Here’s why investors in health insurance stocks like Medibank and NIB should stay alert

Health insurance stocks are facing a big dilemma right now. On one hand patients don’t want to pay more, but private hospitals want them to pay more. What’s new about that, you might ask? Well, the collapse of Healthscope has bought this issue to the forefront, and something will have to give sooner or later.

Of course, other insurers face many of these challenges too – home and contents insurers face the risk of climate change and damages to properties in the future that increases risk for them and likely costs.

But for now, let’s just focus on health insurers given the Healthscope collapse and that the ASX is home to 2 of the 3 largest health insurers.

Health insurance stocks (and non-listed companies too) have been doing well

Australia’s 3 largest are Medibank, NIB and Bupa with the former two being listed. All made pre-tax profits of $1.7bn in 2023-24 as well as Returns on Equity of over 30%. Specifically Medibank made 45% and NIB made 40%.

There is major incentive in having private health insurance and disincentive not too – in facing a tax surcharge and high bills if you don’t have insurance. From April 1, 2025, Medibank and NIB received approvals for 3.99% and 5.79%, both above the average premium increase of 3.73%.

But something may have to give

The collapse of Healthscope has brought to the forefront the reality that the private health system is not profitable. But wait, isn’t Ramsay (ASX:RHC) making profits? Not quite. In 1H25 it made a profit after tax ‘from continuing operations after non-controlling interests) excluding non-recurring items) but its headline loss was $104.9m.

Moreover, its shares have more than halved in 2 years, and CEO Natalie Davis declared that there were industry-wide challenges (namely, workforce shortages and rising costs for supplies). They also face the issue of various treatments meaning overnight stays are less necessary – either they can get treatments done in a day, or even at home. Ramsay is looking to sell its majority shareholding in its European private hospital group.

Of course, smaller operators would have even further difficulties. Industry data released last week showed $12.3bn was paid out in the year to March 31, 2025. Australians are paying $470.80 per hospital visit, $46 more than a year earlier. The average gap for general treatments rose $3 to $61.64 per service.

12.5m people in Australia have hospital cover and 15.1m have general treatment cover. The trend is overall up, with 81,000 people signing up in the first quarter of this year. The bulk of them are in their 40s, about the time in their life they’ll start to need increased healthcare (for themselves, their dependants, or even both). And there were over 5.13 million episodes of care – the highest in a 12 month period.

Something has got to give

Someone will have to pay more to make the system sustainable. Ideally the hospitals, but if even one of the largest providers collapsed (Healthscope), it doesn’t bode well for their capability to. Will insurers pay more and bear the cost, or will they pass it onto consumers.

The industry group, Australian Private Hospitals Association (APHA) wants insurers to pay more. ‘If it costs me $10 to provide a service and you pay me $8, I’m $2 out of pocket,’ said chief executive Brett Heffernan.

But can insurers without passing it onto consumers and having consumers stick around? That’s a difficult question that needs to be faced.

Conclusion

We are not saying that investors should necessarily sell any health insurance stocks they own. Just that they should be aware of the dilemna facing the industry. Maybe insurers will get their consumers to pay more – and even if numbers fall, they’ll be better off making more money from less people rather than less money from more people.

But there is a story to unfold in this sector.

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