Consumers who wait until their 30s or later to take out health insurance for the first time should pay higher premiums, according to the Government's expert advisory group on health insurance.
The Barrington group has also called for curtailments to the scope of services available in the community rating system, which guarantees the same premiums to consumers regardless of their age or risk profile.
In a wide-ranging report urging fundamental reform in the health insurance sector, the group said the protected position of the State-owned VHI should be immediately dismantled.
Stating that the company should be subject to the same regulatory rules as private insurers, the group said such a change would impose new capitalisation requirements on VHI.
The Government should arrange "third-party capital" for the company by March 2008 and suggested that "not less than €100 million" would have to be raised. Instead of calling for the immediate privatisation of VHI, the group favoured a distribution of equity in the company to its members in advance of a flotation next year, "with a view to raising the new capital it needs and to monetising members' existing interests".
The group said it was likely that this "member-first" route would be more popular and therefore more likely to proceed than privatisation and suggested that some one million VHI members might receive €400-€500 each from a distribution of shares.
Chaired by businessman Colm Barrington, the group was appointed by Minister for Health Mary Harney in January to examine the private health insurance market. It found that the current market was "not one where existing and prospective participants can earn or expect to earn" an adequate return on capital, and called on the Government to introduce measures to encourage an increase in the appeal and size of the market.
The Government should reduce by 20 per cent the level of risk equalisation payments that VHI's rivals should pay to compensate it for the higher age profile of its clients, the group said.
It also supported moves to discriminate between first-time health insurance consumers based on the age at which insurance is effected.
The scale of "late-entry loading" should be graduated smoothly from the age of 30 to 65, with a 45-year-old entrant paying 145 per cent the rate paid by a 30-year-old. Premiums should be constant after the age of 65.
"There is a consensus that it is fairer to charge those who effect insurance later in life an additional amount to reflect their likely greater level of risk. To the extent that this change can be represented as what it is, a loyalty bonus for long-term participation in private medical insurance, it seems more likely to be acceptable to the public."
On community rating per se, the group said the principle should apply only up to a level of coverage "deemed adequate for and by the major proportion" of people with health insurance.
Community rating would include "basic coverages providing treatment in public hospitals" and "mid-range coverages providing semi-private care in either public or private hospitals". In the group's view, it should not include "upper-level coverage providing private care in private hospitals" and "top-level coverages providing what many would regard as luxury facilities in top of the range private hospitals".
The group said VHI has a dominant, favoured and protected position in the market and said the company had not shown itself to be clearly in support of the enlargement of the market by new competitors. This appeared to be at odds with Government policy, the group said.
"There is also plausible anecdotal evidence that VHI can do much more to contain the cost of claims, which is by far the major driver of its prices to consumers.
"While VHI claims that its operating costs as a percentage of revenues are lower than its competitors, the group believes that this can largely be explained by VHI's greater scale and by the fact that the newer competitors are attempting to establish and grow their business."
Stating that VHI receives an "implicit subsidy" through its State-sponsorship of €25-€45 million per annum, the group said that bringing the company within the conventional regime for insurer prudential supervision should be of highest priority.
It said a capitalisation requirement in the order of 30 per cent of gross written premiums "does indicate an early need for VHI to raise additional capital of not less than €100 million".
The group also said the financial regulator should reconsider the capital adequacy requirements on VHI's rivals, Quinn Healthcare and Vivas.
"It is probable but not at all certain that a modest decrease as compared with present levels may be justified," it said.
