European commissioner Charlie McCreevy has warned the Government that its policy to introduce risk equalisation in the health insurance market may breach EU law.
He has also questioned whether the VHI should continue to enjoy exemptions from EU regulations that impose a tough supervisory regime on its main competitors.
In a letter to his former government colleague, Tánaiste Mary Harney, Mr McCreevy says the practical application of risk equalisation could lead to a situation in which the competitors of the VHI are "swept out of the market" and a monopoly is reintroduced.
"I am concerned whether this can be considered to be in conformity with the spirit of a well functioning, open and competitive internal market," writes Mr McCreevy.
Risk equalisation involves the transfer of payments from health insurance firms with relatively younger subscriber profiles to ones with relatively older memberships. Bupa, the main competitor to VHI in Ireland, has claimed that it will face risk equalisation payments worth €161 million over three years under the scheme.
The Government argues risk equalisation is essential to underpin the concept of community rating - where everyone pays the same for insurance regardless of age.
Mr McCreevy's intervention in the debate over the introduction of risk equalisation comes at a particularly sensitive time for the Government, which made a decision to introduce risk equalisation last December.
This Government decision was challenged in the High Court in February by Bupa, which has threatened to take its case all the way to the European Court of Justice - a process that could take several years. A decision in the High Court case is currently pending and is expected within weeks.
If it loses its legal case, Bupa has told the Government that it will leave the market.
As internal market commissioner, Mr McCreevy has the responsibility to ensure that EU governments introduce a competitive and fair insurance market that operates across national borders. He has the power to launch legal cases against states that breach EU regulations governing the European health insurance market.
In his letter to Ms Harney, which was sent last week and has been seen by The Irish Times, Mr McCreevy highlights that Ireland was obliged by EU law to abolish a monopoly in the insurance market by January 1st, 1994. Any reintroduction of a monopoly because of the introduction of risk equalisation would be a concern, he says.
Mr McCreevy's letter follows meetings between Commission officials and officials from the Department of Health on February 20th last. "I want to follow up on some of the issues discussed in that meeting and set down some real concerns the Commission has in regard to VHI," says the latter drafted by Mr McCreevy.
The former minister for finance questions whether the VHI should remain exempt from the scope of EU insurance legislation, which forces insurance firms to obtain licences, fulfil stringent solvency requirements and come under strict regulation.
Under EU law certain institutions, whose business covers a very limited sector in a restricted territory, can be exempted from the requirements. The VHI was exempted when Ireland joined the EU in 1973 on the basis that it operated only private health insurance. Mr McCreevy notes in his letter that the VHI now offers a range of other products, such as travel insurance, which is not considered health insurance by the EU.
Given these changes the Commission has doubts if the VHI is still eligible for the exemption it enjoys under the non-life insurance directives as well as from the solvency requirements of EU directives, says Mr McCreevy.
He also criticises the Government's policy to restructure the VHI into a commercial company by 2012 as too slow.
"I would be interested in receiving further clarification of why six years are needed in order to finalise the mentioned restructuring," he says. "The fact that the competitors of the VHI operate in a market under very different conditions (eg solvency requirements, licence prudential supervision) suggest that it may be desirable to complete the restructuring as quickly as possible."
Mr McCreevy asks Ms Harney to forward him her views on these matters of concern.
