Beware the myths and misinformation about risk equalisation, writes Vincent Sheridan.
Before Christmas the Tánaiste made a very important decision for all of us who subscribe to private health insurance - a decision that will ensure affordable premiums irrespective of the age or state of health of the subscriber. This decision was that risk equalisation would commence in the health insurance market with effect from 1st January 2006. Since then those who are opposed to this decision, and who wish to use the community rated health insurance system in Ireland to generate large excess profits, have been busy putting about myths and misinformation concerning risk equalisation. It is time to dispel these myths and counter this misinformation with facts.
1 Risk equalisation is an essential support for community rating. This is the view of all independent experts who have advised either the Government or the Health Insurance Authority (HIA). There have been at least five such reports prepared by different bodies in recent years. The most detailed and authoritative of these reports was that prepared by the York Health Economics Consortium. They concluded:
"There is no satisfactory case for the non-implementation of risk equalisation as long as there is a fundamental commitment to community rating."
The independent statutory body, the HIA, has recommended to Government that risk equalisation be implemented immediately. The Government, who accepted the need for risk equalisation since 1994, has now decided that the scheme should be started. All political parties in this country support this decision.
2 Risk equalisation does not represent a subsidy from one insurer to another. Community rating is all about inter-generational support, ie the young and healthy members of society pay higher premiums so that the sick and elderly can continue to afford to purchase health insurance. Risk equalisation is the mechanism employed for making these inter-generational transfers. The insurance companies act as the collecting and receiving agents. The same rights and obligations apply equally to all insurers.
3 No company entering the Irish health insurance market can have been in any doubt but that it was the Government's intention to introduce risk equalisation. It has been enshrined in legislation since 1994 when competition was first provided for in this market. The necessity for risk equalisation in our community rated market was again clearly set out in the Government White Paper on Private Health Insurance in 1999.
4 So far I have avoided mentioning any other company by name, but I must address the bizarre argument put out by BUPA that risk equalisation cannot be justified because the transfers they would be required to make exceed their profit. For some years the rate of profitability of BUPA's business in Ireland has been three or four times higher than the rate of profitability of the same company in the UK!
What this means is that they are already collecting part of the risk equalisation transfers from their customers, but in the absence of any risk equalisation transfer mechanism they have been allowed to retain these funds as windfall profits.
The fact that the risk equalisation transfers that will be required may be greater than their profits is simply an acknowledgement that they have not been collecting enough from their members and will need to increase their premiums. This cannot come as a surprise since they claim to be cheaper than Vhi Healthcare and yet are demonstrably less efficient, ie their operating expense ratio is approximately 50 per cent higher than ours.
The HIA has concluded that if BUPA were not to artificially reduce their profits (by over-providing for claims) and were to increase their premiums by 7 per cent, they would return the same rate of profit in Ireland as they do in the UK.
5 The claim by BUPA that the introduction of risk equalisation would leave them with no alternative but to leave this market was addressed and rejected by the York Health Economics Consortium.
Their comment was: "Market exit by BUPA Ireland is only likely if it has based its plans on a continuing ability to keep the gains from a younger membership."
On this approach to competition their view was "competition through lower premiums based on the ability to recruit younger members is socially undesirable". Who, but BUPA, could disagree with these conclusions.
6 The claim has been made that risk equalisation is not appropriate in the Irish market because Vhi Healthcare has a large market share. There is absolutely no connection between relative market shares and the concept of inter-generational support, which underpins community rating. The actuarial advisors Mercer, in a report to the Tánaiste, confirmed that the market position of Vhi Healthcare was not relevant to any decision in relation to risk equalisation. They emphasised this further by stating: "Risk equalisation is a mechanism designed to ensure that risk is fairly distributed across all health insurance consumers and does not interfere in any other way in the market."
7 Finally, risk equalisation is conveyed as anti-competitive. The exact opposite is the case. Community rating without risk equalisation provides a huge incentive for insurers to target younger members. This is quite easy to do through distribution strategy, product design, advertising, sponsorship, etc.
Risk equalisation will reduce the profit accruing from younger members and will encourage competition among all sectors and for all age groups in the market.
The decision of the Tánaiste was a positive and essential one for the future of community rated health insurance in Ireland. To the members of Vhi Healthcare it is particularly welcome, since it means that the burden of financing community rating will now be spread equitably across the entire market.
The decision is only a negative one for health insurers who believe they have a right to use our community rated health insurance system as a means of generating windfall profits.
Risk equalisation will ensure that these windfall profits will now be re-distributed for the benefit of the Irish healthcare market.
Vincent Sheridan, is chief executive, Vhi Healthcare