. What they are today is going to be different than what they may be in a month's time. So as an organization, we must continue to step up to support our customers, our people and our community. We know that vaccination has a crucial role to play, and we support the government's 80% vaccination target. As instructed by the government, our aged care workers are required to be vaccinated by September 17. We are working with our other frontline health workers to ensure that they are all vaccinated, too. We'll continue to encourage the rest of our employees to get vaccinated through the use of paid leave and charitable donations on their behalf. We will reward our eligible customers who are fully vaccinated with 1,000 Live Better points and continue to support customers who are doing it tough through our hardship package and mental health support line. And we stand by our commitment not to profit from COVID, and where there are permanent net claim savings, they will again be returned to our customers. So far, our financial support package for customers is around $300 million, including $103 million in COVID permanent net claim savings we are currently returning to our customers through premium relief. This is our largest support package in our 45-year history. We will continue to support the national COVID response, assisting federal and state governments through phone support, welfare checks, in-home COVID testing, contact tracing and mental health services. These are extraordinary times, and they call for extraordinary measures. This year, we've also worked hard to give our customers more value from our products and services because we know how important this is to them. We delivered our lowest average premium increase in 20 years and helped customers save more than $20 million in out-of-pocket costs through our Members' Choice Advantage network. We've invested in technology to simplify and personalize our customers' experience while continuing to meet the needs of those preferring face-to-face support. Our customers are voting with their feet and engaging with our broader health offerings at record levels. We had 760,000 interactions with our Live Better program, either through people joining our rewards program or taking part in activities, an increase of 51% from last year. 133,000 people were supported by one of our member health services this year, up by 51%. And our Medibank at Home program also celebrated its 20,000th patient this year. Our amazing and passionate people are fundamental to our customers' experience, and I'm grateful for their efforts throughout this challenging year. On to Slide 5. We are pleased to deliver another strong set of results for our shareholders. Our financial performance is the result of our customer growth, ongoing cost discipline and positive investment market returns. Our focus on our customers has resulted in net resident policyholder growth of almost 83,000, including almost 30,000 for the Medibank brand. We've grown more in the past 12 months than we have in over 10 years with our market share up by 37 basis points. As Mark will discuss shortly, COVID has had a modest $3 million negative impact on our PHI financial performance with the customer support we provided largely offset by permanent claims savings. Closed borders continue to impact our overseas PHI and travel insurance businesses, and we have seen increased adoption of telehealth and home care as a result of lockdowns. Health Insurance operating profit was up 14.4% to $538.6 million, driven by positive top line growth and a 40 basis point reduction in the management expense ratio. This reflects our strong cost discipline, ongoing productivity program and increasing scale. Segment profit for Medibank Health was up 12.9% to $31.4 million, including our share of the results of Myhealth and other health care investments. More favorable investment markets have resulted in net investment income of $120 million, increasing from $2.4 million in the prior period, resulting in a growth in our NPAT to $441.2 million. And finally, the Board has determined it will pay a fully franked final ordinary dividend of $0.069 per share. On to Slide 6. In Australia, we experience some of the best health outcomes in the world. Our dual public and private systems continue to serve our population well. But as we all know, these quality health outcomes will be at risk if we don't make the changes needed to keep up with the growing health needs of our community. As a nation, we're getting older and less well. Almost half of us are living with a chronic condition, and more than 4 million of us are experiencing mental health conditions with a further 5.9 million Australians at risk. And worryingly, in November 2020, the rate of mental distress had more than doubled compared to pre-pandemic times. The health system continues to operate under pressure. Surgical lists have been delayed, and public waitlists continue to be twice as long as the private system. The pandemic, while being a hugely challenging time for all of us, has also been a catalyst to change the health care in this country. The investments that the private health insurance industry has made and the work that we have done to drive down costs and improve customer experience, combined with a renewed focus on health and well-being, has seen more people value private health. In the 12 months to June 30, the resident PHI market grew by more than 6x the rate of the previous year. We have also seen strong uptake in new care models, in particular, telehealth, virtual and in-home care, by both customers and providers. To maintain our world-leading health care standards, we must innovate and find better ways to care for people outside of hospital settings, invest more in preventative health and support innovative care models. We believe private health will play a significant role in meeting the growing health needs of people in Australia and how we think about this is framing future areas of focus in our strategy. Now to our refreshed strategy on Slide 7. The time is right for our strategy to evolve and reflect our ongoing transformation to a health company. Ultimately, this is about prioritizing our efforts to more broadly support the health of our customers while growing our business and driving broader system change. We will continue to focus on our customers and people, striving to deliver exceptional customer experiences, supported by leading digital platforms and data analytics by empowering our people and providing value by being a partner of choice. To strengthen and grow our core PHI business, we will further differentiate our customer offerings, deliver more value through product innovation and maintain our disciplined approach to investments and running our business. And finally, our continued transformation into a health care company will see us invest more in prevention, choice and better care for customers, building successful stand-alone businesses that also bring benefits back to our core. I'll talk in further details about 3 focus areas on the following slides, beginning with Slide 8. Our people are critical to our success. A highly engaged workforce is essential in order to make sure that we go the extra distance for our customers. We have been an employer of choice for 6 years and are proud to be included in the top 20 global companies for gender diversity. Our commitment to an inclusive, diverse and healthy workplace is key to our sustainability strategy. As a business, we care about our impact on the community, and we continue to embed more sustainable practices across Medibank. But given the significant disruption to the way that we work, we've had to refocus our efforts again in the last year to meet the needs of both our people and our customers, and I'm pleased to say that we've been able to do this well. We've always been progressive on flexible working, which is now here to stay. And while we are constantly responding to lockdowns across our country, we are equally aware that how we work has changed. This is applicable to our health care workers. While there are increased demands for them across the country, the way in which they are working, including juggling working from home, requires the need to adapt. Our retail teams continue to serve our customers regardless of whether they are in store or working from home. And with more collaboration by working through cross-functional squads, we're quicker at developing new programs and pilots, which leverage our technology platforms, making health more accessible, personalized and rewarding for our customers. A great example is the work we're doing to integrate our Live Better program into the MyMedibank app to offer one seamless experience. We strive to be a health partner of choice and continue to build new partnerships with health professionals and evolve our existing relationships with providers so we can deliver even greater value for our customers. An example of that is our joint venture with 45 specialist doctors to develop a new private hospital in Melbourne that will extend the short-stay, no-gap treatment model across a range of procedures for our eligible customers. We expect this to open in 2023. And finally, technology remains a critical enabler. Scaling technology platforms and investment in our data analytics will help drive additional value for our customers and further streamline our operations. Customer efficacy is at record levels for both Medibank and ahm and as such, we've set new benchmarks for FY '22 to maintain our focus on simplifying and improving our customers' experience. Employee engagement has been at positive levels for over 5 years now, and reporting on employee advocacy for the first time, it's pleasing to see employee NPS above target. Our goal is to continue outperforming the global peer average, and we've adjusted our milestone to include the 2 key elements that encompasses employee efficacy for our business. Now on to Slide 9. Our Health Insurance business is in good shape. In the last year, we increased our market share by 37 basis points to 27.3% share. We have been focused on differentiating and growing our PHI business through leveraging our dual-brand strategy, which is the right approach to stand out in a crowded market. Overall, policyholders were up by 3.5%, excluding the impact of COVID-related suspensions, while the Medibank brand reached a turning point, growing for the first time since FY '13. Nearly 70% of our acquisitions are new-to-industry joins, and more than 2/3 are customers under 40 as our 2 brands continue to appeal to the market. Our strong focus on our customers is reflected in a 130 basis point improvement in retention. Going forward, we aim to continue this momentum and growth. While it is reasonable to expect overall participation growth to slow compared to FY '21, we will continue to deliver differentiated and compelling products and services which respond to customer demand. To retain our existing customers, we will continue to broaden our relationships, supporting and rewarding our people for looking after their health and well-being through our Live Better program and our diversified products range. We will continue connecting our health offerings to help customers make more informed choices as they navigate the health system, and our Health Concierge program has supported 20% of our customers go-to hospital this year. We'll also keep checking in with our customers to ensure they're on the right cover to meet their needs, something that we've been doing for the last 5 years. And we will continue to target growth in key segments, including the corporate and regional markets and continue to position our business for the rebound of the overseas market. Our ahm brand will remain focused on its core segment of value seekers. To reflect our focus on growth, our policyholder growth target for FY '22 is to grow by approximately 3%, including continued growth in the Medibank brand, which considers the slowing market growth I mentioned earlier. We have also set ourselves a longer-term growth aspiration to increase our market share by between 25 and 75 basis points by FY '24. Moving to Slide 10. Our customers are trusting us to help them with their broader health needs, whether it be through preventative health and health and well-being or choosing to access our new models of care and support. With consumers spending tens of billions of dollars annually on their health and well-being in Australia, we see significant growth opportunities in this market, and we'll prioritize expanding our Live Better program and extending it to our corporate and overseas customers. We know that our retention benefits when our customers engage with us every day health and well-being. We're also scaling our unique preventative programs, and in FY '21, more than 7,000 new customers had enrolled in one of our preventative health programs, a 23% increase on last year, achieving noticeable health benefits and driving strong levels of customer efficacy with average NPS scores of more than 70. Going forward, we plan to further digitize our preventative health programs to expand reach and improve accessibility while also better integrating them into one platform for a seamless experience. For FY '22, we are targeting around 480,000 customers engaging with our Live Better rewards and activities, our prevention health programs and any new care offerings developed. Now on to Slide 11. Improving access to more contemporary health services and quality health experiences has seen us investing to provide more choice and better care for our customers and the broader community while building successful stand-alone businesses that drive synergies back to our core. Earlier this year, we acquired a noncontrolling interest in Myhealth Medical Group. Our investment recognizes the role of GPs in providing primary care to patients in their local communities and the positive impact this has on the entire health system. Our expectation is that Myhealth will transform their GP model to provide more predictive, proactive and preventative care for their patients. With COVID acting as a catalyst for the broader adoption of virtual health, we've managed 2.5 million telehealth interactions, seen a 32% increase in the number of our PHI customers who use Medibank at Home and recently launched a virtual GP solution to overseas students. We've expanded our short-stay, no-gap program with more than 0.5 million Medibank customers now able to access no-gap joint replacements through 7 hospitals across Australia. Customers accessing this care save, on average, 4 nights in the hospital and $1,500 in out-of-pocket costs. We're expanding this program to additional sites and modalities. We're also bringing these new care models to support the public system. In January, My Home Hospital launched, a Wellbeing SA service delivered by a joint venture with Calvary in South Australia, which has provided hospital-level care in the home to more than 900 public patients. The technology underpinning My Home Hospital has the potential to be scaled nationally across private and public settings. We are broadly tracking in line with our Medibank Health milestone to organically replace the reported FY '18 $30 million operating profit of Garrison by FY '22 on an underlying basis with some temporary COVID financial impacts in FY '21. Our strategy is to continue to grow our health services and to bring benefits back to our core business, focusing on creating value through our partnerships. I'll now hand over to Mark.

Thanks, David, and good morning. Today's result is pleasing as it reflects how resilient the business has been during COVID and demonstrates the benefit of the customer-first journey we've been on for the last 5 years. Importantly, the business exits FY '21 with good momentum, a strong balance sheet and is well positioned for further 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. Profit before tax increased 40.4% to $632.3 million, with group operating profit up 14.6% and investment income more than $117 million above last year's COVID-impacted result. On some of the other line items, the $4.3 million increase in corporate costs includes a $3.8 million increase in the cost of D&O insurance cover, which reflects tight market conditions 12 months ago. However, a combination of improved market conditions and changes to our insurance program will result in the FY '22 cost for D&O cover being in line with FY '21. The higher other income and expenses includes a $4.2 million increase in M&A expenses, and the reduction in specified intangible amortization reflects that some of these balances are now fully amortized. Approximately $9 million of nondeductible expenses resulted in an effective tax rate of 30.2%. However, in FY '22, we expect this rate to be marginally below 30%. And finally, reported EPS was up 39.8% to $0.16 per share. And underlying EPS, which adjusts for the normalization of investment returns, was up 8.7% to $0.145 per share. On Slide 14, we provided a granular view of private hospital claims for the 11 months to May. Whilst the trend of surgical claims recovering more quickly than nonsurgical claims has continued, over the last 6 months, the gap between these recovery rates has closed. Outside of Victoria, total claims paid remained at 2% above the prior period, whereas in Victoria, they were down 6%, but this compares to being down 15% 6 months ago. Whilst the Victorian claims recovery continues to lag, in recent months, this has been more in line with levels experienced across the rest of the country. Outside of Victoria, surgical claims growth of 5% reflects the completion of previously deferred admissions, whereas nonsurgical claims remain 3% lower than in the prior period with particular softness in respiratory and rehab specialties. In line with this continued softness, we've reduced the deferral assumption for nonsurgical claims from 85% to 50%, which has resulted in a 59% deferral rate for all hospital claims. Consistent with this change, at 30 June, the deferred claims liability was down $73 million to $224 million. And COVID had a modest $3 million negative impact on our financial performance this period with the $226 million cost of customer support largely offset by permanent claim savings of $223 million. Turning to Slide 15, which covers the health insurance result. Reported health insurance gross profit was up $55.5 million or 5.5% to $1,069.5 million with revenue and claims up 2.1% and 1.4%, respectively. Looking through the $24.5 million provision impacts and the $13 million and $3 million COVID impacts in FY '20 and FY '21, respectively, underlying gross profit was up 2% from $1,072.5 million. Whilst reported gross margin was up 50 basis points to 16%, underlying gross margin fell 40 basis points to 15.5%, largely due to performance in the overseas portfolio, and I'll cover this in more detail shortly. Underlying operating profit increased 6.6% to $541.6 million, largely driven by strong policyholder growth and a reduction in management expenses. Underlying operating margin was up 10 basis points to 7.8% with the reduction in gross margin more than offset by the improvement in the management expense ratio. And this highlights the importance of our productivity agenda and increasing scale in our financial trajectory. Turning to Slide 16. The PHI market remains buoyant with the APRA data for the 12 months ending 30 June indicating the PHI participation increased 95 basis points to 44.5%, and the number of lives with hospital cover increased by more than 240,000. Customers continue to remain focused on their health and well-being and are showing an aversion to change, and these factors continue to favorably impact our policyholder trajectory. Pleasingly, in the last 12 months, our policyholder numbers increased by almost 83,000 or 4.6%. And to put this in context, this is the equivalent of the size of the 11th largest private health fund. During the period, the majority of COVID-related suspensions were reactivated, and at 30 June, total policy suspensions were in line with pre-COVID levels. Adjusting for these suspensions, policyholder growth was 3.5% with the Medibank and ahm brands growing 1.3% and 10.9%, respectively. Pleasingly, this outcome was despite the temporary closure of the Medibank retail network in Victoria for much of June and the decision to reduce the level of ahm sales through aggregators in the fourth quarter as we look to increase the level of sales through direct channels. The acquisition rate was up 110 basis points, largely driven by the Medibank brand, reflecting particularly strong growth in the new-to-industry segment. The standout metric was the 130 basis point improvement in customer retention and reflects improving customer advocacy across both brands, the benefit of increasing product value and differentiation in the Medibank brand and in ahm that our proposition of simplicity and affordability continues to resonate with customers. Turning to Slide 17. This slide is focused on underlying resident claims expense, and we provided a reconciliation to reported claims in the appendices. Underlying claims, which exclude provision and COVID impacts, were up 4.2%. Net claims, which includes risk equalization, was up 4.8%. Risk equalization was a $24.6 million payable this period with $17.8 million payable in 1H '21, reducing to $6.8 million in 2H '21 as the impact of COVID on claims, particularly in Victoria, started to unwind. And with our claims growth below industry claims growth, we expect to continue to be a net payer to the risk equalization pool. Underlying resident claims growth was down 20 basis points to 2.5% with stable extras claims growth and lower public hospital utilization and room nights paid resulting in lower hospital claims growth. Second half hospital claims growth was also modestly lower than in the first half, in line with the improved risk equalization outcome. In ancillary, the variance in growth rates across modalities will fix the extent to which services were impacted during COVID and have subsequently rebounded rather than any permanent change in usage. Slide 18 details underlying performance split between the resident and overseas portfolios and shows that strong growth in the resident portfolio was partially offset by a decline in the overseas portfolio. In the resident portfolio, underlying gross margin declined marginally to 15.2% with improving revenue and lower claims growth per policy unit. Downgrading of 90 basis points was an improvement of 50 basis points and reflects the benefit of the improving Medibank policyholder trajectory, portfolio management initiatives and the favorable external environment. And we will continue to target downgrading at or below 100 basis points. Whilst absent further prostheses reform, we expect underlying resident claims growth in FY '22 to be in line with 2H '21. We continue to closely monitor rehab referral trends for signs that the current softness is a permanent trend. In the overseas portfolio, the closure of international borders impacted performance, particularly in the second half following a significantly lower-than-normal student intake in January. Average policy units and revenue reduced 11.4% and 10%, respectively, and underlying claims per policy unit increased by 11.6% with increased usage of some services and the impact of the lower student intake I just mentioned. These customers typically have lower claims in the first 12 months, which impacted average claims per policy unit but also resulted in lower sales commissions. With borders remaining closed, in FY '22, we expect a similar decline in the number of policy units and claims growth per policy unit to remain elevated. Moving to Slide 19. Our productivity agenda and increasing scale resulted in a management expense ratio falling 40 basis points to 7.9%. Management expenses were down 2.3% to $530.9 million with operating expenses down 1.4%, stable noncash costs and overseas commissions down significantly. The decrease in operating expenses reflects cost inflation and volume impacts of approximately 2%, more than offset by $20 million of productivity savings. We are targeting further productivity savings of $40 million over the next 3 years, including $15 million in FY '22. These savings are expected to come from process improvement and increasing level of customer interactions through digital channels and at the back end of the period, lower corporate property costs. We remain very focused on balancing our productivity and growth aspirations whilst leveraging the benefits of scale to further improve the management expense ratio. And whilst we didn't expect cost inflation in FY '22 to be materially different to FY '21, the increase in the superannuation guarantee levy from 1 July and changes to Victorian payroll tax rates from 1 January will cost approximately $2 million. Turning to Slide 20. The external environment remains favorable to the long-term prospects of Medibank Health with increasing take-up of new care settings, including in-home care and continued focusing on community on health and well-being. However, COVID did impact operating performance in the second half with the additional COVID-related telehealth revenue we saw in the first half not continuing but ongoing border closures continuing to impact travel insurance revenue. Segment profit increased by 12.9% to $31.4 million with operating profit up 15.8% to $32.2 million and an $800,000 loss from our health care investments. Second half operating profit was $5.4 million lower than in the first half with approximately half of this due to the COVID impacts I just mentioned and modest seasonality. Operating performance reflects strong revenue growth, a stable gross margin of 41.2% and an improving management expense ratio. Revenue was up 5.1% with strong growth in home care and telehealth, partially offset by materially lower travel insurance sales. The 1.7% increase in management expenses to $84.8 million was largely inflation driven and as a result of strong revenue growth, the management expense ratio improved 100 basis points to 29.9%. The $800,000 after-tax loss from our health care investments includes a 3-month contribution from Myhealth of $700,000 and initial losses from other investments. Whilst the business' underlying trajectory is tracking broadly in line with the FY '22 organic operating profit milestone of $47.3 million, the likely closure of borders for much of FY '22 is expected to temporarily impact operating earnings by approximately $4 million. However, this impact is expected to be largely offset by the full year contribution from Myhealth and other investments. We also remain mindful of balancing short-term operating performance against the opportunity to invest for future growth. Looking now at our investment portfolio on Slide 21. Buoyant investment markets resulted in investment income of $120 million, materially higher than the prior period, which was significantly impacted by COVID. Closing asset balances were up 3.9% and includes $327 million of cash to fund deferred claims and customer givebacks. This amount sits outside our target allocation to growth and defensive assets of 20% and 80%, respectively, which remains unchanged. The significant increase in income from the growth portfolio reflects very strong equity markets this period. And in the defensive portfolio, the benefit of narrowing credit spreads more than offset the $10 million reduction in interest income due to the lower RBA cash rate. Underlying investment income, which adjusts for returns on growth assets relative to our long-term return expectation of 8% and for credit spread movements, was down $17 million. This reflects the RBA cash rate impact I just mentioned and a flattening of the yield curve. The underlying investment return of 210 basis points was 195 basis points above the cash rate and is at the top end of our targeted range of 150 to 200 basis points above the benchmark. 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 our allocated capital of more than $170 million. During the period, Health Insurance required capital increased to support revenue growth, and the increase in other required capital largely reflects the $63 million investment in Myhealth. Unallocated capital reduced by $18 million with the investment in Myhealth largely offset by strong investment market returns and lower inadmissible assets. Importantly, our strong capital position means we are well placed to fund further organic and inorganic growth as well as consider capital management in the future. APRA has recommenced consultation on the proposed new PHI capital standard with the industry responding to a quantitative impact study in May. We expect a draft capital standard to be released in late calendar 2021 and that this will take effect from 1 July 2023. We believe we are very well placed to implement this new standard and hope to provide an assessment of the impact to our capital position in 2H '22. Finally, the Board has declared a fully franked final dividend of $0.069 per share, bringing full year dividends to $0.127 per share. This is an 87.7% payout of underlying NPAT, which is above the top end of the 75% to 85% target range and reflects our strong capital position. Finally, on to Slide 23 and our key areas of focus for FY '22. Going forward, we will continue to leverage the investment we've made in the core enablers of technology, digitization and people to remain a strong and connected business. We remain very focused on managing what is within our control, and despite the ongoing COVID uncertainties, are optimistic as we enter FY '20. In PHI, we remain very focused on growing the top line through increasing policyholder numbers and managing the level of downgrading. Whilst absent further prostheses reforms, premium increases are likely to be below industry claims inflation. Our claims management capabilities across hospital contracting and payment integrity and increasing investment in preventative health and new care settings means we are uniquely placed to respond. Importantly, increasing scale and our productivity agenda means we will be able to create capacity to invest in growth as well as further improve the management expense ratio. Continuing to grow Medibank Health will also remain a key area of focus, including through further inorganic growth opportunities and increasingly delivering synergies with the PHI business. And finally, we must ensure that we leverage our strong balance sheet and high level of capital generation into further avenues to grow. I'll now pass back to David, who will make some concluding remarks.

Thanks, Mark. As Australia's largest private funder of health, we have an important role to play in ensuring that our health system can meet the ongoing needs for all people in Australia. Central to the task is reform to improve choice, value and outcomes for patients, both now and in the longer term. We have long argued for reforms that will eliminate the unnecessary costs that the private sector pays, ensuring the private system remains accessible to all in Australia and helping take the pressure off the public system. Over the past 5 years, we have seen the impact of reforms have had on the system, helping to improve value for customers and lower premium increases. We know reforms work, which is why we welcome the federal government's commitment to prostheses reform as Australians with private health insurance have been paying too much for these devices for too long. Reform could give up to $500 million in value back to customers, and we expect to see the impact of these changes flow through over the next 4 years. We remain committed to returning prostheses reform savings to our customers through lower premium increases. We will continue to advocate for reforms that provide greater support for new care settings and preventative health, which are needed if we are to make the health system more patient-centric while reducing waste and improving efficiency. There is a genuine understanding of the need to do things differently. These government reforms are vital, but the health sector also needs to play its part, which is why we are continuing to step up. Driving change to benefit the broader system is embedded in our strategy. Encouraging and rewarding healthy behaviors for our customers is an important impact that we can have every day, but it's not enough by itself. Research suggests that more than 30% of hospital costs are potentially avoidable, and we've seen the evidence of this in our own prevention programs. In the longer term, our focus on preventative health will be key to helping ensure the overall sustainability of the system, and you should expect us to play a more meaningful role in this space. But preventative care will not be enough for many Australians with hundreds of thousands of our customers seeking treatment every year. We will continue to partner with leaders in the health sector to develop innovative, new, patient-centered models that can deliver better care and give people greater choice about where to receive their care and more control over how much they pay for it. With our customers already engaging with these options, you can expect to see more to come from these partnerships. At scale, each of these initiatives has the ability to provide the change that is desperately needed to sustain Australia's health system. However, these changes will not come quickly, nor will they be easy, but we remain focused on the role we have to play to ensuring our health system can continue to support all people in Australia, both now and in the future. Now on to Slide 26. Our strategy has evolved, but our customers and people remain at the center of everything we do. Over the past few years, we have invested in new ways to digitize and personalize our customer experience to support better prevention, to build care around the needs of our customers and to innovate in the area of health and well-being. For many of our customers, we are now a health company, but there are more people we need to reach. We're doing this because it's better for our customers, better for the health system and ultimately better for our business. Much of our world has changed because of COVID, the way we work, the expectations of our customers, how we think about our health and well-being and the way we interact with the health system. And at the heart of our result today and our priorities for FY '22 and beyond is a commitment to helping more people in Australia access the care they need and to support them on their health journey. This commitment is shared by the incredible team here at Medibank. Now on to Slide 27. So turning to our FY '22 outlook. We continue to assess claims activity, and any permanent net claim savings due to COVID will be given back to customers through additional support in the future. We are aiming to achieve approximately 3% policyholder growth in FY '22, including continued growth in the Medibank brand. This assumes a slowing rate of growth in the industry compared to FY '21. Our underlying average net claims per policy unit is forecast to be in line with the second half FY '21 at 2.4% among resident policyholders. We remain focused on controlling our costs with an FY '22 productivity target of $15 million in health insurance management expenses. And finally, targeted inorganic growth for both Medibank Health and Health Insurance also remains areas of focus. I'd like to thank the executives online today and everyone at Medibank for their role in helping to deliver these results. Despite all the uncertainties over the last 12 months, they have delivered even more for our customers and the community. I'll now hand over the call for any questions.

[Operator Instructions] The first question today comes from Sean Laaman from Morgan Stanley.

My first question relates to the outlook and the 3% policyholder growth. Interested in your thoughts on the decline in growth for the industry relative -- in '22 relative to FY '21. Just your thinking around that. And are there any -- anything you're observing in the market at the moment that leads you to take that view?

So thanks, Sean. Look, I think there's a few factors that have driven the growth last year, and it is the largest growth the market has seen in 9 years. There's definitely a strength in PHI proposition as people increase their interest in health and well-being and want more choice to control. We definitely saw a flight to quality, the brands that customers can trust. Retention was no doubt assisted by another year of lower rate changes. And what was unique last year was there's quite a few returning Australians taking up PHI and many less leaving the country. So look, despite the growth in FY '22, we would expect it to be at the same rate as FY '21, but we do expect it to be at rates higher than the previous years, which were around 8.5%, particularly around the maintained focus on health and well-being and the PHI proposition and especially given the increases people are seeing in the public hospital wait times. So we remain confident about our growth prospects around 3%. But yes, it will depend to some degree on the market growth, which is why we also stated our ambition to grow market share over the next few years. So we'll keep you updated during the year as things unfold.

Got it, David. And second question, just with respect to the claims growth for next year at 2.4%, excluding further, I guess, sort of reforms such as prostheses. Can you just sort of clarify the $500 million over 4 years that could be saved prosthetics, how that sits in with that guidance?

Yes. So Sean, that guidance excludes any prostheses reform opportunity. So that's based on the underlying exit momentum we saw in the second half. So whether it be prostheses reform or whether it be the current softness in rehab referral rates continuing, they will both be potential upsides to the claims rate next year.

Right. Right. And just one last quick one, if I may. Just with respect to the JV with the 45 docs in queue. Is there any sort of update in terms of how that's progressing? And any updates on any pipeline with similar opportunities? Just as a last question.

Sean, I'll just kick off and then hand over to Andrew, who's been very involved in that. Look, I think there's strong momentum here. We're seeing customers adopt our short-stay, no-gap model, which has just increased the availability of that through 7 hospitals to over 0.5 million Medibank customers now. So we are seeing more and more interest in this category. I hand over to Andrew to address your particular question.

Yes. Thanks, David. Look, the...

Sorry, Andrew, I think you've...

Thanks, David. So the project in queue is going really well. And just to reemphasize, though, that our strategy in the short-stay hospital sector is a doctor-led strategy. Medibank's very happy to invest with doctors to support them, and that project is a very good example of it. We're delighted to be working with those 45 senior specialists and to support them as they build out a new model of care in that hospital.

The next question comes from Andrew Buncombe from Macquarie Bank.

Just the first one, I suppose, dovetails with the last question. You've commented on your intention for inorganic growth in the Medibank Health division. Maybe if there's any more color you can give us on where that money may be directed, so hospitals, GPs, HSS. Any color around that would be helpful.

Yes. Thanks. Again, I might hand over to Andrew to give more detail. But look, I think our focus here is on investing in businesses, and they're strong businesses in their own right, ensuring that they can drive synergies back to the core and, in the longer term, help catalyze system change so we can deliver more value for customers and progressively looking at more partnerships in this space. We see growth opportunities in all lines of our business to embed and scale what we've already done. But over to you, Andrew, for more...

Yes. Thanks, David. Look, I think we certainly see there are significant growth prospects again with adopting the business model we have with the short-stay strategy. I mean it's clearly resonating with customers, it's resonating with doctors and there is -- we believe, there's significant ongoing growth there, which will be good for the system and good for our customers. The Myhealth investment, we're very excited about that. That's got significant growth prospects. And so that business will grow from an execution point of view in the primary care space, we would envisage, over the next couple of years. And we're always looking for other opportunities. Again, our sort of stated position is largely sort of modest acquisitions. And certainly, if there are other potential options to increase our footprint in the home-based care, we certainly will be looking at those as well.

Perfect. Just in terms of my second question, you've mentioned again the use of debt going forward. Maybe we are closer to actually executing that now. It would just be interesting to hear how you're thinking about an efficient gearing ratio, please.

Yes. So Andrew, so there'd be Tier 2 debt we'd take is a first step. And I think we said before, in broad numbers, $175 million would be the capacity that we think we could take on, and that will be set -- the actual amount will be set by whatever the final capital standard says in terms of the quality and mix of capital. But $175 million is a good starting point. I guess the only condition precedent now to actually raising the debt will be actually understanding how much total capital we will need to hold under the new capital standard, and we hope to get better transparency on that towards the end of this calendar year.

Yes. And then just the final one, please. Maybe if you can give us some color on whether you're taking costs out in the overseas business just as those customer flows remain under pressure. Or are you maintaining that cost base to really leverage up when the borders open again?

Yes. So we haven't -- other than the sales commissions, which are driven to the number of new customers, we've broadly kept that cost base in line with 2019. And in fact, we're actually investing in product and digitization. So we're very well prepared when the borders actually open. Now that's likely to be in our FY '23 year. So we actually see those being potential growth area longer term. So we're continuing to maintain the level of investment and, in fact, trying to get set for when the borders open.

The next question comes from Andrew Goodsall from MST Marquee.

I might just pick up on that last one just around acquisitions. I know you've talked about consolidation in the past. And I guess thinking forward about matching the APRA standards, is the current industry margins that you're seeing sort of making it less likely that we'll see that sort of tension and the M&A opportunities come up?

Yes. Andrew, good question. I think the margin you saw in the most recent APRA data was heavily impacted by the deferred claims liability unwind. There's about $300 million to $400 million of the deferred claims liability being unwound across the industry. So I think the margin was slightly flatter. You're right. I think the deferral of claims as a consequence of COVID has meant a lot of funds are sitting on surplus cash. My view is that as that cash starts to unwind and then the new capital standard increases the level of capital, that many funds will need to hold and what capital -- what can be counted as capital, I think that will be the catalyst to the serious industry consolidation and conversations really starting.

I think the other point to note, Andrew, is that as I said before, we grew last year 83,000 policies, which is about 40% of all growth in the market organically. And to put that into context, that's the 11th largest fund. So whatever we do in this space is going to be disciplined as we assess opportunities going forward.

And probably a bit similar to that, with that growth and obviously a bit weighted to quite a way to ahm is when we look at the risk equalization profile, obviously, it's not reflecting normal trading conditions. But with that ahm growth, is there an element of that risk equalization profile that is tilting your way?

Yes. So Andrew, Medibank will receive under the pool, and ahm, we contribute and we expect that because that's a younger, lower-claiming cohort. The second half risk equalization outcome...

Yes. [indiscernible] my comment there, sorry. Tilt away, sorry. Not tilt to.

Yes. So the first half risk equalization payment was heavily impacted by COVID claiming patterns, particularly in Victoria. I'd take the second half contribution as being more normal and reflective of what we'll need to pay going forward. But of course, if ahm continues to grow strongly and our claims growth continues to be below industry growth, which it has been for some time, we'd expect that payment to the pool to commensurately increase.

Okay. And then just my final one. Just, David, very interested in your opening remarks on the current lockdown. I was just wondering if you're seeing any sort of trends around suspensions. And any -- if you've got any reference points at this early stage for deferrals or any other provisions, noting that hospitals stayed open this time around. So just trying to get a sense for our forecasting sort of what you're seeing so far.

Yes. Some quick remarks and then hand over to Mark as it relates to our provision. But yes, we are seeing a difference at this point versus last time. Elective surgery or nonurgent care has been reduced in New South Wales and Victoria, but we are still seeing customers in other states getting access to care. But end of the day, we will continue to monitor this, and we've committed, as we sit again today, to return any net claim saving benefits to customers. And when we do that, if that does arise, we'll continue to do that in a way that can support longer-term retention as we've done before. But Mark just might want to provide some more detail there.

Yes. So Andrew, we saw, as we ended the last couple of weeks of July and going into August to date, softer ancillary claims. It's a little too early to actually make an informed judgment on what's happening on hospital claims. But as David said, the New South Wales system is starting to shut down elective surgery, so we'd expect some further savings temporarily. And look, it really depends on how long this current lockdown continues in both Victoria and New South Wales. And we will, as a starting proposition, defer the same level -- use the same deferral percentages for our claims as we had going into 30 June.

Okay. That's 30 June this year or prior year because I think...

This year. This year.

This year. Got it. Okay. Terrific. And just have you seen any sort of repeat of last year's suspension behavior or requests?

Look, we've had some increase -- some very, very modest increase in suspensions since we announced our most recent customer support package but not at the same level as we saw in March and April of last year.

The next question comes from Kieren Chidgey from Jarden.

A couple of questions, if I could. Just interested in your thoughts on sort of the upcoming premium rate round. Obviously, your downgrading has been quite good, sort of circa 90 basis points, a bit below probably what you assumed 12 months ago in claims inflation, as you've suggested, is exiting the year at a bit lower level at 2.4%. So given the combination of that, should we be thinking about premium rate rises slightly below sort of the level you sort of requested last year?

I might start off with a bit of an external perspective and then hand over to Mark. I think, Kieren, we're not expecting any material changes in expectation. And if this does happen, it does continue to support a higher-retention environment. But look, a lot will depend on, as I said, underlying claims growth and where we end up also in prostheses reform. Mark?