It may have taken the best part of a decade but the float of Medibank Private announced by Mathias Cormann today is a sensible decision for a cash-strapped government as well as a positive development for the private health insurance sector.

One assumes the government’s scoping study looked at the alternatives – a trade sale, a cornerstone investor and the value of a Medibank retained by government – but the Abbott Government has come to the same conclusion as the 2006 evaluation undertaken by the Howard Government, which resisted industry calls for the business to be carved up by its competitors.

There is no rational argument, other than valuations, for Medibank to remain government-owned and good reasons for it to be privatised.

Apart from the multi-billion dollar proceeds, Medibank operates in what is otherwise a commercial and competitive and highly regulated sector and it is a distortion for the largest player in the sector to be government-owned.

Moreover, that ownership creates a conflict for the government-as-regulator, given that the government approves increases in health insurance premiums and sets a taxation policy that provides incentives for private health insurance (and disincentives for not having it).

The argument against privatisation of the business used to be that Medibank could be used to discipline price increases, but the experience of health insurance and health inflation would suggest that hasn’t happened.

Conversely, a privatised and listed Medibank would have greater incentives to further improve its efficiency and profitability and compete even more aggressively with the vast array of competitor funds, which could help drive innovation and sector-wide efficiency gains.

It would certainly allow the government to take an even closer look at applications for premium increases and force more discipline on the sector and on its dealing with hospitals and other healthcare providers. This is in an environment where an ageing population and expensive new treatments and technologies are accelerating the rate of health inflation.

The government, subject to market conditions, hopes to float Medibank next financial year and in preparation for the event has appointed three new board members – Clayton Utz’s David Fagan and two experienced non-executives, Linda Nicholls and Christine O’Reilly.

Medibank has become increasingly innovative in terms of the services it offers in recent years and has increased its revenue base by nearly 30 per cent over the past four years while reducing its management expense ratio. Last year it grew its earnings 60 per cent to $315 million, although its results over the years have been volatile, which explains the wildly varying estimates of its value in a float.