Health insurer Bupa has lost its European court challenge over the Government's risk equalisation scheme for the private medical insurance sector.

The European Court of First Instance (CFI) yesterday dismissed the health insurer's appeal against a European Commission decision to sanction the scheme, ruling that the Government had the right to force Bupa to make payments to State health insurer VHI.

The decision should guarantee the future of risk equalisation, which is a State compensation scheme under which the VHI receives millions of euro in payments from rival insurers to compensate for its older client base.

It should also bolster the right of EU states to make policy decisions that protect key public services, known as services of general economic interest, from private competition.

In a landmark ruling yesterday the CFI - the court in Luxembourg that hears appeals against community institutions - found that risk equalisation is a "necessary and proportionate means of compensating the insurers required to cover, at the same price, all persons living in Ireland, independently of their state of health, age or sex".

It also ruled that Irish legislation establishing the risk-equalisation scheme was legal and that the compensation system established by the State was fair to Bupa, which entered the market in 1997.

"The court considers that there is no error in the finding that risk equalisation is necessary on a private health insurance market where insurers are required to cover any person at the same price and independently of the individual risk," said the judgment. Bupa initiated the case in 2003 following an EU decision not to raise any State aid objections to the Government's risk- equalisation scheme for health insurers.

The firm has always opposed the setting up of an Irish risk- equalisation scheme and argued in a previous High Court challenge that the scheme could cost it about €160 million over three years - nearly three times its estimated profit for the period.

In the CFI case it argued that the risk-equalisation scheme was anti-competitive and amounted to Bupa paying a State-enforced subsidy to its main rival in the health insurance market, a State-owned firm.

The Government, which was supported by The Netherlands in the case, countered that the scheme was 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.

It argued that private insurers such as Bupa must bear the costs, which it would have to bear if its own risk profile was equivalent to the average market risk.

New entrants to the health insurance market benefit from lower risk profiles than the VHI because they target younger and more affluent consumers.

Bupa could decide to appeal the judgment to the European Court of Justice, but only on points of law.