Sale of VHI may create healthy insurance market

ANALYSIS:If all goes to plan, every consumer will pay the same for health insurance packages, regardless of age

THE GOVERNMENT’S planned private health insurance reforms represent the greatest shake-up in the sector in years and arguably since the establishment of the VHI in the late 1950s. If all goes to plan, within the next two or three years, the landscape of the health insurance sector will be entirely different.

The VHI, the State’s largest health insurer, will be privatised and possibly broken up in the process. There will also be penalties to encourage people to take out health insurance earlier in life, while the Government also wants all insurance companies to provide greater cover for GP services and areas such as screening and disease prevention measures rather than concentrating on acute hospital treatments.

Overall, the Government hopes that its package of measures will provide some stability to a market which has been in flux for several years and at the same time securing for the future the guiding principle of community rating – where everyone pays the same for identical products, regardless of age.

Since the arrival of competition in the health insurance market in the 1990s, the Government has had to face the thorny problem of trying to referee the sector, while also being the owner of the major player in the market.

The picture was further complicated by the fact that regulation of the health insurance market is very different from that in the utilities such as electricity or gas. As part of its regulatory model for health insurance, the Government was requiring private companies to pay over millions to their State-owned rival.

This stemmed from all the advice to the Government over the last 15 years that if community rating was to be protected, a risk equalisation scheme for the sector would have to be put in place.

Just as in the motor insurance sector, where younger drivers often face a loading on their premium because they are deemed to be a higher risk, in a pure health insurance market older and sicker subscribers would face being charged higher rates as they tend to claim more frequently.

However, in a community-rated market, insurance companies cannot charge loadings on the premiums of older subscribers. Traditionally this issue has been dealt with by effectively having younger members pay a little more than actuarially would be required – in essence young subscribers subsidised those who were older and they in turn would be subsidised by those who joined in subsequent years.

While companies could not target younger subscribers on price grounds, the Government feared that they could do so in the way that their plans were designed. For example, plans that provided greater benefits for pregnancy or sports injuries would more than likely have greater appeal to younger members.

Risk equalisation was in essence a system whereby companies with larger numbers of older subscribers would receive financial payments, via the regulator, from their rivals with a younger membership profile.

However, the problem was that the VHI, mainly for historical reasons, had a far greater percentage of older subscribers than its rivals and was losing massive amounts of money on this particular part of the business.

Perhaps predictably, other insurance companies resented being forced to hand over €20 – €30 million in risk equalisation payments to the VHI and the process of introducing such a measure dragged on for years. Eventually, the Government’s risk equalisation legislation was struck down by the Supreme Court in 2008 in a challenge brought by BUPA Ireland.

The Government believes that many of the legal challenges that emerged to the initial risk equalisation scheme centred on the argument that requiring commercial companies to make significant payments to a State-owned enterprise represented a form of State aid.

In the main, this seems to be the thinking of the Government behind the decision to sell off the VHI.

However, the Labour Party has already contended that the plans put forward by Minister for Health Mary Harney were driven by ideology and it drew parallels with the controversial hospital co-location proposals.

The Government, in its reforms, will also seek to address the other main complaint from rival insurers, that the VHI does not have to play by the same regulatory rules as they do – an issue that could have seen the State face court action from the European Commission.

The VHI benefits from an exemption from the general insurance supervisory regime established by two EU non-life insurance directives, even though the firm has expanded beyond the health insurance market.

This means it does not have to meet some obligations required of its rivals in the Irish market, such as setting aside reserves for a minimum guarantee fund and meeting solvency levels.

However, up to now the VHI did not have the money to bring its reserves up to the level required for authorisation by the regulator.

The “substantial” State investment which was announced yesterday – probably in excess of €100 million – will boost the company’s financial reserves.

However, authorisation by the regulator also involves the development of a sustainable business model, which the Government does not believe would be possible in the absence of a new risk equalisation scheme.

The Government’s announcement yesterday does herald a substantial change in the health insurance landscape. However, there are still a number of unknown factors about the plan.

The precise nature of the risk equalisation scheme will only go out for consultation in the weeks ahead.

The Government’s proposals for rebalancing the market so that one company would not have virtually all older subscribers are unclear at the moment as are the plans for the penalties to encourage people to take out cover earlier in life.

There will also have to be discussion about the proposals for new minimum benefits covering primary care services.

For consumers, the Government believes that in time its measures could put a brake on the level of subscription increases that they have experienced in recent years. However, yesterday’s announcement, coming in the wake of the difficulties at the Quinn Group, means that it is uncertain who will be owner of the two largest health insurance companies in the years ahead.

Martin Wall is Industry Correspondent