VHI reform will allow it to raise fees without approval

The VHI will no longer need to secure political approval for subscription increases under new Government reforms expected to be announced today by the Tánaiste and Minister for Health, Mary Harney.

The Irish Times understands that as part of the reforms to the corporate structure of the State-owned private health insurance company, it will be transformed into a semi-state company and be given greater commercial freedom.

However, it is expected that the company will also lose its current derogation governing the level of financial reserves which it has to maintain.

In future the VHI would be required to have reserves that would be in line with normal international solvency requirements.

This could involve the company bringing its financial reserves, over time, up to around 40 per cent of its annual premium income.

At present VHI is classified as a statutory body. Under current legislation the Minister for Health has a right of veto over subscription increases or plans for new products. The new measures will provide the company with greater commercial freedom to determine its own products and to set its own prices.

The reforms of the VHI corporate structure will be announced as part of a package which will see the Minister make a decision on whether or not to trigger the introduction of a controversial risk equalisation mechanism in the private health insurance market.

Risk equalisation is effectively a compensation system under which companies with a larger number of older subscribers (who claim more frequently) would receive payments from rivals with relatively younger memberships. Government advisory bodies have maintained that such a system is necessary to underpin the principle of community rating, where everyone pays the same regardless of age.

The introduction of risk equalisation could see VHI receive up to €30 million annually, mainly from its largest rival, Bupa Ireland.

The regulator for the sector, the Health Insurance Authority (HIA), in October recommended that risk equalisation be introduced.

In its report, which was based on financial returns for the first six months of the year, the HIA said the difference in the risk profiles between companies in the market was getting wider. It said the absence of risk equalisation had facilitated Bupa Ireland in making a surplus of 17.3 per cent of earnings from subscriptions last year.

In the same period Bupa Insurance Ltd in the UK had recorded profits of 5 per cent of earned premiums. The report said that if risk equalisation had been in place for the six months, Bupa Ireland would have had to make payments of €16.5 million to rival companies.

The authority said that in its view the benefits to the consumer which would accrue from the introduction of risk equalisation would outweigh any countervailing factors such as a possible reduction of competitiveness in the VHI. Bupa has argued against the introduction of risk equalisation. A High Court challenge launched by the company is due to be heard early next year.

It is understood that the Tánaiste spent yesterday considering submissions made by health insurance companies on risk equalisation, as well as advice from civil servants.