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

21 $809m funds under management, increased by 6.9% $63m increase in total assets to $890 million Investment and Other Income The Group investment and other income was $13.3 million, a decrease of 77.4%. Tax Income tax credit of $0.4 million was receivable by HCF Life. Cash Flow Net cash flow from operating activities was $45.6 million, an increase of $10.7 million. Cash flows from investing activities included $11.6 million for purchases of plant and equipment. Balance Sheet Guarantors equity increased $51.2 million to $562.6 million. (Refer to page 85 for more information) Assets Total assets are $889.9 million, an increase of $62.9 million, including increases in investments, short-term deposits and cash, of $48.4 million. Capital Expenditure Significant items of capital expenditure during the year include: Improvements to software systems: $1.4 million; Improvements to branches: $2.8 million; Equipment: $1.4 million; and HCF House Refurbishment: $5.2 million. Liabilities Total liabilities rose by $11.7 million (3.7%) to $327.3 million, the major components of liabilities were: Net life insurance policyholders liabilities: $21.9 million, a decrease of $3.1 million; Claims liabilities: $104.0 million, an increase of $15.5 million; Unearned premium liabilities: $146.9 million, an increase of $9.7 million; Provisions: $12.9 million, an increase of $0.3 million; and Trade and other payables: $41.5 million, a decrease of $9.6 million. Borrowings HCF Group has no borrowings HCF ANNUAL REPORT 19

22 Chief Financial Officer s Report continued HCF Group Investments In the 2007/08 financial year, the HCF Group investment portfolio (including managed investments, cash and property) increased by $52.4 million (6.9%), to $809.2 million. Health Fund: Investment Management The HCF managed investment portfolio increased by $50.2 million to $655.8 million at 30 June 2008, an increase of 8.2%. Gross investment returns from financial markets were 1.5% for 2007/08, down on last year s 9.7%. During the year HCF reviewed its investment strategy and as a result appointed MLC Investment Limited to manage its investments through its multi manager implemented consulting platform. This change became effective from November Investment markets where thrown into turmoil during the year as a result of the credit crunch sparked by the US sub prime crisis. The conditions created by this had a material impact on the returns on HCF investments for the year. Over the last five years the Health Fund portfolio has achieved a return of 45.9%, an annualised return of 7.9%. This compares to: an annualised return of 7.8% from the external benchmark of comparative assets; 6.1% for the UBS Bank Bill Index; and 5.8% for CPI Inflation plus a margin of 3.0%. Property Eleven percent of the total investment portfolio is in property. The property portfolio includes HCF House, the head office building in Sydney, and six retail 6.9% increase in HCF Group Portfolio 7.9% return for the Health Fund portfolio % 21% 56% 9% 44% 17% 29% 11% Cash/Bank Bills Property Equities Fixed Interest Health fund investment and property 34% 3% 63% 31% 2% 67% HCF Group managed investment, cash and property portfolio Cash/Bank Bills Equities HCF Life asset mix Fixed Interest 20 THE HOSPITALS CONTRIBUTION FUND OF AUSTRALIA LIMITED

23 sites within NSW and the ACT. These properties are predominately offices/ branches for HCF Group staff. This allocation is an appropriate diversification of risk and weighting of an asset class with considerable capital gain potential. Following the valuer s advice, the valuation of freehold properties at 30 June 2008 was increased by $13.9 million to $80.6 million (a gain of 20.9%). All properties are well maintained to ensure that both rental income and capital values are maximized. HCF Life Investments Fund Management Total funds under management decreased by $7.2 million to $58.7 million at 30 June 2008, a decrease of 10.9%. Non-superannuation retail funds under management also reduced by 10% to $30 million. Over the last five years the HCF Life portfolio has achieved a return of 45.4%, an annualised return of 7.8%. This compares to: an annualised return of 8.6% from the external benchmark of comparative assets; 6.1% for the UBS Bank Bill Index; and 5.6% for CPI Inflation plus a margin of 2.5%. Sheena Jack Chief Financial Officer Sydney (26th September 2008) Investment performance (cumulative) compared to benchmark and other general indicators % HCF % HCF Life /04 04/05 05/06 06/07 07/08 03/04 04/05 05/06 06/07 07/08 HCF Actual Return Cumulative HCF Benchmark Cumulative UBS Bank Bill Index Cumulative CPI + 2.5% and 3% from April 06 Cumulative HCF Life Cumulative HCF Life Benchmark Cumulative UBS Bank Bill Index Cumulative CPI + 2.5% from April 06 Cumulative 2008 HCF ANNUAL REPORT 21

24 Segment Summary Australian Health Insurance Industry Performance Change Premium $m $10,261 $11,127 $12, % Total revenue $10,706 $11,799 $12, % Total claims $8,753 $9,432 $10, % Gross margin 14.7% 15.2% 14.7% 5.4% MER 9.4% 9.6% 10.5% 20.2% Net margin 5.3% 5.6% 4.1% (19.7%) Persons covered 10,189,522 10,561,848 10,942, % Market Conditions The market for private health insurance increased by 3.6% last year to cover almost 11 million people at 30 June % of the population now has some form of private hospital cover. Membership increased in all states with Queensland and Western Australia showing the highest market growth rates. This year the market was characterised by consolidation activity among six of the 11 largest funds with heavy competition between the major funds and the online broker, iselect. Performance Total premium income increased by around 9.5% through a combination of membership growth plus industry rate increases of around 5%. Published Annual Reports suggest most funds would have achieved a strong underwriting result. Claims inflation per customer unit was around 5% and in line with this year s rate increase and prior years experience. We expect there would have been little or no contribution to industry reserves from investment income this year with most funds suffering to some degree from the turbulence experienced in financial markets. Cost Drivers The key cost drivers of health insurance are the number of claimed services per member and the average cost per service. Many of the underlying drivers of cost are not under the direct control of health insurers with the charges for public hospitals and the Medicare Schedule Fee set by government and doctors deciding the site, cost and duration of hospital based care. Hospital Cover The industry funded 7.8 million days of hospital care this year, equivalent to 1.15 days per customer unit. This rate was only slightly higher than last year s and is in line with the trend of small increases in usage of hospitals in previous years. The benefit cost of that care was $7.4 billion, an average of $951 per day made up as follows: Hospital charge: $666 (+ 3.9%) Medical fees: $152 (+ 6.5%) Prosthesis items: $133 (+ 5.5%) Total: $951 (+ 4.6%) These figures indicate the average cost per hospital customer unit increased by 6.2% this year. General Treatment (Extras) Cover Changes to the way these policies are reported to PHIAC has affected the historical data base. HCF estimates, based upon publically available data, indicate the industry funded more than 59 million ancillary services at a total cost of $2.6 billion. We estimate the average number of services per customer unit was steady at 9.4 and the average cost per item increased by 3.1% to $44. Management Expense Publicly available information suggests management expense will have a number of one off costs associated with demutualisation, mergers, acquisitions and higher marketing expense. These factors will cause the industry expense ratio to rise faster this year than increases in membership and normal operating costs would suggest. Overall Impact on Costs HCF estimates total claims and administrative costs rose by 6% on a customer unit basis this financial year. This is about 1% higher than the previous two years and the average rate increase approved by the federal government this year. 22 THE HOSPITALS CONTRIBUTION FUND OF AUSTRALIA LIMITED

25 Regulation Risk The combination of the Private Health Insurance Rebate together with the Medicare Levy Surcharge and Life Time Health Cover has been central to the growth of private health insurance since From 1 July 2008 the income thresholds for the Medicare Levy Surcharge will be increased from $50,000 for single taxpayers and $100,000 for couples and families to $70,000 and $140,000 respectively. The new thresholds will be indexed to movement in average wages in the future. It is expected consumer behaviour will change with those who have already taken out health insurance or those who would have joined simply to avoid the tax levy dropping out of the market. Various models have attempted to project the effect of this change to the sticks and carrots underlying the private health insurance business. A reasonably conservative estimate is for an initial fall in private hospital coverage of around 3 to 4% or 300,000 to 400,000 people in the first year, 2008/09. This one off loss would be followed by lower growth caused by fewer new entrants and by further losses of current, healthier customers in subsequent years. Over a five year period the cumulative loss of current and potential membership could amount to around 1 million with total membership showing little or no growth and coverage falling to around 41% of the population by Some 700,000 to 800,000 episodes of hospital care that would otherwise be performed in private hospitals would be shifted to public hospitals over the same period. Initiatives Individual funds and the industry association have expanded their patient and member advocacy role with particular emphasis placed upon initiatives to improve patient safety, the quality of health care and obtaining the changes to regulation needed to allow more transparent information about provider quality, their service ratings and their charges to be made available to consumers. Disease management programs allowed under the Broader Health Cover initiative are still in start up phase and lack the scale necessary to significantly improve the health. It is too soon to measure their effectiveness in reducing hospital admission rates for high risk and chronically ill members. Outlook Most strategic factors are seen as negative over the next twelve months before improving in 2009/10 and beyond. We expect industry membership will fall marginally in calendar 2009 as a consequence of the government s change to the Medicare Levy Surcharge and the slowing of the national economy. Beyond 2009 we anticipate market growth will resume, but at a very much lower rate than in recent years. Financial markets are expected to recover, but the timing of this is still unclear. Investment income is likely to be low or negative, particularly in those funds exposed to equities in 2008/09. On present trends the real cost of claims will probably continue to increase by an average of 5% to 6% per year on an industry basis although the actual rate for individual funds will differ. This does not include likely changes to the industry risk pool caused by lower risk members opting out of health insurance causing claims costs to increase above historical trends. The current increase in the cost of claims exceeds the Health Minister s announced target for rate increases in 2009/10 and the industry weighted average rate increase last financial year HCF ANNUAL REPORT 23

26 Segment Summary continued How HCF performed compared with the Industry We exceeded industry growth for the fifth consecutive year (6.4% in 2008) Making steady growth in market share to 9.8% We continue to return more to members in benefits (90% of premiums) Spend less on management expenses (7.9% MER) Membership growth: Annual growth (%) in private hospital coverage Market share: Persons covered for hospital treatment (%) Member benefits: Percent of contributions Management expense ratio (%) Industry HCF 24 THE HOSPITALS CONTRIBUTION FUND OF AUSTRALIA LIMITED

27 Like other funds we earned less from our investments this year (3.7% return) We earned a sustainable and responsible profit (4.8%) To maintain a prudent level of reserves (50% of contributions) Premiums per membership are consistently lower than industry (4.9%) ,778 2,691 2,999 2,875 3,048 3,230 3,210 3,405 3,404 3, Investment return: Return on average total assets (%) Net surplus: Net profit margin after tax and before donations (%) Reserves to contributions ratio: Reserves to contribution income (%) Total premiums per hospital policy (EFU) ($ Thousands) 2008 HCF ANNUAL REPORT 25

28 Review of Operations HCF offers a range of products and services that allow our members the freedom to choose and to access high quality health care and financial services. Our commitment to continuous improvement in the efficiency of our operations and service standards enables us to consistently meet and exceed our members needs and expectations. 26 Member Services Access to High Quality and Affordable Health care Hospital Care Private Hospital Network 26 Medical Gap Coverage 27 Prosthesis Benefit 27 HCF Dental Centres and Oral Health Program 27 HCF Eyecare Centres Commitment to Members Meeting Members Expectations Complaint Resolution 28 Health Care Quality, Safety and Satisfaction Hospital Patients 28 HCF Dental Centres 29 HCF Eyecare Centres Making it Easy to do Business with Us Information Management Infrastructure 30 Electronic Commerce and Process and Automation 30 Keeping our members informed Awards for Excellence Member Services Access to High Quality and Affordable Health Care In ,171 HCF members required funding for 252,437, hospital admissions and 1,921,879 medical services an increase of more than 10,000 patients, 20,000 more admissions and 234,000 medical services than in We also paid benefits for 2,545,330 ancillary claims, which include dental, optical, physiotherapy, chiropractic, pharmacy services and ambulance services. The total cost of benefits for these services was $945 million. Eighty percent of hospital admissions were provided by 399 private hospitals covered by HCF charge agreements and 19% provided by 511 public hospitals. Medical and ancillary services were provided by almost 17,000 doctors, 11,000 dentists and 38,000 other service providers. An overview of these services follows with a comprehensive review of trends, usage and the costs of private health care services required by HCF members in the Trends and Statistics Section (pages 46 63). Hospital Care Private Hospital Network HCF negotiates national charge agreements with private hospitals Australia-wide covering accommodation and other hospital-related services for members. We also have medical gap cover arrangements with specialists to cover the difference between their charge for in-hospital medical services and the Medicare Schedule Fee. This ensures members will be fully covered for all hospital treatment or will incur a nominated co-payment, depending on their level of cover. HCF waives co-payments for all same day hospital care and for all overnight admissions resulting from accidents, a benefit not offered by most other funds. Members who choose specialists participating in the HCF Medical Gap Cover scheme usually incur no out-ofpocket medical expenses. Charge agreements are in place with 399 private hospitals and private same day hospitals. These covered 98% of all private hospital admissions nationally and 99% of all private hospital 26 THE HOSPITALS CONTRIBUTION FUND OF AUSTRALIA LIMITED

29 Member Health Programs This year HCF expanded its efforts to help members with chronic conditions keep healthy. Building on several pilot programs that have evolved over the last three years, HCF had increased participation in chronic disease management programs to 2,070 by the end of June. During November 2007 two new programs were launched, the HCF Healthy Heart program and the HCF Healthy Weight for Life Type 2 Diabetes Program. In this section of the Report, we profile these programs, along with the HCF Helping Hand Program. admissions in NSW and the ACT this year. HCF only contracts with private acute and same day hospitals which are fully accredited by official bodies such as the Australian Council of Healthcare Standards, an independent organisation dedicated to improving the quality of health care through performance assessment and accreditation. Medical Gap Coverage HCF s Medical Gap Cover scheme now covers 20,222 doctors, 2,422 more than last year. During 2007/08 we fully covered 87% of all hospital related medical services provided to HCF members, up from 85% last year and above the industry average of 84%. Prosthesis Benefits Charges for prostheses are negotiated on an industry basis by the Prostheses and Devices Negotiating Group. Benefits paid for prostheses increased by $9.8 million (13%) in 2007/08 to $87.6 million. The growth in the number and cost of prostheses reflects higher usage, ageing of the insured population, improved technology and changes in medical practice. HCF Dental Centres and Oral Health Program The HCF network of seven dental centres in the Sydney Metropolitan area enables members to access lower cost, high quality dental services. With 130 highly qualified dentists and 93 surgeries we continue to provide the highest level of dental care to our members. HCF insistence on continuing professional development means all of our dentists meet our required high standard of clinical and personal development. The Australian Council on Healthcare Standards (ACHS), extended the dental network s accreditation out to 2009 following last year s periodic quality assurance review. This year HCF dental centres treated almost 76,000 members and provided 28% of all preventative and diagnostic dental services to NSW members. Dental Network Change HCF Dental Centres Number of centres 7 7 0% Patients treated 70,200 75,600 8% Members using the HCF dental centre network were charged considerably lower out of pocket expenses than those treated in private dental practice. Dental average co-payments Average Co-payment Private practice $32.73 $33.18 HCF dental centres $6.48 $7.27 We introduced the HCF Oral Health Program (OHP) to provide no-gap preventive and diagnostic dental services similar to those provided by our dental centres to members living in the regional and rural areas of NSW and ACT or resident in Victoria and Queensland. This year the number of participating dentists increased by 23% to 1,897 year and they treated 172,200 HCF members, 27% more than in 2006/07 and provided more than 40% of dental services to HCF members residing in these states. Oral Health Programme Change NSW/ACT Number of dentists % Patients treated 83, ,100 22% Queensland Number of dentists % Patients treated 37,200 49,100 32% Victoria Number of dentists % Patients treated 15,600 22,000 41% 2008 HCF ANNUAL REPORT 27

30 Review of Operations continued HCF Eyecare Centres Our seven Eyecare Centres are operated under a franchise agreement with Eyecare Holdings Pty Ltd and are co-located with HCF dental clinics. HCF members can access a full range of affordable high quality optical frames, lenses and contact lenses, with high quality optical care provided by qualified optometrists using modern equipment. This year, 23,989 members used the HCF Eyecare Centres, 11% down from the 26,874 last year. Optical average co-payments* Average Co-payment Private practice $98.70 $ Eyecare centres $93.35 $98.05 * Based on benefit items for frames, lenses and contact lenses. Commitment to Members Meeting Members Expectations HCF provides health and life cover for more than one million people covered by 877,000 current policies with service provided by 50 branches in key locations in NSW, the ACT, Adelaide, Brisbane and Melbourne, our call centres and the HCF website. Upgrading of systems that support our members through branches, customer service systems, the call centre and claims automation has continued this year. Our highly popular branches provided the full range of services required by members and achieved significant sales of health, travel and life insurance products. Branches achieved 28% of all new business nationally and 38% in NSW and ACT this year. HCF Direct handled 714,112 calls, achieved 18% of all new business and handled 40% of all customer services transactions in 2007/08. The HCF web site provides a secure, members-only section. This enables members to access the full range of services they need. These include, pay their premium, submit ancillary claims, change their membership details or cover and obtain account and provider information as well as vote for directors. They can also receive their HCF Australian Tax Office statement, policy summary and rate notifications electronically. An informative Going to Hospital section of the website allows members to view helpful advice on what to expect before, during and after their hospital stay, including information about costs and charges. In addition, we include current articles on health-related subjects and common hospital procedures. Seventeen percent of all new business and 32% of all member service transactions were handled via the web this year, compared to 19% and 28% respectively last year. Our commitment to exceed members service expectations and to continuously improve quality and efficiency through technological change is reflected in our investment in staff training and product development. As part of this commitment HCF regularly surveys members satisfaction with our service and the care provided to them by hospitals, doctors and other providers and uses the results as a key benchmark for tracking and improving performance. Complaint Resolution This year we received 585 complaints, either directly from members or through the Private Health Insurance Ombudsman (PHIO), 9% fewer than last year. The PHIO referred 32 complaints classified as Category 3, (disputes) to us in 2008, compared to 42 disputes last year. All disputes were resolved to the satisfaction of the Ombudsman. HCF s share of all disputes received by the PHIO was 4.7% this year, well below our national industry market share of 8.8% and less than our 5.9% share last year. 9 % reduction in complaints for 2008 The 32 disputes referred to us by the Ombudsman were: Reason Benefit Levels Service and information quality 10 9 Membership 8 4 Claims for pre-existing ailments 6 6 Total The total number of complaints received from all sources is equal to a complaint to membership ratio of 0.14% for the year compared to last year's ratio of 0.15%. Health Care Quality, Safety and Satisfaction Hospital Patient Satisfaction Likelihood of Recommending to Others Hospital and specialty type Public hospitals Private hospitals Cardiac Orthopaedics Surgical Obstetrics & maternity Medical Source: Press Ganey Associates Pty Ltd: Annual survey of HCF members treated as inpatients in public and private hospitals. High level of patient satisfaction maintained Over the past 13 years, HCF has surveyed members satisfaction with their hospital care and shared the results with the hospitals involved to improve the quality of private health care. A comprehensive review of health care quality, patient safety and informed financial and clinical consent is presented in the Chief Executive Officer s Report on page THE HOSPITALS CONTRIBUTION FUND OF AUSTRALIA LIMITED

31 The HCF Healthy Heart Program The Healthy Heart program supports members with coronary artery disease or cardiac failure by providing telephone based self-help and educational information which is designed to help members manage their own condition more proactively and to learn the early warning signs. The Healthy Heart program had around a thousand members involved and is currently on-going. Hospital Care: Quality The quality of care and the likelihood patients would recommended the hospital as "good or very good" remains high Hospital Care: Patient Safety 12% of patients experienced a "very serious" or "serious" incident in hospital or within a week of discharge Private hospital patients continue to report higher levels of overall satisfaction with 86.6% (range 71% to 95%) likely to recommend their hospital to others compared with 77.6% (range 71% to 85%) of those using the four benchmark public hospitals. The specialty with the highest score is cardiac (84.2%) followed by orthopaedics (83.2%). The surgical specialty had the largest fall in score, from 83.1% to 81.9%, a difference that is statistically significant. HCF Dental Centres Patient Satisfaction 8 Patient satisfaction rating Satisfied and highly satisfied Dissatisfied Would recommend hospital Quality of care Annual survey of HCF members treated as inpatients in public and private hospitals Source: Press Ganey Associates Pty Ltd Annual survey of HCF members treated as inpatients in public and private hospitals Source: Press Ganey Associates Pty Ltd. The average waiting time for access to our centres was 4.4 weeks, around the same as last year s 4.3 weeks and is directly comparable to general private practice. Emergencies are always managed as a priority on the day of presentation. Reducing waiting times for non-urgent or non-emergency dental care remains a 2008 HCF ANNUAL REPORT 29

32 HCF Healthy Weight for Life Program The Healthy Weight for Life Type 2 Diabetes program helps overweight members with Type 2 diabetes reduce their weight and thereby improve their blood glucose control. Improved blood glucose control reduced the many complications of diabetes. This is an 18 week program that combines a very low calorie diet, educational modules, internet and telephone monitoring and follow up. It has been very successful, 879 members participated and most lost weight of around 9%. Several members actually brought their blood glucose into the normal range. Many members reported improved self perception of their health, increased energy levels and reduced body pain. Member satisfaction with membership, call centre & branch above90 % priority. A number of improvement projects to lift the productivity of the dental centres and to redesign our patient management processes including clinical records are in progress. Source: HCF Service Monitor HCF Eyecare Centres Patient Satisfaction Patient satisfaction rating Satisfied and highly satisfied Dissatisfied 6 5 Ninety five per cent of patients surveyed in 2007/08 indicated they were satisfied to some extent with the service they received at an HCF Eyecare Centre with the number dissatisfied in line with last year at 5%.There were 13 customer complaints from almost 24,000 patient visits last year. Source: HCF Service Monitor. Making it Easy to do Business with Us Information Management Infrastructure During 2007/08 our investment in our call centre, wireless technology and customer relationship management systems has been increased, bringing significant enhancements to both our members and HCF processing. Electronic Commerce and Process Automation This year we processed 75% of all sales, service and claims transactions electronically with good gains being made in medical claims process automation and on line sales. In 2007, HCF was the first fund in Australia to implement releases for ECLIPSE Version 6. This enabled expansion of our already highly developed automated claims assessment and payment systems for hospital and medical services. Benefits realised include savings in claims processing staff, reduction in the Medicare claims error rate from 12% to 7% and reducing the claims processing back log from three to nil days. The implementation of invoice scanning and data recognition using ReadSoft and integrated data enhancement and verification services was successful, enabling all medical claims data received through the mail to be transferred to ACE (HCF s automated claims processing engine) for assessment and payment. A new scanning capture system was implemented in September 2008 to process hospital claims. These new applications will guarantee that all invoices received through the mail are processed the next working day resulting in no processing delay, no backlog and better quality data capture from the invoices. This year, 399 private hospitals used our online membership eligibility checking service to obtain pre approval for 223,917 hospital admissions (about 89% of all admission enquiries). Sixty five percent of all hospital claims, 80% of all medical claims and 71% of all ancillary claims were processed electronically, providing significant saving for hospitals, doctors, ancillary providers and HCF. The only restriction we now have on achieving higher usage of these systems is the rate providers upgrade their legacy systems. Apart from claims, we are also making good progress and achieving savings across the organisation under our Straight Through Processing and Kaizen projects. These are re-engineering our other high volume, core business processes and will be progressively implemented during 2008/ THE HOSPITALS CONTRIBUTION FUND OF AUSTRALIA LIMITED

33 The HCF Helping Hand Pilot Program The HCF Helping Hand program continued to run throughout the year. This is a support service for members with mental health conditions and it provides regular telephone support, a 24 hour crisis hotline, and helps members to identify deterioration in their condition so they can be pro-active about seeking the medical care they need. The program was extended in duration because of the value members found in this service. A leading psychiatrist, Professor Gavin Andrews of the University of New South Wales, who completed an independent assessment of the program, declared the program a success both in terms of improvements in members mental health and a reduction in hospitalisation, at a recent Australian Health Insurance Association annual conference. Keeping our Members Informed Our communication programs keep members up to date through a range of media, including our six monthly HCF Fit & Well magazine, mailed to over 400,000 members, with industry updates, organisational and product changes and tips on health and associated topics. Two newsletters are produced for the benefit of our members fit@wwwell, is our free monthly newsletter that goes to over 195,000 subscribed HCF members, and HCF Zone, which is specifically targeted at younger members. An annual policy summary is provided to members, detailing their coverage benefits paid throughout the year. The policy includes an invitation to review their cover and change or upgrade it to suit their needs. Policy summaries are also available online or upon request. Our publications and promotional material are reviewed as part of a continuous improvement process. We design our HCF brochures and other collateral in a standardised, clear and easy to read layout and tone. We encourage our members to provide feedback on this and any product or service announcements via our address [email protected] or via our call centre or branch network. HCF s intranet database, audited quarterly, contains relevant customer and product information that allows all our front line staff to address member enquiries quickly and effectively. We also include current internal and external news so our staff can offer high level service. Marketing materials continue to reflect the HCF Difference, highlighting HCF s advantages to prospective members. The HCF brand enjoys high recall and acceptance, with new business increasing by 25% on the prior year and an above industry average member retention ratio. We further rationalised our product range during the year, providing our members with access to our new, easier to understand range. HCF products are great value for money and subject to continual refinement. Awards for Excellence HCF is now a three time winner of a major award for Excellence in Marketing from the Australian Marketing Institute (AMI). The awards are judged by marketing industry peers and HCF enters these awards as an objective measure of its marketing and communication effectiveness and performance. Our medical claims invoices scanning and recognition application received the ReadSoft Outstanding International Achievement Award for innovation and implementation and their Eco Warrior Award for contributing to a more sustainable earth by saving up to one million sheets of paper annually. HCF achieved its tenth Gold Award for its 2007 Annual Report (see inside front cover) HCF ANNUAL REPORT 31

34 Corporate Social Responsibility We strongly support the principle of the Global Reporting Initiative s sustainability reporting. We are committed to providing stakeholders with a balanced view of our economic, environmental and social performance. 32 Commitment to Sustainability 33 Global Reporting Initiative Sustainability Indicators Index 34 Commitment to Staff Our Workforce 34 Staff Satisfaction 34 Recruitment and Retention 35 Training 35 Occupational Health and Safety 36 Healthy and Fit Staff 36 Employment Agreements 36 Senior Executive Remuneration 37 Mercer Human Resources Benchmark Monitor 37 Average Salary 38 Equal Employment Opportunity 39 People Systems Environmental Regulation 40 Environmental Commitment HCF House Australian Building Greenhouse Rating (ABGR) 40 Water and Energy Conservation 40 The Green Grid 40 Dental Centre Network 41 Recycling 41 Paper Social Commitment 42 Commitment to Community HCF Health and Medical Research Foundation 42 Community Events and Charities HCF Organisational Structure 44 Senior Management Profiles Commitment to Sustainability HCF has fully embraced the principles of corporate responsibility and our commitment to strict standards is demonstrated throughout this report. We believe that our business success and therefore our ability to service our members, is linked to a sustainable future. In order to achieve this goal, we measure our performance against results that are economically viable, environmentally sound and socially responsible. This report was prepared in accordance with the Global Reporting Initiative (GRI) Sustainability Guidelines (G3). Any omissions of core and relevant additional indicators are explained in the GRI Index on page 33. While details of our economic performance information can be found in the narrative and formal financial sections throughout this report, the following sections address our social and environmental outcomes for 2007/ THE HOSPITALS CONTRIBUTION FUND OF AUSTRALIA LIMITED

35 Global Reporting Initiative Sustainability Indicators Index Core and relevant additional indicators are listed. GRI Indicator Reported Section Pages Strategy and analysis CEO s Report Scorecard 6 About HCF 3 Chairman s Report 8 10 How we performed 6 7 Organisational profile Commitment to Staff Organisational Structure Report parameters Contents IFC 1 Review of Operations Governance, commitments and engagement Corporate Governance Commitment to Members 28 Complaint Resolution 28 Patient Satisfaction Commitment to Sustainability 32 Commitment to Staff Environmental Commitment Social Commitment 3, 5 10, 14, 32, 41 Commitment to Community 42 Governance and Compliance Disclosure of management approach Operational Excellence 13 Developing our People Commitment to Staff Corporate Governance Core performance indicators Economic About HCF 3 How we performed 6 7 Highlights 4 5 Chairman s Report 8 10 CEO s Report Segment summary Five Year Summary 17 HCF compared with industry Chief Financial Officer s Report Review of Operations Trends and Statistics Financial Statements Environmental Corporate Social Responsibility Social Corporate Governance 71 Chairman s Report 8 10 Review of Operations Corporate Social Responsibility Core indicators omitted All Core Indicators reported Any additional indicator included Performance against industry benchmarks Segment summary HCF ANNUAL REPORT 33

36 Corporate Social Responsibility continued Commitment to Staff Our comparative position within the top quartile of all funds remains a source of pride, and is principally due to the efforts and dedication of our people. We believe that loyal staff, offering exceptional service to members and achieving high levels of productivity, must feel valued and satisfied that their work and loyalty is appreciated. We regularly measure staff satisfaction, provide opportunities for development and promotion, and are committed to ensuring supporting workplace systems and safety and health initiatives. Our Workforce At 30 June 2008, 885 people were employed by HCF, a figure in line with last year. Full-time staff accounted for 72%, 27% part-time and 1% temporary or casual employees. Women make up 74% of the workforce and men 26%. Twenty six percent of executives and middle managers within the Group are women. Overall, women fill 66% of all leadership positions within HCF. Staff Satisfaction This year the staff participation rate for our Employee Opinion Survey climbed from 84% to 88% (group wide). The survey is conducted by an external organisation, Measured Insights, and HCF is benchmarked against 185 companies. Staff again rated HCF in the highest quartile of the categories of overall satisfaction, immediate leadership and engagement and our results improved significantly across each of the categories in each business unit. Staff members enjoying the staff lounge at our Sydney Head Office 34 THE HOSPITALS CONTRIBUTION FUND OF AUSTRALIA LIMITED

37 Recruitment and Retention The rate of voluntary departures from HCF was 21.9% this year, down from 24% last year. A number of initiatives played a key role in reducing this rate, including an exercise conducted at the beginning of 2008 which set out to identify our recruitment brand. Attraction strategies, logo and web page development and advertising content were evaluated and improved. The 2007 Dental Assisting traineeship intake resulted in 10 of our 17 trainees gaining permanent positions with HCF. Our second program in 2008 shows continued promise, with the prospect of a number of permanent positions being offered. Training All training and development courses are closely aligned with business objectives to achieve maximum efficiency and the most effective results. In 2007/08 we invested $1.4 million or $1,606 per employee in staff training, slightly ahead of last year. We conducted 24,823 hours of in house training for 855 employees. This increased the average training hours per employee from 23 hours in the last financial year to 28 hours. Training courses covered strategy implementation from initial job training through to special sales training and the introduction of new processes and technology. 16 staff completed certificates or diplomas in management and we supported 48 staff attending external development programs at tertiary level. We also launched our Strategic Leaders Program, one element of HCF broader succession management strategy. Executive development initiatives included supporting the participation of two senior executives in the 2007/08 International Federation of Health Plans Executive Development Program. Staff rated HCF in the highest quartile for overall satisfaction < Staff commitment: Percentage favourable HCF work force: Head count by age and gender Leadership Satisfaction Engagement Male Female Group 2008 HCF ANNUAL REPORT 35

38 Corporate Social Responsibility continued Occupational Health and Safety Our target this year was to maintain the Group Lost Time injury frequency rate below 4%. This figure was not achieved and the injury frequency rate increased to 6.7% despite a number of initiatives to identify and manage workplace injuries. These initiatives have achieved reductions in incidents and lost time during the first months of the new financial year. HCF has two Occupational Health and Safety Committees which meet quarterly. The Group and Dental Peak Committee operate under the supervision of the General Manager of Human Resources who reports directly to the CEO. Both committees have positively impacted the health and safety of our people by analysing trends and identifying workplace risk. A number of training programmes designed to improve understanding of appropriate ergonomic practices, have been rolled out to several units within HCF including the OHS Committee and Dental Network Managers. Healthy and Fit Staff The physical and emotional well being of our people is important for engagement and retention. HCF implemented an Employee Assistance Programme (EAP) in June 2008 which provides confidential counselling to employees on a self referral basis. Pilates and Yoga programmes subsidised by HCF continue to play an important role in our employees health and well being. Employment Agreements The HCF Dental Centres Workplace Agreement which covers 192 dental employees and the HCF workplace Agreement which covers 295 clerical and support employees were successfully negotiated this year. The extensive consultation and feedback opportunities provided to employees during this process was a key feature in the acceptance of the terms and conditions of employment contained in the document. This collectively bargained agreement remain % 1% 28% % 3% % <25 < /05 05/06 06/07 07/08 HCF staff age profile compared with Australian Labourforce HCF Workforce: Voluntary turnover vs. Benchmark HCF work force composition Australian Labour Force Plan Team Leaders Executive HCF Actual Professional Middle Management Frontline Support Staff 36 THE HOSPITALS CONTRIBUTION FUND OF AUSTRALIA LIMITED

39 in effect for the next two years. All other staff are employed on an individual employment contracts which include standard conditions of employment across the group. Senior Executive Remuneration Our executive remuneration policy is to link all performance rewards, including merit pay to specific and quantifiable performance targets for individual, business unit and corporate objectives using balanced scorecards. This means all general and middle managers have at least one significant performance objective, target and measure linked to financial results, satisfying customers and other stakeholders, developing operational excellence and the organisation s strategic capabilities. A minimum of 30% up to a maximum of 40% of any performance reward in any year is formally linked to meeting these non-financial objectives. The HCF Reward and Performance Management System provides for three components: nominal base salary including superannuation, salary sacrifice and FBT; other non-financial benefits (these are at HCF s discretion); and at risk, short term incentives (up to a maximum of 35% of base pay). HCF follows a rigorous and transparent annual salary review process which includes a formal performance appraisal. The results of individual managers are compared with their individual and business unit key performance indicators, targets and performance hurdles which are aligned with both the annual business plan and three year strategic plan. The total remuneration of the CEO and those executives reporting directly to him, including the payment of any short term incentive, is reviewed by the Board Remuneration Committee and approved by the Board at the end of each financial year. Mercer Human Resources Benchmark Monitor Q1 Median Q3 HCF Training Expenditure per employee (dollars) Staffing HR staff as % of total staff Training staff as % of total staff Marketing staff as a % of total staff Finance & Administration staff as a % of total staff IT staff as a % of total staff Turnover Voluntary turnover % per annum OH&S Incident Frequency (12mth mvg avg) per million hrs Average days lost (12mth mvg avg) days per incident Key to understanding the table Q1 represents the lower quartile. It indicates that 25 percent of participants were under this number. Median is the industry average. Half the numbers are above and half are below. Q3 represents the upper quartile. It indicates that 25 percent of participants were above this number. Training & Development Training hrs: employee Training Exp: employee $1,172 $1,393 $1,489 $1,601 $1, HCF ANNUAL REPORT 37

40 Corporate Social Responsibility continued HCF obtains independent advice from a remuneration consultant each year to ensure its salary structure, scales and position grades are competitive with the market and reflect best practice for executive reward. This advice is reviewed by the Board Remuneration Committee and, depending upon their recommendation, approved by the Board as part of the annual business planning and financial budget process. Any increase in nominal base salary ranges is indicative only and does not guarantee a fixed increase in any executive s remuneration in any year. The Board Remuneration Committee also reviews non-executive director fees each year after obtaining expert advice from an independent remuneration consultant to ensure they are appropriate to the level of responsibility and demands placed upon non-executive directors and comparable with similar responsibilities in the market. The Committee s findings are reviewed by the Board who submits any recommendations to HCF s constituents for approval at the Annual General Meeting. Average Salary Grade Male Female Ratio Executive $399,175 $348,651 87% Management $164,988 $144,473 88% Professional staff $87,756 $82,876 94% Front line employees $44,010 $45, % Staff Numbers June 2008 All Staff Female Male Total CEO 1 1 General managers Middle managers Team leaders Specialists Frontline Support staff Temporary staff Total Job Creation Total FTE (at Financial Year end) Fund Life Dental centre Group Note: The high level of process automation and other productivity improvements achieved has enabled HCF to handle significantly higher transaction volumes and customers without the need to employ more staff. No staff have been made redundant by these productivity improvements. 38 THE HOSPITALS CONTRIBUTION FUND OF AUSTRALIA LIMITED

41 Equal Employment Opportunity HCF believes in equal opportunity for all and we are committed to the principles of Equal Employment Opportunity (EEO). Recruitment, promotion, performance planning and review and remuneration decisions are based solely on an individual s relevant skills, qualifications, abilities and aptitudes for successful performance in a particular position. This is without regard to factors that are discriminatory in nature. In this way, HCF ensures our people consistently produce high quality work that satisfies both their needs and those of the organisation. Our commitment to internal development and advancement has this year seen the promotion of 15 staff into more senior positions. HCF pays equal salaries for equal work. Differences in the average salary for male and female staff reflect the higher proportion of males in some of the more senior or specialised positions within grades. People Systems In 2007 HCF introduced an online performance management system for all employees. As part of this review all individual performance measures were aligned with and linked to corporate objectives using the balanced score card approach. Each year, HCF takes part in a benchmark study by Mercer Human Resource Consulting to compare our training, staffing, turnover and injury rates to that of the finance and insurance industry. The results are set out in the table on page 37. HCF Sydney call centre 2008 HCF ANNUAL REPORT 39

42 Corporate Social Responsibility continued Environmental Regulations HCF strictly conforms to all environmental regulations governing our presence in the local government areas where we are located. Disposal Standards HCF s disposal of dental waste, obsolete PCs and paper complies with community environmental standards. Environmental Commitment While HCF s activities do not impact adversely on biodiversity of flora and wildlife habitats, we are careful to observe all environmental regulations governing our presence in the local government areas where branches and worksites are situated. We continue to act responsibly to minimise and offset the impact of our operations on water and energy consumption and the use of raw materials, including paper. We are careful to manage the disposal of clinical waste from our dental centres. HCF delivers the highest standard of environmental care and we manage our business operations with minimal risk to the environment. No breaches of environmental regulations were reported during the year. HCF House: Australian Building Greenhouse Rating (ABGR) The ABGR scheme provides accredited assessments of the greenhouse intensity of office buildings by awarding a star rating on a scale from 1 to 5. HCF has undertaken an extensive audit of its headquarters building and made significant changes to energy usage and other environmentally sensitive practices in recent years. In particular, our Green IT program is delivering excellent results in managing energy levels, recycling and paper usage. We have requested a review of our rating and anticipate results will be available in December The Green Grid HCF has become a member of The Green Grid a global consortium dedicated to advancing energy efficiency in data centres and business computing environments. HCF s participation in The Green Grid further enforces the company s commitment to the management of energy and power usage in the data centre. The Green Grid seeks to provide industrywide recommendations on best practices, metrics and technologies that will improve overall data centre and business computing energy efficiencies. Water and Energy Conservation As a result of our program to reduce water usage and use energy more efficiently, HCF can report that HCF House water consumption for 2008 reduced by 22% in total and by 38% in Kilolitres per employee. While total energy usage rose by 16%, our usage was 13% improvement on 2007 when measured by Kilowatts per employee. Our Green IT program manages our energy levels through use of off-peak power settings and other initiatives. While we had a 63% increase in servers, our carbon emissions increased by only 14%. Environmental Performance Indicators 2006/ /08 Change Electricity: total kwh used* 2,799,117 3,240,697 16% Kwh per employee* 8,856 7,679-13% Kwh per square metre* % Natural gas: total megajoules used* 2,710,328 2,901,699 7% Water: total Kilolitres used* 16,839 13,155-22% Kilolitres per employee* % Paper: waste sent for recycling (tonnes) % Paper: purchased (tonnes) % Toner cartridges recycled (number) % * Indicator refers to HCF House 40 THE HOSPITALS CONTRIBUTION FUND OF AUSTRALIA LIMITED

43 We will continue our efforts to achieve greater energy efficiency, reduce greenhouse gas emissions, recognising the benefits to the environment, the community and the associated financial savings from reducing energy consumption. Potential gas or water leaks and the use of water and electricity are constantly monitored at all our sites and we pay particular attention to head office air conditioning cooling towers to prevent the atmospheric release of pathogens. Dental Centre Network We have adopted the clinical waste packaging, secure storage and disposal standards specified by environmental protection regulators at all our Dental Centres. Efficient waste disposal is ensured by careful management and the employment of licensed contractors to ensure proper disposal of all Dental Centre waste. Compliance with all of the x-ray standards specified under current Radiation Control legislation is assured by the presence of a Radiation Safety Officer. Recycling HCF recycles its used toner cartridges from laser printers and photocopiers and encourages staff to recycle paper and conserve paper through wide use of electronic communications. We do not use recycled toner cartridges as the associated damage to printers is not covered by warranty. 461 toner cartridges were sent for recycling, 1% fewer than last year s 466. Under our Green IT initiative, 98% of computer associated waste was recycled, avoiding impact on landfill sites. Paper This year we sent 234 tonnes of waste paper for recycling, 13% more than last year and 97 % of all paper used contained a recycling content between %. This Annual Report is printed on Designate earth white, a paper which is elemental chlorine free, made from sustainable forest pulp, and has Environmental Management Systems accreditation. HCF s interactive website, and automated revenue collection and claim payment systems also assist to reduce paper consumption. The automation of our business practices, saved around 1 million sheets of paper during the year. A PDF version of this annual report is available on the HCF website ( reducing the number of printed annual reports. Social Commitment HCF has a long history of meeting its social obligations and contributing to the Australian community. This contribution is made through good corporate citizenship, behaving ethically, generating value within the Australian economy and by direct community support. The following charts indicate the extent of our corporate citizenship, showing how we add value and meet our civic responsibilities as an economic entity. We are particularly committed to investment in support of research into medical and health services and provide ongoing support to health related and other charitable organisations. Corporate Citizenship HCF Health Insurance HCF Life HCF Group $ 000 $ 000 $ 000 Paying Our Dues Total Paid $ 000 $ 000 Value Generation Total revenue 1, Total claims Industry risk equalisation 21.5 N/A 21.5 Less suppliers and non salary expenses Gross value added Value Distribution Retained earnings Depreciation Salaries & bonuses Payroll tax Company & other taxes and levies State ambulance Levy 28.9 N/A 28.9 Social charge transfer to HCF Foundation 5.0 N/A 5.0 Value distributed Corporate tax 2,193 (674) Payroll tax 3,640 3,443 FBT GST collected Staff superannuation 4,567 4,917 Tax we pay but not identified Ambulance levy 26,472 28,929 Other govt levies 538 1,062 Local government rates and taxes 849 1,071 Total 38,971 39, HCF ANNUAL REPORT 41

44 Corporate Social Responsibility continued Commitment to Community The HCF Health and Medical Research Foundation The HCF Health and Medical Research Foundation, established in 2000, was formed to encourage medical research projects and examine the provision, administration and delivery of health benefits in Australia. HCF funds the corpus of the Foundation by donation from the net operating profit of the health fund. In 2007/08, we contributed $5 million, equivalent to 9.6% of the Fund s net profit (before donation). This donation increased the corpus to $25 million. Since establishment the Foundation has awarded 17 research grants in excess of $6.3 million. In 2007/8, the Foundation committed funding for five projects: a study of the equivalence of the use of intraocular lenses in cataract surgery; the development of an Independent National Clinical Evidence Service at the University of New South Wales; a study into recovery after knee replacement surgery; the CHOICE study for secondary prevention of heart disease; and a partnering project in the design of an electronic decision support framework. Community Events and Charities This year HCF raised over $20,000 for charities which rely almost entirely on the generosity of Australians to continue their good work. Organisations we support include Jeans for Genes, Red Nose Day, Daffodil Day, Bandaged Bear Day, Motor Neurone Disease and World Retina Day. Merchandise sold through our network of branches raises money for community organisations. Sales of sunscreen on behalf of the Cancer Council totalled just under $15,000 this year. Charity Supporting Our support includes: Research into genetic diseases; Research into Sudden Infant Death Syndrome (SIDS); Cancer research, education and patient support; The Children s Hospital, Westmead Research; Those living with motor neurone disease; and Studies into retinal degenerative diseases. We also supported the Humpty Dumpty Foundation with a donation of just over $8,000 to enable the purchase of Ezy Intra- Osseous kits for use at six rural hospitals. Research into genetic diseases Research into Sudden Infant Death Syndrome (SIDS) Cancer research, education and patient support The Children s Hospital, Westmead Research. Those living with motor neurone disease Studies into retinal degenerative diseases HCF Health and Medical Research Foundation Grants have also supported the following critical research Combined care the key to stroke prevention ICARUSS is an innovative Australian model promoting an integrated approach to stroke survivors. In hospital, a patient s risk factors are assessed, and shared care is managed by a coordinator to provide regular, clear and comprehensive updates and, where necessary, alerts about health and behavioural issues. Supported by a $1.4 million grant. Clicking onto the right health information Dr Enrico Coiera, Director at the Centre for Health Informatics at the University of New South Wales and his research team, are developing a prototype, stand-alone web service to assist Australian clinicians and consumers in searching on-line for healthrelated information. Supported by a $1 million grant. Make the healthy call on diabetes An interactive, computer-controlled phone system for improving the management of Type 2 diabetes is being developed by Professor Brian Oldenburg of Monash University s School of Public Health and Preventative Medicine and his research team. Oldenburg intends for the virtual, around the clock clinic to complement existing specialist services. Supported by a $310,000 grant. 42 THE HOSPITALS CONTRIBUTION FUND OF AUSTRALIA LIMITED

45 HCF Group Organisational Structure (as at 1 November 2008) HCF Board Chairman Greg Gardiner HCF Group Group Internal Auditor Ralph Lai HCF Group Chief Executive Officer Terry Smith HCF Life Board Chairman Bruce Gibson Chief Financial Officer General Manager Sheena Jack Group Finance and Payroll: Allan Fraser Property Management: Roger Singleton Process Improvement Manager: John Van Put HCF Life Managing Director Tony Hutchinson Finance: Kelvin Kon Operations: Brian Paterson Business Development: Roy O Donnell Information Management General Manager Patrick Shearman Data Centre Manager: Kanwaljit Kanwar Claims Automation: Joseph Elias Branch Systems Development & Office Services: Wayne Miller Branch Support: Jarka Haisler Projects: Steve Deller Benefits Management General Manager Chris Wallace Hospital: Susan Hamilton Medical Director: Dr. Andrew Cottrill Ancillary: Julie Macey Dental Director (Acting): Dr. Hera Dimitriadis Corporate Ventures General Manager Shaun Larkin Group Marketing General Manager Phil Soden Corporate Communications: Damien Long Segment and Product Management: Damien Bray Group Sales: Danny Saksida Operations General Manager Stephen Nugent Operations: Joe O Donnell HCF Direct (Call Centre): Belinda Sproule Group Services and Ezipay: Vince DiFalco North Region: Paul Simpson South Region: Joanna Mallon Risk Management & Group Secretary General Manager Ian McDonald Compliance Management: Michael Longhurst Risk Management: Justin Gordon Technical Manager David Watson Human Resources General Manager Trish Dorian HR Management: Joanne Newton HR Development: Dr. David Rosete 2008 HCF ANNUAL REPORT 43

46 Senior Management Profiles Terry Smith MBE, RFD, ED Chief Executive Officer, HCF Terry Smith was appointed HCF Chief Executive Officer in February Prior to this, Terry gained extensive general management experience in marketing, distribution and operations management for retail financial services and insurance. Phil Soden MElectCom, BA, AFAIM, AFAIA General Manager, Group Marketing Phil Soden joined HCF in 1987 and was appointed General Manager, Group Business Unit in He has more than 30 years experience in marketing and advertising with national brand leaders. Has also has 25 years senior management experience in marketing, sales and retail. Patrick Shearman MInfTech, MSc, B.Comm (Hons), MBCS General Manager, Information Management Patrick Shearman was appointed General Manager, Information Management in June He has senior management experience in information technology primarily in the development and support of systems in the financial services industry. Sheena Jack BA (Acc), CA Chief Financial Officer Sheena Jack joined HCF in November Sheena has more than 20 years experience in finance, consulting and senior management roles across the financial services industry including superannuation, investments and health and life insurance. Ian McDonald FCA Company Secretary Ian McDonald was appointed Company Secretary of HCF and its subsidiaries on 1 September Prior to this appointment he was HCF s General Manager Finance since October 1995 and Chief Internal Auditor from September 1991 to October Prior to joining the company Mr McDonald had extensive experience as a partner in a Big 6 accounting firm, in providing assurance services, financial and taxation consulting to large and medium sized public and private companies and businesses. He has been a chartered accountant for over 36 years. Anthony Hutchinson ANZIIF (Associate) Managing Director, HCF Life Anthony Hutchinson joined HCF in He has over 40 years experience in life insurance of which 30 years has been in general management with HCF and other leading life insurers. Trish Dorian MBA, FAICD General Manager, Human Resources Trish Dorian joined HCF in November 1997 as General Manager, Human Resources. She has senior management experience in both the health and public sectors, in the operation of labour market programs, industry training boards and delivery of clinical and other health services. Stephen Nugent B Bus (Marketing), Grad Cert (Internet Marketing), AFAIM, CPM General Manager, Operations Stephen Nugent joined HCF in October 1991 as General Manager, Retail Business Unit. He is currently General Manager, Operations. Stephen s senior management experience includes retail sales and distribution of financial services and general insurance products through branch networks and call centres. Shaun Larkin MBA, MHSc, BHA, FAIM, FCHSE General Manager, Corporate Ventures Shaun Larkin was appointed to his current role in November He joined HCF as General Manager, Strategic Development in March 1997 and was subsequently appointed as General Manager, Benefits Management in May Prior to joining HCF, Mr Larkin was based in Singapore for four years where he led the establishment of a chain of ambulatory medical centres throughout Asia. His role prior to this was as an executive for a large private hospital operator for eight years, working in both Australia and the United States. Chris Wallace BEc(Hons), PhD(Econ), ANZIIF (Fellow) General Manager, Benefits Management Chris Wallace joined HCF in November He has over 20 years experience as a business consultant and executive in general insurance, workers compensation, and financial services. Prior to joining HCF, he was an executive director with a major accounting and advisory firm where he was an insurance economist advising insurance regulators, government, and insurers. 44 THE HOSPITALS CONTRIBUTION FUND OF AUSTRALIA LIMITED

47 No more excuses Lots of care and extra benefits made easy I wear both glasses and contact lenses, so I have made claims for these services during my time as a HCF member. Last year I had my wisdom teeth removed which was not a lot of fun. I really appreciated how straight forward it was to make a claim for the surgery and the time spent in hospital. Melissa Yee 2008 HCF ANNUAL REPORT 45

48 Trends and Statistics Each year, HCF gathers statistics to monitor trends in its private health care services. The information provided for hospital and ancillary care includes trends in the types of health care provided, average costs and number of patients. Total health care benefits paid increased by 10% to $945 million With $687 million in benefits for hospital care, 11% more than last year These funded 252,437 hospital admissions for 142,171 members Total benefits paid ($ million) Total hospital care benefits paid ($ million) Hospital episodes (thousands) Same day admissions are increasing the overall admission rate Most admissions were in the private sector, although public hospital admissions are increasing Private hospitals share of benefits paid increased from 58% to 59% 14% 13% 4% 10% 59% Hospital admission rate per 1,000 HCF members Overnight Total Same Day Hospital shares of HCF patient admissions Percentage of total admissions Private Public Distribution of hospital benefits Private Hospitals Ambulance Medical Services Public Hospitals Prosthesis 46 THE HOSPITALS CONTRIBUTION FUND OF AUSTRALIA LIMITED

49 Total hospital benefits paid to the 200 highest claimants averaged $105,000 and increased 27% to $21.1 million 21.1 Medical benefits paid this year increased by 10% to $99 million Prosthesis benefits increased by 13% Total benefit average claim per patient Benefits paid for medical services Benefits paid for prosthesis Total (millions) Average (thousands) Benefits ($ millions) % No Gap Paid ($ million) Growth PA (%) The overnight admission rate and the case mix complexity for overnight cases are stable Increases in hospital charges rather than a more complex case mix is the key factor in higher claims costs and premium increases The 30 highest volume procedures accounted for 60% of all private hospital admissions and 49% of all private hospital charges Same Day Medical (Overnight) Surgery (Overnight) Total Overnight admission rate per 1,000 HCF members and case mix index Calendar year Private hospitals: Average charge per overnight case compared with overnight case mix Calendar year High volume hospital benefit procedures Surgery and Obstetrics Average charge per case index % Admissions % Charges Medical, Psychiatric and Rehabilitation Case mix Index (Base year 2003) Case mix Index (Base year 2003) 2008 HCF ANNUAL REPORT 47

50 Trends and Statistics continued The 10 highest cost procedures provided by the private sector accounted for 2% of total admissions and 14.2% of total hospital benefits paid Selected high cost procedures maximum charge ($ 000) See code CODE: 1. Coronary artery bypass graft 2. Cardiac electrophysiology study etc 3. Heart valve replacement 4. Cardiac pacemakers 5. Nervous system tumours 6. Laminectomy 7. Total hip replacement 8. Total knee replacement 9. Fractures of hip, femur or pelvis 10. Heart diseases (other than coronary artery disease) Variability in Hospital Practice and Efficiency The HCF hospital efficiency index (below) compares the relative efficiency of hospitals after making allowances for differences in ages of patients and the types of cases treated. Ten private acute hospitals have been used as examples of the variation in efficiency between hospitals over the last five years. Hospitals R, S, L, F and O represent the top five most efficient hospitals out of the top 26 hospitals. Hospital R has been the most efficient hospital over the last two years. Hospitals A, J, W, Y and D are less efficient and represent the bottom five out of the top 26 top hospitals for Hospital D has been the least efficient hospital over the last five years but appears to have made some improvement compared to The top 26 private acute hospitals provided 58% of all private hospital overnight admissions for HCF members in HCF continues to provide feedback to hospitals on their efficiency and other performance indicators. Overall there continues to be only slight observed improvement in the least efficient hospitals over time private acute hospitals provided 58% of all private hospital overnight admissions to members Range of reasonable variation R Most Efficient S L F O A J W Y D Least Efficient Variations in hospital efficiency years ended December Hospital efficiency index The hospitals in this table are different to previous Annual Reports to reflect the five most efficient and five least efficient hospitals out of the current top 26 hospitals Source: HCF hospital admission data. Index compares relative performance after adjusting for differences in age and sex of patient, and casemix. 48 THE HOSPITALS CONTRIBUTION FUND OF AUSTRALIA LIMITED

51 Hospital Care Scorecard: The year at a glance Patient Satisfaction Measure 2006/ /08 Change % Change Patients would recommend this hospital to others % Likely, very likely % -1.1 Patients overall rating of care provided by hospital and doctors % Good/very good % -1.2 Patient s health after treatment (is) % Much better % -1.1 Extent condition has improved as expected (by patient) % Good/very good % 1.3 Nursing care (overall) % Good/very good % -1.7 Doctor care (overall) % Good/very good % 0.3 Admission procedures % Good/very good % -1.1 Discharge procedures % Good/very good % -0.6 Patient Safety: Patients reporting an adversee event in hospital or within one week of discharge Patients suffering any side effect during or after hospital episode % all overnight patients % -0.2 Patients rating the event / side effect as serious or very serious % all overnight patients % 0.1 Patient Information: Quality of explanations given to enable clinical and financial consent By the specialist & anaesthetist before clinical consent % Good/very good % 0.4 Extent of explanation of diagnosis / treatment % Good/very good % 0.6 Knowledge of specialist charges before admission % Fair/good % -0.4 Knowledge of hospital charges before admission % Fair/good % -1.2 Admission as public / private patient to public hospital fairly/very well % -4.1 Access to and choice of care Total number of admissions to hospital Admissions (no.) 231, , % 20,447 Total number of members admitted to hospital No. of members 132, , % 9,808 Total number of members admitted to hospital (same day) No. of members 81,917 88, % 6,817 Total number of members admitted to hospital (overnight) No. of members 65,581 70, % 4,488 Proportion of total admissions in a public hospital % admissions % 0.60 Proportion of total admissions in a private hospital % admissions % Private hospitals & day hospitals under contract (HPPA) HPPA (no.) % 3 Admissions within HCF (HPPA) network (national) % admissions 98% 98% Medical services provided to HCF members in hospital Medical services ( 000) 1,809 2, % 278 Specialist doctors participating in HCF gap cover scheme (national) No. covered 17,800 20, % 2,422 Medical services fully covered by gap cover % services % 0.02 Efficiency and charges Average length of stay (all overnight) Actual % Average length of stay (all episodes incl. same day) Actual % Average private hospital charge per admission Actual $2,250 $2, % 35 Weighted average increase in HCF medical gap cover fees Percentage % 0.8 Financial Total benefits paid to hospitals $ millions $426 $ % $44 Total benefits paid for prosthesis $ millions $77.8 $ % $9.8 Total benefits paid for medical services in hospital $ millions $89.6 $ % $ HCF ANNUAL REPORT 49

52 Trends and Statistics continued Ancillary Benefit Trends Benefits paid for ancillary claims increased 8.9% on last year These benefits helped fund 5.7m ancillary health care services a 5.5% increase on last year Dental benefits increased by 11.2% to $151 million /4 04/5 05/6 06/7 07/8 03/4 04/5 05/6 06/7 07/ Total ancillary health care benefits paid 03/4 04/5 05/6 06/7 07/8 Ancillary health care services Total dental benefits paid Optical benefits increased by 5.2% to $36 million Physiotherapy and chiropractic benefits increased by 7% to $38 million Ancillary provider charges have decreased by 1.1% /4 04/5 05/6 06/7 07/8 Total optical benefits paid 03/4 04/5 05/6 06/7 07/8 Total physiotherapy and chiropractic benefits paid Decrease in average charge on last year See code below 1 Dental periodic oral exam) 2 Optical (single vision lens) 3 Physiotherapy (initial consultation) 4 Chiropractic (initial consultation) Source: HCF Average Charge Survey THE HOSPITALS CONTRIBUTION FUND OF AUSTRALIA LIMITED

53 Face to face, on the phone or over the internet it s easy to do business with us HCF ANNUAL REPORT 51

54 Trends and Statistics continued Understanding Statistics The following pages provide a more in-depth view of the hospital trends and statistics shown on pages Over the 2007/08 financial year, HCF collected and collated data from each hospital admission, both day only and overnight. From this information, we present a detailed analysis on the number of hospital admissions, average length of stay, reason for admissions and associated costs. For your reference, we provide an explanation and summary of the statistics below each corresponding table. Index of Tables 52 Table 1 HCF Hospital Admissions by Patient Category 53 Table 2 Trends and Hospital Admissions 54 Table 3 Top 10 Overnight Surgical and Obstetrics Admissions 55 Table 4 Top 10 Overnight Medical, Psychiatric and Rehabilitation Admissions 56 Table 5 Top 10 Day Only Admissions (All Categories) 57 Table 6 Selected High Cost Private Hospital Admission Types, By Average Charge per Admission 58 Table 7 Maternity 58 Table 8 Maternity Admission Trends 59 Table 9 Overnight Psychiatric Hospital Admissions 60 Table 10 Summary of 200 Highest Cost Claimants by Category 61 Table /08 Medical Charges Statistics Table 1 HCF hospital admissions by patient category Year ended March 2008 Admissions Average Admissions per 1,000 length of % of all % of all All admissions Patients Admissions per patient persons covered stay (days) patients charges OVERNIGHT Surgical 36,858 41, % 46.9% Medical 28,152 37, % 18.4% Obstetrics 9,675 10, % 7.8% Psychiatry 1,576 2, % 3.7% Rehabilitation 2,101 2, % 3.5% Total overnight 70,069 93, % 80.3% SAME DAY Surgical 82,955 99, N/A 58.3% 17.0% Medical 5,634 39, N/A 4.0% 1.9% Obstetrics N/A 0.3% 0.0% Psychiatry 707 7, N/A 0.5% 0.3% Rehabilitation 1,236 11, N/A 0.9% 0.5% Total same day 88, , N/A 62.4% 19.7% Total 142, , % 100.0% Source: HCF Hospital claims data; HCF Current membership data Note: Total number of patients is less than the sum of their components as one patient may appear in more than one group. This also affects the % of all patients figures. 52 THE HOSPITALS CONTRIBUTION FUND OF AUSTRALIA LIMITED

55 Table 2 Trends and hospital admissions Years ended March % Growth 06/07 to 03/04 04/05 05/06 06/07 07/08 07/08 OVERNIGHT ADMISSIONS Surgical 35,042 36,139 37,479 39,149 41, % Medical 29,267 30,114 32,093 34,724 37, % Obstetrics 8,504 8,518 9,280 9,935 10, % Psychiatry 1,719 1,778 1,969 1,984 2, % Rehabilitation 1,355 1,790 1,984 1,872 2, % Total overnight 75,887 78,339 82,805 87,664 93, % Admission rate per 1,000 persons covered % % private hospital 74.9% 74.0% 73.6% 72.2% 71.1% -1.5% SAME DAY ADMISSIONS Surgical 75,756 80,222 86,555 91,854 99, % Medical 28,201 27,478 30,970 37,318 39, % Obstetrics % Psychiatry 3,713 5,720 6,321 6,938 7, % Rehabilitation 3,109 4,953 7,220 7,859 11, % Total same day 111, , , , , % Admission rate per 1,000 persons covered % % private hospital 88.9% 88.9% 88.3% 87.9% 87.5% -0.5% ALL ADMISSIONS Total all admissions 186, , , , , % Admission rate per 1,000 persons covered % % private hospital 83.2% 83.0% 82.6% 82.0% 81.4% -0.7% Source: HCF Hospital claims data; HCF Current membership data Table 1 and Table 2 The overall hospital admission rate for HCF members increased in 2007/08 by 1.2 per cent to 271 admissions per 1,000 persons covered. The same day admission rate continues to increase, rising by 2.2% to 170 per Overnight admissions decreased by 0.4% compared to last year. A significant number of patients required more than one admission to hospital during the year. This was predominantly evident in same day admissions for psychiatry and rehabilitation services as well as medical admissions for chemotherapy and renal dialysis, which averaged 10.9, 9.2 and seven admissions per patient respectively. Many patients having dialysis require 100 or more admissions per year. Private hospitals continue to dominate service delivery, however, their share of total HCF patient admissions has decreased marginally from 82% to 81.4% HCF ANNUAL REPORT 53

56 Trends and Statistics continued Table 3 Top ten overnight surgical and obstetrics admissions Years ended March Admissions Average length of stay (days) Average charge per admission ($) Reason for Change Change Change admission Category 05/06 06/07 07/08 % 05/06 06/07 07/08 % 05/06 06/07 07/08 % PUBLIC HOSPITALS Confinement and delivery by any means O 1,388 1,632 1, % % 1,746 1,848 1, % Other musculoskeletal system and connective tissue or procedures S % % 2,539 3,016 3, % Antenatal care O % % 2,745 2,335 1, % Anal and stomal procedures S % % 2,293 1,985 1, % Appendectomy S % % , % Gall bladder removal S % % 1,512 1,285 1, % Hernias and hydrocoeles S % % 1, , % Other circulatory system or procedures S % % 4,882 4,176 4, % Minor small and large bowel procedures S % % 1,362 3,095 3, % Other digestive system operating room procedures S % % 2,774 3,156 3, % All admissions public hospitals 4,216 4,784 5, % % 2,185 2,345 2, % PRIVATE HOSPITALS Confinement and delivery by any means O 6,925 7,301 7, % % 4,554 4,746 4, % Other musculoskeletal system and connective tissue or procedures S 805 1,105 3, % % 3,022 3,676 3, % Hernias and hydrocoeles S 1,872 1,943 2, % % 2,681 2,850 3, % Tonsillectomy S 1,501 1,730 2, % % 1,221 1,330 1, % Selective coronary angiography S 1,532 1,607 1, % % 8,476 8,317 8, % Gall bladder removal S 565 1,514 1, % % 4,220 4,328 4, % Total knee replacement S 1,250 1,313 1, % % 17,438 18,178 18, % Prostatectomy S 1,159 1,279 1, % % 4,733 5,081 5, % Total hip replacement S 1,028 1,060 1, % % 19,305 20,312 20, % Gynaecological laparoscopy S 875 1,003 1, % % 3,291 3,377 3, % All admissions private hospitals 42,543 44,300 46, % % 5,630 5,898 6, % Source: HCF Hospital claims data Note: The column Category indicates whether the reason for admission is obstetric (O) or surgical (S). Table 3 This table shows the 10 most common surgical and obstetric procedures for which HCF members were admitted to a public or private hospital over the last three years. Admissions to private hospitals increased 4.8 per cent this year, while public hospital admissions increased by 6.8 per cent. The 10 most common procedures made up 58.2 per cent of public hospital and 50 per cent of private hospital admissions in these categories. In public hospitals there were increases in the number of admissions for a majority of the 10 most common surgical and obstetric procedures. Notable changes over last year were increases in Other Musculoskeletal system and connective tissue OR procedures (349.1 per cent), Anal and stomal procedures (44 percent), Gall bladder removal (29 percent) and Antenatal care (17.4 percent). Increases in the length of stay for Hernias and hydroceles, Minor small and large bowel procedures, and Gall bladder removal has resulted in an increase in the average charge for these procedures by 49.8, 10.5 and 27.6 per cent respectively. The most noticeable increases in private hospital procedures were for Other musculoskeletal system and connective tissue OR procedures (231.1 per cent), Tonsillectomy (16.4%), Total hip replacement (8.7 percent), Hernias and hydroceles (7.6 per cent) and Gynaecological laparoscopy (5.9 per cent). The length of stay for most of the Top 10 procedures continues to decrease or remain unchanged, with the exception of Selective coronary angiography (increased by 3.8 per cent). The overall average charge associated with care in private hospitals increased by 3.4 per cent compared to last year. The rise in charges is related to the increasing costs associated with prostheses (implanted devices). 54 THE HOSPITALS CONTRIBUTION FUND OF AUSTRALIA LIMITED

57 Table 4 Top ten overnight medical, psychiatry and rehabilitation admissions Years ended March Admissions Average length of stay (days) Average charge per admission ($) Reason for Change Change Change admission Category 05/06 06/07 07/08 % 05/06 06/07 07/08 % 05/06 06/07 07/08 % PUBLIC HOSPITALS Observation and follow up M 4,084 4,263 4, % % 1,974 1,934 1, % Digestive system disorders M 1,205 1,595 1, % % 2,142 1,844 1, % Chest pain M 1,229 1,303 1, % % 1,187 1,119 1, % Lung infections M , % % 1,939 2,185 2, % Other nervous system disorders M % % 2,071 2,515 2, % Fractures, sprains etc of arm or lower leg M % % 1,486 1,974 2, % Bronchitis and asthma M % % % Other heart disorders M % % 2,245 1,987 2, % Heart failure, heart attack & shock M % % 3,474 2,965 3, % Cellulitis M % % 2,364 2,312 2, % All admissions public hospitals 17,669 19,582 22, % % 2,361 2,399 2, % PRIVATE HOSPITALS Sleep apnoea M 2,478 2,665 2, % % % Orthopaedic rehabilitation R 1,134 1,028 1, % % 6,746 7,568 7, % Sick neonates M 1,188 1,344 1, % % 3,255 3,695 3, % Major depressive episode P , % % 10,307 9,442 10, % Observation and follow up M 1,499 1,238 1, % % 2,371 2,638 2, % Digestive system disorders M % % 2,383 2,742 2, % Lung infections M % % 3,490 3,848 4, % Chest pain M % % 1,918 1,826 1, % Heart failure, heart attack & shock M % % 4,856 5,136 5, % Cellulitis M % % 3,593 3,673 3, % All admissions private hospitals 18,377 18,998 20, % % 3,690 3,972 4, % Source: HCF Hospital claims data Note: The column Category indicates whether the reason for admission is medical (M), psychiatry (P) or rehabilitation (R). Table 4 The 10 most common procedures for medical, psychiatry and rehabilitation care accounted for 53.9 per cent of all admissions. There were six conditions common to both the public and private sectors Observation and follow-up, Digestive system disorders, Chest pain, Lung infections, Heart failure heart attack and shock and Cellulitis. Overall, public hospital admissions increased by 12.6 per cent with the main increases being admissions for Bronchitis and asthma (32.9 per cent), Lung infections (28.9 per cent), Other nervous system disorders (25.7 per cent) and Fractures, sprains etc of arm or lower leg (19.5 per cent). In private hospitals, overall admissions in these patient categories increased by 6.4 per cent. The most notable increases were in Cellulitis (47.5 per cent), Orthopaedic rehabilitation (31 percent), Lung infections (19.3 per cent) and Major depressive episode (14 per cent). Admissions for Observation and follow up, Digestive system disorders, Chest pain and Sick Neonates decreased by 16 per cent, 9.9 per cent, 4.3 per cent and 2.1 per cent respectively compared to last year HCF ANNUAL REPORT 55

58 Trends and Statistics continued Table 5 Top ten day only admissions (All Categories) Years ended March Admissions Average charge per admission ($) Change Change Reason for admission Category 05/06 06/07 07/08 % 05/06 06/07 07/08 % PUBLIC HOSPITALS Renal dialysis M 6,976 8,612 9, % % Gastroscopy and colonoscopy S 1,043 1,114 1, % % Observation and follow up M % % Collection or giving of blood or bone marrow M % % Chemotherapy M % % Cystoscopic procedures S % % Hysteroscopic procedures S % % Digestive system disorders M % % Chest pain M % % Skin tumour removal S % % All admissions public hospitals 15,386 17,406 19, % % PRIVATE HOSPITALS Gastroscopy and colonoscopy S 29,686 31,957 35, % % Chemotherapy M 9,033 10,625 10, % % Renal dialysis M 7,248 8,560 8, % % Orthopaedic rehabilitation R 4,052 4,665 7, % % Cataract surgery S 6,209 6,644 7, % 1,813 1,864 1, % Dental extraction/restoration S 5,669 6,017 6, % % IVF procedures S 3,193 3,580 3, % % Skin tumour removal S 3,425 3,547 3, % % Major depressive episode P 3,320 3,669 3, % % Cystoscopic procedures S 3,448 3,536 3, % % All admissions private hospitals 115, , , % % Source: HCF Hospital claims data Note: The column Category indicates whether the reason for admission is medical (M), psychiatric (P), rehabilitation (R), obstetric (O) or surgical (S). Table 5 Same day hospital admissions in both public and private hospitals and day facilities accounted for 62.8 per cent of all hospital admissions, increasing by 1 per cent compared to last year (62.2 per cent). Public hospital same day admissions increased by 13.8 per cent with increases evident in all of the categories listed in the Top 10 day only admissions compared to last year. The main increases were in Chest pain (59.8 per cent), Digestive system disorders (23.4 per cent), Observation and follow up (16.9 per cent), Renal dialysis (13.8 per cent), and Gastroscopy and colonoscopy (13.3 per cent). Same day admissions in private hospitals increased by 9.4 per cent with notable increases in Orthopaedic rehabilitation (53.9 per cent), IVF procedures (10.6 per cent) and Gastroscopy and colonoscopy (10 per cent). 56 THE HOSPITALS CONTRIBUTION FUND OF AUSTRALIA LIMITED

59 Table 6 Selected high cost private hospital admission types, by average charge per admission Years ended March Average length Average Total Admissions of stay (days) charge ($) charges ($) % % % % Average change change change change Maximum charge/ % 06/07 to 06/07 to 06/07 to 06/07 to charge day Total Reason for admission 07/08 07/08 07/08 07/08 07/08 07/08 07/08 07/08 ($) ($) charges MEDICAL Fractures of hip, femur or pelvis % % 9, % 623, % 58, % Nervous system tumours % % 7, % 370, % 50, % Prostate cancer % % 7, % 371, % 72, % Fractures, sprains etc of arm or lower leg % % 6, % 577, % 50, % Cancer origin unknown % % 5, % 1,872, % 46, % Blood poisoning % % 5, % 882, % 28, % Heart failure, heart attack and shock % % 5, % 498, % 29, % Skin ulcers % % 4, % 278, % 18, % Chronic lung disease % % 4, % 1,061, % 31, % Diabetes % % 4, % 171, % 17, % Total of the above procedures 1, % % 5, % 6,709, % 72, % SURGICAL Heart valve replacement % % 25, % 2,611, % 115,936 2, % Coronary artery bypass graft % % 23, % 9,759, % 146,142 1, % Total hip replacement 1, % % 20, % 23,807, % 79,852 2, % Total knee replacement 1, % % 18, % 24,702, % 59,356 2, % Cardiac pacemakers % % 18, % 8,298, % 90,510 6, % Nervous system tumours % % 16, % 1,946, % 85,254 1, % Heart diseases (other than coronary artery disease) % % 15, % 1,156, % 54,530 2, % Cardiac electrophysiology study etc % % 14, % 6,121, % 122,946 5, % Coronary angioplasty and stents % % 13, % 6,212, % 39,116 5, % Other liver diseases % % 12, % 476, % 27,477 1, % Fractures of hip, femur or pelvis % % 11, % 542, % 58, % Laminectomy % % 11, % 9,161, % 82,855 1, % Total of the above procedures 5, % % 17, % 94,798, % 146,142 2, % Total 22 high cost procedures 6, % % 15, % 101,508, % 146,142 1, % Source: HCF Hospital claims data; HCF Current membership data Note: The Maximum charge in the total rows of the above table is the highest of all the maximum charges listed HCF ANNUAL REPORT 57

60 Trends and Statistics continued Table 6 We have ranked high cost procedures on the basis of the average hospital charge per admission. Charges per admission depend on factors such as casemix and length of stay and the types of patients who underwent these treatments. The charges for medical admissions are primarily based on the cost of the length of stay in hospital. Surgical admissions usually also include charges for theatre, intensive care facilities, prostheses or disposable items in addition to length of stay. The total charges for these 22 high cost procedures accounted for 18.8 per cent of total hospital charges in 2007/08, but only accounted for 2.6 per cent of all admissions. The number of admissions for high cost medical procedures increased by 4.2 per cent compared to the previous year. The overall increase in the average length of stay has resulted in an increase in the overall average charge for the high cost medical procedures listed. The number of admissions for high cost surgical procedures increased by 4.4 per cent on the previous year. The majority of surgical high volume, high cost admissions continue to be for cardiac and orthopaedic procedures. Heart valve replacement procedures had the highest average charge. The combined charge for the 22 highest cost procedures has increased by 7.8 per cent. Table 7 Maternity Years ended March Total Confinement Vaginal deliveries Caesarian sections Admissions per 1,000 female Average Average Average as % Age of persons length of length of length of of all Hospital type member Admissions covered stay (days) Admissions stay (days) Admissions stay (days) admissions Public , Total 1, Private , , , % , , , % Total 7, , , % All , , Total 9, Table 8 Maternity admission trends % Growth 06/07 to Hospital type 03/04 04/05 05/06 06/07 07/08 07/08 Public 1,248 1,359 1,453 1,690 1, % Private 6,392 6,265 6,934 7,316 7, % Total 7,640 7,624 8,387 9,006 9, % Admissions per 1,000 female persons covered % Source: HCF Hospital claims data; HCF Current membership data Note: This table includes admissions for overnight and sameday confinements only (ie. no other obstetric treatment). Table 7 and Table 8 Maternity admissions to public and private hospitals increased by 7.5 per cent and 2.7 per cent respectively. The caesarian section rate continues to increase each year. For private hospital patients aged the caesarean section rate for the year was 47.8 per cent (45.6 per cent last year). For women between the ages of (usually considered a lower risk group) the caesarian rate in private hospitals has increased to 37.8 per cent (36.9 per cent last year). These figures should be viewed in context of many women choosing to have private health insurance because they know they will fall into a high-risk group, independent of age. There is also a debate that a high caesarian section rate can be appropriate, depending on the risk factors of mothers. Females aged between 15 and 49 experienced a birth ratio of 39 admissions per 1,000 female persons covered, 3.7 per cent lower than last year. 58 THE HOSPITALS CONTRIBUTION FUND OF AUSTRALIA LIMITED

61 Table 9 Overnight psychiatric hospital admissions Year ended March 2008 Overnight Re-admissions (number of patients) Admissions per 1,000 Average persons length of within within within Gender Age Patients Admissions covered stay (days) 35 days 90 days 365 days PUBLIC HOSPITALS Male 19 and under and over Female 19 and under and over Total PRIVATE HOSPITALS Male 19 and under and over Female 19 and under and over Total 1,343 1, Total private and public 1,576 2, Source: HCF Hospital claims data; HCF Current membership data Note: Each patient may appear in more than one group. For example, 37 patients had admissions in both the public and private sector during the year ended March Patients may also move between age groups between subsequent admissions. Of the 1,576 patients, 372 had multiple psychiatric admissions during the year. Some of these patients may have been re-admitted for same day as well as overnight stay. Table 9 There was a substantial increase in both the number of overnight psychiatric patients and admissions compared with last year (11.5 per cent and 13.4 per cent respectively). Admissions to public hospitals rose 5.7 per cent, however the proportion of services delivered by the public sector is 13.3 per cent (14.3 per cent last year). Admissions to private hospitals increased by 14.7 per cent. Private hospital admissions for overnight psychiatric services accounted for 86.7 per cent of all overnight psychiatric hospital admissions. On average, the number of admissions per patient was 1.4, same as the last four years. The average length of stay was 18.5 days, an increase of 3.5 per cent compared to last year. Approximately 24.5 per cent of patients were re-admitted to hospital within 35 days (22 per cent last year). The number of patients who required re-admission more than 35 days after discharge decreased slightly from 17.7 per cent to 17.6 per cent. For private hospital admissions, females aged between 20 and 44 years continue to have the greatest requirement for hospital admission relating to a psychiatric condition HCF ANNUAL REPORT 59

62 Trends and Statistics continued Table 10 Summary of 200 highest cost claimants by category Year ended March 2008 Per patient Average Total length of Total benefit Median age membership Benefit Category Patients admissions $ (years) (years) Admissions Days $ Cardio thoracic surgery ,349, ,083 Orthopaedic (surgical) ,697, ,872 Rehabilitation ,448, ,575 Circulatory system (medical) ,038, ,861 Psychiatric , ,033 Neurosurgical , ,001 Colorectal (surgery) , ,104 Injuries, poisoning and toxic effects of drugs (medical) , ,292 General surgical , ,815 Nervous system (medical) , ,980 Other ,401, ,028 Total 200 1,271 21,071, ,356 Source: HCF Hospital claims data; HCF Health policy data Note: This table includes same day and overnight admissions. Other includes those categories which had two patients or less. Admissions for renal dialysis have been excluded from the analysis as dialysis skews the admissions per patient indicator. Table 10 The median patient age for highest cost claimants is 71 years with an average length of membership of 24 years. Average benefits paid per patient increased by $22,427 from $82,929 last year to $105,356 this year (an increase of 27 per cent). The average benefit paid is equivalent to 63 years membership as a single in HCF s Top Plus hospital cover. Categorisation is based on the highest cost procedure for a claimant and the total claimed. This means the specialty illness groups chosen can change significantly from year to year. Cardio thoracic surgery continues to be the highest cost specialty procedure particularly due to the prosthetic implants involved. This is followed by Orthopaedic surgery and Rehabilitation. Medical patient admissions for Injuries, poisoning and toxic effects of drugs had the highest average benefit paid for a procedure, at $129,292 per member. Adverse events, defined as unintended injuries caused by medical management rather than the underlying condition of the patient, may have contributed to these high cost procedures. Examples of adverse events include hospital-acquired infections, medication errors, unintended admission to intensive care unit, unintended return to operating theatre, length of stay greater than 21 days and same prosthesis implanted within two years. An adverse event attributable to error is potentially preventable. 60 THE HOSPITALS CONTRIBUTION FUND OF AUSTRALIA LIMITED

63 Table /08 Medical Charges Statistics Year ended March 2008 Average Average Charges compared Charges Medicare Benefits Schedule Fee Charge to schedule fees compared to Description (Abbreviated) $ $ $ % previous year Category 1 Professional attendances $76 $91 $ % 3.4% Category 3 Therapeutic procedures $162 $283 $ % 2.9% Category 5 Diagnostic imaging services $142 $169 $ % 0.6% Category 6 Pathology services $28 $31 $3 10.8% -11.4% All items $94 $147 $ % -2.6% SELECTED SURGICAL PROCEDURES Laparoscopic cholecystectomy $654 $1,100 $ % 2.8% Upper GIT endoscopy $116 $154 $ % 2.0% Hernia repair (femoral or inguinal) $372 $596 $ % 1.7% Colonoscopy with or without biopsy $296 $414 $ % 3.0% Colonoscopy with removal of polyps $418 $569 $ % 3.1% Varicose veins $419 $785 $ % 5.9% Transluminal stent insertion $380 $513 $ % 4.7% D&C, curettage of uterus $105 $197 $ % 4.8% Abdominal hysterectomy $587 $1,068 $ % 5.1% Prostatectomy (endoscopic) $929 $1,772 $ % 5.1% Coronary angiogram $585 $794 $ % 1.9% Coronary artery bypass graft single $1,906 $3,350 $1, % 4.9% Coronary artery bypass graft multiple $2,091 $3,466 $1, % -1.1% Tonsils and/or adenoids < 12 yrs $263 $641 $ % 6.0% Cataract operation $798 $1,394 $ % 2.3% Total hip replacement $1,173 $2,420 $1, % 1.8% Knee hemi-arthroplasty $1,048 $2,276 $1, % 7.6% Total knee replacement $1,175 $2,364 $1, % 3.7% Knee surgery cruciate ligament repair $1,169 $2,583 $1, % 3.8% Other arthroscopic knee surgery medium $588 $1,231 $ % 4.0% OTHER SELECTED THERAPEUTIC PROCEDURES Oocyte retrieval $325 $445 $ % 1.4% Management of ICU patient (first day) $323 $385 $ % 2.1% Management of ICU patient (day after the first) $239 $278 $ % 2.6% Intravenous Chemotherapy up to 1 hour $58 $69 $ % 4.5% Intravenous Chemotherapy 1 6 hours $87 $103 $ % 3.0% Management of labour and delivery $476 $1,164 $ % 2.1% Management of complicated confinement $1,116 $1,639 $ % 2.6% Pre-operative examination by anaesthetist $38 $72 $ % 5.9% 2008 HCF ANNUAL REPORT 61

64 Trends and Statistics continued 2007/08 Medical Charges Statistics (continued) Average Average Charges compared Charges Medicare Benefits Schedule Fee Charge to schedule fees compared to Description (Abbreviated) $ $ $ % previous year SELECTED ATTENDANCES GP consultation at a hospital Level B $67 $51 -$ % 2.0% Specialist consultation initial $76 $107 $ % 0.0% Specialist consultation subsequent $38 $52 $ % 2.0% Consultant physician initial $133 $165 $ % 1.9% Consultant physician subsequent $67 $83 $ % 3.8% SELECTED DIAGNOSTIC PROCEDURES & IMAGING lead electrocardiography ECG $27 $34 $6 22.3% 6.3% Overnight investigation for sleep apnoea $524 $643 $ % 3.9% Selective coronary arteriography & angiocardiography $357 $501 $ % 0.4% CT scan upper abdomen and pelvis $480 $523 $43 8.9% 0.8% Chest x-ray $47 $53 $6 13.7% 0.0% SELECTED PATHOLOGY GROUPS Pathology Services ** Haematology $22 $24 $2 8.5% -4.0% Pathology Services ** Chemical $24 $26 $2 8.5% 4.0% Pathology Services ** Microbiology $33 $35 $3 7.7% 0.0% Pathology Services ** Tissue pathology $124 $143 $ % 0.7% Pathology Services ** Patient episode initiation $16 $19 $3 15.4% 0.0% 62 THE HOSPITALS CONTRIBUTION FUND OF AUSTRALIA LIMITED

65 Table 11 For the year ended 31 March 2008, 1,921,879 in hospital medical services were provided to HCF members, an increase of 234,373 (13.89%) services compared to the previous 12 month period. Doctors charged a total of $282 million for these services which represents an increase of $28 million (10.96%) compared to 2006/07. The equivalent Medicare Benefits Schedule fee for these services was $180.7 million (64.1%) of the amount charged. Medicare refunded $135 million and HCF paid benefits of $92 million under its gap cover and other schemes. The balance, $55.8 million (19.8% of total medical charges) represents the patient out of pocket cost for medical services. Total medical benefits paid by HCF increased by $9.5 million (11.52%) over this period. Table 11 provides a list of the most common in-hospital medical services covered by HCF. We have highlighted 15 procedures where the average charge is between $366 and $1,444 more than the Commonwealth Medicare Benefits Schedule fee (CMBS). Some key points are: Therapeutic procedures (which include surgical operations) charges are 75% above the CMBS (73% last year). Surgical operations average charges for different procedures in this group range from 32.8% to 144.1% above the CMBS. Management of labour and delivery reported charges for these services continue to average approximately 145% above CMBS while charges for complicated confinements are almost 47% above the CMBS fee. Tonsil and/or adenoids removal reported an average charge of 144% over the CMBS fee. Knee surgery cruciate ligament repair has an average charge of 121% above the CMBS fee. Total hip replacement This charge is now on average $1,247 (106.3%) more than the CMBS fee (106.7% last year). Pre-operative examination by an anesthetist (the most common service performed by these practitioners) the average charge is more than 86% above the CMBS (83% last year). Consultations specialist charges for initial consultations were 41.5% higher than the CMBS. Those for physicians are 24.4% above the CMBS HCF ANNUAL REPORT 63

66 Directors Report The Board of Directors of The Hospitals Contribution Fund of Australia Limited has pleasure in submitting its report for the year ended 30 June Principal Activities The principal activities of entities within the consolidated entity during the financial year were: (i) (ii) The provision of health insurance within Australia; The provision of term life and disability insurance and investment policies in Australia; and (iii) The operation of Dental Centres for contributors and their dependants. Operating Results The operating surplus of the consolidated entity after income tax was $37,316,000. [2007: Surplus $70,477,000]. This result included a $5 million (2007: $9 million) donation to The HCF Health and Medical Research Foundation. Dividend The Hospitals Contribution Fund of Australia Limited is a company limited by guarantee and in accordance with the Company s Constitution does not declare a dividend. Review of Operations, Likely Developments A review of operations of the consolidated entity during the financial year and the likely developments in the consolidated entity s operations known at the date of this Report have been included in the Chairman s and Chief Executive Officer s Report, and the Review of Operations. Significant Changes in State of Affairs Guarantors Equity increased from $511.4 million to $562.6 million, an increase of $51.2 million. This included a gain on revaluation of land and buildings of $13.9 million. Significant Events after the Balance Date Following an approach from the Directors of Manchester Unity Australia Limited, HCF entered into a competitive process and was subsequently successful in being nominated as the preferred bidder to purchase the shares in Manchester Unity for $256 million. A Merger Implementation Deed was signed on 27 August Manchester Unity members will be asked to vote on the proposal in early December If the vote is successful, and subject to Regulatory Approvals, Manchester Unity members will receive a cash consideration. HCF will fund that consideration through existing internal cash resources. It is expected that the combined HCF, Manchester Unity Group will achieve scale synergies that previously were not available to the two organisations alone. No other matters or circumstances have arisen since the end of the financial year which significantly affected or may significantly affect the operations of the consolidated entity, the results of those operations, or the state of affairs of the consolidated entity in financial years subsequent to the financial year ended 30 June Environment HCF has observed all environmental regulations governing its presence in the local government areas where its branches and worksites are situated. This includes all HCF s Dental Centres meeting their obligations under environmental protection and radiation control legislation covering disposal of clinical waste and x-ray radiation standards. The entity was active in energy conservation, materials recycling and waste reduction practices throughout the year. HCF s activities do not impact adversely on biodiversity of flora and wildlife habitats. Indemnification of Directors During or since the financial year, the Company has paid premiums in respect of contracts insuring any past, present or future Directors, Secretaries and other officers of the Company against certain liabilities. In accordance with common commercial practice, the insurance policies prohibit disclosure of the nature of the liabilities insured against and the amount of the premiums. 64 THE HOSPITALS CONTRIBUTION FUND OF AUSTRALIA LIMITED

67 Meetings of Directors The number of parent and life insurance subsidiary Directors meetings (including meetings of committees of Directors) and the number of meetings attended by each Director during their terms of office in the financial year were: Audit Remuneration Nominations Risk & Compliance Directors Committee Committee Committee Committee Meeting Meetings Meetings Meetings Meetings Attended Held Attended Held Attended Held Attended Held Attended Held Parent Company C. L. Clifton # 6 S. P. Coppock J. A. B. Dunlop * 4* G. J. Gardiner 11* 11* * 6* J. R. O Dea M. E. Rummery # 6 R. J. Schneider T. J. Smith L. J. Stone G. W. Wright Life Company D. A. Dixon * 4* M. J. Gallagher G. J. Gardiner J. B. Gibson 11* 11* A. J. Hutchinson T. J. Smith R. G. Utz * 4* 3 4 * Denotes Chairman # Ineligible to attend (Parent Company Risk & Compliance matters are addressed at the Audit Committee Meetings) 2008 HCF ANNUAL REPORT 65

68 Directors Report continued HCF Board of Directors G. J. Gardiner (Chairman), 65 BEc (Syd), FCPA, FAICD Independent Director Mr Gardiner was first appointed to the Board by the New South Wales Minister for Health in October He was elected a Director by eligible contributor voters for a three-year term commencing 30 November 1995 and re-elected for further terms in November 1998, October 2001 and November At the Annual General Meeting in November 2007 he became an appointed Director. Mr Gardiner has an extensive background in finance and merchant banking at Development Finance Corporation Limited, in industry as Deputy Managing Director of Pioneer International Limited, and in publishing as Chief Executive Officer of John Fairfax Limited. He is a Director of HCF Life Insurance Company Pty Limited, Chairman of Primary Health Care Limited, Figtree Developments Limited and a director of a number of other companies. He is a past President of the Juvenile Diabetes Foundation of Australia. C. L. Clifton, 53 MB BS (Hons), BHA Independent Director Elected Dr Clifton has served on HCF s Board since February 1994, initially as the appointee of the University Teaching Hospitals Association (Industrial) in New South Wales and subsequently elected by eligible contributor voters, the latest being in November 2007 for a three year term. She is currently a registered medical practitioner and a company director for various publicly listed and private companies. Her other current directorships include InvoCare Ltd and Health Care Australia (a provider of nursing and home care services) and she is also a councillor for the University of New South Wales. Prior to 2001, she held various positions in the public and private healthcare sectors including Chief Executive Officer of the Sisters of Charity Health Service in New South Wales and Deputy Chief Executive Officer of the Northern Sydney Area Health Service. She holds degrees in medicine and health administration and also has a specialist qualification in medical administration. S. P. Coppock, 53 BA, LLB, MBA, LLM, MTax Independent Director Elected Mr Coppock was elected to the Board in November 2007 for a three year term. He is a lawyer specialising in taxation who has worked in private, corporate and government practice. His work in private practice took him to regional NSW, Parramatta and Sydney. He has a strong background in community involvement and has been a member of the South Eastern Sydney Illawarra Area Health Medical Research Ethics Committee and is a local government councillor on Willoughby City Council. He has been and is a director on not-for-profit bodies and has been a part time lecturer for over a decade in subjects ranging from occupational health and safety; business law, legal ethics and taxation. He is the principal of a policy consultancy that specialises in the preparation of submissions and strategic advice on legal issues in government policy for private sector. J. A. B. Dunlop AM, 71 Independent Director Mr Dunlop was originally appointed to HCF s Board in October 1997 by the Health Services Association of New South Wales. He is a Director of The Children s Medical Research Institute. He was Chairman of the Children s Hospital at Westmead from 1983 until July 2004, when the New South Wales Government dissolved all Area Health Boards. Mr Dunlop has extensive commercial experience as the Managing Director of Edwards Dunlop and Company Limited between 1978 and 1987, and as a Director of Health Super Pty Ltd between 2000 and He was elected Chairman of the HCF Audit Committee on 5 February Mr Dunlop was appointed a Member of the Order of Australia in 1987 for service to the welfare of children. 66 THE HOSPITALS CONTRIBUTION FUND OF AUSTRALIA LIMITED

69 J. R. O Dea, 42 BA, LLM, MBA, FAICD Independent Director Elected Mr O Dea joined the Board on 30 November 1995, having been elected by HCF contributors. He was re-elected in October 2006 to serve a further three-year term. Mr O Dea has a background in law, having previously worked as a solicitor in private and corporate practice. He also has past experience as a local government councillor, as a director on various statutory and charity boards as well as a general manager in the financial services industry. Mr O Dea is currently a Member of the NSW Parliament and is married with four children. M. E. Rummery AM, 61 B.Univ (Hons) SCU Independent Director Ms Rummery was originally appointed to the Board in December 1995 by the Health Services Association of NSW. She is a retired lawyer, a Director of Catholic Healthcare Ltd and former Deputy Chancellor of Southern Cross University. Ms Rummery is currently Co-Chair of the Rural Health Taskforce and a former member of the Clinical Excellence Commission appointed by the NSW Minister for Health. For many years she was Chair of the Northern Rivers Area Health Service Board. Mrs Rummery was made a Member of the Order of Australia in 2001 for services to health and education and was also awarded an Honorary Doctorate in 2007 by Southern Cross University. R. J. Schneider AM, 62 Independent Director Mr Schneider was appointed by the Board in January He was formerly the Chief Executive Officer of the Australian Health Insurance Association, a post he held for 22 years concentrating on policy issues relating to health financing and delivery. Prior to joining AHIA he was a journalist and media administrator. He has published extensively including Making Medicare Better and two books on politics. Mr Schneider was made a Member of the Order of Australia in 2008 for his contribution to the private health insurance industry and national health policy development and was made a Life Member of the International Federation of Health Plans in 2006 for services to the private health sector. For several years he was an industry representative on the Private Health Insurance Administration Council and the Health Insurance Advisory Council. T. J. Smith, 66 MBE, RFD, ED Executive Director Mr Smith is HCF s Chief Executive Officer and was appointed to the Board in December He has held the position of CEO since February He has extensive management experience in marketing, distribution and operations management in the retail financial services and insurance industries. Mr Smith is a Director of HCF Life Insurance Company Pty Limited, a Vice President of the International Federation of Health Plans and Director and President of Australian Health Insurance Association Limited. Mr Smith was appointed a director of Primary Health Care Limited in May HCF ANNUAL REPORT 67

70 Directors Report continued Board of Directors HCF Life Insurance Company Pty Ltd L. J. Stone, 70 ATCL Independent Director Elected Mrs Stone was elected to the Board in October 1997 and re-elected for further terms in 2000, 2003 and November She is a company director with a strong community involvement. Mrs Stone has long and sustained experience with the health industry having been Chairman of an Area Health Service Board and State President of the Health Services Association of NSW. Currently, Mrs Stone is Chairman of Sylvanvale Foundation (formerly, Handicapped Children s Centre NSW) and is President of Sutherland Foods Services Inc [Meals on Wheels]. Mrs Stone continues as a Company Director of family companies involved with property investments. She has also served previously, as a Member of the New South Wales Legislative Assembly, as a member of the NSW Community Welfare Appeals Tribunal and as a Local Government Councillor. G. W. Wright, 63 B Com, BCA (Hons) MBA, BHA, FCIS, AFCHSE, CHE, FCPA Independent Director Mr Wright was appointed to the Board by the Private Hospitals and Nursing Homes Association of Australia in November 1982 and has been reappointed by its successor, the Private Hospitals Association of NSW Inc. Since 1985 he has been a management consultant specialising in health care management and financing issues in Australia and overseas. He is also Chairman/Director/ Continuing Advisor to several groups operating not-for-profit hospitals and residential aged care services in NSW. J. B. Gibson, (Chairman), 67 FCA, ACIS, ACIM Non-executive Chairman Mr Gibson has been HCF Life Chairman since He is a chartered accountant and former principal in a firm of chartered accountants. He is a former Chairman of The Hospitals Contribution Fund of Australia Limited, and former general manager of a Sydney-based firm of stock brokers. He has 46 years commercial experience including 12 years auditing listed companies. M. J. Gallagher, 58 BA (Macq), FIAA Non-executive Director Mr Gallagher is an actuary who worked in reinsurance for 35 years, specialising in life and health products. He has worked in both technical and general management roles in Australia, UK and North America. His most recent full-time role was as a life risk specialist for the Australian Prudential Regulatory Authority. A. J. Hutchinson, 66 ANZIIF (Assoc) Executive Director Mr Hutchinson is the HCF Life Managing Director. He has extensive general management experience in life insurance and funds management with HCF Life and other leading insurers. D. A. Dixon, 66 BA (Hons) (Qld), MA (Cantab). Non-executive Director Mr Dixon is Executive Chairman of a financial advisory firm and a Director of two listed public companies. He has also worked with the International Monetary Fund, the Commonwealth Treasury, Department of Finance and is a professional investor, superannuation and tax consultant. Mr Dixon is author of several personal finance, superannuation, taxation and investment strategy books. 68 THE HOSPITALS CONTRIBUTION FUND OF AUSTRALIA LIMITED

71 Company Secretary G. J. Gardiner, 65 BEc (Syd), FCPA, FAICD Non-executive Director Mr Gardiner is the current Chairman of The Hospitals Contribution Fund of Australia Limited. He has extensive experience in finance and merchant banking at Development Finance Corporation Limited, in industry as Deputy Managing Director of Pioneer International Limited, and in publishing as Chief Executive Officer of John Fairfax Limited. He is Chairman of Primary Health Care Limited, Figtree Developments Limited and a director of a number of other companies. T. J. Smith, 66 MBE, RFD, ED Executive Director Mr Smith is Chief Executive Officer of The Hospitals Contribution Fund (HCF) of Australia Limited. He has extensive management experience in marketing, distribution and operations management in the retail financial services and insurance industries. Mr Smith is a Vice President of the International Federation of Health Plans and Director and President of Australian Health Insurance Association Limited. Mr Smith was appointed a director of Primary Health Care Limited in May R. G. Utz, 67 FCA, FCPA, F FIN Non-executive Director Mr Utz is a chartered accountant and former Managing Director of Morgan Grenfell (Aust) Securities Ltd, former Director of Ord Minnett Holdings Limited, Chairman of Emerging Leaders Investment Limited and a former committee member of the Sydney Stock Exchange. He has over 46 years investment experience. I. M. McDonald, 62 FCA Mr McDonald was appointed company secretary of HCF and its subsidiaries on 1 September Prior to this appointment he was HCF s General Manager Finance since October 1995 and Chief Internal Auditor from September 1991 to October Prior to joining the company Mr McDonald had extensive experience as a partner in a Big 6 accounting firm, in providing assurance services, financial and taxation consulting to large and medium sized public and private companies and businesses. He has been a chartered accountant for over 36 years. Auditors Independence Declaration to the Directors of the Hospitals Contribution Fund of Australia Limited We have obtained an independence declaration from our auditors, Ernst & Young, which is set out on the following page and forms part of the Directors Report for the year ended 30 June Signed in accordance with a resolution of the Directors. G. J. Gardiner Chairman Sydney, 25 September HCF ANNUAL REPORT 69

72 Auditor s Independence Declaration 70 THE HOSPITALS CONTRIBUTION FUND OF AUSTRALIA LIMITED

73 Corporate Governance HCF s approach to Corporate Governance 1.1 Profile of HCF Policy, framework and approach to corporate governance Compliance with the ASXCGC s Best Practice Recommendations Date of this statement The Board of Directors a) Membership and expertise of the Board 72 b) Board role and responsibility 72 c) Board size and composition 73 d) The selection and role of the Chairman of the Board 73 e) Director independence 73 f) Avoidance of conflicts of interest by a Director 74 g) Meetings of the Board and its conduct 74 h) Succession planning 75 i) Review of Board performance 75 j) Nomination and appointment of new HCF Directors 75 k) Term in office and retirement and re-election of Directors 75 l) Director education 75 m) Board access to information and advice 75 n) Company Secretary Board Committees a) Board Committees and membership 76 b) Committee Charters 76 c) Committee procedures 76 d) Audit, Risk and Compliance Committee 77 e) Nominations Committee 78 f) Remuneration Committee Audit governance and independence a) Approach to audit governance 79 b) Engagement and rotation of the external auditor 79 c) Certification and discussions with the external auditor on independence 79 d) Relationship with the external auditor 79 e) Restrictions on non-audit services by the external auditor 79 f) Attendance at the Annual General Meeting Controlling and managing risk a) Approach to risk management 80 b) Risk management roles and responsibilities 80 c) CEO and CFO assurance 80 d) Internal review and risk evaluation 81 e) Compliance framework Promoting ethical and responsible behaviour a) HCF s Code of Conduct 81 b) Internal policies and procedures 81 c) Concern reporting and whistleblowing Corporate responsibility and sustainability a) Approach to corporate responsibility and sustainability 82 b) Reporting on our corporate responsibility and sustainability performance HCF Life Policy 2008 HCF ANNUAL REPORT 71

74 Corporate Governance continued 1. HCF s Approach to Corporate Governance The Board of Director s of The Hospital Contribution Fund of Australia Limited (HCF) is responsible for the corporate governance of the consolidated entity. The Board guides and monitor the business and affairs of the HCF Group. 1.1 Profile of HCF HCF is registered under the Corporations Act 2001 as a public company limited by guarantee. It is also registered under the Private Health Insurance Act 2007 as a Registered Private Health Insurer, which means it has a statutory responsibility to give priority to the interests of its contributors. HCF has no share capital, no shareholders and no borrowings. It is operated on a not for profit basis as HCF s Constitution prohibits any distribution of surplus or assets to its Members. HCF is governed by a Board of Directors. In addition to the circumstances in which any Director may be removed or retire by rotation, HCF s Constitution and the Corporations Act 2001 empowers the Members of HCF to remove any Director by ordinary resolution at a general meeting. HCF s Constitution also mandates that every five years an independent expert must review HCF s corporate governance structure to determine whether it is operating efficiently and as intended and reflects then current best practice, and whether any refinements or changes to it should be submitted to Members for approval. 1.2 Policy, framework and approach to corporate governance HCF s policy on corporate governance is to have a culture, including appropriate values and behaviours, that underpin its everyday activities, ensures transparency and accountability and protects stakeholder interests. This policy includes a commitment to best practice governance standards, which the Board sees as fundamental to the sustainability of HCF s businesses and performance. In pursuing this commitment, the Board continues to: monitor Australian developments in best practice corporate governance; contribute to debates on what represents best corporate governance for the health and life insurance industries; and review and improve its governance practices. HCF has taken into account the Principles of Good Corporate Governance and Best Practice Recommendations published in March 2003 ( Best Practice Recommendations ) by the Australian Stock Exchange Limited s Corporate Governance Council [ASXCGC], Australian Standard AS8000 Good Governance Principles, Private Health Insurance Administration Council s Industry Corporate Governance Guidelines [PHIACICGG], Private Health Insurance Code of Conduct developed under the auspices of the Australian Health Insurance Association and so far as HCF s subsidiary, HCF Life Insurance Company Pty Limited is concerned, the Australian Prudential Regulation Authority s Policy Guidelines [APRAPG]. Additionally, in accordance with the ASXCGC Best Practice Recommendations, HCF has posted copies of this Corporate Governance Statement on its website Compliance with the ASXCGC s Best Practice Recommendations The ASX listing rules require listed entities to include a statement in their annual report disclosing the extent to which they have followed the 28 ASXCGC Best Practice Recommendations during the reporting period, identifying any recommendations that have not been followed and providing reasons for that variance. Although HCF is not a listed entity and thus not required to comply with ASX listing rules, the Board considers it appropriate to adopt the relevant ASXCGC recommendations in the company s governance policies and practices. 2. Date of this Statement This Corporate Governance Statement reflects HCF s corporate governance policies and practices as at 25 September The Board of Directors a) Membership and expertise of the Board The Board has a broad range of relevant financial and other skills, experience and expertise to meet its objectives. The current Board composition, with details of each Director s background, is set out in the Directors Report on pages 66 to 69 of the Annual Report. The Board considers that the nonexecutive Directors bring the right mix of skills, knowledge, expertise and experience necessary to govern the HCF Group. Of the ten Directors, three have financial experience, four have specific healthcare and legal experience and three have extensive business experience. All Directors have experience of the social and environmental context in which the businesses operate. The Board s approach to selection, performance evaluation and tenure of Directors is described on pages 73 to 78 of this Corporate Governance Statement. ASXCGC s Best Practice Recommendation 2.1, 2.5 b) Board role and responsibility The roles and responsibilities of the Board are formalised in the Board Charter. The Board Charter also defines the matters that are reserved for the Board and its Committees, and those that the Board has delegated to management. In summary, the Board is accountable to its constituents and contributors for HCF s performance and its responsibilities include: strategy providing strategic direction and approving corporate strategic initiatives; board performance and composition evaluating the performance of non-executive Directors, and determining the size and composition of the HCF Board as well as approving the selection of appropriate persons for appointment and election as Directors; leadership selection evaluating the performance of and selecting the Chief Executive Officer [CEO]; succession planning planning for Board and executive succession; 72 THE HOSPITALS CONTRIBUTION FUND OF AUSTRALIA LIMITED

75 remuneration setting CEO remuneration, and setting non-executive Director remuneration within guidelines furnished by the independent external remuneration consultants, subject to the approval of Members; financial performance approving HCF s operating plan and budget, monitoring management and financial performance; financial reporting considering and approving HCF s annual financial statements; audit selecting and recommending to constituents the appointment of the external auditor. Determining the duration, remuneration and terms of appointment of the external auditors and evaluating their performance and ongoing independence. Maintaining a direct and ongoing dialogue with the external auditor; risk management approving HCF s risk management strategy and monitoring its effectiveness; corporate responsibility considering the social, ethical and environmental impact of HCF s activities, setting standards and monitoring compliance with those standards; and relationship with regulators maintaining dialogues with the Private Health Insurance Administration Council [PHIAC], the Commonwealth Department of Health and Ageing [DoHA], the Australian Securities and Investments Commission [ASIC], the Australian Prudential Regulation Authority [APRA] and other regulators. The Board has delegated a number of these responsibilities to its Committees. The responsibilities of these Committees are detailed in section 4 of this Corporate Governance Statement. The Board has delegated to management responsibility for: strategy developing and implementing corporate strategies and making recommendations on significant corporate strategic initiatives; senior management selection making recommendations for the appointment of senior management, determining terms of appointment, evaluating performance, and developing and maintaining succession plans for senior management roles; financial performance developing HCF s annual operating plan and budget and managing day-to-day operations within the budget; risk management maintaining an effective risk management framework; continuous disclosure keeping the Board fully informed about material developments; and corporate responsibility managing day-to-day operations in accordance with standards for social, ethical and environmental practices, which have been set by the Board. HCF s Board Charter is available in the corporate governance section of its website at ASXCGC s Best Practice Recommendation 1.1, 9.1 c) Board size and composition As at the date of this Corporate Governance Statement there are nine independent non-executive Directors and one executive Director on the Board. The Constitution provides for a maximum of ten Directors. On the recommendation of the Nominations Committee the Board appoints up to five independent nonexecutive Directors and selects four independent non-executive Directors for election by voting contributors. The Board appoints the CEO as the sole executive Director. The Nominations Committee assesses the Board composition and size from time to time and may make recommendations to the Board for changes to the Board composition and size. The Nominations Committee also assesses the skills required to discharge the Board s duties, having regard to HCF s business mix, financial position and strategic direction, including specific qualities or skills that the Nominations Committee believes are necessary for one or more of the Directors to possess. d) The selection and role of the Chairman of the Board The Directors elect one of the independent non-executive Directors to be Chairman. The Chairman s role includes: ensuring that, when all Board members take office, they undertake appropriate induction covering the terms of their appointment, their duties and responsibilities; providing effective leadership on formulating the Boards strategy; representing the views of the Board to the public; ensuring the Board meets at regular intervals throughout the year, and that minutes of meetings accurately record decisions taken and, where appropriate, the views of individual Directors; guiding the agenda and conduct of all Board meetings; and reviewing the performance of non-executive Directors. The current Chairman of the Board, Greg Gardiner, is an independent non-executive Director. He has been a Director and Chairman of HCF since October The Chairman is a member of each Board Committee and Chairman of the Nominations and Remuneration Committees. ASXCGC s Best Practice Recommendation 2.2, 2.3 e) Director independence HCF s Constitution requires that a majority of the Directors must be independent and specifies the criteria to be used to determine whether a Director is independent. The criteria are: 1. The Directors must affirmatively determine whether or not a Director is independent, initially at the time of appointment or election and thereafter on a periodic basis. Each Director must provide the Directors with all information required by the Directors to make their determination. Each Director must also, whenever requested to do so, affirm to the Directors whether or not the Director is independent HCF ANNUAL REPORT 73

76 Corporate Governance continued 2. To be independent, a Director must be independent of management and free from any business or other relationship that could materially interfere with, or could reasonably be perceived to materially interfere with, the exercise by the Director of unfettered and independent judgment. 3. A Director will be regarded as independent when the Director: (a) has not within the last three years been employed in an executive capacity by the Company or any controlled entity of the Company, or been a Director after ceasing to hold that employment; (b) has not within the last three years been associated with, or a principal of, a material professional advisor or material consultant to the Company or any controlled entity of the Company or an employee materially associated with the service provided; (c) is not a material supplier or customer of the Company or any controlled entity of the Company or an officer of or otherwise directly or indirectly associated with a material supplier or customer and has no material contractual relationship with the Company or any controlled entity of the Company other than as a Director; (d) has not served as a Director for a period which could, or could reasonably be perceived to, materially interfere with the Director s ability to act in the best interests of the Company (and, to the extent required by the Private Health Insurance Act 2007, the interests of the Contributors); and (e) is otherwise free from any interest and any business or other relationship which could, or could reasonably be perceived to, materially interfere with the Director s ability to act in the best interests of the Company (and, to the extent required by the Private Health Insurance Act 2007, the interests of the Contributors). 4. The Directors may determine that a Director is independent notwithstanding the existence of a relationship (including any of these specific relationships), where the Directors determine that the relationship could not materially interfere with, or could not reasonably be perceived to materially interfere with, the exercise by the Director of unfettered and independent judgment. 5. A relationship is material where the value of goods or services provided to or by the Company over the past three years accounts, in aggregate, for more than 5% of the gross revenue or expenses of either the Company or the other party over that three year period. 6. A lack of independence does not disqualify a Director. However, where the Directors determine that a Director is not independent, the Directors must decide the extent to which the lack of independence should be addressed by an alternative mechanism, such as: (a) disclosure of the facts and circumstances giving rise to the lack of independence in the annual report of the Company; (b) excluding the Director from being present at any meeting at which a matter that is compromised by the lack of independence is being considered or decided; and (c) approving participation by the Director at any meeting at which a matter that is compromised by the lack of independence is being considered or decided, subject to any appropriate conditions. Any or all of these alternative mechanisms may be appropriate in any given circumstances. The Directors will determine what is appropriate. ASXCGC s Best Practice Recommendation 2.1, 2.5 f) Avoidance of conflicts of interest by a Director The Board is conscious of its obligations to ensure that Directors avoid conflicts of interest [both real and apparent] between their duty to HCF and their own interests. The Board has adopted a procedure to ensure that conflicts and potential conflicts of interest of Directors are disclosed to the Board. Any Directors with a material personal interest in a matter being considered by the Board must declare their interest and, unless the Board resolve otherwise, they may not participate in boardroom discussions or vote on matters on which they face a conflict. In addition, Directors are required to disclose any actual or potential conflict of interest on appointment as a Director and are required to keep these disclosures up to date. Directors may not make any representations or agreements on behalf of HCF unless such an authority is explicitly delegated by the Board, through a resolution to the director either individually, or as a member of a Board committee. g) Meetings of the Board and its conduct The Board has up to eleven scheduled meetings each year and meets whenever necessary between scheduled meetings to deal with specific matters needing attention. The Board meets annually to discuss HCF s strategic plan and set the overall strategic direction of the organisation. The Chairman and the CEO establish meeting agendas, for assessing HCF s coverage of financial, strategic and major risk areas, throughout the year. The Directors have the opportunity to review meeting materials sufficiently in advance. Directors are always encouraged to participate with a robust exchange of views and to bring their independent judgements to bear on the issues and decisions at hand. In addition to their formal meetings, the Board undertakes periodic development seminars to enhance Directors knowledge of governance matters and related key issues facing HCF. Over the past year these included discussions on HCF s succession planning, International Financial Reporting Standards, organisational strategy, technology and IT strategy, risk management, regulatory compliance and Australian economic conditions. Senior managers attend Board meetings quarterly to present a Review of Operations for their business units and are personally questioned by Directors on their responsibilities, performance, problem areas and action programs for improvement. Senior managers are also available to be contacted by Directors between meetings. 74 THE HOSPITALS CONTRIBUTION FUND OF AUSTRALIA LIMITED

77 The Board meets without executive management at least once a year or as required. The Audit, Risk and Compliance Committee meets with HCF s external auditors without executive management being present at the conclusion of each Audit, Risk and Compliance Committee meeting. Meetings attended by Directors for the past financial year are reported in the Directors Report on page 69 of the Annual Report. Minutes are kept and reviewed by the Chairman and then approved by Committee Members at the following meeting. Minute books are retained. h) Succession planning The Board (through the Nominations Committee) plans succession of its own members and is responsible for developing and implementing succession planning for non-executive Directors, taking into account the challenges and opportunities facing HCF and the skills and expertise which are needed by the Board in the future. The Board is responsible for CEO succession planning. i) Review of Board performance The Board undertakes ongoing self-assessment and reviews the performance of the Board, Board Committees and individual Directors annually. This is to ensure that the Board and Board Committees are working effectively. The performance review process is conducted internally and includes written surveys of Directors based on best practice questionnaires designed by big four accountancy firms. These reviews are wide-ranging and include, amongst other things, each Director s contributions to Board discussions, best features and recommendations for improvement. The survey results are collated by the Company Secretary and the results reviewed by the Board and Board Committees. ASXCGC s Best Practice Recommendation 8.1 j) Nomination and appointment of new HCF Directors HCF has a maximum of ten Directors: Up to five Directors may be appointed by the incumbent Directors and up to four Directors may be elected by voting contributors. The CEO, who is appointed by the Directors, is automatically appointed as a Director. Potential candidates for appointment or elections as Directors are first selected by the Nominations Committee and then submitted to the Board for approval. The Nominations Committee reviews potential candidates by reference to the Director Eligibility criteria specified in the Constitution, having regard to the potential candidate s experience and other qualities. Voting contributors are invited to nominate candidates for election as Directors. External consultants may also be used to access a wide base of potential candidates. Those selected are assessed by the Board against the Director Eligibility Criteria specified in the Constitution, including background, experience, professional skills, personal qualities, whether their skills and experience will complement the existing Board and their availability to commit themselves to the Board s activities. New Directors receive a Letter of Appointment, which sets out their duties, their terms and conditions of appointment including expected term of appointment, and the expectations of the role and remuneration. If the Board appoints a new Director during the year to fill a casual vacancy in the position of a Director elected by voting contributors, that person must stand for election by voting contributors at the next election. Voting contributors are provided with relevant information on the candidates for election. The Nominations Committee reviews appointment criteria from time to time and makes recommendations concerning the re-election of any Director by voting contributors or appointment of any Director by the Board. As part of the process of considering whether to support the re-election of a Director, the Nominations Committee conducts a peer review of that Director during the year in which that Director will become eligible for re-election. ASXCGC s Best Practice Recommendation 2.5 k) Term in office and retirement and re-election of Directors HCF s Constitution states that at each annual general meeting one-third of its Directors, excluding the CEO, must retire. Retiring Directors are eligible for consideration by the Nominations Committee for re-appointment by the Board or re-election by voting contributors. The Nominations Committee evaluates the contribution of retiring Directors through a peer review process. The maximum time that each Director can serve in any single term is three years. The Board has not specified the maximum number of terms of office that any Director may serve. l) Director education When appointed to the Board, all new Directors undergo an informal induction program appropriate to their experience to familiarise them with matters relating to HCF s business, strategy and any current issues before the Board. The induction program includes meetings with the Chairman, the CEO, each Chairman of the respective Board Committees, each General Manager and the Company Secretary. The Board ensures Directors continue their education by participating in appropriate programs and attending relevant worksite visits. This allows existing Directors time in each business area to gain a greater understanding of key issues. HCF s Company Secretary provides Directors with ongoing guidance on matters such as corporate governance, HCF s Constitution and the law. m) Board access to information and advice All Directors have unrestricted access to company records and information and receive regular detailed financial and operational reports from executive management to enable them to carry out their duties. Each Director enters into an Access and Indemnity Deed with HCF to ensure seven year access to documents after retirement as a Director. The Chairman and other non-executive Directors regularly consult with the CEO, the Chief Financial Officer (CFO), the Company Secretary, the General Manager Group Risk Management, the Group Compliance Manager, and other General Managers and may consult with, and request additional information from, any HCF employee HCF ANNUAL REPORT 75

78 Corporate Governance continued The Board, and each Director individually, has the right to seek independent professional advice, at HCF s expense, to help them carry out their responsibilities. While the Chairmen s prior approval is needed, it may not be unreasonably withheld and, in the Chairmen s absence, approval of the Board may be sought. ASXCGC s Best Practice Recommendation 2.5 n) Company Secretary The Company Secretary is Ian McDonald, FCA. Mr McDonald joined HCF in 1991 as Chief Internal Auditor and was appointed to his present role in September 2006 with responsibility for the management and delivery of company secretarial, legal, compliance and risk management services to the HCF Group. Prior to Ian s current appointment he was HCF s General Manager Finance (Chief Financial Officer) from October 1995 and was a partner at Touche Ross & Co/KPMG from 1979 to 1991 providing assurance, financial and taxation consulting services to large and medium sized public companies. Responsibilities for the secretarial function include providing advice to Directors and officers on corporate governance and regulatory matters, developing and implementing HCF s governance framework and giving practical effect to the Board s decisions. All Directors have access to advice from the Company Secretary. 4. Board Committees a) Board Committees and membership There are currently three Board Committees of HCF whose powers and procedures are governed by HCF s Constitution and the relevant Committee s Charter, as approved by the Board. The Board Committees and their membership at 25 September 2008 are set out in the table following. b) Committee Charters The roles and responsibilities of each Committee are set out in the respective Committee Charters, which are reviewed annually. Copies of the Committee Charters are available in the corporate governance section at HCF s website c) Committee procedures Operation of the Committees and reporting to the Board The Board s Audit, Risk and Compliance Committee meets quarterly. The Nominations Committee meets annually and at other times if required. The Remuneration Committee meets as necessary. Each Committee is entitled to the resources and information it requires, including direct access to employees and advisers as well as appropriate funding. The CEO, senior executives, other selected employees and external independent experts are invited to attend Committee meetings as necessary. All independent Directors receive all Committee papers and can attend all Committee meetings, subject to there not being any conflict of interest. Composition and independence of the Committees Committee members are chosen for the skills, experience and other qualities they bring to the Committees. The Audit, Risk and Compliance Committee is required to have all independent non-executive Directors as members. The Nominations Committee is composed of all independent non-executive Directors. When independent non-executive Directors are being considered for re-appointment or re-election as Directors, they do not participate as members of the Nominations Committee unless and until they are re-appointed or re-elected. The Remuneration Committees is composed of three independent non-executive Directors. How the Committees report to the Board Following each Committee meeting, the Board is given an oral report by the Chairperson of each Committee. All Minutes of meetings of Committees are distributed to every independent Director. How Committees performance is evaluated The performance of Committees is surveyed using best practice questionnaires. Results, including the identification of strengths, weaknesses and recommended improvements, are discussed and reviewed initially within each Committee and then reviewed by the Board. The performance of each Committee member is evaluated as part of the performance review of each independent non-executive Director. ASXCGC s Best Practice Recommendation 4.5, 7.3, 8.1, 9.5 Membership of Board Committees as at 25 September 2008 Audit, Risk and Compliance Nominations Remuneration Committee Committee # Committee C. L. Clifton C. L. Clifton J. A. B. Dunlop J. A. B. Dunlop * J. A. B. Dunlop G. J. Gardiner * G. J. Gardiner G. J. Gardiner * J. R. O Dea J. R. O Dea J. R. O Dea M. E. Rummery M. E. Rummery R. J. Schneider R. J. Schneider L. J. Stone L. J. Stone G. W. Wright G. W. Wright S. P. Coppock S. P. Coppock * Denotes Committee Chairman # Those Directors who seek: (2007) re-election C. L. Clifton; appointment G. J. Gardiner; reappointment M. E. Rummery; (2008) reappointment J. A. B. Dunlop, R. J. Schneider, G. W. Wright, are excluded from those meetings where independence/conflict of interest is an issue. Attendances of Directors at Committee meetings are set out in the Directors Report on page 65 of the Annual Report. 76 THE HOSPITALS CONTRIBUTION FUND OF AUSTRALIA LIMITED

79 d) Audit, Risk and Compliance Committee Role of the Committee The Audit, Risk and Compliance Committee, which comprises all the independent non-executive Directors, oversees all matters concerning: integrity of the financial statements and financial reporting systems; making recommendations to the Board for the appointment of the external auditor; making recommendations to the Board for the appointment of the Appointed Actuary external auditor s qualifications, performance and independence; performance of the internal audit function; the identification, assessment, controls and treatment of risks; fraud control; and compliance with financial reporting and related regulatory requirements including the financial condition report of the Appointed Actuary. The Board approves the external and internal audit plans on the recommendation of the Audit, Risk and Compliance Committee. The Committee ensures that all recommendations arising from internal and external audits are reviewed and implemented where appropriate and reasons given when recommendations have not been implemented. The Committee is provided with a status report for all recommendations provided by the internal and external auditors for which it is agreed action is required. These reports include responsible officers and implementation dates. Minutes of the Committee meetings are included in the papers provided to all independent Directors. Integrity of the financial statements The Audit, Risk and Compliance Committee considers whether the accounting methods applied by management are consistent and comply with applicable accounting standards and concepts. The Committee reviews and assesses: any significant estimates and judgements in financial reports and monitors the methods used to account for unusual transactions; the processes used to monitor and ensure compliance with laws, regulations and other requirements relating to external reporting of financial and non-financial information; and the major financial risk exposures and the process surrounding the disclosures made by senior executives in connection with their personal certifications of their respective responsibility for information disclosed in the annual financial statements. External audit The Audit, Risk and Compliance Committee is responsible for making recommendations to the Board concerning the appointment of HCF s external auditor and the terms of engagement. The Committee reviews the performance of the external auditor and regularly reviews its policy on the independence of the external auditor. This evaluation includes an annual review of the external auditor s internal quality control procedures and consideration of any inquiry or investigation by governmental or professional authorities, within the preceding five years in respect of assignments carried out by the external auditor. As well, the capabilities of the lead audit engagement staff are reviewed. The independent external auditor reports on their findings to this Committee and to the Board. For permitted non-audit services, use of the external audit firm must be assessed in accordance with HCF s pre-approval policy, which requires that all non-audit services be pre-approved by the Audit, Risk and Compliance Committee, by delegated authority to a sub-committee consisting of one or more members where appropriate. The external auditor receives all Audit, Risk and Compliance Committee papers and attends all Committee meetings. The Committee also meets with the external auditor and Appointed Actuary without management being present. Committee members are able to contact the external auditor and Appointed Actuary directly at any time. Internal audit The Audit, Risk and Compliance Committee approves the appointment and replacement of the Chief Internal Auditor and reviews the internal audit responsibilities, budget and staffing. The Audit, Risk and Compliance Committee Chairman meets separately with the Chief Internal Auditor. Appointed Actuary The Audit, Risk and Compliance Committee is responsible for making recommendations to the Board concerning the appointment of the Appointed Actuary and the terms of engagement. The Committee reviews the Appointed Actuary s performance. Compliance with financial reporting and related regulatory requirements The Audit, Risk and Compliance Committee is responsible for ensuring compliance with applicable financial reporting and related regulatory requirements. The Committee, amongst other things: discusses with management and the external auditor, HCF s major financial risk exposures and the steps management has taken to monitor and control such exposures, including HCF s risk assessment and risk management policies; discusses with the external auditors their report regarding significant findings in the conduct of their audit and the adequacy of management s response; discusses with management, the external auditor and Appointed Actuary the annual financial statements; 2008 HCF ANNUAL REPORT 77

80 Corporate Governance continued discusses with management, the external auditor and Appointed Actuary correspondence with regulators or government agencies and reports which raise issues of a material nature; discusses with the Company Secretary legal matters that may have a material impact on the financial statements and/or HCF s compliance with financial reporting and related regulatory policies; and establishes procedures for the receipt, retention and treatment of financial complaints, including accounting, internal accounting controls or auditing matters and the confidential or anonymous submission by employees of concerns regarding accounting or auditing matters. Financial knowledge of Committee members The Audit, Risk and Compliance Committee includes members who have appropriate financial experience and an understanding of the industry in which HCF operates. All members of the Audit, Risk and Compliance Committee satisfy the independence requirements under the ASXCGC Best Practice Recommendations and PHIAC Industry Corporate Governance Guidelines. The Audit, Risk and Compliance Committee relies on the information provided by management, the external auditor and the Appointed Actuary. Management determines that HCF s financial statements and disclosures are complete and accurate. The external auditor has the duty to plan and conduct audits. Further information on audit governance and independence is included in section 5 of this Corporate Governance Statement. ASXCGC s Best Practice Recommendation 4.2, 4.3, 4.4, 4.5 Risk Management oversight The Audit, Risk and Compliance Committee oversees the risk profile of HCF within the context of the risk-reward strategy determined by the Board. The determination of this strategy includes recommendations from the CEO and senior management on the parameters of the HCF Group s risk-reward profile and appropriate strategy. The Committee monitors the alignment of risk profile with current and future capital/ liquidity requirements and oversees the risks inherent in HCF s operations. For all risk types this includes: reviewing and approving the frameworks for managing HCF s operational and compliance risks; ensuring effective monitoring of the risk profile, performance, and management and control of HCF s risks; ensuring the development and ongoing review of appropriate policies that support HCF frameworks for managing risk; determining, approving and reviewing the limits and conditions that apply to the taking of risk, including the authority delegated by the Board to the CEO, CFO and General Manager Group Risk Management; The Committee reviews significant issues that may be raised by internal audit as well as the length of time and action taken to resolve such issues. At an individual risk type level the following are included: reviewing and approving HCF s provisioning methodology; reviewing and approving HCF s funding plan and ensuring appropriate monitoring of funding and liquidity requirements; Operational risk reviewing the risk that arises from inadequate or failed internal processes, people and systems or from external events; and compliance risk ensuring processes are in place to anticipate and effectively manage the impact of regulatory change on HCF s operations, and overseeing compliance with applicable laws, regulations and regulatory requirements, reviewing and discussing with management and the external auditor any correspondence with regulators or government agencies and any published reports that raise material issues for HCF, and ensuring procedures exist for appropriately managing complaints and whistleblower concerns. The Committee routinely updates the Board about its activities quarterly and also monthly if significant new risks emerge. ASXCGC s Best Practice Recommendation 7.1, 7.3 e) Nominations Committee Role of the Committee The primary function of the Nominations Committee is performing review procedures to assist the Board in fulfilling its oversight responsibility by ensuring that the Board comprises individuals best able to discharge the responsibilities of Directors, having regard to the law and the highest standards of governance. The Committee is responsible for: developing and reviewing policies on Board composition, strategic function and size; performance review process of the Board, its Committees and individual Directors; developing and implementing induction programs for new Directors and ongoing education for existing Directors; assessing eligibility of potential candidates nominated for election as Directors recommending potential candidates for appointment or election as Directors to the Board; reviewing Director independence; succession planning for the Board; reviewing HCF s corporate governance policies to ensure they meet Australian corporate governance standards; and considering whether HCF meets relevant corporate governance standards under legislation and of various regulatory bodies, including PHIAC, ASIC and APRA. ASXCGC s Best Practice Recommendation 2.4, THE HOSPITALS CONTRIBUTION FUND OF AUSTRALIA LIMITED

81 f) Remuneration Committee Role of the Committee The Remuneration Committee assists the Board by working to ensure that HCF has remuneration policies and practices that fairly and responsibly reward executives. The Committee s decision on reward structures are based on business performance, legal obligations and high standards of corporate governance. The Committee s purpose is to: review and approve executive remuneration policy; review and recommend to the Board on corporate goals and objectives relevant to the CEO, and the performance of the CEO in light of these objectives; recommend to the Board on the remuneration of the CEO; approve remuneration packages for positions reporting directly to the CEO; review and recommend to the Board, on the advice of independent external consultants, Directors fees; approve all performance recognition expenditure; and oversee general remuneration practices across the HCF Group. The Committee also reviews and recommends to the Board on the recruitment, retention, termination, and succession planning policies and procedures for the CEO and senior positions reporting directly to the CEO. Independent remuneration consultants are engaged by the Committee to ensure that HCF s reward practices and levels are consistent with market practice. 5. Audit governance and independence a) Approach to audit governance The Board is committed to three basic principles: that HCF s financial reports present a true and fair view; that HCF s accounting methods are comprehensive and relevant and comply with applicable accounting rules and policies; and that the external auditor is independent. Australian and international developments are monitored. b) Engagement and rotation of the external auditor HCF s independent external auditor is Ernst & Young. Ernst & Young was appointed by Members at the 1985 annual general meeting in accordance with the provisions of the Corporations Act. The Board has adopted a policy that the responsibilities of the lead audit partner cannot be performed by the same person for longer than five years. The present Ernst & Young lead audit partner for HCF s audit is Andrew Price who assumed this responsibility in The Board requires a minimum five-year cooling off period before an audit partner is allowed back onto the audit team. ASXCGC s Best Practice Recommendation 4.5 c) Certification and discussions with the external auditor on independence The Audit, Risk and Compliance Committee requires the external auditors to confirm quarterly to the Committee that they have maintained their independence and have complied with the independence standards as promulgated by Australian regulators and professional bodies. Periodically, the Committee meets separately with the external auditors without executive management being present. Certification is provided in the Non- Audit Services and Independence declaration in the Directors Report on page 70. d) Relationship with the external auditor HCF s current policies on employment and other relationships with its external auditors include the following: the audit partners and any employee of the external audit firm on the HCF audit are prohibited from being an officer of HCF; an immediate family member of an audit partner or any employee of the external audit firm on the HCF audit is prohibited from being a Director or an officer in a significant position at HCF; any former external audit partner or external audit firm s former employees who have participated on HCF audits are prohibited from becoming a Director or officer in a significant position at HCF for at least three years, and after the three years can have no continuing financial relationship with the audit firm; members of the audit team and audit firm are prohibited from having a business relationship with HCF or any officer of HCF unless the relationship is clearly insignificant to both parties; officers of HCF are prohibited from receiving any remuneration from the external audit firm; and the audit team in any given year cannot include a person who had been an officer of HCF during that year. e) Restrictions on non-audit services by the external auditor To avoid possible independence or conflict issues, the external auditor is not permitted to carry out certain types of non-audit services for HCF, including: preparation of accounting records and financial statements; financial information systems design and implementation; appraisal or valuation services and other corporate finance activities; internal audit services; temporary or permanent staff assignments, or performing any decision-making or ongoing monitoring or management functions; legal, litigation or other expert services; 2008 HCF ANNUAL REPORT 79

82 Corporate Governance continued recruitment services for managerial, executive or Director positions; and For all other non-audit services, use of the external audit firm must be assessed in accordance with HCF s pre-approval policy, which requires that all non-audit services be preapproved by the Audit, Risk and Compliance Committee, by delegated authority to a sub-committee consisting of one or more members where appropriate. The breakdown of the aggregate fees billed by the external auditor in respect of each of the two most recent financial years for audit, audit-related, tax and other services is provided in the 2008 Annual Financial Report. f) Attendance at the Annual General Meeting HCF s external auditor attends the annual general meeting and is available to answer questions from Members on: the conduct of the audit; the preparation and content of the audit report; the accounting policies adopted by HCF in relation to the preparation of the financial statements; and the independence of the auditor in relation to the conduct of the audit. ASXCGC s Best Practice Recommendation Controlling and Managing Risk a) Approach to risk management HCF approaches risk management by identifying, assessing and managing the risks that affect its businesses in accordance with a set of core risk management values. This approach enables the risks to be balanced against appropriate rewards and reflects HCF s vision and values, objectives and strategies, and procedures and training. HCF distinguishes four main types of risk: business risk the exposure to changing government policies, new legislation, price control and fraud; operational risk the risk that arises from inadequate or failed internal processes, people and systems or from external events; financial risk associated with achieving revenue and income growth targets including fluctuations in investment markets impacting on HCF s investment portfolio; and compliance risk the risk of failing to comply with all applicable legal and regulatory requirements and industry codes of practice, and to meet HCF s ethical standards. In addition to and linked to these four main types of risk, HCF allocates resources to manage the following risks: claims risk the risk of not being able to meet contributors claims for benefits liquidity risk the risk of failing to adequately fund cash demand in the short term; reputational risk the risk of negative experiences and perceptions impacting HCF s standing with stakeholders; and strategic risk the risk associated with the vulnerability of a line of business to changes in the strategic environment. As these risks are interlinked, HCF takes an integrated approach to managing them. ASXCGC s Best Practice Recommendation 7.1, 7.3 b) Risk management roles and responsibilities The Board is responsible for reviewing and approving HCF s risk management strategy, frameworks and key risk parameters. HCF s risk management governance structure is set out in the table in this section. Approval of HCF s risk management framework and significant policies resides with the Audit, Risk and Compliance Committee under powers delegated by the Board. Executive management is responsible for implementing the Board approved risk management strategy and developing policies, controls, processes and procedures to identify and manage risks in all of HCF s activities. HCF s business model recognises that the responsibility for managing risks inherent in its business lies with the business units. This responsibility includes developing business unit specific policies, controls, procedures and monitoring and reporting capability, and is aligned with the risk frameworks approved by the Audit, Risk and Compliance Committee. c) CEO and CFO assurance The Board receives regular reports about the financial condition and operational results of HCF and its subsidiaries. The CEO, CFO annually provide formal statements to the Board that in all material respects that the financial records of the company for the financial year have been properly maintained in that they: correctly record and explain its transactions and financial position and performance; enable true and fair financial statements to be prepared and audited; and are retained for seven years after the transactions covered by the records are completed. HCF s risk management governance structure Board Considers and approves the risk-reward strategy of HCF including social, environmental, ethical responsibility and reputational risk Board Committees Audit, Risk and Compliance Nominations Remuneration Committee Committee Committee Integrity of financial statements and systems Risk profile and risk management Board experience, mix of skills, succession and governance Responsible reward practices in line with performance 80 THE HOSPITALS CONTRIBUTION FUND OF AUSTRALIA LIMITED

83 Group Risk Monitoring Drives HCF s risk management culture, frameworks and reviews of assessments for maximum performance in line with risk appetite; Ensures risk management is a competitive advantage, delivers better solutions for customers, protects capital and grows surplus, and builds stakeholder value; and Forges a partnership with the business, which shares the vision and the responsibility for superior risk management. Business Units Manage risks inherent in the business including the development of business-specific policies, controls, procedures and reporting in respect of the risk classes; the financial statements, and notes required by the accounting standards for the financial year comply with the accounting standards; the financial statements and notes for the financial year give a true and fair view of the Company s and consolidated Group s financial position and of their performance; and the risk management and internal compliance and control systems are sound, appropriate and operating efficiently and effectively. ASXCGC s Best Practice Recommendation 4.1, 7.2 d) Internal review and risk evaluation The Risk Management and Compliance managers together with the Chief Internal Auditor provide independent assurance to the Board, executive management and external auditor on the adequacy and effectiveness of management controls for risk. The compliance function also carries out activities that measure the effectiveness of compliance risk management as provided in more detail below. e) Compliance framework HCF s compliance framework is driven by a strong culture of compliance and a series of principles and practices: compliance is the responsibility of every staff member; complying with both the letter and spirit of regulatory standards; embedding compliance in how HCF conducts its businesses; visibility and accountability of senior management to ensure a strong compliance culture; advice and assistance is provided by a dedicated compliance function; and active engagement in meetings to ensure high standards for the industry in which HCF operates. Primary responsibility for managing compliance risk resides with business unit line management, who are required to demonstrate that they have effective processes in place consistent with HCF s compliance principles and practices. Within each major business area there is a clear compliance function, with specific responsibilities designed to guide compliance within that business as part of the business unit risk management team. The compliance framework utilises a range of mechanisms, including audit, file reviews, customer surveys and operational risk assessments to measure the effectiveness of the HCF Group compliance programs. The compliance framework is established and maintained by the Audit, Risk and Compliance Committee which receives regular reports from the Compliance Manager and Risk Manager on the status of compliance across the HCF Group. Key components of the framework established to support these principles include: environment board and management oversight and accountability, culture and independence; identification identifying obligations, compliance plans and implementing change; controls policies, processes, procedures, communications and training, documentation; and monitoring and reporting monitoring, incident and breach escalation, reporting, issue management and managing regulatory relationships. 7. Promoting Ethical and Responsible Behaviour a) HCF s Code of Conduct HCF s Code of Conduct sets out the principles that govern HCF s conduct and the behaviour that stakeholders can expect from HCF. The Code of Conduct applies without exception to all Directors, executives, management and employees, and is aligned to HCF s core values of teamwork, integrity, achievement, responsibility and accountability. HCF s Code of Conduct sets out the foundation principles and operates under the following key guidelines: act with honesty and integrity; respect the law and act accordingly; respect confidentiality and not misuse information; value and maintain professionalism; avoid conflicts of interest; and strive to be a good corporate citizen and achieve community respect. ASXCGC s Best Practice Recommendation 3.1, 3.3, 10.1 b) Internal policies and procedures Beyond HCF s Code of Conduct, HCF complies with a range of external industry codes, such as the AHIA Code of Conduct and Electronic Funds Transfer Code of Conduct. In addition, HCF has a number of key policies to manage its compliance and human resource requirements. There are a range of guidelines, communications and training processes and tools to support these policies. These tools include the content of the Compliance Portal of HCF s Intranet, which forms part of the staff induction process and the online compliance tests that staff undertake. Individual business units also have systems and procedures in place to support HCF policies. ASXCGC s Best Practice Recommendation 3.1, HCF ANNUAL REPORT 81

84 Corporate governance continued c) Concern reporting and whistleblowing Employees are actively encouraged to bring any problems to the attention of management, the human resources team or the compliance manager. This includes activities or behaviour that may not be in accord with the Code of Conduct of HCF or the industry, other HCF policies, or other regulatory requirements or laws. HCF provides a mechanism to raise issues, including: arising issues concerning fraud directly with HCF s Fraud Control team; making suggestions for more efficient processes via the online incident reporting facility; and raising concerns about people issues such as harassment or discrimination directly with Human Resources management. Concerns about breaches of our regulatory obligations or internal policies or procedures can be raised anonymously with the Group Compliance Manager and Group Risk Manager through HCF s intranet whistleblowing reporting facility. HCF has a Whistleblower Protection Policy to protect individuals who make reports about suspected breaches of HCF s policies through these channels. The concern reporting system complies with the whistleblower provisions of all relevant legislative requirements and the Australian Standard AS 8004 Whistleblower Protection Programs for Entities. ASXCGC s Best Practice Recommendation 3.1, 3.3, Corporate Responsibility and Sustainability a) Approach to corporate responsibility and sustainability HCF aims to produce positive outcomes for all stakeholders in managing its business and to maximise financial as well as social and environmental value from our activities. In practice this means having a commitment to transparency, fair dealing, responsible treatment of employees and customers, and positive links into the community. Sustainable and responsible business practices within HCF are integrated into and viewed as an important long term driver of capacity, performance and reputation. Through such practices HCF seeks to reduce operational and reputation risk, and enhance operational efficiency, while contributing to a more sustainable society. HCF accepts that the responsibilities on the Board and management, which flow from this approach, go beyond strict legal and financial obligations. In particular, HCF s Board seeks to take a practical and broad view of Directors fiduciary duties, in line with community expectations. HCF s corporate responsibility and sustainability approach goes beyond ASXCGC s Best Practice Recommendations 3.1 and ASXCGC s Best Practice Recommendation 3.1, 3.3, 10.1 b) Reporting on our corporate responsibility and sustainability performance HCF has been reporting on its social, ethical and environmental performance through its Annual Report. HCF also seeks to ensure that transparent and comprehensive reporting on all dimensions of its performance is central to HCF s approach to governance and responsibility management. First and foremost the reports seek to address the issues that matter most to contributors, employees, other stakeholders and the community. ASXCGC s Best Practice Recommendation 3.1, HCF Life Policy The economic entity includes a wholly owned life insurance subsidiary, HCF Life Insurance Company Pty Limited (HCF Life). HCF Life has a Board of seven persons, five independent Directors, the Managing Director of the subsidiary and the Chief Executive Officer of the Parent Company. With the exception of the Chairman of the Parent Company Board, none of HCF Life s independent Directors serve as Directors of the Parent Company. HCF Life s independent Directors have specialised general management, financial, investment management skills and experience appropriate to life insurance and to meet the onerous regulatory obligations imposed on directors of companies in the industry. The Life Board has an Audit Committee and a Risk & Compliance Committee composed solely of the independent Directors. Independent Directors other than the Life Board Chairman chair these Committees. A management committee, the Investments Committee, is composed of the Managing Director and the CFO (Life). The two non-executive directors Messrs J.B. Gibson and R.G. Utz are attendees of the Investments Committee meetings. The Charters of HCF Life s Board, Audit and Risk & Compliance Committees are published on HCF s website The performance of Committees is surveyed using best practice questionnaires. Results, including the identification of strengths, weaknesses and recommended improvements, are discussed and reviewed initially within each Committee and then reviewed by the Board. 82 THE HOSPITALS CONTRIBUTION FUND OF AUSTRALIA LIMITED

85 Financial Statements The Hospitals Contribution Fund of Australia Limited For the year ended 30 June 2008 Income Statement 84 Balance Sheet 85 Statement of Recognised Income and Expense 86 Statement of Cash Flows 87 Notes to the Financial Statements Summary of Significant Accounting Policies Revenues and Expenses Income Tax Retained Earnings and Reserves Trade Receivables and Other Assets Financial Assets at Fair Value Through Profit or Loss Inventories Investments in Controlled Entities Investments in Associated entities (a). Property, Plant and Equipment (b). Reconciliations of Property, Plant and Equipment Intangible Assets Investments Relating to Life Insurance Business Trade and Other Payables (current) Unearned Premium Liabilities and Unexpired Risk Liabilities Provisions Tax Claims Liabilities Life Insurance Policyholders Liabilities Cash and Cash Equivalents Capital Expenditure Commitments Lease Expenditure Commitments Employee Entitlements and Superannuation Commitments Contingent Assets and Liabilities Remuneration of Key Management Personnel Related Party Disclosures Auditors Remuneration Other Statutory Information Subsequent Events Risk Management Segment Information Financial Instruments Solvency Requirements of Health Fund 119 Directors Declaration 120 Independent Audit Report 121 Further Information 123 Contact Details HCF ANNUAL REPORT 83

86 Income Statement The Hospitals Contribution Fund of Australia Limited For the year ended 30 June 2008 Consolidated Parent Notes $ 000 $ 000 $ 000 $ 000 Gross premium revenue 2(a) 1,098, ,144 1,081, ,131 Outwards reinsurance expense 2(a) (1,152) (867) Net premium revenue 2(a),30 1,096, ,277 1,081, ,131 Claims expense (925,831) (837,783) (923,025) (833,567) Reinsurance recoveries Health benefits reinsurance trust fund levies (21,492) (6,874) (21,492) (6,874) State levies (28,891) (26,311) (28,891) (26,311) Net claims incurred (975,460) (870,027) (973,408) (866,752) Underwriting result before expenses 121, , ,010 98,379 Increase in policyholders liabilities 2(b),18(a) (446) (799) Acquisition costs 2(b) (54,124) (41,112) (54,124) (41,112) Other underwriting expenses 2(b) (33,188) (40,600) (28,633) (36,029) Underwriting result 33,632 26,739 25,253 21,238 Finance revenue 12,035 57,793 22,934 51,167 Other revenue 1,273 1,193 9,198 7,577 2(a) 13,308 58,986 32,132 58,744 Other expenses 2(b) (4,999) (4,055) (5,362) (4,055) Donation to The HCF Medical and Health Research Foundation 2(b) (5,000) (9,000) (5,000) (9,000) Profit before income tax 36,941 72,670 47,023 66,927 Income tax benefit/(expense) 3(a) 375 (2,193) Net profit after income tax 4,30 37,316 70,477 47,023 66,927 The above statement should be read in conjunction with the accompanying notes. 84 THE HOSPITALS CONTRIBUTION FUND OF AUSTRALIA LIMITED

87 Balance Sheet The Hospitals Contribution Fund of Australia Limited as at 30 June 2008 Consolidated Parent Notes $ 000 $ 000 $ 000 $ 000 Current assets Cash and cash equivalents 19(b) 35,409 37,211 28,451 32,303 Trade receivables and other assets 5 46,281 42,746 44,778 41,054 Financial assets at fair value through profit or loss 6 655, , , ,542 Current tax assets Inventories Total current assets 738, , , ,575 Non-current assets Deferred tax assets 3(b) 1, Investments in controlled entities 8 10,010 10,377 Investments in associated entities Property, plant and equipment 10 96,897 78,241 96,854 78,205 Intangible assets 11 2,241 1,838 2,240 1,837 Investments relating to life insurance business 12 51,026 60,564 Trade receivables and other assets Total non-current assets 151, , ,612 90,555 Total assets 889, , , ,130 Current liabilities Trade and other payables 13 41,478 51,112 41,357 59,488 Unearned premium liabilities , , , ,817 Provisions 15 8,661 8,381 7,955 7,661 Current tax liabilities Claims liabilities ,050 88, ,692 86,161 Life insurance investment linked contract liabilities 18 1,249 1,243 Life insurance contract liabilities Total current liabilities 302, , , ,127 Non-current liabilities Provisions 15 4,238 4,237 4,178 4,173 Deferred tax liabilities 3(b) Life insurance investment linked contract liabilities 18 2,826 3,694 Life insurance contract liabilities 18 17,383 19,260 Total non-current liabilities 24,520 27,806 4,178 4,173 Total liabilities 327, , , ,300 Net assets 562, , , ,830 Guarantors equity Share Capital Reserves 68,222 54,370 68,222 54,370 Retained earnings 494, , , ,460 Total guarantors equity 562, , , ,830 The above statement should be read in conjunction with the accompanying notes HCF ANNUAL REPORT 85

88 Statement of Recognised Income and Expenses The Hospitals Contribution Fund of Australia Limited For the year ended 30 June 2008 Consolidated Parent Notes $ 000 $ 000 $ 000 $ 000 Fair value revaluation of land and buildings 4(b) 13,852 8,411 13,852 8,411 Net Income recognised directly in equity 13,852 8,411 13,852 8,411 Profit for the period 4(a) 37,316 70,477 47,023 66,927 Total recognised income and expenses for the period 51,168 78,888 60,875 75,338 Attributable to; Equity holders of the parent 51,168 78,888 60,875 75,338 Minority interest The above statement should be read in conjunction with the accompanying notes. 51,168 78,888 60,875 75, THE HOSPITALS CONTRIBUTION FUND OF AUSTRALIA LIMITED

89 Statement of Cash Flows The Hospitals Contribution Fund of Australia Limited For the year ended 30 June 2008 Consolidated Parent Notes $ 000 $ 000 $ 000 $ 000 Cash flows from operating activities Receipts from members and customers 1,112, ,832 1,092, ,588 Benefits and levies paid (954,332) (867,227) (945,571) (856,157) Reinsurance payments (16,206) (9,819) (16,206) (9,819) Payments to suppliers and employees (103,270) (84,278) (96,589) (78,374) Interest received 4,770 4,807 2,242 1,820 Life company expenses paid Income tax paid (1,703) (1,673) Property income 2,423 2,251 2,568 2,251 Receipts from other 1,138 1,031 9,078 7,414 Net cash flows from operating activities 19(a) 45,595 34,924 48,603 40,247 Cash flows (used by)/from investing activities Proceeds of sale on property plant and equipment Dividend received other 1,380 2,619 Dividend received controlled entities Proceeds from sale of investments 146, ,796 10,000 Purchases of investments (183,790) (198,782) (51,000) (30,000) Purchases of property, plant and equipment (11,642) (4,870) (11,600) (4,866) Net cash flows used for investing activities (47,397) (36,074) (52,455) (34,678) Net (decrease)/increase in cash and cash equivalents (1,802) (1,150) (3,852) 5,569 Cash and cash equivalents at start of period 37,211 38,361 32,303 26,734 Cash and cash equivalents at end of period 19(b) 35,409 37,211 28,451 32,303 The above statement should be read in conjunction with the accompanying notes HCF ANNUAL REPORT 87

90 Notes to the Financial Statements The Hospitals Contribution Fund of Australia Limited For the year ended 30 June Summary of Significant Accounting Policies BASIS OF PREPARATION The principal accounting policies adopted in the preparation of the financial report are set out below. These policies have been consistently applied to all years, unless otherwise stated. This general purpose financial report has been prepared in accordance with Australian Accounting Standards and the Corporations Act The financial report has been prepared on a historical cost basis except for properties, derivative financial instruments and investments at fair value through the profit and loss. Rounding The financial report is presented in Australian dollars and all values are rounded to the nearest thousand dollars ($ 000) unless otherwise stated under the option available to the Company under ASIC Class Order 98/100. The company is an entity to which the class order applies. STATEMENT OF COMPLIANCE The financial report complies with Australian Accounting Standards and International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board. The group has adopted AASB 7 Financial Instruments; Disclosures and all consequential amendments which became applicable on 1 January The adoption of this standard has only affected the disclosure in these financial statements. There has been no affect on profit and loss or the financial position of the entity. The following standards, interpretations and amendments were available for early adoption but have not been applied by the Group in these financial statements. AASB 8: Operating Segments. This is applicable for annual reporting periods beginning on or after 1 April The standard requires the Group to adopt the management approach to disclosing information about reportable segments. AASB 101: Presentation of Financial Statements and AASB amendments to Australian Accounting Standards arising from AASB 101. This is applicable for annual reporting periods beginning on or after 1 January This standard requires the presentation of a statement of comprehensive income which replaces the Income Statement and makes changes to the Statement of Changes in Equity. Any changes made with respect to a prior period adjustment or reclassification in the financial statement will require a third Balance Sheet as at the beginning of the comparative periods to be disclosed. The Group will need to reformat its Income Statement and Statements of Recognised Income and Expenses for its 30 June 2009 financial statements. AASB 3: Business Combinations and AASB 127: Consolidated and Separate Financial Statements and AASB amendments to Australian Accounting Standards arising from AASB 3 and AASB 127 (effective from 1 July 2009). The revisions to the standards apply prospectively to business combinations and will be effective for the 30 June 2010 financial year end. The main changes under the standard are that: acquisition related costs are recognised as an expense in the income statement in the period they are incurred. earn outs and contingent considerations will be measured at fair value at the acquisition date, however remeasurement in the future will be recognised in the income statement. step acquisitions, impacting equity interests held prior to control being obtained, are remeasured at fair value, with gains and losses being recognised in the income statement. Similarly where control is lost, any difference between the fair value of the residual holding and its carrying value is recognised in the income statement: and while control is retained, transactions with minority interests would be treated as equity transactions. PRINCIPLES OF CONSOLIDATION The consolidated financial reports are those of the economic entity, comprising The Hospitals Contribution Fund of Australia Limited, the parent entity, and all entities which it controlled from time to time during the year and at year end. All inter-company balances and transactions, including unrealised profits resulting from intra-economic entity transactions, have been eliminated in full. The financial reports of controlled entities are prepared for the same reporting period as the parent entity, using consistent accounting policies. Adjustments are made to bring into line any dissimilar accounting policies that may exist, except where these may be required by accounting standards. SIGNIFICANT ACCOUNTING POLICIES OF HEALTH INSURANCE BUSINESS AND GROUP Product classification Insurance contracts: Insurance contracts are defined as those containing significant insurance risk at the inception of the contract, or those where at the inception of the contract there is a scenario with commercial substance where the level of insurance risk may be significant over time. The significance of insurance risk is dependant on both the probability of an insurance event and the magnitude of its potential effect. Once a contract has been classified as an insurance contract, it remains an insurance contract for the remainder of its lifetime, even if the risk reduces significantly during the period. The company has determined that all current contracts issued to members are insurance contracts. 88 THE HOSPITALS CONTRIBUTION FUND OF AUSTRALIA LIMITED

91 Insurance contract liabilities Health insurance outstanding claims liabilities Health insurance outstanding claims liabilities are measured as the central estimate of the present value of expected future payments against claims incurred but not settled at the Balance Sheet date, whether reported or not, together with related claims handling costs and an additional risk margin to allow for the inherent uncertainty in the central estimate. Claims handling costs include internal and external costs incurred in connection with the negotiation and settlement of claims. Internal costs include all direct expenses of the claims department and any part of the general administrative costs directly attributable to the claims function. Due to the short tail nature of the Company s products expected future payments are not discounted to present value. Provision for unearned premium and unexpired risks The proportion of written premiums, gross of commission payable to intermediaries, attributable to subsequent periods is reported as unearned premium. The change in the provision for unearned premium is taken to the income statement in the order that revenue is recognised over the period of the risk. Further provisions are made to cover claims under unexpired insurance contracts which may exceed the unearned premiums and the premiums due in respect of these contracts. The adequacy of the unearned premium liability in respect of each class of business is assessed by considering current estimates of all expected future cash flows relating to future claims covered by current insurance contracts. This assessment is referred to as the liability adequacy test and is performed separately for each group of contracts subject to broadly similar risks and managed together as a single portfolio. If the present value of the expected future cash flows relating to future claims plus the additional risk margin to reflect the inherent uncertainty in the central estimate exceeds the unearned premium liability less related intangible assets and related deferred acquisition costs then the unearned premium liability is deemed to be deficient. The entire deficiency is recognised immediately in the Income Statement both gross and net of reinsurance. The deficiency is recognised first by writing down related intangible assets and then related deferred acquisition costs, with any excess being recorded in the Balance Sheet as an unexpired risk liability. Premiums in arrears The company recognises premiums in arrears up to two months after the last financial date paid to. Premiums in arrears are adjusted to take into account the probability of receiving the revenue. The probability factor is the company s best estimate of the probability of receiving the funds based upon past experience. Revenue recognition Revenue is recognised to the extent that it is probable that the economic benefits will flow to the entity and the revenue can be reliably measured. Premium revenue Premium revenue comprises contributions received from members, inclusive of the 30%, 35% or 40% Government rebate. Premium revenue is recognised in the Income Statement from the attachment date, as soon as there is a basis on which it can be reliably measured. Revenue is recognised from the attachment date in accordance with the pattern of the incidence of risk expected over the term of the insurance cover. Premium revenue relating to future financial periods is classified as unearned premium liability and is measured in accordance with the pattern of the incidence of risk expected over the term of the insurance cover. The proportion of premium received or receivable not earned in the Income Statement at the reporting date is recognised in the Balance Sheet as an unearned premium liability. Risk Equalisation Scheme All Health Insurers participate in the Risk Equalisation Scheme under the Private Health Insurance Act Under this scheme eligible benefits are pooled based upon variable per cent allocation to age cohorts, each fund is charged a levy so as to bear a portion of this pool. The amounts payable to and receivable from the Risk Equalisation Scheme are determined by the Private Health Insurance Administration Council after the end of each quarter. Estimated provisions for amounts payable and income receivable are recognised on an accruals basis. Finance revenue Interest Interest revenue is recognised when control of a right to receive consideration for the provision of, or investment in, assets has been attained. Interest is credited to income on an accruals basis. Interest income on fixed interest securities is recognised on an effective yield basis. Dividends Dividend income is accrued when declared. Income tax The Hospitals Contribution Fund of Australia Limited is exempt from income tax under the provisions of section of the Australian Income Tax Assessment Act For the other entities in the group income tax expense or revenue for the period is the tax payable on the current period s taxable income based on the income tax rate adjusted by changes in deferred tax asset and liabilities attributable to temporary differences between the tax bases of assets and liabilities and their carrying amounts in the financial statements, and unused tax losses. Deferred tax assets and liabilities are recognised for temporary differences at the tax rates expected to apply when the assets are recovered or liabilities are settled, based on those tax rates which are enacted or substantively enacted. The relevant tax rates are applied to the cumulative amounts of deductible and assessable temporary differences to measure the deferred tax asset or liability. The carrying amount of deferred income tax assets is reviewed at each Balance Sheet date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised HCF ANNUAL REPORT 89

92 Notes to the Financial Statements continued Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to utilise those temporary differences and losses. Current and deferred tax balances attributable to amounts recognised directly in equity are also recognised directly in equity and not in profit or loss. Deferred tax assets and deferred tax liabilities are offset only if a legally enforceable right exists to set off current tax assets against current tax liabilities and the deferred tax assets and liabilities relate to the same taxable entity and the same taxation authority. Goods and Services Tax (GST) Revenues, expenses and assets are recognised net of the amount of GST except : where the GST incurred on a purchase of goods and services is not recoverable from the taxation authority, in which case the GST is recognised as part of acquisition of the asset or as part of the expense item as applicable; and receivables and payables are stated with the amount of GST included. The net amount of GST recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the Balance Sheet. Cash flows are included in the Statement of Cash Flows on a gross basis and the GST component of cash flows arising from investing and financing activities, which is recoverable from, or payable to, the taxation authority are classified as operating cash flows. Commitments and contingencies are disclosed net of the amount of GST recoverable from, or payable to, the taxation authority. Cash and cash equivalents Cash and cash equivalents in the Balance Sheet comprise cash at bank and on hand and short-term deposits with an original maturity of three months or less. For the purposes of the Statement of Cash Flows, cash and cash equivalents consists of cash and cash equivalents as defined above, net of outstanding bank overdrafts. Trade and other receivables Trade receivable, which generally have day terms, are recognised and carried at original invoice amount less an allowance for any uncollectable amounts. An allowance for doubtful debts is made when there is objective evidence that the Group will not be able to collect the debts. Bad debts are written off when identified. Receivables from related parties are recognised and carried at the nominal amount due. Interest is taken up as income on an accruals basis. Investments in controlled entities Investments in controlled entities are carried at cost. Investments in associates The Groups investment in associates is accounted for using the equity method of accounting in the consolidated financial statements. Associates are entities over which the group has significant influence and that are neither subsidiaries nor joint ventures. Under the equity method, investments in the associates are carried in the consolidated balance sheet at cost plus post acquisition changes in the Group s share of net assets of the associates. Goodwill relating to an associate is included in the carrying amount and is not amortised. The Group s share of its associates post acquisition profits or losses is recognised in the Income Statement, and its share of post acquisition movements in reserves is recognised in reserves. The cumulative post acquisition movements are adjusted against the carrying amount of the investment. Dividends receivable from associates are recognised in the parent entity s Income Statement, while in the consolidated Financial Statement they reduce the carrying amount of the investment. When the Group s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate. The reporting date of the associate and the Group are identical and the associate s accounting policies conform to those used by the Group for like transactions and events in similar circumstances. Derivatives HCF via its investments in unit trusts can have exposure to derivatives if authorised by the constitution governing the trusts. Conditions of use are set out in the product disclosure statement and risk management statement. There are rigid guidelines regarding the use of derivatives which are set and monitored by HCF s investment advisor MLC Investments Limited. These guidelines cover, among other things, liquidity requirements, limits on investment managers gross exposure and counterparty risk. The Trusts can invest in derivatives to: reduce risk; reduce transaction costs; take advantage of opportunities to increase returns; and create leverage or to short exposures. Whilst the use of derivatives is allowed, it is the policy that, unless indicated otherwise, derivatives will not be used to: increase the level of market risk beyond that required to meet the Trusts objective; create economic leverage. Economic leverage is where the Trusts exposure to the return on a market is greater than that which could be achieved by investing in that market without using derivatives or borrowed funds; and create an uncovered short exposure to an asset or market, i.e. a short exposure without an offsetting long exposure considered a reasonable hedge for that asset or market. 90 THE HOSPITALS CONTRIBUTION FUND OF AUSTRALIA LIMITED

93 Derivatives will not be used in a way that is contrary to regulatory requirements. Inventories Consumable stores are valued at cost. Goods for resale are valued at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs necessary to make the sale. Deferred acquisition costs Acquisition costs incurred in obtaining health insurance contracts are deferred and recognised as assets where they can be reliably recognised and measured and where it is probable that they will give rise to premium revenue that will be recognised in the income statement in subsequent reporting periods. Deferred acquisition costs are amortised systematically in accordance with the expected pattern of risk. This pattern of amortisation corresponds to the earning pattern of the premium revenue. Assets backing health insurance liabilities As part of its investment strategy the Company actively manages its investment portfolio to ensure that investments mature in accordance with the expected pattern of future cash flows arising from health insurance liabilities. With the exception of investments in controlled entities and property, plant and equipment, the Company has determined that all assets are held to back health insurance liabilities and accordingly have been measured at fair value. The accounting policies are described below. Investments and other financial assets The Consolidated Entity classifies its financial assets in the following categories: financial assets at fair value through profit and loss and receivables. The classification depends on the definition and the purpose for which the investments were acquired. The classification of investments are determined at initial recognition and evaluated at each reporting date. (i) Financial assets at fair value through the income statement Financial assets classified in this category are assets held for the purposes of trading. Assets in this category are classified as debt or equity securities. They are carried at fair value and unrealised gains and losses are recognised through the income statement. (ii) Loans and receivables Loans and receivables including loan notes and loans to key management personnel are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are carried at amortised cost using effective interest method. Gains and losses are recognised in the income statement when the loans and receivables are derecognised or impaired, as well as through the amortisation process. The fair value of investments that are actively traded in organised financial markets are determined by reference to quoted market bid prices at the close of business on the balance sheet date. Unlisted unit trusts are recorded at fund managers valuation. Derecognition of financial assets and financial liabilities Financial Assets A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognised when: the rights to receive cash flows from the assets have expired; the Group retains the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a pass through arrangement; or the Group has transferred its rights to receive cash flows from the asset and either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. When the Group has transferred its rights to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Group s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration received that the Group could be required to repay. When continuing involvement takes the form of a written and/or purchased option (including a cash-settled option or similar provision) on the transferred asset, the extent of the Group s continuing involvement is the amount of the transferred asset that the Group may repurchase, except that in the case of a written put option (including a cash-settled option or similar provision) on an asset measured at fair value, the extent of the Group s continuing involvement is limited to the lower of the fair value of the transferred asset and the option exercise price. Financial liabilities A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the term of an existing liability is substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognised in profit or loss. Impairment of financial assets The Group assesses at each balance date whether a financial asset or group of financial assets is impaired HCF ANNUAL REPORT 91

94 Notes to the Financial Statements continued Financial assets carried at cost If there is objective evidence that an impairment loss on loans and receivables carried at cost has been incurred, the amount of the loss is measured as the difference between the asset s carrying amount and the present value of the estimated future cash flows (excluding future credit losses that have not not been incurred) discounted at the financial asset s original effective interest rate (i.e. the effective interest rate computed at initial recognition). The carrying amount of the asset is reduced either directly or through use of an allowance account. The amount of the loss is recognised in profit or loss. The Group first assesses whether objective evidence of impairment exists individually for financial assets that are individually significant, and individually or collectively for financial assets that are not individually significant. If it is determined that no objective evidence of impairment exists for an individually assessed financial asset, whether significant or not, the asset is included in a group of financial assets with similar credit risk characteristics and that group of financial assets is collectively assessed for impairment. Assets that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed. Any subsequent reversal of an impairment loss is recognised in profit or loss, to the extent that the carrying value of the asset does not exceed its cost at the reversal date. If there is objective evidence that an impairment loss has been incurred on an unquoted equity instrument that is not carried at fair value (because its fair value cannot be reliably measured), or on a derivative asset that is linked to and must be settled by delivery of such an unquoted equity instrument, the amount of the loss is measured as the difference between the asset s carrying amount and the present value of estimated future cash flows, discounted at the current market rate of return for a similar financial asset. Property Property is measured on a fair value basis. At each reporting date, the value of these assets is reviewed by Directors based on an independent valuation, to ensure it does not differ materially from the asset s fair value at that date. Where necessary, the asset is revalued to reflect its fair value. Increments on revaluation of property are credited directly to the Asset Revaluation Reserve, and are not included in the determination of net profit/loss. A decrement is recognised as an expense when determining net profit/loss except that, to the extent that the decrement on revaluation of property reverses a previous revaluation increment previously credited to, and still included in the balance of, an Asset Revaluation Reserve in respect of that same class of assets, whereby it is debited directly to that revaluation reserve. Plant and equipment Plant and equipment is stated at cost less accumulated depreciation and any accumulated impairment losses. Such cost includes the cost of replacing parts that are eligible for capitalisation when the cost of replacing the parts is incurred. Similarly, when each major inspection is performed, its cost is recognised in the carrying amount of the plant and equipment as a replacement only if it is eligible for capitalisation. These assets are not revalued above their recoverable amount. Any gain or loss on the disposal of revalued assets is determined as the difference between the book value of the asset at the time of disposal and the proceeds from disposal, and is included in the results of the company or the economic entity in the year of disposal. Depreciation of property, plant and equipment Depreciation is provided on a straight line basis on all property, plant and equipment, other than freehold land, at rates calculated to allocate their cost cost or valuation less estimated residual value against revenue over their estimated useful lives less any impairments. Major depreciation periods are: freehold buildings 50 years; leasehold improvements 5 to 10 years; plant and equipment 5 to 15 years; computer equipment 3 years; and other items-based upon estimated useful life. Depreciation periods have not changed from Intangible assets The useful lives of intangible assets are assessed as finite. Intangible assets with finite lives are amortised over the useful life and assessed for impairment whenever there is an indication that the intangible assets may be impaired. The amortisation period and the amortisation method for an intangible asset with a finite useful life is reviewed at least at each financial year-end. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are accounted for by changing the amortisation period or method, as appropriate, which is a change in accounting estimate. The amortisation expense on intangible assets with finite lives is recognised in profit or loss in the expense category consistent with the function of the intangible asset. Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognised as a profit or loss when the asset is derecognised. Major amortisation period is: software 3 years. Impairment of non-financial assets Non-financial assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset s carrying amount exceeds its recoverable amount. 92 THE HOSPITALS CONTRIBUTION FUND OF AUSTRALIA LIMITED

95 Recoverable amount is the higher of an assets fair value less costs to sell and value in use. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash inflows that are largely independent of the cash inflows from other assets or groups of assets (cash generating units). Non-financial assets other than goodwill that suffered an impairment are tested for possible reversal of the impairment whenever events or changes in circumstances indicate that the impairment may have reversed. Trade and other payables Trade and other payables are carried at amortised cost and due to their short term nature they are not discounted. They represent liabilities for goods and services provided to the Group prior to the end of the financial year that are unpaid and arise when the Group becomes obliged to make future payments in respect of the purchase of these goods and services. The amounts are unsecured, non-interest bearing and are usually paid within 30 days of recognition. Provision for employee benefits Provision is made for employee benefits accumulated as a result of employees rendering services up to the reporting date. These benefits cover wages and salaries, annual leave and long service leave. Sick leave is non-vesting and is accounted for as incurred. The liability for wages and salaries, annual leave and any other employee entitlements expected to be settled within twelve months of the reporting date, is calculated at nominal amounts based on remuneration rates which are expected to be paid when the liability is settled. Provision for annual leave is estimated at anticipated salary rates for the following year. The liability for long service leave entitlements represents the present value of the estimated future cash outflows to be made. In determining future cash outflows, consideration has been given to future increases in wage and salary rates, and the probability that employees will remain in the economic entity s employ for the period of time necessary to qualify for long service leave. The calculation includes related on-costs. In calculating the present value, the estimates of future cash outflows are discounted using the rates attaching to government guaranteed securities which have terms to maturity approximating the terms of the related liability. Employee entitlement expenses and contributions made to superannuation funds by entities within the economic entity are recognised against profits when due. Provision for makegood on leased premises In accordance with lease agreements the company is obliged to restore leased premises to their original condition when vacating premises at the termination of a lease. The Company has recognised assets and liabilities in relation to its obligations. The makegood assets are amortised over the minimum term of the lease. The provision for makegood has been determined based on the area to be made good and the company s best estimate of the cost per square metre to makegood the premises. The Company reviews the adequacy of the provision for makegood annually. Leases Operating lease payments, where the lessors effectively retain substantially all the risks and benefits of ownership of the leased assets, are included in the determination of the operating profit in equal installments over the lease term. Operating leases have an average lease term of approximately five years. Rental properties represent the major portion of operating leases. The cost of improvements to leasehold property are capitalised, recorded as leasehold improvements and amortised over the unexpired portion of the lease or estimated useful life of the improvements, whichever is shorter. SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS HEALTH INSURANCE Significant accounting judgements In the process of applying the Group s accounting policies, management was not required to make any judgements, apart from those involving estimations, which had a significant effect on the amounts recognised in the financial statements. Significant accounting estimates and assumptions Outstanding claims provision The risk margin has been based on an analysis of the past experience of the company. This analysis examined the volatility of past payments that has not been explained by the model adopted to determine the central estimate. This past unexplained volatility has been assumed to be indicative of the future volatility. The outstanding claims estimate is derived using all data combined in an aggregate model. As such diversification benefits have been implicitly allowed for in this process. The Outstanding Claims provision has been estimated using a modified chain ladder method, based on historical experience and future expectations as to claims. The calculation was determined taking into account two months of actual post balance date claims. Based on historic experience, approximately 80% of outstanding claims are received within two months of balance date, and accordingly only 20% of the outstanding claims provision requires an estimate. Accordingly, reasonable changes in assumptions would not have a material impact on the outstanding claims balance. SIGNIFICANT ACCOUNTING POLICIES OF LIFE BUSINESS Principles underlying the conduct of life insurance business Activities of the life insurance operations The life insurance operations of the company are conducted within separate statutory funds as required by the Life Insurance Act 1955 and are reported in aggregate with the shareholders fund in the Income Statement, Balance Sheet, and Statement of Cash Flows of the Company HCF ANNUAL REPORT 93

96 Notes to the Financial Statements continued The accounting treatment of certain transactions in this financial report varies depending on the nature of the contract underlying the transactions. The major contract classifications relevant to the business of HCF Life are investment contracts and life insurance contracts. For the purposes of this financial report, holders of investment contracts or life insurance contracts are collectively and individually referred to as policyholders. Investment contracts The investment business of HCF Life relates to products such as savings and investment-linked policies. The nature of this business is that HCF Life receives deposits from policyholders and those funds are invested on behalf of the policyholders. The liability to the policyholders of the investment contracts is linked to the performance and value of the assets that back those liabilities. When such contracts are issued by a registered life insurance entity, and administered through Life statutory funds in accordance with the requirements of the Life Insurance Act 1995, the underlying contracts are defined as investment contracts. Life insurance contracts HCF Life also issues contracts that transfer significant insurance risk from the policyholder covering death, disability, or sickness of the insured. When any such contracts are issued by a registered life insurance entity, and administered through separate Life statutory funds in accordance with the requirements of the Life Insurance Act 1995, the underlying contracts are defined as life insurance contracts. Assets backing investment contract and life insurance contract liabilities Assets backing investment contract and life insurance contract liabilities are measured on a basis that is consistent with the measurement of the liabilities, to the extent permitted under accounting standards. As life insurance and investment contract liabilities are measured on the basis of fair value, assets backing such liabilities are measured at fair value wherever this option is available in the relevant accounting standards. Realised and unrealised gains and losses arising from changes in the fair value are recognised in the Income Statement. All assets that back investment contract and life insurance contract liabilities are included within the Life statutory funds and, as such, are separately identifiable. Premiums and claims Premium revenue Life insurance contracts Premium amounts earned by providing services and bearing insurance risks are recognised as revenue. Other premium amounts received, which are akin to deposits, are recognised as an increase in policy liabilities. Premiums due after but received before the end of the financial year are shown as unearned premium liabilities in the Balance Sheet. Investment contracts The nature of the wealth management business is that HCF Life receives deposits from policyholders and these funds are invested on behalf of the policyholders. There is no premium revenue recognised in respect of the life investment contracts. Claims expense Life insurance contracts Claims are recognised when the liability to the policyholder under the policy has been established or upon notification of the insured event, depending event, depending on the type of claim. Claims are separated into their expense and liability components. Claims incurred that relate to the provision of services and bearing of risks are treated as expenses and these are recognised on an accruals basis once the liability to the policyowner has been established under the terms of the contract. Investment contracts There are no claims expenses in respect of investment contracts. Claims incurred in respect of investment contracts represent investment withdrawals and are recognised as a reduction in policy liabilities. Policy acquisition costs Policy acquisition costs incurred in relation to life insurance contracts are recorded in the Income Statement and include the fixed and variable costs of acquiring new business. The Appointed Actuary assesses the value and future recovery of these costs in determining the policy liabilities. These costs are deferred to the extent they are deemed recoverable in the premiums or policy charges (as appropriate for each policy class). Acquisition costs deferred are limited to the lesser of the actual costs incurred and the allowance for the recovery of such costs in the premium or policy charges. This has the effect that acquisition costs deferred are amortised over the period that they will be recovered from the premiums or policy charges, the Financial Performance impact of which is reflected in increase in policy liabilities in the Income Statement. For life investment contracts all origination costs are expensed as incurred as HCF Life does not incur incremental costs like advisor fees and commission payments in selling or generating new business. Basis of Life expense apportionment Apportionment of expenses has been made as follows : all expenses have been apportioned between policy acquisition, policy maintenance and investment management with regard to the objective when incurring each expense, and the outcome achieved. Where doubt exists as to the correct allocation of expenses between the disclosure categories, they have been allocated as maintenance expense; expenses which are directly attributable to an individual policy or product are allocated directly to the statutory fund within which that class of business is conducted; and all indirect expenses charged to the Income Statement are equitably apportioned to each class of business. 94 THE HOSPITALS CONTRIBUTION FUND OF AUSTRALIA LIMITED

97 The apportionment basis has been made in line with principles set out in the Life Insurance Actuarial Standards Board (LIASB) Valuation Standard (Actuarial Standard AS1.04) and in accordance with Division 2 of Part 6 of the Life Insurance Act Only where expenses derived from outside the normal business activities of the company and are non-recurrent in nature have they been apportioned as one-off expenses. Assets All financial assets within the life statutory funds have been determined to back either life insurance or life investment contracts. All investments with the statutory and shareholder funds are managed and their performance evaluated on a fair value basis in accordance with the investment strategy. After initial recognition, all investments within the statutory and shareholder funds are classified as fair value through profit or loss. The fair value of investments that are actively traded in organised financial markets is determined by reference to quoted market bid prices at the close of business on the balance sheet date. Operating assets comprise fixed assets utilised within the business that are carried at cost and depreciated. Carrying values of such assets have been assessed as equating to market values. Depreciation is provided on a straight line basis at rates calculated to write off cost less estimated residual value over the useful life of the asset. These rates are consistent with those adopted by the parent company. Liabilities Policyholders liabilities Policyholders liabilities in relation to life insurance contracts are measured at net present values of estimated future cash flows or, where the result would not be materially different, as the accumulated benefits available to policyholders. This is calculated on an actuarial basis. Policyholders liabilities in relation to life investment contracts are measured at fair value. Investment revenue Dividends are taken to income on an entitlement basis from the date when the shares cease to be quoted cum div on the stock exchange. Dividends on unlisted shares are taken to income on a cash basis. All other investment income is taken to income on an accrual basis. Net realised and unrealised gains and losses are included in the Income Statement. Disaggregated information As the Shareholders Fund and each of the five Statutory Funds are immaterial on an individual basis to the group, the requirements of AASB 1038 to disclose disaggregated information has not been complied with for the purposes of this report. The financial statements of HCF Life Insurance Company Pty Limited have been prepared in accordance with AASB 1038, (and have been lodged with the relevant Australian regulators) and show all major components of the financial statements disaggregated between the five Statutory Funds, and the Shareholders Fund. SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS LIFE INSURANCE The effective date of the actuarial report on policyholder liabilities and solvency reserves is 30 June The actuarial report was prepared by Mr Paul Murphy, FIAA. The actuarial report indicates that Mr Murphy is satisfied as to the accuracy of the data upon which policyholders liabilities have been determined. The amount of policyholders liabilities has been determined in accordance with methods and assumptions disclosed in this financial report and the requirements of the Life Insurance Act 1995, which includes applicable standards of the Life Insurance Actuarial Standards Board ( LIASB ). Disclosure of assumptions Policyholders liabilities have been calculated in accordance with Actuarial Standard AS 1.04 issued by the LIASB. The Actuarial Standard requires the policyholders liabilities to be calculated in a way that allows for the systematic release of planned margins as services are provided to policyholders and premiums are received. The profit carriers used for the major product groups in order to achieve the systematic release of planned margins are as follows: Actuarial methods Group or individual Product carrier classification Method Profit Individual Investment account Accumulation N/A Investment linked Accumulation N/A Lump sum risk Projection Premiums Disability income Projection Claims cost Other risk Projection Premiums Group Lump sum risk Accumulation N/A Other risk Accumulation N/A Actuarial assumptions The Appointed Actuary in accordance with AS1.04 issued by the LIASB sets the assumptions used in determining the Margin on Services policy liabilities. The assumptions incorporate the expected future operating experience of the company and are based on a detailed analysis of actual past experience of the company and on industry statistics. Discount rates The pre-tax discount rate used for the projection method is the risk free rate of return for the average term of the liabilities. The pre-tax rates were 7.75% (2007: 7.00%). An allowance for tax has been made in determining the after tax earning rates. The allowance is consistent with the current tax legislation applying to HCF Life Insurance Company Pty Limited HCF ANNUAL REPORT 95

98 Notes to the Financial Statements continued Investment crediting rates and unit price increases Policies are assumed to be credited with the after tax earnings rates less the charges specified in the policy documents. Maintenance expenses The assumed maintenance expenses are those expected in the coming year. Inflation A rate of 4.0% (2007: 3.7%) has been assumed being consistent with future expectations. Voluntary discontinuances Rates which vary by product type and policy duration have been based on the experience of the company over the recent past. Surrender value The full account value is paid on surrender of investment account and investment linked policies. The minimum amount required under AS4.02 published by the LIASB is paid on surrender of conventional policies. No surrender value is paid on risk policies because they are renewable annually. Mortality Rates are based on 80% of IA90 92 (a table published by the Institute of Actuaries of Australia). Appropriate adjustments to the base table have been made for smoker status and duration. Total and permanent disablement rates are based on industry experience. Rates of accident, health claim and waiver are based on the company s experience. Disability Income assumptions are based on 60% of IAD89 93 (a table published by the Institute of Actuaries of Australia). Asset mix The assumptions regarding asset mix are based on the actual mix of assets as at year end. Unit prices and crediting rate An accumulation approach has been used to determine policy liabilities for investment-linked business and no assumptions are needed about crediting rates of growth of unit prices. No changes from last year. Solvency requirements The solvency requirement in each statutory fund is calculated in accordance with the solvency standard AS2.04 issued by the Life Insurance Actuarial Standards Board. The management capital requirement has been determined in accordance with standard AS6.03. Impact of changes in assumptions The impact of changes in assumptions on the group are not of a material nature and the details of the HCF Life assumptions can be found in their account details. Morbidity Trauma rates assumed are based on a published paper by Gratton and Fabrizio. These rates were multiplied by the previous best estimate mortality rates and divided by the mortality rates published by Gratton and Fabrizio. 96 THE HOSPITALS CONTRIBUTION FUND OF AUSTRALIA LIMITED

99 2. Revenues and Expenses (a) REVENUE Consolidated Parent Notes $ 000 $ 000 $ 000 $ 000 Health insurance revenue: Premiums earned 30 1,081, ,131 1,081, ,131 Finance and other revenue Interest revenue 3,086 1,820 3,086 1,820 Movements from financial assets at fair value through profit or loss 8,316 46,946 8,316 46,946 Dividends: Controlled entity HCF Life Insurance Company Pty Limited Controlled entity HCF No2 Pty Limited 9,017 Rental revenue 2,345 2,376 2,490 2,376 Other revenue 1,138 1,030 9,078 7,414 Proceeds on sale of property, plant and equipment Total finance and other revenue 15,005 52,335 32,132 58,744 Sub-total health insurance revenue 1,096,423 1,017,466 1,113,550 1,023,875 Life insurance revenue: Premiums revenue 16,584 15,013 Less: Outward reinsurance 1, ,432 14,146 Finance and other revenue Dividends 1,306 2,255 Interest 2,790 3,004 Other revenue Movements from financial assets at fair value through profit or loss (5,808) 1,182 (1,697) 6,651 Sub-total life insurance revenue 13,735 20,797 Total revenue 30 1,110,158 1,038,263 1,113,550 1,023,875 Income summary Health insurance contributions revenue 1,081, ,131 1,081, ,131 Life insurance premiums revenue 15,432 14,146 Total premium revenue 30 1,096, ,277 1,081, ,131 Health insurance investment and other revenue 15,005 52,335 32,132 58,744 Life insurance investment and other revenue (1,697) 6,651 Total finance and other revenue 13,308 58,986 32,132 58,744 Total revenue 30 1,110,158 1,038,263 1,113,550 1,023, HCF ANNUAL REPORT 97

100 Notes to the Financial Statements continued 2. Revenues and Expenses (continued) Consolidated Parent Notes $ 000 $ 000 $ 000 $ 000 (b) EXPENSES Health insurance expenses: Movement in deferred acquisition costs 1,053 1,053 Movement in claims liabilities 16,531 3,520 16,531 3,520 Movement in provision for employee entitlements 305 2, ,314 Movement in provision for directors retirement scheme (1,737) (1,737) Group expenses Amortisation and depreciation of buildings 10(b) 1,159 1,151 1,159 1,151 plant and equipment 10(b) 3,636 3,414 3,619 3,391 leasehold improvements 10(b) (b) 5,007 4,874 4,990 4,851 Intangible assets-software 11 1,252 1,561 1,252 1,560 Net loss on sale of property, plant and equipment Rental-operating leases 8,791 7,986 8,791 7,986 Life Company Life insurance expenses: Total claims expense 2,806 4,216 Less: Reinsurance recoveries revenue Net claims incurred 2,052 3,275 Policy acquisition expenses Commission-policy acquisition Other 1,586 1,497 Policy maintenance expenses Commission 7,343 5,842 Other 2,176 2,187 Investment management expenses Total life insurance operating expenses 12,625 10,956 Increase in policyholders liabilities Consolidated Parent Notes $ 000 $ 000 $ 000 $ 000 Life insurance expenses include the following items: Amortisation and depreciation of property, plant and equipment Loss on sale of non-current assets 2 Provision for employee entitlements Superannuation contributions Provision for outstanding claims (994) 1, THE HOSPITALS CONTRIBUTION FUND OF AUSTRALIA LIMITED

101 3. Income Tax Consolidated Parent Notes $ 000 $ 000 $ 000 $ 000 (a) INCOME TAX (BENEFIT)/EXPENSE As stated in Note 1, The Hospitals Contribution Fund of Australia Limited is exempt from income tax for health insurance business. HCF Life Insurance Company Pty Limited is subject to income tax and these amounts reflect that expense. Other controlled entities have no income tax expense. (375) 2,193 Currently the taxation of life insurance business is not based on the concept of profit but rather different rates of tax are applied to various classes of business. The current rates of taxation applicable to the taxable income of significant classes of business are as follows: % % Ordinary life insurance business Complying superannuation Other business Shareholder Taxation basis The principal elements for the calculation of the taxable income for each class of business are as follows: Assessable income: complying superannuation business specified rollover amounts and investment income; other business accident and disability premiums earned and investment income; shareholder funds and ordinary life insurance business investment income. The gains and losses on sale of investments to the extent referable to the complying superannuation business are determined under the capital gains tax provisions of the Income Tax Assessment Act (ITAA). The exceptions are gains on fixed interest securities and foreign exchange gains or losses referable to the superannuation business which are tax paid primarily under the ordinary income provisions. The gains and losses on the sale of investments to the extent referable to other taxable classes of business are taxed primarily under the ordinary income provisions, with the capital gains tax provisions potentially applying depending on circumstances. Allowable deductions The allowable deductions for each taxable class of business in Australia include: acquisition costs (such as commissions) in relation to investment related life insurance business, superannuation business and other business ; other expenses referable to the business (such as investment expenses); and an allocation of the general management expenses of the company these deductions are then allocated to each class of business in accordance with the basis specified in the ITAA (which may or may not reflect the allocation of the expense for accounting purposes) HCF ANNUAL REPORT 99

102 Notes to the Financial Statements continued 3. Income Tax (continued) Basis of income tax apportionment A notional income tax expense is calculated for each product as if the product were invested within a stand-alone Statutory Fund. The difference between this and the actual tax expense is apportioned to products having regard to their contribution to the difference. Consolidated Parent Notes $ 000 $ 000 $ 000 $ 000 The composition of the total income tax expense is as follows: Total current income tax expense 1,215 1,582 (Over)/Under provisions for the previous year (68) 141 Deferred attributable to future years: Deferred income tax Relating to origination and reversal of temporary differences (1,522) 470 Income tax expense/(benefit) reported in the Income Statement (375) 2,193 A reconciliation between tax expense and the product of account profit before income tax multiplied by the company s applicable income tax rate is as follows: Accounting (loss)/profit before income tax (1,404) 5,768 At the company s statutory income tax rate of 30% (2007:30%) (421) 1,730 Tax effect of differences between amounts of income and expenses recognised for account and the amounts deductible/assessable in calculating taxable income: Tax offsets and credits (245) (492) Permanent differences due to movement in investment contract liabilities Non deductible items Other items 23 (51) Over/(under) provided in previous years after excluding amounts attributable to policyholders (68) 141 Income tax expense/(benefit) reported in the Income Statement (375) 2,193 (b) DEFERRED INCOME TAX Deferred income tax at 30 June relates to the following: Deferred tax liabilities Revaluations of financial assets held at fair value 538 Temporary timing differences on assessable income Total deferred tax liabilities Deferred tax assets 1, THE HOSPITALS CONTRIBUTION FUND OF AUSTRALIA LIMITED

103 4. Retained Earnings and Reserves Consolidated Parent Notes $ 000 $ 000 $ 000 $ 000 (a) Movements in retained earnings were as follows: Balance 1 July 457, , , ,533 Net profit 37,316 70,477 47,023 66,927 Balance 30 June 494, , , ,460 (b) Asset revaluation reserve Balance 1 July 54,370 45,959 54,370 45,959 Revaluation of land and buildings 13,852 8,411 13,852 8,411 Balance 30 June 68,222 54,370 68,222 54,370 The asset revaluation reserve is used to record increments and decrements in the fair value of land and buildings to the extent that they offset one another. 5. Trade Receivables and Other Assets CURRENT Premiums in arrears 8,829 8,503 8,829 8,503 Other receivables 3,883 6,096 3,102 4,863 Receivables from the Health Insurance Commission 28,608 25,264 28,608 25,264 Interest receivable Deferred acquisition costs 1,053 1,053 Prepayments 3,186 2,424 3,186 2,424 Total current trade receivables and other assets 46,281 42,746 44,778 41,054 NON-CURRENT Receivables from associates Total non-current trade receivables and other assets Total trade receivables and other assets 46,788 42,881 45,285 41,189 The carrying amount disclosed above is a reasonable approximation of fair value 6. Financial Assets at Fair Value Through Profit or Loss Holdings in Unlisted Trusts at fair value: Cash, bank bills and floating rate notes 200, , , ,987 Government, semi-government and corporate securities 328, , , ,927 Shares 126, , , ,628 Total financial assets at fair value through profit or loss 655, , , , HCF ANNUAL REPORT 101

104 Notes to the Financial Statements continued Consolidated Parent Notes $ 000 $ 000 $ 000 $ Inventories Consumable stores and goods for resale Investments in Controlled Entities Shares in controlled entities (see below) 10,010 10,014 Acquisition costs for controlled entity 363 Total investments in controlled entities 10,010 10,377 Percentage held by the Consolidated Entity Parent Country of Investments in controlled entities: incorporation % % $ 000 $ 000 HCF Life Insurance Company Pty Limited ordinary and preference shares Australia ,000 10,000 HCF Nominees Pty Limited ordinary shares (20,000 50c shares ) Australia HCF Staff Superannuation Pty Limited 1 (two $1 shares) Australia HCF Pty Ltd (two $1 shares) Australia HCF Executive Superannuation Pty Limited 1 (two $1 shares) Australia HCF No2 Pty Limited (formerly IOR Australia Pty Ltd) ordinary shares (4000 $1 shares) 2 Australia These companies were placed in voluntary liquidation by the members on 26 November ,010 10,014 2 On the 25 September 2007 the remaining assets of HCF No2 Pty Limited were distributed to HCF Australia Pty Limited its parent entity and sole shareholder. A final meeting was called and the Company was subsequently deregistered on the 26 February Investments in Associated Entities Moneytime Health Pty Limited ordinary shares (1000 $1 shares) Australia Total investments in associated entities THE HOSPITALS CONTRIBUTION FUND OF AUSTRALIA LIMITED

105 10(a). Property, Plant and Equipment Consolidated Parent Notes $ 000 $ 000 $ 000 $ 000 Freehold land: At fair value 10(b) 25,345 19,220 25,345 19,220 Buildings on freehold land: At fair value 10(b) 55,299 47,202 55,299 47,202 Total freehold land and buildings 80,644 66,422 80,644 66,422 Freehold land and buildings were revalued by the Directors at 30 June 2008 at fair value using advice received from independent valuers as at that date as a basis. The independent valuations were carried out by Scott Fullarton (FAPI) of Scott Fullarton Valuations Pty Ltd. Revaluations are performed on the basis of sale and leaseback under their existing usage method or under vacant possession under their planned sale method, as appropriate. The change required to the overall carrying value on revaluation was credited directly to the asset revaluation reserve. Consolidated Parent Notes $ 000 $ 000 $ 000 $ 000 Leasehold improvements: At cost 3,274 3,728 3,274 3,728 Accumulated amortisation (2,924) (3,166) (2,924) (3,166) 10(b) Plant, equipment, furniture and fittings, motor vehicles At cost 42,476 39,762 42,338 39,634 Accumulated depreciation (26,573) (28,505) (26,478) (28,413) 10(b) 15,903 11,257 15,860 11,221 Total property, plant and equipment, furniture and fittings, motor vehicles At fair value 80,644 66,422 80,644 66,422 At cost 45,750 43,490 45,612 43, , , , ,784 Accumulated depreciation and amortisation (29,497) (31,671) (29,402) (31,579) Total property, plant and equipment 10(b) 96,897 78,241 96,854 78, HCF ANNUAL REPORT 103

106 Notes to the Financial Statements continued 10(b). Reconciliations of Property, Plant and Equipment Reconciliations of the carrying amounts of property, plant and equipment at the beginning and end of the current and previous year. Consolidated Parent Notes $ 000 $ 000 $ 000 $ 000 Freehold land: Carrying amounts at beginning 19,220 17,660 19,220 17,660 Net amount of revaluation increments less decrements 6,125 1,560 6,125 1,560 10(a) 25,345 19,220 25,345 19,220 Buildings on freehold land: Carrying amounts at beginning 47,202 40,235 47,202 40,235 Additions 1,529 1,267 1,529 1,267 Depreciation expense 2(b) (1,159) (1,151) (1,159) (1,151) Net amount of revaluation increments less decrements 7,727 6,851 7,727 6,851 10(a) 55,299 47,202 55,299 47,202 Leasehold improvements: Carrying amounts at beginning Depreciation expense 2(b) (212) (309) (212) (309) 10(a) Plant and equipment: Carrying amounts at beginning 11,257 13,070 11,221 13,003 Additions 8,457 1,850 8,416 1,845 (Disposals)/adjustments (175) (249) (158) (236) Depreciation expense 2(b) (3,636) (3,414) (3,619) (3,391) 10(a) 15,903 11,257 15,860 11,221 Total net carrying amount 10(a) 96,897 78,241 96,854 78,205 Total property, plant and equipment Carrying amounts at beginning 78,241 71,836 78,205 71,769 Additions 30 9,986 3,117 9,945 3,112 (Disposals)/adjustments (175) (249) (158) (236) Depreciation expense 2(b) (5,007) (4,874) (4,990) (4,851) Net amount of revaluation increments less decrements 13,852 8,411 13,852 8,411 Total net carrying amount 96,897 78,241 96,854 78, THE HOSPITALS CONTRIBUTION FUND OF AUSTRALIA LIMITED

107 11. Intangible Assets Consolidated Parent Notes $ 000 $ 000 $ 000 $ 000 Software At cost 10,401 8,745 10,392 8,737 Accumulated amortisation (8,160) (6,907) (8,152) (6,900) Total intangible assets 2,241 1,838 2,240 1,837 Software Carrying amounts at beginning of period 1,838 1,645 1,837 1,643 Additions 1,655 1,754 1,655 1,754 Depreciation expense 2(b) (1,252) (1,561) (1,252) (1,560) Total net carrying amount 2,241 1,838 2,240 1, Investments Relating to Life Insurance Business Marketable securities at fair value Equity security investments 18,268 22,634 Debt security investments Bank accepted bills of exchange 31,721 36,259 Floating rate notes 681 1,100 Mortgage backed securities ,758 37,930 Total investments relating to life insurance business 51,026 60, Trade and Other Payables (current) Trade creditors and benefits payable 31,879 47,679 31,324 46,700 Other creditors and accruals 9,599 3,433 9,599 3,433 Payable to controlled entities 434 9,355 Total current trade and other payables 41,478 51,112 41,357 59, Unearned Premium Liabilities and Unexpired Risk Liabilities (a) Unearned premium liabilities Unearned premium liability as at 1 July 137, , , ,524 Deferral of premiums on contracts written in the period 146, , , ,817 Earning of premiums written in previous periods (137,242) (130,809) (135,817) (129,524) Unearned premium liability as at 30 June 146, , , ,817 (b) Unexpired risk liabilities A review of the adequacy of the unearned premium liabilities was carried out at balance date in accordance with the accounting policy in Note 1. This review being referred to as the liability adequacy test. At balance date there was no need to recognise an unexpired risk liability (2007:nil) HCF ANNUAL REPORT 105

108 Notes to the Financial Statements continued 15. Provisions Consolidated Parent Notes $ 000 $ 000 $ 000 $ 000 Current provisions Employee entitlements 22(a) 8,183 7,897 7,477 7,177 Provision for makegood on leased premises Total current provisions 8,661 8,381 7,955 7,661 Non-current provisions Employee entitlements 22(a) 2,635 2,634 2,575 2,570 Provision for makegood on leased premises 1,603 1,603 1,603 1,603 Total non current provisions 4,238 4,237 4,178 4,173 Total provisions 12,899 12,618 12,133 11,834 Employee entitlements Opening balance 7,897 9,059 7,177 8,266 Payments (4,466) (5,802) (4,245) (5,594) Provision increase 4,752 4,640 4,545 4,505 Total net carrying amount current 8,183 7,897 7,477 7,177 Provision for makegood on leased premises Opening balance 2,087 2,094 2,087 2,094 Write off (6) (7) (6) (7) Total net carrying amount 2,081 2,087 2,081 2,087 Employee entitlements Opening balance 2,634 2,553 2,570 2,507 Provision increase Total net carrying amount non current 2,635 2,634 2,575 2, Tax Current tax (asset)/liability (91) THE HOSPITALS CONTRIBUTION FUND OF AUSTRALIA LIMITED

109 Consolidated Parent Notes $ 000 $ 000 $ 000 $ Claims Liabilities Claims liabilities central estimate of expected present value of future payments for claims incurred 1 99,491 84,277 98,133 81,926 Risk margin 2 2,026 1,855 2,026 1,855 Claims handling costs 2,533 2,380 2,533 2,380 Total claims liabilities 104,050 88, ,692 86,161 Changes in the claims liabilities can be analysed as follows: At 1 July 88,512 83,652 86,161 82,640 Claims incurred during the year 975, , , ,752 Claims paid during the year (959,922) (865,167) (956,877) (863,231) At 30 June 104,050 88, ,692 86,161 Health Insurance Assumptions 1 The expected future payments are not discounted to present value due to the short tail nature of the products written by the company where claims are generally settled within 12 months. 2 The risk margin of 2.0% (2007:2.2%) of the underlying liability has been estimated to equate to a probability of adequacy of approximately 75% (2007: 75%) Life Insurance Assumptions 1 The amount disclosed is the Gross Claims provision as at 30 June 2008 and is not discounted to present value. There are no expected future payments of MOS liabilities. 18. Life Insurance Policyholders Liabilities Non Investment-Linked Investment Linked Business Contracts Total $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 (a) Policyholders liabilities Gross policyholders liabilities 18,890 21,062 4,075 4,937 22,965 25,999 Reinsured policyholders liabilities Gross policyholders liabilities ceded (1,093) (1,014) (1,093) (1,014) Net policyholders liabilities 17,797 20,048 4,075 4,937 21,872 24,985 Movements in net policyholders liabilities Opening balance 20,048 23,567 4,937 6,851 24,985 30,418 Add: Premiums recognised as change in policy liabilities 1,843 1, ,627 2,343 Less: Claims recognised as change in policy liabilities (4,849) (5,249) (1,337) (3,326) (6,186) (8,575) 17,042 19,792 4,384 4,394 21,426 24,186 Increase/(decrease) in policyholders liabilities as shown in the Income Statement (309) Closing balance 17,797 20,048 4,075 4,937 21,872 24, HCF ANNUAL REPORT 107

110 Notes to the Financial Statements continued Total $ 000 $ Life Insurance Policyholders Liabilities (continued) (b) Business valued using the projection method Best estimate liabilities Value of future policy benefits 29,628 28,395 Value of future expenses 29,592 28,001 Value of future policy premiums (70,896) (67,431) Total best estimate liabilities for life insurance contracts (11,676) (11,035) Value of future profits For non-investment-linked business Value of future shareholder profit margins 5,546 5,196 Total value of future profits for life insurance contracts 5,546 5,196 Value of policyholders liabilities other For non-investment-linked business Termination value 23,927 25,887 For investment-linked business Termination value 4,075 4,937 Total policyholders liabilities other 28,002 30,824 Net policyholders liabilities Current 1,663 2,031 Non-current 20,209 22,954 Net policy liabilities 21,872 24,985 (c) The consolidated financial report includes both the Statutory Funds and Shareholders Fund of HCF Life Insurance Company Pty Limited ( HCF Life ), which is incorporated within Australia. Under the Life Insurance Act 1995, the parent entity s access to the assets of HCF Life is restricted. Policyholders have a prior right to the assets of HCF Life to satisfy the obligations to policyholders and any surplus attributable to the parent entity is only available after approval from HCF Life s independent actuary. Guarantors Equity includes the following amounts which are not presently available for distribution: $ 000 $ 000 Retained earnings 20,210 20,977 Represented by: Investments, short term deposits and other assets 47,239 51,790 Less: Other liabilities 5,157 5,828 42,082 45,962 Less: Net policyholders liabilities 21,872 24,985 20,210 20, THE HOSPITALS CONTRIBUTION FUND OF AUSTRALIA LIMITED

111 Consolidated Parent Notes $ 000 $ 000 $ 000 $ Cash and Cash Equivalents (a) Reconciliation of net profit after tax to the net cash flows from operations Net profit after tax 37,316 70,477 47,023 66,927 Adjustments for: Depreciation and amortisation 6,258 6,445 6,241 6,409 Adjustment of financial transactions (1,380) (2,619) (25) (25) Loss on sale of non-current assets Changes in fair value of financial assets at fair value through profit or loss (9,220) (46,945) (9,220) (46,945) Change in fair value of Life Company financial assets 5,808 (835) Share of associates net loss Changes in Assets and Liabilities (Increase)/decrease in trade and other receivables (2,269) (2,950) (2,721) (2,607) (Increase)/decrease in deferred acquisition costs (1,053) (1,053) (Increase)/decrease in interest and dividend receivable (263) (133) (Increase)/decrease in inventories (Increase)/decrease in prepayments (762) (715) (762) (715) (Increase)/decrease in investments in subsidiaries 367 Increase/(decrease) in trade creditors and benefits payable (9,254) 9,097 (15,376) 12,751 Increase/(decrease) in payables to controlled entities (8,921) 524 Increase/(decrease) in other creditors and accruals (380) (1,100) 6,166 (4,928) Increase/(decrease) in claims recognised as a change in liabilities (5,716) (9,134) Increase/(decrease) in policyholders liabilities 2,603 3,701 Increase/(decrease) in makegood provisions (6) (1,610) (6) (1,610) Increase/(decrease) in claims liabilities 15,538 4,860 16,531 3,521 Increase/(decrease) in unearned premium liability 9,685 6,433 9,556 6,293 Increase/(decrease) in tax liability (2,098) 519 Increase/(decrease) in employee entitlements 287 (642) Net cash flow from operating activities 45,595 34,924 48,603 40,247 (b) Reconciliation of cash and cash equivalents Cash balance comprises: Cash on hand 13,629 12,946 13,041 12,497 Short term deposits 15,410 19,806 15,410 19,806 29,039 32,752 28,451 32,303 Life insurance cash on deposit 6,370 4,459 Total cash and cash equivalents 35,409 37,211 28,451 32,303 Cash at bank earns interest at floating rates based on the daily bank deposit rate. Short-term deposits are made for varying periods of between one day and three months, depending on the immediate cash requirements of the company, and earn interest at the respective short-term rates HCF ANNUAL REPORT 109

112 Notes to the Financial Statements continued 20. Capital Expenditure Commitments Estimated capital expenditure contracted but not provided for at balance date: Consolidated Parent Notes $ 000 $ 000 $ 000 $ 000 payable not later than one year after the end of the financial year Total capital expenditure commitments Lease Expenditure Commitments Aggregated lease expenditure contracted for at balance date, but not provided for: Operating leases: Not later than one year 5,799 7,832 5,799 7,832 Later than one year and not later than five years 11,323 13,021 11,323 13,021 Later than five years Gross operating lease commitments 17,482 20,853 17,482 20,853 Operating leases sub-let to third parties with minimum lease payments expected to be received: Not later than one year Later than one year and not later than five years 1,274 1,687 1,274 1,687 Later than five years Gross operating lease recoveries 1,945 2,498 1,945 2,498 Net operating lease commitments 15,537 18,355 15,537 18,355 Notes : (a) Rental payments for operating leases are determined on a lease by lease basis depending on lease terms and escalation clauses and estimated variable expenses. (b) Operating leases generally have a five year lease term. Commitments represent payments for property rentals. Some premises have been sub-let to third parties. Future minimum lease payments expected to be received at the reporting date are $1,945,000 (2007: $2,498,000). (c) The company has granted a number of lessors bank guarantees to support these obligations. 22. Employee Entitlements and Superannuation Commitments (a) Employee entitlements Consolidated Parent Notes $ 000 $ 000 $ 000 $ 000 Current Aggregate employee entitlements are comprised of accrued wages, salaries and oncosts and provisions: Annual leave 15(a) 5,579 5,446 4,873 4,946 Long service leave 15(a) 2,604 2,451 2,604 2,231 Total current employee entitlements 8,183 7,897 7,477 7,177 Non-current Long service leave 15(a) 2,635 2,634 2,575 2,570 Total non current employee entitlements 2,635 2,634 2,575 2,570 Total employee entitlements 10,818 10,531 10,052 9, THE HOSPITALS CONTRIBUTION FUND OF AUSTRALIA LIMITED

113 22. Employee Entitlements and Superannuation Commitments (continued) (b) Superannuation commitments Contributions by companies in the economic entity are made at a rate sufficient to meet the entity s superannuation guarantee obligations (9% of salary during the year) or at such higher rate as agreed between the employee and the Company. The entity makes contributions to complying superannuation funds as requested by employees, to meet the requirements of the superannuation guarantee legislation. The entity has no further obligations relating to superannuation commitments. 23. Contingent Assets and Liabilities There are no other contingent asset or liabilities for this financial year. 24. Remuneration of Key Management Personnel The key management personnel includes for the Hospitals Contribution Fund nine Non-executive Directors one CEO and eight General Managers for the HCF Life Insurance Company Pty Limited five Non-executive Directors one Managing Director Consolidated Parent $ $ $ $ (a) Short term employee benefits Cash Salary 4,627,385 4,042,525 3,846,696 3,320,037 Cash Bonus 61,688 1,130,114 61, ,048 Non monetary benefits 36,862 38,414 32,073 33,088 Post-employment Superannuation 450, , , ,427 (b) Retirement benefits 2,900,231 1,926,161 5,176,274 8,500,257 4,316,974 6,583,761 An interest free secured loan of $333,000 has been made to a key management person as a consequence of a long term incentive arrangement. On satisfactory completion of the terms of the arrangement the loan will not be repayable. HCF will satisfy any related taxation obligation. The cost of this overall arrangement has been progressively brought to account in accordance with the vesting period, on the basis that the terms of the arrangement will be satisfied. Key management personnel received no other remuneration benefits. 25. Related Party Disclosures (a) Details of Directors retirement benefits and remuneration are set out in Note 24. (b) (c) During the past year HCF supplied office space and supporting services and other administrative functions to HCF Life on a cost recovery basis. During the financial year the parent entity received commissions under normal terms and conditions totalling $7,940,331 (2007: $6,383,442) from HCF Life for sales of life insurance policies. During the year, a controlled entity paid brokerage fees under normal commercial terms and conditions to Ord Minnett Limited. Mr R. G. Utz, a director of HCF Life Insurance Company Pty Limited, was appointed as a director of Ord Minnett Holdings Limited on 21 April HCF ANNUAL REPORT 111

114 Notes to the Financial Statements continued 26. Auditors Remuneration Amounts received or due and receivable by the parent company auditors for: Consolidated Parent $ $ $ $ an audit of the financial reports of the entity and any other entity in the consolidated entity 365, , , ,000 an audit of other regulatory requirements of the entity and any other entity in the consolidated entity 90,000 86,500 90,000 86,500 other services in relation to the entity and any other entity in the consolidated entity tax services 8,750 8,750 other assurance and advisory services 44,206 55,860 36,990 48,985 Total auditors remuneration 499, , , ,235 The auditors do not receive any other benefits. 27. Other Statutory Information The Hospitals Contribution Fund of Australia Limited (HCF or Fund) is a company limited by guarantee and is incorporated in Australia in the state of NSW. The Hospitals Contribution Fund of Australia Limited is the parent entity and is the ultimate parent entity. The registered address of the company is, 403 George Street, Sydney, NSW The financial report for the Group for the year ended 30 June 2008 was authorised for issue in accordance with a resolution of Directors on 25 September Subsequent Events Subsequent to balance date HCF Australia Limited signed a merger implementation deed with Manchester Unity Australia Limited, the merger is conditional upon Manchester Unity receiving approval from its members and the proposal being approved by the various regulatory authorities. If the merger is approved HCF Australia Limited will pay $256 million, with Manchester Unity Australia Limited becoming a wholly owned subsidiary of HCF. 29. Risk Management The consolidated entities financial condition and operating activities are affected by a number of key financial risks including interest rate risk, currency risk, credit risk, market risk, liquidity risk and fiscal risk and non-financial risks including insurance risk, compliance risk, regulatory risk and operational risk. The consolidated entity has implemented a group wide risk management network to mitigate those risks. Group risk management roles and responsibilities HCF s Board of Directors determines the groups overall risk appetite and approves the risk management strategies, policies and practices to ensure that risks, including compliance risks, are identified and managed within the context of this appetite. The Board has delegated the direct review of risk management, to the HCF Audit and Risk and Compliance Committee and HCF Life Audit, Risk and Compliance Committees. Committee members are Non-executive Directors. The management team is responsible for implementing and assessing the effectiveness of risk management strategies and internal controls across the group. The group has a General Manager Risk Management who has the responsibility for risk compliance and related issues within the Group. The General Manager Risk Management is assisted in this task by the following functions and activities: Risk Management Which maintains the HCF Risk Management Framework to ensure that the business has in place the appropriate structures, processes and competencies to give due consideration of all strategic and operational risks and assesses the adequacy of their controls. Compliance Which provides a process and reporting framework to enable all business to meet their regulatory compliance obligations in accordance with HCF Group Compliance Policies. Internal Audit Which provides independent assurance to senior management and Directors regarding the adequacy of controls over perceived higher risk activities of the Group. Risk Reporting recording management s perceptions of risks and controls within individuals business units. Investments Which establishes and reviews policies and controls and processes in connection with financial risk, including investment risk, credit risk, currency risk and capital management. Actuarial A separate dedicated actuarial department analyses all claims to monitor the appropriateness of the rates. 112 THE HOSPITALS CONTRIBUTION FUND OF AUSTRALIA LIMITED

115 29. Risk Management (continued) INSURANCE RISK HEALTH INSURANCE ACTIVITIES HCF s health Insurance activities primarily include prudent pricing, together with claims management and investment management. Because of the specific requirements of Health Insurance and community rating, risks must be accepted at a standard rate. The rates that are proposed are subject to review by the Minister for Health and must ensure the financial viability of the health fund. While HCF has the ability to determine rates and benefits payable within certain guidelines there is limited ability to price risk. There is the impact of the Risk Equalisation Scheme which is a government mandated policy which allocates a percentage of all payments to members based upon age cohorts to be paid by all health funds in proportion to overall membership. The key policies in place to mitigate risks in health insurance include: operation of the Health Benefits Reinsurance trust fund; the use of Actuarial models based on historical data to calculate premiums; monitoring of fund rules and changes as appropriate; and industry policies and PHIAC requirements. Concentration of insurance risk There is concentration of risks into the areas where we have a higher than average membership e.g. NSW. Because of the Community Rating Principle we are unable to set different prices based on an individuals age or to reflect their previous claims history. As such we are unable to directly mitigate these concentrations of insurance risks. INSURANCE RISK LIFE INSURANCE ACTIVITIES HCF Life Insurance activities are either non-underwritten products which are sold as add on s to health insurance products or as separate underwritten products. The risk of add on policies is that the rates may not reflect the claims made and there is no underwriting of individual risks, but the overall program is reviewed and individual payments are generally small. The underwritten policies are subject to underwriting risks, and due to portfolio size are also subject to volatility of claims. In compliance with contractual and regulatory requirements, the risks are actively managed to ensure they satisfy policyholder s risk and reward objectives and do not adversely affect ability to pay benefits and claims when due. Compliance and operational risk are controlled and monitored to maintain the efficiency of the Group and as well as to manage the risk of non-compliance. Risk management objectives and policies for mitigating risk Underwriting policies and procedures Policies in place to systematically underwrite policies. Risk strategy relating to life insurance products determination of appropriate risk/return ratios for policies. Capital allocation and solvency requirements Capital requirements are measured using a risk based capital approach and by reference to the various regulatory reporting requirements. Solvency margin requirements established by local Regulators (APRA) are in place to reinforce safeguards for policyholder s interests, being primarily the ability to meet future claims payments. The solvency margins measure the excess of the values of the insurer s assets over the value of its liabilities, each element being determined in accordance with the applicable valuation rules. Monitoring of insurance risk The financial and operating results are monitored and detailed annual investigations are performed into the mortality, morbidity and persistence experience of the business. Claims Management procedures strict claims management procedures are in place to ensure the timely and correct payment of claims in accordance with policy conditions. ASSET AND LIABILITY RISK GROUP Asset and liability management techniques Assets are allocated to different classes of business using a risk based approach. Premiums received and returns obtained from investments provide the liquidity to meet claims payments and associated expenses as they arise. Furthermore, the terms and conditions of investment products are such that the majority of the investment risk and rewards are borne by the policyholders. Methods to limit or transfer life insurance risk exposures The group purchases reinsurance to manage the exposure to accepted insurance risk. Concentration of risk The Company writes a mixture of individual and group insurance business providing mortality, morbidity and annuity benefit payments. The mix of business is monitored and managed to avoid inappropriate concentrations of risk. Concentrations of risk based on individual lives are managed through the use of surplus reinsurance arrangements whereby the group s maximum exposure to any individual life is capped. Concentrations of risk by product type are managed through monitoring of the in force life insurance business and the mix of new business written each year. A product pricing and re-rating process ensures that any cross subsidies between insurance rates for groups of policyholders of different sex and age are minimised such that product profitability is not materially impacted by changes to the age and sex profile of the in force business. Terms and conditions of life insurance contracts The nature of the terms of the insurance contracts written is such that certain external variables can be identified on which related cash flows for claim payments depend HCF ANNUAL REPORT 113

116 Notes to the Financial Statements continued 29. Risk Management (continued) The table below provides an overview of the key variables upon which the timing and uncertainty of future cash flows of the various life insurance and investment contacts depend. Type of contract Detail of contract workings Nature of compensation for claims Key variables affecting future cash flows Long-term non-participating insurance contracts with fixed and guaranteed terms (Term Life and Disability) Guaranteed benefits paid on death, ill health or maturity that are fixed Benefits, defined by the insurance contract, are not directly affected by the performance of underlying assets or the performance of the contracts as a whole. Mortality, morbidity, market earning interest rates, lapses, expenses. Long-term insurance contracts (Whole of Life) These policies include a defined initial guaranteed sum assured which is payable on death. Benefits dependent on contracts. Mortality, morbidity, market earning interest rates, lapses, expenses. Non-discretionary participating investment contracts without guaranteed returns The gross value of premiums received is vested in units and the investment account is the value of the units. Investment management fees are deducted from policyholders annually based on the average value of funds under management. The investment return is equal to the earnings on assets backing the investment contracts less an applicable management fees. Market risk, interest rates, expenses. Capital risk The Group and parent entity s objectives when managing capital are to safeguard their ability to continue as a going concern, so they continue to provide benefits for its stakeholders and to maintain an optimal capital structure. HCF is required to comply with the Solvency and Capital Adequacy Standards under schedule 2 and 3 of the Private Health Insurance (Health Benefits Fund Administration) Rules Financial risk The Groups financial instruments consist mainly of deposits with banks, short term investments, investments in unit trusts, accounts receivable and payable, loans to and from subsidiaries. Senior executives meet on a regular basis and evaluate treasury management strategies in the context of the most recent economic conditions and recommend changes to the Board of Directors when considered prudent. The objective is to assist the Group in meeting its financial target while protecting future financial security. The Group is exposed to a number of forms of financial risk, the most significant being market risk and liquidity risk. The impact of these risks on the Life Insurance business is discussed in the preceding sections. This section provides an explanation of the other aspects in which the Group is affected by financial risks. Market risk The Group takes on exposure to market risks including currency risk, fair value interest risk and price risk. Market risks arise from open positions in interest rates, currency and equity products, all of which are exposed to general and specific market movements. The market risks that the Group primarily faces are equity risk and interest rate risk, due to the nature of its investments and liabilities. With respect to insurance and investment contracts where the Group incurs market risk primarily in the form of interest rate risk, the risk is managed through asset/liability management strategies that seek to match the interest rate sensitivity of the assets to that of the underlying liabilities. The overall objective in these strategies is to limit the net change in the value of assets and liabilities arising from interest rate movements. While it is more difficult to measure the interest sensitivity of insurance liabilities than that of the related assets, to the extent that it is possible to measure such sensitivities the Group believes that interest rate movements will generate asset value changes that substantially offset changes in the value of the liabilities relating to the underlying insurance and investment contracts. 114 THE HOSPITALS CONTRIBUTION FUND OF AUSTRALIA LIMITED

117 For all the assets backing insurance contracts that are not sensitive to interest rate or market risk, the Group has developed investment guidelines to manage the Group s exposure to equity risk primarily by seeking to match the risk profile of equity investments against risk-adjusted equity market benchmarks. The Group measures benchmark risk levels in terms of price volatility in relation to the market in general. For the assets backing such liabilities, the key objective is to ensure that adequate returns in relation to the market in general. For the assets backing such liabilities, the key objective is to ensure that adequate returns are delivered maintaining a sufficient level of liquid assets to fund unexpected cash outflows arising from insurance claims payments. The liquidity risk section below deals with this aspect of the Group risk management in greater detail. Investment activity for the Group is undertaken in accordance with an investment mandate established by the Board of Directors. The mandate stipulates the investment allocation mix, the match of investment assets and liabilities and the use of derivatives. Liquidity risk The Group is exposed to daily calls on its available cash resources from claims, maturing policies and surrenders. Liquidity risk is the risk that payment of obligations may not be met in a timely manner at a reasonable cost. The Board sets limits on the the minimum proportion of maturing funds available to meet such calls and on the minimum level of borrowing facilities that should be in place to cover maturities, claims and surrenders at unexpected levels of demand. The table below summarises the maturity profile of certain financial liabilities of the consolidated entity and the company based on the remaining undiscounted contractual obligations. As at 30 June 2008 Investment 1 year or less 1 to 5 years Over 5 years linked Total Consolidated $ 000 $ 000 $ 000 $ 000 $ 000 Trade and other payables 41,478 41,478 As at 30 June ,478 41,478 Investment 1 year or less 1 to 5 years Over 5 years linked Total Consolidated $ 000 $ 000 $ 000 $ 000 $ 000 Trade and other payables 51,112 51,112 51,112 51,112 Interest rate risk The Group manages some of its exposure to interest rate risk by matching assets to the liabilities that they back. Separate asset liability matching analyses are employed for separate categories of products within each business. Although this natural hedging is not reflected in the accounting policies adopted or in the presentation of the results and Balance Sheet included in these financial statements, it does mitigate the Group s exposure to such risk. These matching procedures are not 100% effective. The Group strikes a balance mitigating the most significant exposure to interest rate risk while maximising the return to participating policyholders and shareholders by allowing some flexibility to those who manage the investment of the assets. A number of derivatives may be held to enable the matching of asset and liability to further mitigate exposure to interest rate movements. Credit risk Credit risk arises from the financial assets of the Group, which comprise cash and cash equivalents, trade and other receivables and investments backing insurance liabilities. The Groups exposure to credit risk arises from potential default of the counter party, with a maximum exposure equal to the carrying amount of these instruments. Credit risk exposures are calculated regularly and compared to authorised credit limits before further transactions are undertaken with each counterparty and therefore the Group does not require collateral or other security to support credit risk exposure. In addition, receivable balances are monitored on an ongoing basis with the result that the Group s exposure to bad debts is not significant. There is no significant concentration of credit risk within the Group and financial instruments are spread amongst a number of financial institutions and fund managers to minimise the risk of default of counterparties. Equity price risk Equity price risk is the risk that the fair value of equities will decrease as a result of changes in levels of equity indices and the value of individual stocks. The Company holds all of its equities as fair value through the profit or loss. The investment policy stipulate the limit of any individual stock in the equity portfolio while asset concentration risks are managed according to the investment objective HCF ANNUAL REPORT 115

118 Notes to the Financial Statements continued 30. Segment Information The economic entity operates solely within Australia and predominantly in the private health care insurance and life insurance industries. Health Life Eliminations Consolidated Industry segments Notes $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 $ 000 Operating revenue Income from customers outside the consolidated entity 1,081, ,131 15,432 14,146 1,096, ,277 Intersegment transactions 16,982 6,409 (16,982) (6,409) Other Segment Revenue Investment income 8,316 46,946 (5,808) 1,182 2,508 48,128 Interest income 3,086 1,820 2,790 3,004 5,876 4,824 Dividends other corporations 1,306 2,255 1,306 2,255 Rental income 2,490 2,376 (145) 2,345 2,376 All other revenues 1,258 1, ,273 1,403 Total revenue 2(a) 1,113,550 1,023,875 13,735 20,797 (17,127) (6,409) 1,110,158 1,038,263 Consolidated entity profit before tax 47,023 66,927 (1,403) 5,768 (8,679) (25) 36,941 72,670 Consolidated entity tax 375 (2,193) 375 (2,193) Consolidated entity net operating profit 47,023 66,927 (1,028) 3,575 (8,679) (25) 37,316 70,477 Total assets 839, ,130 61,061 67,560 (10,434) (10,702) 889, ,988 Total liabilities (301,555) (284,279) (26,178) (31,623) (327,299) (315,568) Other Segment information: Acquisition of property, plant and equipment, and other non current assets 10(b) 9,945 3, ,986 3,117 Depreciation and amortisation (6,242) (6,411) (17) (24) (6,259) (6,435) Other non-cash expenses 15(b) (4,550) (4,568) (203) (153) (4,753) (4,721) 116 THE HOSPITALS CONTRIBUTION FUND OF AUSTRALIA LIMITED

119 31. Financial Instruments (a) Terms, conditions and accounting policies Balance Sheet Notes Accounting Recognised Financial Instrument June 2008 Policies Information, Terms and Conditions FINANCIAL ASSETS Cash at bank 19(b) Refer Note 1. Interest is credited at the bank s negotiated rate. Short term deposits 12, 19(b) Refer Note 1. Short term deposits are at 11 am call, with an average interest rate of 6.78% over the year (2007: 6.25%). Premiums in arrears 5 Refer Note 1. The collection ratio is based on actual arrears collection data gathered over several years. Other receivables 5 Refer Note 1. Commonwealth Government bonds 6 Refer Note 1. Government bonds and semi-government & semi-government securities securities holdings facilitated via unlisted pooled trusts. Corporate securities 6 Refer Note 1. Corporate security holdings facilitated via unlisted pooled trust Mortgage-backed securities 6, 12 Refer Note 1. Mortgage-backed securities have a weighted average interest rate of 7.23% (2007: 6.53%) and a maturity date of 12/02/2011(2007: 12/02/2036). Interest is received at the next reset date. Bank bills and floating rate notes 6, 12 Refer Note 2. Bank bills have a weighted average interest rate of 7.86% (2007: 6.42%) and a maturity range of 08/08/2008 to 26/09/2008 (2007: 30/07/2007 to 21/11/2007). Interest is received on maturity. Floating rate notes have a weighted average interest rate of 5.84% (2007:6.22%) and a maturity range to perpetuity. (2007: to perpetuity) Listed shares and convertible notes 6, 12 Refer Note 1. Unlisted trusts 6 Refer Note 1. Distributions are paid either quarterly or semi-annually. FINANCIAL LIABILITIES Trade creditors 13 Refer Note 1. Trade creditors are normally settled on 30 day terms. Other creditors and accruals 13 Refer Note 1. Other creditors are normally settled on 30 day terms HCF ANNUAL REPORT 117

120 Notes to the Financial Statements continued 31. Financial Instruments (continued) (b) Interest rate sensitivity analysis The following table demonstrates the impact of a 100 basis points change in Australian and International interest rates, with all other variables held constant, on HCF Group s profit and equity. It is assumed that the 100 basis point change occurs at the reporting date (30 June 2007 and 2008) and there are concurrent movements in interest rates and parallel shifts in yields curves. 30 June, June, 2007 Impact Impact Impact Impact on profit on equity on profit on equity $ 000 $ 000 $ 000 $ 000 Change in variable +100 basis points 5,681 5,681 5,153 5, basis points (5,681) (5,681) (5,153) (5,153) (c) Equity movement sensitivity analysis The analysis below demonstrates the impact of a 10% movement in Australian and International equities. This analysis was performed to assess the risk of holding investments linked to equity instruments. It is assumed any change occurs as at the reporting date. 30 June, June, 2007 Impact Impact Impact Impact on profit on equity on profit on equity $ 000 $ 000 $ 000 $ 000 Change in variable 10% increase in Australian equities 5,397 5,397 8,094 8,094 10% increase in International equities 8,421 8,421 6,534 6,534 10% decrease in Australian equities (5,398) (5,398) (8,096) (8,096) 10% decrease in International equities (8,421) (8,421) (6,534) (6,534) (d) Credit risk exposure With regard to the Company s investment in unlisted trusts, the controls imposed in managing the underlying credit risk exposures contained therein are set and controlled by our investment manager MLC Investments Limited under its multi manager platform. These controls include setting and monitoring minimum and average credit ratings and maximum exposures to individual counter parties and fund managers. (i) With regard to credit risk exposures presented by counterparties to underlying derivative contracts, the controls imposed, are contained with the Risk Management Statement. (i) Credit exposure by type $ 000 $ 000 Investments held as fair value through the profit and loss (i) 713, ,565 Due from Government 28,608 25,264 Due from Individuals 8,829 8, , ,332 There are no material amounts of collateral held as security at 30 June There are no amounts past due but not impaired. 118 THE HOSPITALS CONTRIBUTION FUND OF AUSTRALIA LIMITED

121 31. Financial Instruments (continued) (e) Hedging instruments The Company via its investments in unlisted unit trusts, has exposure to foreign currencies. In certain instances, the funds chosen fully hedge these exposures using spot foreign exchange contracts to hedge the value of the underlying assets. The objective is to eliminate currency movements on the underlying assets from the performance of the fund. The associated costs and marked to market effect of the spot foreign exchange contracts are reflected in the unit price adopted valuation of assets and measurement of profit or loss. HCF Life enters into exchange-traded options where it agrees to sell or call for the underlying stock in accordance with the terms of the individual contract. The objective is to economically hedge the underlying portfolio against market movements Exchange traded options are recognised at the date the contract is entered into. Each option is carried at fair value with gains and losses recognised through profit or loss. 32. Solvency Requirements of Health Fund a) Under the Schedule 2 of Private Health Insurance (Health Benefits Fund Administration) Rules 2007 the solvency reserve for The Hospitals Contribution Fund of Australia Limited at 30 June 2008 is $136,083,000 (2007: $116,367,000) b) SOLVENCY REQUIREMENTS OF THE STATUTORY FUNDS FOR LIFE COMPANIES As indicated in Note 1, distribution of the retained profit of HCF Life Insurance Company Pty Limited is limited by the prudential capital requirements of the Life Insurance Act 1995, the detailed provisions of which are specified by actuarial standards. In accordance with Part 5 of the Life Insurance Act 1995, Actuarial Standard 2.04; Solvency Standard prescribes a minimum capital requirement the solvency requirement for each statutory fund of the company. The Solvency Requirements, and ratios in respect of those requirements are as follows: Statutory Funds Statutory Funds Total 2008 Total 2007 $ $ SOLVENCY REQUIREMENT 1 $35,548,000 $39,225,000 Solvency Reserve % 3.33% 3.91% Coverage of Solvency Reserve NOTE: 1 Represents the minimum level of assets required to be held in each statutory fund, prescribed by the Solvency Standard referred to in Part 5 of the Life Insurance Act HCF ANNUAL REPORT 119

122 Directors Declaration 120 THE HOSPITALS CONTRIBUTION FUND OF AUSTRALIA LIMITED

123 Independent Audit Report 2008 HCF ANNUAL REPORT 121

124 Independent Audit Report continued 122 THE HOSPITALS CONTRIBUTION FUND OF AUSTRALIA LIMITED

125 Further Information Glossary Contributor A person from whom HCF accepts contributions and who is eligible for benefits. The Fund HCF and HCF No2 Pty Limited (formerly IOR Australia Pty Limited) HCF The Hospitals Contribution Fund of Australia Limited a registered health benefits organisation. HCF No.2 Pty Limited A registered health benefits organisation until 31 December, Inpatient Any member who is admitted to hospital. Medical Gap Occurs when doctors charge more than the Medicare Schedule Fee. Generally, contributors pay any difference above the Schedule Fee. Member A contributor, the contributor s spouse or partner, and any dependent children of contributor. Same Day Patient An inpatient who receives treatment in hospital, or a day hospital facility, but does not stay overnight. Abbreviations AASB Australian Accounting Standards Board ACHS Australian Council on Healthcare Standards AFSL Australian Financial Services Licence AHIA Australian Health Insurance Association CABG Coronary Artery Bypass Graft CVA Cerebrovascular Accident FSRA Financial Services Reform Act IASB International Accounting Standards Board ISQH International Society for Quality in Healthcare PBI Predictive Business Intelligence PHIAC Private Health Insurance Administration Council 2008 HCF ANNUAL REPORT 123

126 Contact Details Head Office HCF House 403 George Street, Sydney NSW 2000 Telephone (02) Facsimile NSW South Region Regional Office 93 City Plaza, Bankstown NSW 2200 Telephone (02) Facsimile (02) Branches Albury Bankstown Bega Belconnen Bondi Junction Bowral Burwood Campbelltown Canberra Deniliquin (03) Griffith Hurstville Liverpool Miranda Nowra Pagewood Roselands Sydney CBD Wagga Wagga Woden Wollongong Full Service Agents Cootamundra Goulburn Leeton NSW North Region Regional Office Suite 9, 10 Edgeworth David Avenue, Hornsby NSW 2077 Telephone (02) Facsimile (02) Branches Armidale Blacktown Brookvale Castle Hill Charlestown Chatswood Coffs Harbour Dubbo Erina Grafton Hornsby Lismore Macquarie Centre Maitland North Sydney Orange Parramatta Penrith Port Macquarie Tamworth Tweed Heads (07) Full Service Agents Bathurst Interstate Branches Melbourne 330 Collins Street, Melbourne VIC 3000 Telephone (03) Brisbane Shop G7 8, MacArthur Central, Cnr Queen and Edwards St, Brisbane QLD 4000 Telephone (07) Adelaide Shop 1, 49 Gawler Place, Adelaide SA 5000 Telephone (08) Dental Centres Sydney Dental Centre 3rd floor, HCF House, 403 George Street, Sydney NSW 2000 Telephone (02) Parramatta Dental Centre Level 6, 128 Marsden Street, Parramatta NSW 2150 Telephone (02) Chatswood Dental Centre Level 6, 13 Spring Street, Chatswood NSW 2067 Telephone (02) Hurstville Dental Centre 12 Butler Road, Hurstville NSW 2220 Telephone (02) Bondi Junction Dental Centre Level 8, 1 Newland Street, Bondi Junction NSW 2022 Telephone (02) Brookvale Dental Centre Warringah Mall Shopping Centre, Cnr Pittwater Road & Condamine Streets, Brookvale NSW 2100 Telephone (02) Blacktown Dental Centre Level 6, Westpoint Tower, Westpoint Shopping Centre, Patrick Street, Blacktown, NSW 2148 Telephone (02) Eyecare Centres Sydney Level 9, 403 George Street, Sydney NSW 2000 Telephone (02) Chatswood Level 6, 13 Spring Street, Chatswood NSW 2067 Telephone (02) Parramatta Level 6, 128 Marsden Street, Parramatta NSW 2150 Telephone (02) Bondi Junction Level 8, 1 Newland Street, Bondi Junction NSW 2022 Telephone (02) Hurstville Street Level Butler Road, Hurstville NSW 2220 Telephone (02) Brookvale Warringah Mall Shopping Centre, Cnr Pittwater Road & Condamine Street, Brookvale NSW 2100 Telephone (02) Blacktown Level 6, Westpoint Tower, Westpoint Shopping Centre, Patrick Street, Blacktown NSW 2148 Telephone (02) THE HOSPITALS CONTRIBUTION FUND OF AUSTRALIA LIMITED

127 HCF Branches, Full Service Agents and Regional Offices Branches Regional Offices Full Service Agents Designed & produced by Designate Reporting This Annual Report is printed on elemental chlorine free paper, made from sustainable forest paper pulp and is accredited with EMS (Environmental Management Systems) certification HCF ANNUAL REPORT 125

128 You get more with HCF Annual Report 2008