VHI chief has a long-term health plan for Ireland

There was no mistaking John O’Dwyer’s anxiety, during an interview in the Dublin offices of the VHI, to get across his view that the massive State-owned health insurance provider has been moved to a very good place since he took on the position of chief executive in August 2012.

A subordinated €90 million loan from Berkshire Hathaway that boosted the organisation's capital reserves has meant that, at the end of July, the VHI finally became an authorised, regulated entity in the Irish health insurance market. That in turn put to bed a years-long worry about the State having to trump up money to put the entity on a sound financial footing.

“It has given people in here a fantastic lift,” says O’Dwyer who, when discussing the affairs of the almost 60-year-old insurance business, speaks in slow, clear, well-formed sentences designed to make his comments accurate and clear. “We developed our own strategies, did our own private funding, and we are standing on our own two feet.”

Back when he was taking on the job, there was speculation in media and political circles that the VHI might need up to €300 million from public funds to get its capital reserves to a position that would meet with Central Bank approval. That the debate was occurring against the backdrop of Ireland’s economic and employment collapse, and the negative effect that had on the numbers paying for health insurance, added to the sense of concern.

In the months after he came into the job, he says, the organisation developed a clear long-term strategy. In 2013, for the first time ever, the VHI entered into a private funding arrangement when it agreed a reinsurance deal with Berkshire Hathaway. O’Dwyer won’t say how much of the VHI’s book was involved, but says that different amounts are laid off in different years, and that the overall effect has been to reduce the VHI’s capital requirements “by hundreds of millions”.

Capital reserves

Meanwhile, the VHI was steadily increasing its capital reserves, which over a three-year period went from €290 million to more than €450 million. Approximately 90 per cent of that came from retained earnings, and the rest from balance sheet management. That still left the reserves short by approximately €90 million, a problem that was solved by the subordinated loan from Berkshire Hathaway.

Because the deal with Warren Buffett’s US conglomerate puts them last in the queue in the event that “anything goes wrong”, the interest or fee involved is a little bit higher, but that is all O’Dwyer is willing to say about price. The two deals with the Omaha, Nebraska-based business involve separate parts of that organisation and are in no way linked, and do not involve any loss of control, O’Dwyer says.

“The private funding arrangements were a clear vote of confidence in the VHI’s business plan by a very reputable company, Berkshire Hathaway, and we didn’t have to have our hand out to Government. We worked on our own plans. Our team here is very, very pleased that we were able to do this ourselves.”

When the €90 million deal and the VHI’s transition to being a regulated insurer were announced, O’Dwyer, at a press briefing, said the business was now a “more valuable asset” for the State. He says he made the comment in response to a direct question and that the issue of privatisation is one for the Government, not for the VHI. His job, he says, is to ensure that the VHI has a good strategy and is able to compete in the market place.

“However, we believe that an authorised and financially healthy VHI is clearly a more valuable asset. It is a much more valuable asset.”

Asked for a figure, he laughs, and says he doesn’t know how much it might be worth.

Likewise, he says the idea of universal health insurance is a matter for Government, though he points out that it is very expensive and that the Dutch system took up to 20 years to put in place.

On the other hand, he also says the respected research group, Consumer Powerhouse, has consistently found that the Dutch believe theirs to be the best health service on the planet.

Customer loyalty

For more than 40 years, the VHI was the only seller of health insurance in the Irish market. It is an extremely well-known brand, with strong customer loyalty. It has approximately one million customers, and premium income of approximately €1.4 billion. That gives it an important role in not just the Irish health insurance market, but in the Irish health sector, and Irish society generally.

O’Dwyer says that when seeking to put in place a new strategy, he established a bottom-up, as against a top-down, project that involved more than 50 people, from a wide range of areas, working on different aspects of an overall plan.

“I think that strategy and that approach helped us get buy-in. A lot of people formulate strategies, but it is implementation that is often the key. It’s the people in the company who implement and I like to think that involving people in the plan helped us to implement it, because we had advocates and ambassadors out there.”

On the other hand, he says, it “wasn’t rocket science” and that that plan involved making better use of the VHI’s key assets – its staff, its data, and its customer loyalty.

Last year, the VHI produced an after-tax surplus of €49.8 million, down from €65 million the previous year, with the figures representing a one percentage point reduction in the profit margin, to 3.4 per cent. O’Dwyer says that, internationally, a margin of 2 per cent would be considered a good outcome, and that the VHI aims for a margin of between 2 and 3 per cent. He also points out that, alongside boosting its capital reserves over recent years, the organisation has also been increasing its claims reserves.

Authorisation means that the VHI has “a little more freedom” in deciding what products it will offer its customers, with O’Dwyer mentioning life insurance, and income continuance insurance for sick people, as the type of products that might be looked at.

The downturn hit the health insurance market but O’Dwyer says that 2015 is looking good.

“We are only halfway through the year, but it is definitely the first time we have had a growth in customer numbers in some years.”

He is hopeful that by year’s end the numbers will be up by between 15,000 and 20,000, and attributes this to the once-off bounce from the new 35-year-old rule but, perhaps more importantly, to increased employment in the economy.

O’Dwyer thinks the age-related loading system brought in this year, which will make health insurance more expensive for those who first take it out after the age of 35, is fair. He points out that people would be put out if a 50-year-old could join a pension scheme and become entitled to the same benefits as someone who had been paying into it since they were 25.

All of which brings the interview to the subject which probably most animates the VHI boss: demographics.

“This is probably the biggest challenge facing the country in terms of health policy over the next 20 years,” he says. While in the 20 years up to 2011, the number of people over 65 years of age grew to 530,000, from 400,000, the same period after 2011 is likely to see an even more dramatic increase, to just under a million. “That’s a huge challenge.”

It is expected that over the coming 15 years, the number of cancers diagnosed will double, while the number for chronic diseases will grow by up to 50 per cent. “We cannot continue with the same model. We won’t be able to pay; so we have to innovate.”

There is a trend towards people living healthier lives and O’Dwyer believes that is something that should be promoted not just by Government but also by health insurers. This fits in with his point that the VHI does not just “pay the bills” but also seeks to influence how healthcare is delivered in Ireland.

Medical developments

He mentions the VHI’s Swiftcare centres, its new hospital in the home service (Homecare,) and its screening activities. These type of measures – early diagnosis, treatment outside hospital etc – can be good for the patient while also keeping down costs, with affordability of insurance being, O’Dwyer says, a huge issue for the VHI.

So medical developments that, for instance, allow for less invasive surgical techniques and, therefore, less time in hospital, all play into the VHI’s drive to maintain affordability while continuing to provide a service.

He thinks the system needs to do a better job in rewarding health service providers, and insurers, that deliver their services in more effective and more efficient ways. “We need to innovate, and align rewards with treatments,” while all the time putting the customer at the centre of the discussion.

As an example, he points out how, in Germany, an insurer can be rewarded for an early diagnosis of diabetes and then for helping prevent the disease progressing to the next stage, or even for reversing the disease by a stage.

At present, the Irish system compensates health insurers with older patients on their books, but O’Dwyer thinks the system needs be further developed, to incentivise insurers to positively affect a customer’s health.

When it is put to O’Dwyer that surely the cost of treating an unhealthy customer is an incentive for such an approach, he counters that an insurer can invest heavily in the health of a customer, and that customer can then just leave for another provider, or none.

A system that is more successful at promoting healthier living, more early diagnosis, and cheaper, more effective treatment, is one that will be better able to meet the challenge that lies ahead given likely demographic changes.

O’Dwyer took on the top job in the VHI after a four-year stint as chief operating officer of the life, general and health insurance business of Interamerican, a Greek subsidiary of the Dutch insurance group Achmea.

Contingency plans

Interamerican, the largest health insurer in Greece, had its own ambulance service and its own small hospitals, and is an extremely well-known brand there.

During O’Dwyer’s 2008 to 2012 period running the business he had to draw up contingency plans and recovery plans for possible disasters. While in Ireland such plans might be developed while thinking the odds were against their ever having to be activated, that was not the case in Greece, where plans for what to do, for example, in the case of Greece exiting the euro were among the scenarios examined.

Early on there were a lot of heated debates at board level as to whether to offload Greek assets, including property and bonds, at a small loss. This was a difficult decision but it was done and a few years later was shown to have been a very wise move that helped Interamerican weather the storm better than most Greek insurers.

O’Dwyer’s view is that Greece is a “gem” with great potential, but that its biggest single problem is its taxation system. “Their ability to collect, the systems and processes, well, they leave a lot to be desired.”

As an example, he talks of a “PAYE” manager with a salary of approximately €55,000 who is educated and in his 40s and raising a family, and who sees his taxes increased by 20 per cent, his salary cut by 20 per cent, his pension wiped out, and his children’s prospects in Greece reduced enormously.

Yet this person has to struggle on while seeing his neighbour not pay any tax at all. “There are a lot of people who fit that box.”

But when not being pressed to discuss the country's crisis, he is more inclined to discuss the attractions of Greece and the Greek people. You get the impression it is topic in which he is very interested, though probably not as much as the demographics and future strategies for the VHI and the Irish health system. CV Name: John O'Dwyer Position: chief executive of the VHI.

Age: 58. Family: Married with three children.

Something you might expect: He goes for 6am swims in a Dublin pool a few mornings a week before coming to work, partly for health reasons.

Something you might not expect: He is a sports fanatic and a supporter of Athens team Panathinaikos, whom he saw play a number of times against arch rivals Olympiachos, of Piraeus, during his time working in Greece.