Analysis:The decision by Bupa Ireland to withdraw from the Irish health insurance market could, ironically, give the Government the impetus to break up the largest player in the sector, the State-owned VHI.

Senior Government figures accepted last night that the departure of Bupa from Ireland after 10 years was a blow for competition in the sector.

As the other market players consider how to woo Bupa's 475,000 subscribers, senior Government figures believe the process will only enhance VHI's dominant position. They say a situation in which VHI has over 75 per cent of the market would act as a disincentive to other players to enter the sector.

Senior Government figures believe that, for true competition to emerge, there would have to be at least three - and preferably four - companies in the market.

Government attention will now focus on a report by the Competition Authority on the position of the VHI, which was ordered by Minister for Health Mary Harney when she triggered the introduction of the controversial risk equalisation scheme last December.

This report is expected in mid-January and is virtually certain to recommend that the health insurer should be broken up.

However, the devil will be in the details of how this should be achieved, and nobody in Government circles is underestimating the complexity of such a task. The Government would have to consider whether the company should be divided, for example, on a regional or some other basis.

Secondly, it would have to consider whether the VHI brand name would have to be eliminated so as not to give one part of the divided entity an advantage over the other.

It is understood that similar proposals were floated a number of years ago when Ms Harney was in the Department of Enterprise and Employment. At the time, they were opposed by the Department of Finance, among others.

No decision is likely before the general election.

For the moment at least, the big winner from yesterday's developments is the VHI. If and when a High Court stay is lifted, the VHI will expect to receive €7.72 million in payments from its rival for the first six months of this year.

Broadly similar payments are also likely to accrue for the second six months. On top of this, the company can look forward to winning some of Bupa's membership.

The most recent entrant to the market, Vivas Health, is also likely to benefit from the departure of Bupa. The company is enjoying a "honeymoon" period exempting it from risk equalisation payments as a relatively new entrant to the market. However, this will end next year.

Yesterday, questions centred around why Bupa was really pulling out of the market. Many observers had assumed Bupa's long-held position that it would not remain in a risk equalisation environment was merely a tactic in negotiations with the Government.

Bupa had realised annual profits of around €20 million from its Irish operation in recent years and both the regulator and Government-appointed consultants had argued that it could operate profitably here even after the introduction of the risk equalisation scheme.

Yesterday, the company tersely stated that the judge in the High Court had found that both bodies were wrong in their assumptions.

Much confusion among observers stems from the conflicting figures thrown out by various players in the industry concerning the actual cost of risk equalisation. By their nature, estimates regarding market conditions three years down the line are not an exact science.

However, the Health Insurance Authority, in its confidential report to the Minister in the autumn, said Bupa Ireland would have had to pay more than €37 million in risk equalisation payments in the 12 months to last June if the compensation scheme in the health insurance industry had been fully operational at the time.

Ultimately it appears that what forced Bupa's hand was the escalating liability for risk equalisation payments, even in a scenario where it could postpone actual payments for some time through further court action. The company has estimated that for every day it remained in the market, its liability to the payments increased by €232,000.

It believes that, by the time it fully winds down its operation in 2008, it will have had to pay out around €56 million.

It appears that there is no way back now for Bupa, although an intervention from the EU Commission regarding risk equalisation could change things.

In the meantime, the Government will consider other measures to generate competition in the health insurance sector.