The VHI has started lobbying aggressively for the immediate introduction of risk equalisation in the health insurance market. Without this measure, the group's new chief executive, Mr Vincent Sheridan, is convinced that lifelong, affordable health insurance is under threat. Some 2 per cent of every VHI premium increase is caused by the absence of risk equalisation, he said. Risk equalisation involves transfer payments between insurers to spread the claims' costs of less healthy members among all the companies on the market according to market share and the number of claims they pay. It means that all health insurers pay a share of all the claims of older, sicker members and is aimed at discouraging companies from targeting younger, healthier people as members.
BUPA is opposing its introduction as anti-competitive, arguing that it amounts to the smaller company in the market subsidising the larger operator. VHI maintains it is essential to ensuring a level playing field in the Irish market.
"We are coming from behind. BUPA has been lobbying quite successfully against risk equalisation. But this is essential to ensure a level playing field in a market where community rating is a requirement," Mr Sheridan explained in his first interview since he took up his position on April 9th. His first priority is to ensure that effective risk-equalisation measures are put in place immediately, he said. He is concerned that risk-equalisation measures could be "so watered down as to be ineffective". Other important issues for Mr Sheridan include defining and implementing a future structure for the VHI, expanding its range of products and services, and maintaining tight control of the costs of the services it provides for members.
Risk equalisation is necessary because of the Government requirement that health insurers operate on a community-rating basis, according to Mr Sheridan. Community rating means that any company selling health insurance in the Irish market cannot charge different premiums according to the age, sex or state of health of its customers. It means the cost of the insurance risk is shared across the whole insured community so that older or sicker individuals do not pay more for a given level of cover than younger or healthier people. The Government commitment to community rating is aimed at ensuring equal access to affordable health insurance and encouraging people to take up private health insurance. The alternative is a risk-rating system where older/less healthy people pay considerably more for a similar level of cover than younger or healthier people. Some 50 per cent of the Irish population is covered by private health insurance compared with some 25 per cent in the UK where risk-rating applies.
"When VHI was a monopoly, community rating without risk equalisation worked because all the claims were equalised within the same company. Community rating is a distortion of a normal market and, to effect balance, risk equalisation must be applied. Risk equalisation underpins community rating," he said. The problem is that there is a dramatic variation in claims as age increases - the claims' cost of an average 65 year old is six times that of an average 25 year old, Mr Sheridan explained. VHI said its average member age was 35 years compared with an estimated average for the more newly established BUPA of 27 years.
The new aggressive VHI approach has included building a set of accounts for BUPA's performance - BUPA does not publish accounts for its Irish operation. In 2002, according to VHI estimates, VHI will make a return of 1.5 per cent compared with a 25 per cent return at BUPA, which is seven times smaller. Mr Sheridan attributed this difference to the absence of risk equalisation.
"In effect what is happening is that VHI members are paying 2 per cent more every year to create excess profits in the Irish subsidiary of a multinational company," he claimed. Mr Sheridan was adamant that without risk equalisation the system of community rating is facing certain collapse. He rejects the argument that it will drive potential competitors away from the Irish market. In Australia where community rating and risk equalisation apply, some 45 companies are competing for business.
"Where risk equalisation is properly applied, competition can thrive," he said.
The VHI board is considering a report on its future structure from its advisers, AIB Corporate Finance. Since the Government mooted the privatisation of the statutory corporate body, the future options for VHI range around flotation, trade sale, strategic alliance or mutualisation. Mr Sheridan was reluctant to be drawn on the issue at this time. But he commented that VHI's present structure - where it needs approval from the Department of Health for new products and price changes - is "very limiting". VHI has been approached by several insurers and other companies interested in an alliance. A strategic partner with expertise in some of the new products/ service areas could be of benefit to the group to reduce lead time between conception of products/services and getting them to market, Mr Sheridan acknowledged.
