Facing the challenges at VHI

THE FRIDAY INTERVIEW:Jimmy Tolan,  chief executive, VHI

JIMMY TOLAN, chief executive of the VHI, the State health insurer, is worked up. The company is “challenged,” he says. The insurer’s losses are mounting as it serves the needs of ageing customers who are more prone to illness and therefore less profitable, while his rivals target younger, lucrative customers.What’s more, VHI’s rivals, Quinn Healthcare and Aviva (former Hibernian Vivas), are poaching Tolan’s profitable, younger members with fierce competition offering them products on ever-narrowing profit margins. This, he believes, will eventually force older customers to pay more.

He fears this will lead to the collapse of community rating, the Government-favoured system in operation for 53 years which guarantees that a 60-year-old will pay no more for their health insurance than a 20-year-old.

VHI spends more than 50 per cent on older customers, compared to 15 per cent for its rivals, he says; this is straining the insurer and the wider system.

“You are not going to be able to sustain competition in the form that we have, which I believe is a ‘zero-sum’ competition, and community rating at the same time. One of them is going to break and I believe it is community rating,” he says.

Tolan offers a plethora of facts and figures as evidence of how “challenged” the VHI and community rating are. The insurer had 280,000 customers over the age of 60 last year, compared with 180,000 a decade ago. It had more customers over 60 at the end of last year than at the beginning.

The VHI is losing €170 million annually covering these customers, he says. The company expects to generate underwriting losses of at least €80 million in 2009 and will cover 9 per cent more procedures this year, on top of a 73 per cent increase over the past five years.

Tolan says that an insurance policy on a 25-year-old generates gross profit margins of 30 per cent after the levy is taken into account, while a 75-year-old has a negative margin of at least 50 per cent.

“All the competition is at the younger end of the market. All the product design, all the sales and promotions focus on corporates, young people or young families. This is no competition at the older end of the market – we lost 115,000 to 120,000 customers last year,” he says.

The situation forced VHI to raise its prices by an average of 8 per cent just over a fortnight ago, which compares with price increases of 12 per cent at Aviva and 15 per cent at Quinn.

Tolan is quick to point out that these were his rivals’ average increases and that Aviva’s most popular plan rose by 22 per cent while Quinn’s climbed by 27 per cent.

Despite claims that he is playing on an uneven field, the VHI chief is not willing to let his rivals devour the profitable end of the market. To keep pace, VHI’s insurance for a family of four, costing €2,208, is slightly lower than it was this time last year, for example.

He feels the VHI’s pricing has surprised his rivals. “The competition has been a bit more ferocious that they thought it would have been. If you met either of them, I don’t think they would be leaping for joy. I think the competition will be particularly ferocious over the next 18 months.”

The root cause of the VHI’s problems is the Supreme Court’s decision in 2008 to strike down the Government’s risk-equalisation plan, under which rivals would have paid the State insurer compensation for having more older customers. This would certainly have eased the VHI’s burden.

As an alternative, the Government’s health insurance levy, introduced last year on VHI’s rivals, was designed to cover the cost of a tax-relief scheme which helps older customers subsidise their health insurance. Tolan says it is only 40 per cent effective when it could be 80 per cent like in other countries such as Germany and Australia, where community rating works.

The skewed marketplace is stopping the VHI from falling within the remit of the Financial Regulator because it cannot meet the target 40 per cent solvency levels required under EU rules, says Tolan. This, in turn, is holding the company back from taking on new markets and products.

“Not being financially regulated is a huge disadvantage to this organisation. It has impeded our growth – we can’t offer life assurance, savings products, pensions to our customers. We have a life product ready for the last year and a half. We cannot grow geographically. It is actually a huge strategic imperative for this organisation,” he says.

To meet the threshold, the VHI will not just require capital of more than €100 million and reinsurance to pass on some risk; it must show it can maintain minimum solvency over five years, including under a pessimistic scenario. Any potential full or partial privatisation of VHI to generate capital is “a matter for Government” and “open to debate”, says Tolan.

“The regulatory environment – the community rating – that governs us is the key to unlocking us to achieving financial regulation,” he says.

On Tuesday, Minister for Health Mary Harney responded to criticism from outgoing EU Commissioner Charlie McCreevy about the Government’s decision to postpone again the deadline for the VHI to amass sufficient capital reserves to come under the remit of the regulator. The commission has already referred the matter to the European Court of Justice.

The Minister said the VHI would be regulated by the new March 31st deadline and that she intended to bring proposals to Government over the coming weeks to resolve the issue “including the introduction of full risk equalisation”. Tolan welcomes Harney’s plans.

He says the VHI cannot meet the deadline “without an injection of third-party capital”. As it stands, the insurer cannot prove that it would have sufficient reserves over five years when the health insurance levy expires in 2011.

The levy generated €40 million for VHI last year. “It [the levy/tax relief] will have to be continued and increased – I am looking for it to double.”

He fears the market is moving towards a risk-rated system similar to the UK where older customers are charged more and cannot get insurance without paying well over the odds.

The VHI’s most popular plan for older people would have to double from €900 a year for it to be profitable, says Tolan, but the company has no plans to raise prices again this year.

He believes the problem is deeper than just meeting a regulatory target or adjusting health insurance prices. Community rating is “a social goal, embedded in our DNA” that Quinn and Aviva are unwilling to even partially fund.

“It is the right for society and the Government is fundamentally committed to it. From a policy perspective, there is no debate, but policy in itself isn’t sufficient – you actually have to go to the next level and what underpins that policy.”

Tolan believes insurers should be making modest returns on their capital, far below the highs of 35 per cent and more than the general insurers were earning at their peak. They should be “utilities focused solely on the health insurance needs of their members”, he says.

To this end, VHI’s SwiftCare Clinics treat more than 60,000 minor injuries annually, he says. (The figure doubled during the icy spell over Christmas.) The insurer screened 4,000 customers for type II diabetes, the most common form, and cardiovascular risk, and expects to screen 30,000 by 2011. It plans to launch a “hospital in the home” service starting in Dublin this year.

“If we don’t actually start to focus on what is really driving healthcare costs rather than competing for a slice of the market – the profitable end of the market – we are not improving anything and we are wasting resources by designing products focused on younger lives.”

Name: Jimmy Tolan.

Position: Chief executive, VHI.

Age: 46.

Family: married with three children.

Education: BComm from UCD.

Work: After a stint at KPMG, he worked at fruit importers Fyffes, rising to the position of chief executive, before joining VHI in 2008.

Something you might expect: He is an avid fan of Dublin GAA.

Something that might surprise: He has a big interest in US presidents, citing Lyndon B Johnson as the most underrated president because of the social policies he introduced in his five years in power.