The European Commission has asked the State to end its unlimited guarantee to the VHI before the end of the next year.
The commission said the guarantee provided the VHI “improved creditworthiness” which gave the insurer an “undue financial advantage” over its competitors, as it can not be liquidated or wound up.
“A level playing field on the Irish market for private medical insurance can only exist if all operators compete on equal market terms,” said EU competition commissioner Joaquin Almunia.
“The removal of the unlimited State guarantee to the [VHI] is essential to ensure that competition on this market takes place on the operators' own merits.”
The commission has proposed a series of measures under EU state aid rules to abolish the guarantee.
It suggested that one or a number of subsidiaries of the VHI be incorporated as private limited companies which would take responsibility for the insurer’s economic activities and be governed by common Irish company law.
The commission has also requested that, regardless of the final structure of the VHI, the removal of the unlimited guarantee should be completed by December 31st of next year.
Minister for Health James Reilly said the State had consistently argued that the guarantee did not exist and that considerable efforts had been made to ally the concerns of the commission. This had culminated in a set of proposals the commission has now accepted.
"Today's announcement represents a clear pathway by which issues around the original complaint can be resolved," he said.
The VHI was set up in 1957 as a statutory body and it is governed by the Voluntary Health Insurance Act 1957, which means it cannot be forced into bankruptcy.
The European Court of Justice found last September that VHI’s exemption from Central Bank authorisation and regulation was in breach of EU directives. In contrast, its private competitors had to have substantial financial reserves.
The ruling had huge implications for the Government which faced having to pump over €200 million into the company to bring its reserves up to a level which would facilitate authorisation by the Central Bank.
The VHI welcomed the development and said the measures outlined formed part of "a complex process" that will allow its healthcare division to apply to be regulated by the Central Bank.
"Vhi Healthcare believes that it is a strategic imperative for Vhi Healthcare to be regulated and that this will be in the best interests of our 1.2 million customers," it said in a statement.
The VHI said it would require additional capital in order to meet the Central Bank's solvency rules.
