VHI faces break-up in health reforms

James Reilly is intent on forcing through his plan for the State’s largest health insurer

ON THURSDAY, May 5th, Minister for Health James Reilly asked to meet Jimmy Tolan, the chief executive of the State-owned health insurance company VHI.

The Minister wanted to discuss the Government’s plans to introduce universal health insurance.

Tolan met him in the department shortly after 3.30pm. While they had met several times previously, it was only the second time that Tolan had met him as Minister.

The two men have very differing views on how to solve the conundrum that is VHI – a loss-making insurer whose losses will only increase given the older age profile of its customer base – and the wider dysfunctional health insurance market.

As stated in the Programme for Government, the Minister’s aim is to have universal health insurance in place by 2016. This will involve splitting VHI into two or three insurers, with one of the entities to be retained in public ownership.

Under this system, rival health insurers will offer the same basket of products to customers and the system of risk equalisation and community rating would be maintained so that younger and older customers would pay the same.

The previous minister, Mary Harney, had intended to privatise VHI and to inject about €300 million in capital so the insurer could meet capital solvency levels to secure regulatory approval.

The new Government shelved the plans to sell the insurer.

Tolan clearly wasn’t going to agree with the Minister’s plans.

Tolan had called for a US-style Medicare entity to be established to deal with the insurance needs of people aged over 65, who represent the most expensive segment of the market. Competition would remain in the 0-65 age profile between VHI, Aviva, Quinn Healthcare and any other entrants to the market.

At his meeting with Reilly, Tolan expressed his opposition to the Government’s plan. He said that he was not the man to be involved in the break-up as he believed that it didn’t make sense.

The following day, VHI announced Tolan’s resignation.

Commenting on the resignation, the Minister acknowledged the differences between them.

“It might be fair to say that he might have had issues with some of the options under consideration,” said Reilly. “And he has made his decision and I utterly respect that.”

It has been a frenetic 90 days in power for the new Minister for Health. He has cleared out the board of the Health Service Executive and forced the resignation of the chief executive of the State’s largest health insurance company.

This week he set up the “special delivery unit” to cut hospital waiting lists and waiting times in hospital emergency departments.

A report commissioned by Reilly from Goodbody Corporate Finance and law firm Matheson Ormsby Prentice on the health insurance market and the VHI is due to be completed in July, setting out a path for the Government’s plans for the insurer.

The company has a 58 per cent share of the health insurance market and the Minister believes it is impossible to have universal health insurance with a dominant player in the market.

“You cannot have a public company dominating the market,” said a source familiar with his thinking. “It gets too cosy with the system that it purchases from. What incentive does it have to bring down costs?”

Reilly nailed his colours to the mast last April when he spoke about the closure of Cork Medical Centre after it had failed to secure insurance cover from VHI.

“We are going to set about this in an aggressive fashion,” he said. “If we had three VHIs, and one of them refused to cover this clinic, this clinic would not be in the trouble it is now. But because the VHI is in such a dominant position, it is in trouble.”

The challenge for the Government lies in attracting outside players into a market that is ageing significantly. This will require significant capital to fund the increased cost of delivering healthcare.

The VHI estimated that, by 2020, the greatest increase in the older segment of the population will be among the over-85s. This will increase by 120 per cent to 106,000. This is followed by a 52 per cent increase in 75-84 year olds, which will rise to 248,000.

The number of over 65s is forecast to double to one million by 2030.

An additional €3 billion of funding will be required to meet the healthcare needs of older members by 2016, the company said.

VHI insures the vast majority of older customers as its competitors cherry-pick younger people who have fewer healthcare demands, making them more profitable.

The company funds the healthcare needs of 129,000 customers in the over-70 age group; its rivals fund 13,000 between them among this cohort. VHI has losses of €110 million on customers in this age bracket; the figure for Aviva and Quinn is €8 million.

“The private health insurance market is dysfunctional,” said a source close to the Minister.

The Government believes that insurers will be attracted into a market doubling in size with the introduction of universal health insurance. (About 50 per cent of people have health insurance.) Two US health insurers are said to have made approaches to the Department of Health about the possibility of entering the market.

Critics of the Government plan say the lack of outside interest in the purchase of Quinn Healthcare, which has 450,000 customers, shows the potential difficulties in drawing in foreign players.

Greater segmentation in the market from the break-up will create difficulties when there is a shortage of capital in the system, the VHI claims. It maintains that its break-up would mean higher insurance costs for customers.

Splitting the insurer would lead to the loss of buying power and economies of scale, the VHI maintains – a claim that is challenged by sources close to the Minister, who say the company has not shown major success in cost savings.

“They say they have a big gun but where are their kills from using it?” said a senior source.

The Government believes the company has not used its dominant position to reduce the average costs of a hospital stay and the average length of a stay. A recent report by actuarial consultants Milliman found there was considerable potential for the VHI to make further savings through avoiding unnecessary admissions.

They found that the insurer was overly focused on the effect its older clients had on claims and that this may have led to “missed opportunities to manage claims and thus limit premium increases and improve financial performance”.

VHI’s ratio of operating costs to premium income stands at just over 6 per cent compared with 27 per cent at Aviva and 11 per cent at Quinn Healthcare. Maintaining costs at the same level in three VHI entities would require about €30 million in additional annual costs that would be passed on to customers, the company claims.

Securing regulatory approval for three VHI entities will be difficult when the Government is being sued by the European Commission for failing to implement adequately a regulatory regime to oversee the VHI.

The Department of Health believes there is a possibility that the part of the VHI retained in public ownership may avoid having to meet solvency ratios if it has a social goal of offering the same-cost insurance to the elderly.

However, sources in the sector say this will be impossible. If it competes with for-profit insurers, it must be overseen to the same regulatory standards.

The Department of Health is drawing heavily on the Dutch model of universal health insurance, with officials and advisers planning to visit the Netherlands to examine its system shortly.

The summer months should throw up further developments on plans for universal health insurance and the break-up of the VHI with the publication of the Goodbody/MOPS report.

The Minister is intent on forcing through the break-up of the VHI as part of his wider reform of the healthcare sector. As the resignation of Tolan showed, he is not for turning.