The case taken by Bupa Ireland challenging the European Commission's approval of the Government's risk equalisation scheme has been dismissed.
The health insurer sued the commission in 2003 after it approved the policy, which forces private health insurers like Quinn and Vivas to compensate the Voluntary Health Insurance Board for the older age profile of its clientele.
The European Court of First Instance in Luxembourg ruled today: "Such a mechanism is a necessary and proportionate means of compensating the insurers required to cover, at the same price, all persons living in Ireland."
The Government says that the risk-equalisation scheme is necessary to underpin the concept of community rating in the health insurance market under which everyone pays the same amount for similar products, regardless of age.
However, Bupa Ireland opposed the scheme, claiming it would force Bupa to make payments of tens of millions of euro to an already profitable larger competitor.
The scheme prompted Bupa to sell its Irish business to the Quinn Group last year. It had started operating in Ireland in 1997 after the Government liberalised the private health insurance market.
Welcoming today's decision, VHI said it was good news for consumers in Ireland since a negative judgement could have meant the end of community rating for health insurance in this country.
Chief executive Vincent Sheridan said: "The decision is bad news for those who wish to use community rating as a means of generating windfall profits by way of regulatory arbitrage .
"It also marks another failed attempt by Bupa to destroy community rating in Ireland," he said.
Minister for Health Mary Harney said: "The Government, my department and I have always seen risk equalisation as important and necessary in the provision of an equitable and competitive health insurance market in Ireland.
"Risk equalisation enables the provision of a level playing field for all consumers and insurers and allows for the protection of the consumer by facilitating community rating and open enrolment," she said.
The Health Insurance Authority said it welcomed the ruling by the court that a risk equalisation scheme is "necessary and proportionate" in a community rated market.
"This view is consistent with the view of the Authority and of other independent experts. It is also consistent with the regulation of private health insurance in other jurisdictions, where risk equalisation is a common mechanism in community rated markets," it added.
While noting the decision, Quinn Healthcare said: "There are still serious competition issues in the Irish health insurance market as a result of the VHI's dominant position and the fact that it is not subject to normal insurance regulation requirements.
"This lack of competition is clearly illustrated by the fact that there are only two private companies operating in the health insurance market compared to over 20 Irish and overseas insurers operating in the rest of the general insurance market in Ireland," it said.
Vivas Health chief executive Oliver Tattan said: "While we are disappointed that the commission has endorsed a system of subsidisation of the most dominant player in the market and has deemed that this form of state aid is legal the case was just one of many legal investigations underway at a local and European level."
"The outcome of the other cases may not be known for a substantial period of time. Until all investigations are resolved the market will continue to suffer from a lack of investment and from limited competition," he said.
But Labour's health spokeswoman, Jan O'Sullivan, said: "The principle of risk equalisation is a well-established feature of the health insurance market throughout Europe."
She said: "Without risk equalisation, new entries to the market could simply cherry-pick young customers with a view to maximising their profits."
