Annual Report You get more with HCF

Transcription

1 Annual Report 2008 You get more with HCF

2 Notice of Annual General Meeting 3:30pm on 27th November 2008 in the Auditorium Level 7 of the Company s registered office at HCF House, 403 George Street, Sydney NSW 2000 The Hospitals Contribution Fund of Australia Limited ABN HCF achieved its tenth Gold Award for its 2007 Annual Report from Australasian Reporting Awards (ARA), becoming the most consistently awarded report in the Banking, Finance and Insurance Division. 3 About HCF Group HCF is one of Australia s largest combined registered private health and life insurance organisations. Our Mission 3 Our Vision 3 Our Values 3 4 Highlights Group Financial and Operational Highlights 4 6 How We Performed How We Performed Against This Years Set Targets 6 8 Chairman s Report Chairman Greg Gardiner reports on HCF s strong growth in the Health, Life and Travel Insurance businesses. Putting Members Interests First 8 Sustainable Economic Performance 8 Meeting our Social Responsibility 9 Good Governance and Compliance 9 Our Changing Operating Environment 9 Looking Ahead Chief Executive Officer s Report Terry Smith reports on ensuring HCF s economic sustainability through prudent reserves, with a current increase of fund reserves totalling $538 million. Health Insurance 12 Life Insurance 15 Business Outlook for Chief Financial Officer s Report CFO Sheena Jack reports on significant premium income growth for both the Health and Life Insurance divisions. 22 Segment Summary Market conditions and outlook for Australian private health insurance. Australian Health Insurance 22 HCF Performance Compared with the Industry 24

3 The 2008 Annual Report of the HCF Group provides a balanced overview of our results in economic, social and environmental terms. We have achieved a responsible surplus while containing expenses, grown our total membership to well in excess of one million, maintained our commitment to the welfare of our people, successfully renewed our efforts in effective environmental management and above all, delivered on our promise to our members that You get more with HCF. In the following pages we present a considered view of the outlook for our industry, outlining specific targets we have set for HCF group in the 2009 financial year. The Review of Operations lists the improved benefits to members and details the progress achieved by our business units for the past year. 26 Review of Operations HCF funded 252,437 hospital admissions and 5.7 million ancillary services. Member Services 26 Hospital Care 26 Commitment to Members 28 Complaint Resolution 28 Health Care Quality, Safety and Satisfaction 28 Making it Easy to do Business with Us 30 Awards for Excellence 31 Corporate Social 32 Responsibility HCF s business success and ability to service our members, is linked to a sustainable future. Commitment to Sustainability 32 Global Reporting Initiative Sustainability Indicators Index 33 Commitment to Staff 34 Environmental Regulations 40 Environmental Commitment 40 Social Commitment 41 Commitment to Community 42 HCF Group Organisational Structure 43 Senior Management Profiles 44 Trends and 46 Statistics Hospital and Medical Trends 46 Hospital Care Scorecard 49 Ancillary Benefit Trends 50 Understanding Statistics Directors Report HCF Board of Directors 66 HCF Life Insurance Company Pty Ltd 68 Auditor s Independence Declaration Corporate Governance 83 Financial Statements Notes to the Financial Statements 88 Directors Declaration 120 Independent Audit Report Further Information Further Information 123 Contact Details 124 HCF Branches, Full Service Agents and Regional Offices HCF ANNUAL REPORT 1

4 Meeting the needs of everyone in the family Our family life I have been a lifetime member with HCF. As a child I was covered by my family s membership; as a young adult, I continued with a single membership, and now, with a family of my own, we have a family membership. Our membership has been great value and has helped us a lot as a family. As we all have different needs, it s great to know that we all benefit from our membership in different ways. We make regular claims for physiotherapy, podiatry, naturopathy, dietitian, hospital and pilates as part of my gym membership. The customer service is fantastic and the staff at North Sydney are always friendly and obliging. Anna Mason 2 THE HOSPITALS CONTRIBUTION FUND OF AUSTRALIA LIMITED

5 About HCF Group The HCF Group consists of HCF of Australia Limited and its fully owned subsidiary, HCF Life Insurance Company Pty Limited. HCF was established in 1932 to provide the community with the means of insuring against the cost of medical care. Since then, it has grown to become one of the country s largest combined registered private health and life insurance organisations. HCF is financially secure, has no borrowings and is one of the few major health funds to allow contributors to vote for Directors to the Board. HCF is a public company limited by guarantee. It operates on a notfor-profit basis and is registered under the Private Health Insurance Act To service our growing national membership we maintain a network of branch offices in NSW, ACT, Queensland, Victoria and South Australia with national coverage provided by our call centres and full sales and service virtual branch at HCF Health Insurance HCF provides the full range of private health insurance cover allowed by law to fund access by its members to hospital, medical, ambulance and ancillary services throughout Australia. These services are provided by a national network of public and private hospitals, medical specialists and approved ancillary providers. Health Care Services HCF is dedicated to purchasing and delivering the best quality health care for members. We monitor patient satisfaction with both the quality and outcome of the hospital, dental and eye care services they use. We also offer members access to HCF s network of seven quality accredited dental and eye care centres which are each equipped with the latest technology and are staffed by experienced, caring professionals. The HCF dental and eye care centres are all located in Sydney. HCF has organised a panel of almost 1,900 dentists in Queensland, NSW, ACT and Victoria who provide the same range of no gap services as the dental centres to ensure equity of access for all members (More information in Review of Operations pages 26 31). HCF Life HCF Life is a wholly owned subsidiary of HCF and was formed in It provides members with affordable, good value sickness, accident and death cover and extends the financial protection provided by our health policies. It also provides members with safe investment products. The HCF group at a glance Change Our Mission HCF s mission is to satisfy the needs of Australians for access to affordable, high quality health care when they need it, personal protection, secure asset growth and peace of mind. Our Vision Our Vision is to become the leader and the benchmark for excellence within our industry when it comes to: choosing a health fund; achieving better health outcomes for members; highly efficient, low cost operations; being good people to partner with; and setting the standard for fiscal and ethical responsibility. Our Values integrity: we act ethically always. Customer Focus: we make it easy to do business with us. Personal Accountability: we are fully compliant. Strong Leadership and Teamwork: we all belong to the one team HCF. Innovation: we constantly strive to find better ways to satisfy our members needs. Group equity $511.4 (m) $562.6 (m) 10% Credit Rating (Standard & Poors) A-(strong) A-(strong) Total policies in force 829, ,000 6% Total lives covered 1,396,900 1,477,400 6% Branches Dental centres 7 7 Eye care centres 7 7 Staff (full time equivalents) % 2008 HCF ANNUAL REPORT 3

6 Highlights Group Financial and Operational Highlights Net profit after tax and before donation Lives covered % decrease % increase Health Coverage Life Coverage Underwriting profit Management Expense Ratio as a % of net premiums % increase reduced to 8% Net premiums Staff Engagement % increase increased to 77% HCF Benchmark highest Benchmark 3rd Quartile THE HOSPITALS CONTRIBUTION FUND OF AUSTRALIA LIMITED

7 Goals Maintain a strong financial position. Continuously increase the value of HCF membership. Achieve operational excellence. Develop a world class organisation with the people and strategic capabilities needed to achieve objectives. Highlights Lower investment income in the wake of financial market volatility caused Group net profit after tax and before donation to health research to fall by 47% to $42 million this year. Group underwriting result improved to $34 million, 26% better than last year. Net premiums increased by 12% to $1,097 million reflecting strong growth in membership and improved cross selling of health, life and travel insurance. Fund membership reached 1.07 million persons, a gain of 5.6% and exceeded the industry average growth rate for the fifth successive year. Productivity and efficiency improvements reduced the Group management expense ratio (MER) from 8.4% to 8%. The health fund MER reduced to 7.9% and is again one of the lowest of all major funds. Staff engagement increased to 77%, 8% above the top quartile bench mark. Every unit in the HCF Group is in the top quartile. The Manchester Unity Board unanimously recommended its members approve HCF s merger proposal. If approved the merger will occur in 2008/09. Trends Slowing economic growth and very volatile financial markets. Changes to Medicare Levy Surcharge (MLS) income thresholds. Population ageing and the incidence of chronic disease. Provider charge increases and the cost of new technologies and drugs. Industry consolidation and increased market competition. Outlook Slowing or negative market growth in the short term (economic, MLS, affordability) Increasing pressure on benefits through changing risk profiles after MLS, ageing, new technologies, expansion into disease management and provider costs. Pressure on premiums from low growth, MLS, price controls and affordability. Reduced returns from investments Group targets for 2008/9 Maintain the reserve to annual premium ratio at 50% Revenue growth: Increase earned premiums by 8% Membership growth: Increase national market share from 9.6% to 11.6% Efficiency: Reduce management expense ratio to less than 8% Increase staff engagement to more than 77%. Strategies HCF s Key Strategies to 2011 are to: Increase membership and revenue by developing innovative products and services to attract and retain members. Ensure members have access to high quality, cost effective, affordable health care and other value adding services when and where they need them, at the lowest possible cost. Develop a world class organisation with the leadership, people, knowledge and capabilities needed to achieve our objectives. Ensure the long term economic sustainability of the HCF Group by: Earning a responsible and sustainable profit; Responsibly pricing our products and services; Supplementing earnings from our core health funding business through prudent investment and diversification strategies; Maintaining an appropriate and prudent level of reserves. The planned merger of HCF and Manchester Unity Friendly Society in 2008/2009 will support the achievement of these strategies and enable the combined entitities to provide greater value to members, staff and other stakeholders through scale economies, building corporate capabilities and a bigger voice HCF ANNUAL REPORT 5

8 HCF Group: How We Performed Against This Year s Set Targets Strategic Focus and Strategies Strategic Goals and Key Performance Indicators Revenue Growth: Strategies Maintain appropriate and prudential reserve levels. Responsibly price our products Earn additional income through prudent investment strategies Membership Growth: Strategies Align products and distribution channels with key segments Cross sell health, life, travel and other insurance Increase business outside NSW/ACT Organise and manage quality, cost effective provider networks Minimise medical out of pocket expense Increase patient satisfaction with the care we have funded Increase member satisfaction with the service we deliver Achieve Operational Excellence: Strategies Effectively control benefit costs Effectively manage administrative costs Increase use of low cost transactions People and Organisation Capability: Strategies Maintain top quartile staff satisfaction and engagement Develop the competencies & leadership we need to succeed Community and Social Responsibility: Strategies Contribute to health & medical research which will benefit all Australians Ensure a safe workplace Manage risk and compliance systems effectively Goal: Achieve a strong and sustainable financial position Group Equity Solvency requirement cover (health insurance) Operating profit after tax and donation to research Net premium income Underwriting surplus after expenses Investment and other income Goal: Increase the value of membership Health fund membership growth Life insurance policy growth Revenue earned outside NSW/ACT Satisfaction with being a HCF member (survey) Hospital, medical and dental charge agreements (national) Medical services covered without a co-payment Patients satisfied (hospital, doctor, dental, optical care) Members satisfied with HCF service channels (Survey) Goal: Control benefit costs and the systematically improve operational efficiency and service levels Group Claims Ratio Health fund management expense ratio (MER) Transactions processed by ebusiness & call centre Goal: Develop the skills and capabilities needed to grow our business Staff engagement index (Benchmark survey score) Staff retention Key job succession/coverage ratio Leadership Index (Benchmark survey score) Staff (full time equivalents) Operating revenue per $1,000 of payroll cost Goal: Ensure HCF is fully compliant and plays an appropriate role in improving the health of our communities HCF Health & Medical Research Foundation donation Research donation as percentage of operating profit Lost time accident frequency rate per million hours worked Significant fines for non compliance with laws or regulations Non compliance with regulations, voluntary codes 6 THE HOSPITALS CONTRIBUTION FUND OF AUSTRALIA LIMITED

9 Results and Performance Against Targets 2006/7 2007/ /8 Change on Unit Actual Actual Forecast Last Year Major Initiatives and actions this year $ 000 $511, , ,004 10% Merger proposal to Manchester Unity: recommended X minimum % $'000 $70,477 $37,316 $57,855-47% $'000 $979,277 $1,096,850 $1,067,398 12% Average premium earned per policy increased by 5.2% $'000 $26,739 $33,632 $15,231 26% $'000 $58,986 $13,308 $48,482-77% Revised investment strategy and new fund managers appointed new business and ventures project Major initiatives and actions Lives '000 1,011 1,068 1,037 6% Revised sales strategy: new policies increased by 22% to 51,000 Lives ' % As above - annual premiums increased 10%, sales by up 8% % premium 22% 23% 22% 7% Interstate marketing strategy - premiums grew 20%, sales by 15% % 98% 96% NLT 95% -2% Chronic disease management programs cover 2,200 patients Number 19,741 22,518 20,150 14% Funded 698,000 days of hospital care, 5.4% more than last year % Services 85% 87% 86% 2% Funded 1,922,000 medical services, 14% more than last year % (weighted) 92% 91% 93% -1% Funded 5,669,000 ancillary services, 5.7% more than last year % (weighted) 93% 90% 95% -3% Major initiatives and actions % premium 88.9% 88.7% 90.3% -0.2% Dental centres operations improvement % premium 8.2% 7.9% 7.9% -0.3% Straight through claims processing project saved $1.2 million % total 73% 75% 76% 2% Kaizen (Lean Thinking) project initiated - 10 initiatives in progress Major initiatives and actions % 75% 76% 76% 1% Team building for units with below HCF average scores % pa 76% 78% 78% 2% Team building for units with below HCF average scores % key jobs 100% 100% 100% 0% Executive development programs % 77% 79% 77% 2% Leadership development program FTE (#) % $ $25,860 26,661 25,461 3% Major initiatives and actions $'000 9,000 5,000 5,000-44% Five new projects funded, $2.3million in forward grants % NPAT 12% 12% 8% 0% Corpus increased to $25 million % Hours (m) 4% 7% 4% 63% $ nil nil nil 0% Risk, compliance and fraud programs improved Number 7 20 nil 186% All breaches were minor and self reported 2008 HCF ANNUAL REPORT 7

10 Chairman s Report I am pleased to present the 2007/08 HCF Annual Report to members, particularly as we continue to produce excellent results in the face of national and international financial instability. Our commitment to members, the community and key stakeholders remains undiminished. As a not-for-profit organisation, we will always put our members interests above profit and build value for members, not shareholder wealth. We are determined to maintain the highest standards in governance and reporting and to benchmarking these aspects of our performance against the best of corporate organisations listed on the Australian Securities Exchange (ASX). This commitment and its achievement underpin our ongoing sustainability in the competitive business world. I am delighted to report that HCF achieved its tenth Gold Award from Australasian Reporting Awards in June this year for our 2006/07 Annual Report and even more so as our report was runner up for the prestigious 2007 Annual Report of the Year, second only to one of Australia s leading corporate. Putting Members Interests First Our regular quarterly surveys into member satisfaction continue to report high level results. This year has been no exception, with the overall satisfaction level for the year reaching 96%, only slightly down on last year. While we are justly proud of this continued level of approval, we can see opportunities for improvement and our detailed independent survey results provide a guide to those areas where we can do better. We recorded strong growth in the health, life and travel insurance businesses again this year and exceeded the average growth rate of all health funds for the fifth year in succession. At 30 June this year the membership of the health fund was 1,067,624 persons, 57,000 more than last year and the number of persons insured by the life company had increased by 23,700 to 409,800. Three out of every five HCF members under the age of 55 now have some form of life or accident cover. Travel insurance premiums increased by 19% to $2.5 million. This year, we paid a record $973 million for members health benefits, $107 million more than last year. This was equal to a return of 90 cents in the dollar of premium income and above the industry average return of around 85%. HCF Life claims provided for during the year were $2.1 million, 37% lower than last year. Our strategy for continuous improvement to our business processes, Operational Excellence, has delivered more gains in efficiency, productivity and cost control through further improvement to customer management systems. This year our ebusiness channels handled 75% of all sales, service and claims transactions and assisted in maintaining an expense ratio which is lower than any of the other major funds and, at 7.9%, is well below industry averages. Later in this report, we provide details of the progress of our member health programs, introduced last year. These programs are designed to improve the health and quality of life of members with chronic or complex conditions such as cardiovascular disease, diabetes and mental health and are provided free of charge to participating members. Sustainable Economic Performance HCF is vigilant in its responsibility to provide the highest value to members while maintaining a sustainable and responsible level of profit which will ensure we have a prudential level of 8 THE HOSPITALS CONTRIBUTION FUND OF AUSTRALIA LIMITED

11 $973m member benefits up by $107 million (12.3%) 7.9% fund expense ratio reduced from 8.2% and is 25% lower than the industry average 22% sales growth to 51,000 new policies this year reserves to meet the solvency standards demanded of a large and growing financial organisation. This year our group operating net profit was $37.3 million after tax and donation to the HCF Health and Medical Research Foundation compared with last year s $70.5 million. The operating result was affected solely by the extreme volatility of equity markets following the sub prime crisis. We earned $13.3 million in investment and other income this year, 77% down on 2006/07. Both our health and life businesses achieved an underwriting result 3% above plan with the group underwriting margin increasing by 25% to $33.6 million. We consider this outcome a responsible level of surplus, given financial market conditions and our strong commitment to maintaining member benefits. The net-profit margin for the Group was 3.4% this year, against our target of 5.4% and last year s figure of 7.2%. The health fund net margin was 4.3% for the year compared with an expected industry average of 3.8%. As a not-for-profit health fund, we believe the most appropriate measure of our relative efficiency is the combined ratio (i.e. net claims plus administrative expense) as a percentage of contributions rather than return on equity. In HCF s case this ratio has been maintained at 98% and includes savings in management expense being returned to members by way of improved benefits. Meeting Our Social Responsibility HCF strongly supports the principle that all our activities should reflect our policy of being economically viable, environmentally sound and socially responsible. It is important to note, the health and life insurance services we provide are a social good in themselves, as they help to share risk and create financial solidarity between individuals, companies and our society at large. The Group s operations this year generated $156 million in gross economic value added. From this we paid $41 million in federal and state taxes, ambulance levies and staff superannuation and $65 million in salaries to our 885 employees. We donated $5 million to the HCF Health and Medical Research Foundation increasing its corpus to $25 million. The Foundation funds grants for health and medical research which will benefit all Australians and currently has more than $6 million in approved projects underway. HCF s health insurance premiums are, on average, 5% lower than the average premium of all other funds when compared on a per family equivalent policy unit (EFU) basis. HCF s average premium per EFU has increased at a compound annual growth rate of 4.8% since 2004 and compares favourably with the industry average of 5.3% compound growth over the same period. HCF s rate increase in April 2008 was 6.2% compared with the industry average of 5%. Good Governance and Compliance HCF is not a listed entity but the Board considers it appropriate to adopt the relevant Australian Securities Exchange Corporate Governance Best Practice Recommendations (ASXCGC) and includes a statement in our Annual Report disclosing the extent to which they have been followed. We believe our commitment to good governance is an indicator of management capability and quality. This is reflected in the high regard for HCF s governance practices and level of disclosure held by regulators, ratings agencies and other stakeholders. Standard and Poor s, the international ratings agency, confirmed their May 2007 assessment of HCF as A -Strong, on 1 September 2008 after taking into account the proposed merger between HCF and Manchester Unity. This is the highest rating they give for a not for profit organisation. Our Changing Operating Environment Financial year 2007/08 saw a number of significant changes to the industry s operating, regulatory and economic environments including: the election of a Labor government followed by their decision to retain ownership of Medibank Private and in May, to change the income thresholds for the Medicare Levy Surcharge; 2008 HCF ANNUAL REPORT 9

12 Chairman s Report continued some consolidation of the industry with more likely to follow; extreme volatility in global equities markets resulting in little return on invested funds for the industry overall, this has continued into 2008/09; a strong underwriting result for the industry which helped cushion the adverse effects of the downturn in equities markets; and the growing influence of online brokers and independent health fund comparator sites on new business. The proposed changes to the Medicare Levy Surcharge thresholds combined with the uncertain economic conditions caused a slow down in new business across the industry at year end and this appears to have continued into the first quarter of 2008/09. We expect this trend to continue, at least in the immediate term and that HCF will not be immune from this even though we enjoy strong member loyalty, high service standards and a range of excellent value for money products. Two funds, MBF and nib, announced their intention to demutualise and list on the ASX last year and in November, nib decided to do so. This was followed by a successful bid by BUPA Australia Health, Australia s third largest fund, to acquire the MBF Group, Australia s second largest health fund. This transaction was completed in June 2008 and has positioned the enlarged BUPA Group to challenge Medibank Private s leadership position. There are three other merger and acquisition transactions currently in process which are expected to be completed later in 2008/09; Medibank Private has made a binding offer to acquire AHMG, Geelong is acquiring Druids (Victoria) and we, after an approach from Manchester Unity to participate in a competitive structured bidding process submitted a proposal to merge our two funds in August Our proposal was recommended unanimously by the Manchester Unity Board and will be voted on by their members at the end of Looking Ahead The outlook for HCF and the private health insurance business remains positive even though the challenges will be many. We are in a very strong financial position with the people necessary to realise our vision and to manage our response to the changes we have foreshadowed as well as take advantage of the opportunities which we expect will emerge. With a new government comes change and we are actively contributing at industry and organisation level to the many commissions and reviews being conducted into the future health care system. Besides strengthening our very competitive capability platform we believe HCF will in future play an increasing role in sourcing and funding disease management programmes which are effective in slowing the onset of disease and improving the health of members suffering from chronic disease. Our first priority is our highest risk members who are relatively few in number yet account for almost half the claims paid each year. Over time we see this approach evolving to cover our entire insured population with appropriate programs covering the entire risk spectrum. We hope to complete the acquisition of Manchester Unity by the end of December 2008 and to commence the integration process early in the New Year. We believe the merger will realise benefits for the members of both funds and synergies for the combined group which would not otherwise be available. In Closing It is a distinct privilege to chair such an outstanding organisation as HCF. The aims, ethics and consistent performance not only in financial terms but in the areas of social responsibility, validate our reputation for excellence and our high standing in the Australian business sector. The clear dedication to our members best interests has been a major factor in our success and will continue to guide our decisions into the future. I acknowledge and sincerely appreciate the contribution of my fellow Directors throughout the year and, in particular, I would like to record my appreciation for their commitment to ensuring the excellence and effectiveness of our compliance, governance, risk management and assurance systems. Our success would not be possible without the extraordinary efforts of the Chief Executive and his senior management team, who combine long term strategic thinking with a constant awareness of and dedication to the many tasks at hand each day. Our market leadership is in good hands. Most of all I would like to thank our people, the HCF team at all levels of the organisation, whose energy, dedication and hard work are at the heart of our continuing success. Our staff have initiated, developed and implemented the processes and systems that set HCF apart and ensure our long term sustainability. G.J. Gardiner Chairman Sydney, (26th September 2008) 10 THE HOSPITALS CONTRIBUTION FUND OF AUSTRALIA LIMITED

13 Long time members, reaping the benefits and getting more out of life. Knee surgery. Got it covered Ron and I have been HCF members since We chose HCF as their member benefits were more appealing to us than what other health funds offered, and we continue to benefit having made claims for Physiotherapy, Chiropractics and Hospital cover. I have had two major operations on my knee in the past 10 years and HCF covered me (without question) for this major surgery. We like the convenience of the call centre, and the ladies at our local HCF branch offer great customer service not to mention the fact that they are always good for a laugh! Ron and Judy Walters 2008 HCF ANNUAL REPORT 11

14 Chief Executive Officer s Report We have maintained our fundamental mission of ensuring members can have access to affordable and high quality health care of their choice despite a very competitive marketplace and unsettled business conditions. We have followed our successful 75th anniversary year with another positive performance that largely meets our internal targets, as published in the 2007 Annual Report and meets or exceeds industry benchmarks. Our progress is detailed in the tables on pages 4 7 of this report and throughout the relevant sections that follow. Results for the health fund and HCF Life Company are discussed separately in the following review. We present a considered view of the outlook for our industry, outlining specific targets we have set for the HCF group in the 2009 financial year and the Review of Operations (page 26 31) lists the improved benefits to members and details the progress achieved by our business units for the past year. Health Insurance HCF continues to lead the industry in vital areas including growth in membership, customer satisfaction and a lower management expense ratio. Ensuring a Strong and Sustainable Financial Position The health fund achieved a responsible operating profit again this year earning $52 million before tax and donation to the medical research foundation and $47 million after. This was down $20 million (32%) on last year s result. All of the fall in operating profit was caused by a lower return on our investments which earned $26.8 million this year. Total funds under management were $656 million and the gross return on managed investments was 1.5% for the year, 1.1% lower than the benchmark and well below last year s return of 9.7%. The fall in yield reflects the volatility experienced by HCF and most other organisations in financial markets during the year which has continued into 2008/09. We achieved a strong underwriting result of $25.3 million after claims and other expenses for the health insurance business which was 19% better than last year. Our continued success in attracting and retaining younger members and families means the gap between the risk profile of the HCF customer base and the average for the industry continues to widen. As a consequence, our payments to the industry risk equalisation scheme increased by almost $15 million to $21 million and now account for 1.9% of our earned contributions, up from 0.9% on last year. This year s results demonstrate why the health fund must maintain a prudent level of reserves to ensure it can cope with changes in the political, economic or market environments and to enable it to take advantage of opportunities as they arise without the need to raise additional capital or increase premiums to cover shortfalls. I am pleased to report fund reserves increased by $61 million to $538 million as at 30 June 2008 and the solvency ratio to total assets remains at almost twice the minimum required by regulation, despite the difficulties encountered this year. 12 THE HOSPITALS CONTRIBUTION FUND OF AUSTRALIA LIMITED

15 5.6% increase in total fund membership 9.8% national share of total persons covered, up from 9.6% Increasing Membership Membership of our health fund showed continued growth in the face of uncertainty in the financial markets which caused some reduction in discretionary spending by households. Total membership of the fund increased by 5.6% this year to 467,374 policies covering 1,067,624 persons, an increase of almost 57,000 people.the number of HCF policy holders has continued to grow faster than the industry overall increasing our share of the industry s net gain in policies this year from 9.3% to 11.8%. The strong growth in membership reflects the continuing success of our market segmentation, market expansion and product improvement strategies. New business increased by 22% to 51,000 policies this year with around 52% of all growth occurring in states outside of NSW, in line with our objective of diversifying our exposure to geographic market risk. Membership in states outside NSW now accounts for 24% of our total membership, up from 22% in The redesign of our health and life insurance product packages, together with improved sales training programmes and the success of HCF On Line, our full service web branch, all played major roles in achieving this result. HCF s national market share of total health policies in force increased from 8.8% to 9.0% with similar gains in persons with private hospital cover (up from 9.7% to 9.9%). Given the intensity of competition and the amounts spent by our major competitors on advertising this year we believe this is an excellent result. Operational Excellence Transforming What We Do In last year s report, we made a commitment to control expenses while retaining high levels of benefits for our customers. In 2008, our management expense ratio (MER) reduced further, from 8.2% to 7.9% and will remain one of the lowest of all other open funds. Savings made in operations enable us to continue to return a much higher overall percentage of premiums to members in the form of health care benefits. We call this the mutuality dividend. If we calculate the difference between our MER and the average for the industry this year it comes to $30 million in added value for members. Customer retention and satisfaction remain at higher than industry levels. More importantly, these indicators are in line with our own high standards and remain a source of pride in achievement to HCF. Customer satisfaction was down from last year s record 98% to 96% and staff satisfaction maintained a high 76%, up from 75% last year. Staff satisfaction and engagement scores were in the top quartile of the benchmark survey overall and in every business unit. We continue to work strenuously to improve both these measures by developing sensible and effective policies and systems that increase staff engagement and this flows through to above average customer comfort levels. A prime example of efficient customer systems that benefit HCF, its members and providers was the introduction of medical claims scanning, which reduced claims assessment and payment times and brought significant savings of $1.2 million in our operational expenses. Other examples of productivity and process improvements are in the Review of Operations. Technology continues to deliver improved efficiencies, with our website usage growing to 807,000 visitors and internet sales improving by 10% and accounting for 17% of all new business. Industry bench marking indicates HCF s investment in technology is generating above average returns on below average IT costs. The HCF Difference Increasing Value for Members Total health benefits paid were $973 million this year or 90% of annual premiums. This remains significantly above the average industry figure of 85%. In total, benefits paid increased by $107 million, or 12.3%, with benefits for hospital care growing by 13% to $709 million HCF ANNUAL REPORT 13

16 Chief Executive Officers s Report continued 96% customer satisfaction, down from last year s record 98% 77% staff satisfaction. All units are in the benchmark top quartile Total ancillary benefits paid were 9% higher than last year although this was around 3% lower than our forecast. The average benefit paid per claim increased by 3% as expected, reflecting the indexation and/or real increases in benefit amounts and limits we provided this year, in line with our usual practice. The cause of the variance was the rapid growth in membership above plan which caused the number of claims per member to be 2% lower than expected due to waiting periods. Last year, we reported the results of a series of pilot programmes designed to better manage the present and future unmet needs of HCF members with a chronic and/or a complex condition such as coronary heart disease, cancer, arthritis, mental illness, diabetes or asthma. Our aim this year was to scale up those programs which were proven to be effective as part of our five year population health strategy. Three programs were found to be most effective, cardiovascular disease management, (Healthy Heart), diabetes type two (Healthy Weight for Life) and mental health (Helping Hand). I am pleased to report we have almost 2,100 members enrolled in them at year s end and we are currently working to develop a broad range of new and effective disease management programmes based upon Australian standards of care to reduce modifiable risk factors and improve the health of our most at risk members. These programs will be provided at no charge to up to 25,000 members on a voluntary participation basis over the next five years and will complement, not replace, the care provided by their treating doctors. As a not for profit health insurer, HCF will continue to offer better value by consistently returning more to members in benefits than other funds and by our commitment to members that we will keep our operating costs the lowest in the industry through a new process of continuous improvement which involves all staff. We call this The HCF Difference and achieve this by combining many benefits which are unique to HCF, such as access to our quality accredited dental and eye clinics, lower co-payments than our competitors for hospital based care and maintaining market leadership of medical gap cover. Modest increases in premiums in April this year have been kept to a minimum and were accompanied by a list of improved benefits for all members apart from those under the Broader Health Cover initiative outlined above. Improving Health Care Quality, Patient Safety and Informed Patient Consent We strongly support the new Commonwealth Government s initiative to introduce individual public hospital scorecards. These will provide better information than is currently available and should enable patients and their families to make more informed choices about their care providers. We are working through our industry association to secure the changes needed to the Privacy Act which would allow HCF to provide similar information to its members about private and public hospitals and the extent of any gap charges for medical and other health services. Since 1996 we have surveyed HCF members who were admitted to hospital in order to monitor their satisfaction with the quality and safety of the care provided to them and of other performance bench marks. This year s survey involved 3,684 members admitted to 47 private and four public (benchmark) hospitals located in NSW, the ACT, Queensland, Victoria and South Australia. The key survey findings in 2008 were: Overall satisfaction with the quality of care provided is declining, from 92% in 2006 to 90% in 2008; The likelihood members would recommend their private hospital to others was virtually unchanged at 87% with the rating for the four bench mark teaching public hospitals falling from 79% to 78%; Informed clinical consent has improved with 94% of members rating the explanation given to them by their specialist before their procedure as good or very good compared with 93% last year. Rating of the explanation given by their anaesthetist was unchanged at 90%; Informed financial consent remains a concern, particularly for medical specialist fees. Ninety five percent of members reported they had a fair or good knowledge of the likely hospital charges before being admitted compared with 88% having prior knowledge of specialist charges. This level of informed financial consent falls to 79% for hospital charges and to 66% for specialist charges when only those reporting a good 14 THE HOSPITALS CONTRIBUTION FUND OF AUSTRALIA LIMITED

17 10% increase in life insurance annual premiums 38% increase in life underwriting surplus to $8.4 million knowledge are included. This explains why many people with private health insurance complain about the unexpected gap and why funds should be allowed to publish charges. The information is readily available; and Patient safety and the incidence of patients experiencing some form of adverse event remains a concern as it is not improving. More than one in five HCF members (21%) who were admitted to a public or private hospital this year reported experiencing one or more adverse events in hospital or within a week of being discharged. Fourteen percent of all HCF patients ranked their event as serious or very serious with caught an infection (17%), bleeding (16%), complications with surgery (15%) and reaction to anaesthetic (11%) again being the most common. Funds have the capability to provide information on hospital quality and safety to members but until the Privacy Principles are changed are prevented from doing so. We have published our hospital care scorecard again this year, on page 49 and made public additional information we have derived from our hospital and other health services research. Life Insurance HCF Life is a highly successful, low cost, niche business, with its progress linked to the growth and retention of HCF members. The HCF customer base provides the means for HCF Life to grow while avoiding the costs and infrastructure required to compete directly in markets dominated by the major life insurance companies and banks. Financial Results Financial performance from the life insurance business remains strong with the equities return affected by losses in domestic and overseas financial stocks. HCF Life created shareholder value of $6.3 million this year, 33% lower than last year and 23% lower than plan. Shareholder equity was $34.9 million against last year s $35.9 million. The underwriting surplus for the year was $8.4 million, 36% above plan and 38% above last year. Operating revenue increased by 9% to $15.7 million, 5% higher than plan with claims 37% lower than last year at $2.1 million and 61% of forecast. The investment portfolio incurred a mark to market loss of $3.1 million compared with last year s positive result of $4.1 million. The life investment portfolio yield for the year was 0.6% negative compared with our external benchmark return of negative 0.2%. The Life Company net result after tax was a loss of $1.0 million. Operations Results Total sales of $2.8 million by annual premium were 8% higher than last year. Improved cross selling by HCF branch staff, continued strong growth in the health insurance business and better than expected direct marketing campaign results were the main factors in the sales result. Annual premiums in force increased by 10% to $17.9 million and total lives covered increased by around 6% to 409,800. Life Company Goals for 2008/09 Increase shareholder value by $8 million. Maintain net earned premiums and underwriting profit after the Medicare Levy Surcharge changes. Earn benchmark portfolio return or better on managed funds. Merger with Manchester Unity Group HCF submitted a proposal to merge with Manchester Unity Australia Limited following a competitive bidding process. HCF s proposal has been unanimously recommended by the Manchester Unity Board for their members approval. We believe this merger will create a much stronger and competitive national health insurance and member services group covering 1.25 million people with a national market share of 11.7%. The combined group will be committed to delivering a wider range of products and services than would have been possible in the absence of this proposal and continuing to provide the high standards of service the members of both organisations expect. As the third largest private health insurance group in Australia the combined group will have an improved bargaining position with providers, a much stronger voice in the not for profit sector and will be able to advocate more effectively on behalf of members on all matters affecting their health care HCF ANNUAL REPORT 15

18 Chief Executive Officers s Report continued 13% more hospital benefits to fund 252,000 episodes of care 9% more ancillary benefits funded 2.5 million extras claims Senior Executive Movements Shaun Larkin was transferred from his position as General Manager, Benefits Management, which he has held since 2002, to develop the corporate ventures function in November His new role involved establishing the feasibility of this new function and seeking out and forming strategic and financial partnerships with innovative companies that share HCF s commitment to improving health care quality, service and affordability. We welcomed Shaun s replacement, Chris Wallace, to HCF in November Business Outlook for 2009 The Chairman covered our changing operational environment and outlook in his report and a summary of current market conditions, industry performance and our outlook for Australian health insurers follows this report on page 22. The nature of HCF Life s operations, their integration within the health insurance customer and product base will see their performance and experience align with that of the health insurance business. In summary we expect: Most strategic factors (market growth, industry profitability and structure and economic conditions) to be negative or neutral in the next twelve months before slowly improving out to 2011; Industry membership growth will slow or decline in 2008/2009 as the full effects of changes to the Medicare Levy Surcharge thresholds; the slowing economy and the current uncertainty in financial markets are felt; Industry profit margins will most likely fall in the short term as a result of lower investment returns, government pressure to hold rate increases below claims inflation, higher provider charges and increases in the industry risk profile caused by ageing and the loss of some lower risk members; and Competition between major funds and on line brokers to increase or maintain their share of new and existing business in a low or no growth market will increase. The management team and Board have established clear priorities and projects to improve HCF s current performance in the health and life insurance business segments and across each of the five key strategy areas described on page 5. We look forward to the members of Manchester Unity approving our merger proposal in December If approved, managing the effective integration of the three Manchester Unity businesses (health insurance, financial services, retirement villages and aged care) will be a high priority in At the same time we recognise management must remain focussed on achieving HCF s strategic outcomes while managing the integration of the Manchester Unity business with minimal disruption to the day to day operations of both organisations. We are confident our unique strengths, our strong capability platform, sound financial position and commitment to the not for profit ethos will enable HCF to respond to these challenges and continue to create superior economic value for our members and other stakeholders. Finally, the success of HCF group is directly influenced by the excellence of our staff. Their contribution to our ability to serve our members and remain the leading not for profit health fund in Australia is both recognised and sincerely appreciated. T.J. Smith Chief Executive Officer Sydney (26th September 2008) 16 THE HOSPITALS CONTRIBUTION FUND OF AUSTRALIA LIMITED

19 Five Year Summaries HCF Health (Incorporating both the Health Fund and HCF No 2 Australia Pty Limited since its acquisition in November 2002) % change Item Unit on 2007 Membership levels Policies 400, , , , , % Total reserves $ , , , , , % Earned contributions $ , , , ,131 1,081, % Benefits payable $ , , , , , % Reinsurance (recovery)/payment $ 000 1,189 3,254 10,680 6,874 21, % State levies $ ,651 22,734 24,152 26,311 28, % Total benefits payable $ , , , , , % Management expenses $ ,493 69,798 72,090 77,141 82, % Underwriting surplus/(deficit) $ 000-1,457 7,288 25,365 21,238 25, % Other income/(other expenses) net $ ,398 40,403 46,950 54,689 26, % Operating surplus/(deficit) before abnormals $ ,941 47,691 72,315 75,927 52, % Donation to The HCF Health & Medical Research Foundation $ 000 5,000 9,000 5, % Operating profit/(loss) $ ,941 47,691 67,315 66,927 47, % Revaluation adjustments increase/(decrease) reflected directly through reserves land & buildings $ 000 1,782 1,565 3,193 8,411 13, % Solvency ratio (HCF) Coverage Assets exceed minimum solvency requirements ratio Claims ratio % Return on assets % % Management expenses ratio to earned contributions % % Staff (in full-time equivalents, excluding Dental Centres) Number % Claims paid Number 2,455,161 2,759,513 2,873,770 3,077,332 3,315, % Certain amounts have been reclassified to enable direct comparison between years. HCF Life % change Item Unit on 2007 Profit/(loss) (after tax) $ 000 2,379 2,751 2,550 3,575-1, % Total funds under management $ , ,014 67,891 65,930 58, % Total equity $ ,130 29,860 32,385 35,935 34, % Shareholder investment returns $ 000 2,418 2,572 3,019 4,116-3, % Coverage of solvency reserve Times % Earned premiums $ ,527 12,478 12,966 14,475 15, % 2008 HCF ANNUAL REPORT 17

20 Chief Financial Officer s Report The Group results for 2007/08 reflect HCF s policy of maximising benefits paid to members, firm control of management expenses and sound investment strategies. Total revenue for the Group reached $1,110 million, with Health Fund revenue increasing by 12%. The figures below show significant premium income growth for both the Health and Life Insurance divisions, an increase of 12.1% in claims paid, whilst investment income fell by $45.7 million to $12.0 million. Capital expenditure this year totalled $11.6 million; significant items included property refurbishment, software upgrades and equipment. The group surplus was $42.3 million and $37.3 million, after allowing for a donation of $5 million to the HCF Medical and Health Research Foundation. The surplus is 47% lower than the previous year. This is a direct impact of reduced investment earnings in the current year. HCF remains financially sound with Total Assets of $890.0 million, and Guarantors equity of $562.6 million. Provisions increased slightly by $0.3 million to $13 million. Surplus The Group surplus (after tax) was $37.3 million. Including: $47.0 million surplus from HCF; $1.0 million loss from HCF Life; and $8.7 million final distribution of HCF No. 2 net assets. This result represents a return on operating revenue of 3.4%. Contribution/Premium Income Health insurance business contribution income increased by $116.2 million to $1,081.4 million. Net premiums on life insurance policies were $15.4 million, an increase of 9.1%. (Refer to page 4 for more information) Claims Total claims payable were $975.4 million, 12.1% higher than last year. Including: $973.3 million paid as health insurance benefits; and $2.1 million as life insurance claims. Life Policies Policyholders liabilities increased by $0.4 million. Management Expenses Group management expenses increased by 6.9% to $87.3 million. 18 THE HOSPITALS CONTRIBUTION FUND OF AUSTRALIA LIMITED