(Pictured: Rohan Mead)
With only the hint of a smile, Rohan Mead said last week that, within the next 10 years, there would be more people in Australia suffering from dementia than there were currently living in Tasmania.
The problems associated with an ageing population are serious and complicated. And they are problems that super funds, as well as governments, insurance companies and businesses in general need to come to terms with. For investors, wherever there’s a problem, there is usually an opportunity.
Mead, the group managing director of Australian Unity, was addressing media in Sydney about various issues, both investment – especially property – and social, to do with ageing. Australian Unity not only owns aged-care and medical-facility properties, it also has a private health insurer. Private heal insurance (PHI) is an even bigger minefield than life, term and disability insurances.
“The reality of the demographic projections is now in the planning horizon,” Mead said. “About 46 per cent of Federal Government spending will be on health and aged care within the next four decades. For the states, the situation is even worse.”
Official statistics put the current total Federal Government spending at $130 billion but Australian Unity believes the number is closer to $150 billion, which is more than the allocation to economic infrastructure. The health care sector is the nation’s largest employer, with about 1.4 million workers. Australian Unity estimates that another 1 million net new jobs will be required in the sector over the next decade. Health and related costs have continued to rise faster in both nominal and real terms than GDP growth in recent years.
With the probability that Medibank Private with be either sold or floated soon, the PHI sector may be in for a bit of a shake-up, although Mead says the economics are not very attractive. He describes PHI as “the most extreme” of all forms of insurance in terms of its premiums-to-claims ratio. An average of 91 per cent of revenue is paid out in claims, leaving 9 per cent for all administration, sales and other overhead and marginal costs. “Product design is THE game in town for the PHI insurer,” he says.
The problem is more acute, not just because of the demographics, but also because the medical industry’s “disease profile” has broadened out, as has the “intervention profile”, meaning we now treat more ailments more frequently.
Mead said the health sector represented “a formation of producer interests”, mainly doctors, and, until now, there had never been a consumer.
“There’s an extraordinary transformation going on,” he said. “It will be a fascinating ride as we watch, as the economic formation, which is under extreme stress, transforms.”
For super funds there are two opportunities: one has to do with member retention in retirement and the other to do with non-traditional real estate investment. For smaller investors, there are probably more opportunities to do with providing various aged-care services.
As big owners of property as well as listed and unlisted business of all shapes and sizes, super funds are well placed to be involved in the construction and/or ownership of new aged-care and retirement facilities which will be required at an increasing rate in the future. They could also be a beneficiary through tying such activities to their member-retention programs, by, for example, linking continued fund membership with access to retirement or aged-care living, as Members Equity did with home ownership in the early days of its operation.
Chris Smith, Australian Unity’s head of health care and retirement property, said there was an expanding and vital role for the private sector. Already, the private system treated 40 per cent of all patients.
Private Public Partnerships represented a strong trend for the future, he said. An example was the planned major new hospital near Mona Vale on Sydney’s northern beaches, which was a mix of private ownership and operations and government operations and postponed ownership. The plan is to allow for considerable expansion possibilities, too.
Generally speaking, property leased for healthcare purposes had delivered higher returns for slightly higher risk than other property, Smith said.
FOOTNOTE: Tasmania, the world’s 26th largest island, had a population of 513,000 as of June last year, according to Tasmanian Treasury.