Contender BUPA has fight on its hands

IN the big scrap in the health insurance market, round one has gone to local heavyweight, the VHI. But it could be a long fight. More talks may take place next week between the Department of Health and the British health insurer BUPA on its plans for the Irish market. But it is hard to see an end to the impasse which has led Mr Michael Noonan to threaten to throw BUPA out of the ring.

It is an intriguing contest. In the green corner is the slightly battered local fighter, showing a new combativeness before impending competition. In the blue corner stands BUPA, the challenger, and Britain's leading private health-care insurer. Include some senior figures in Irish public life and the usual bevy of consultants and legal advisers, and it is obvious that neither side will throw in the towel easily.

To understand the fight, it is necessary to look at what is at stake. On the surface it is a row about community rating the principle that everybody pays the same for health insurance. But it is also a dispute about what community rating should mean and, more fundamentally, the kind of health-care insurance we want to provide.

It is also about the future of the VHI, an organisation trying to find its way out of major financial difficulties, whose financial director warned last July that it was heading for disaster.

In the middle is the referee, the Health Minister, Michael Noonan. His problem is that he is also in VHI's corner, as its only shareholder (on behalf of the people of Ireland). He might also be accused of making "hometown" decisions.

Politically the issues are also dynamite, with VHI subscribers angry at successive price increases and top-up billing but fearful of further crises.

Mr Noonan cannot say he wasn't warned. When he took office in late 1994, his Department already had a private report which identified VHI's core problems. The report committee was chaired by a former Aer Lingus managing director, David Kennedy, Judge Catherine McGuinness and a former Irish Life senior executive, Bob Willis. It did not pull its punches.

It was highly critical of the VHI's corporate culture and said a row between chairman Noel Hanlon and former chief executive Tom Ryan who left as a result - had been "a major distraction for the organisation".

The VHI faced a major financial crisis, it said, correctly predicting that its projections were too optimistic. In addition, the organisation had a product range and relationships with health-care providers which left it at risk from a new competitor.

Two years on, what has changed? The VHI still makes heavy losses on its core business:

. Its claims costs will probably exceed its premium income by £8 million to £9 million in the financial year ending next month, although investment income will lead to an overall surplus of £1 million to £2 million;

. It is still at war with the health-care providers, with no sign of new products;

. Towards the end of last year, another chief executive, Brian Duncan, resigned after persistent disagreements with Noel Hanlon and the board.

One thing has changed: seven new members were appointed to the VHI board last July. Together with Noel Hanlon and some of the longer-established board members, they are leading the fight against BUPA's policies, while an influential group on the board has also taken the reins in trying to plan for the future.

The fight started in earnest on November 19th when BUPA introduced its products. The VHI immediately accused it of aiming to attract healthier young subscribers by offering them cheaper rates. BUPA responded that its advice was that it was within the rules.

Also, BUPA argues vigorously, it offers an attractively priced basic product to cover all treatment costs, with the option to subscribers of taking out additional cash plans which would allow them to upgrade hospital accommodation or meet other associated hospital costs.

The crux of the argument is that BUPA charges older subscribers more for its cash plans. It says these plans are not health insurance per se and thus do not contravene the 1994 Health Insurance Act. The VHI argues that BUPA is trying to undermine community rating.

At issue is Section 7 (1) of the Act, which says community rating applies to health-care contracts and to contracts which "relate" to the same health service or ancillary health service as the main contract.

A powerful VHI lobby swung into action after the BUPA announcement. At the helm was Noel Hanlon, the Longford businessman who is also chairman of Aer Rianta and who, despite being non-executive chairman, spends most of the working day in the VHI offices.

The others are similarly strong-minded individuals including Paul Coulson, the financier who made his money in leasing, Phil Flynn, a senior trade union leader for many years and also the ICC bank chairman, John O'Connor, a consulting engineer, barrister John McMenamin and Michael O'Keeffe, a Mater consultant.

This group and the VHI's public relations advisers, Murray Consultants, instigated a lobbying campaign which involved meeting the main parliamentary parties. These were briefed by senior directors. A particularly favourable response was received from Fine Gael, according to those involved.

BUPA also briefed Fianna Fail, Labour and the Progressive Democrats. Fine Gael did not have time for a meeting.

For a month after the BUPA products came on the market, it heard nothing from the Department. But on December 13th the Department wrote seeking clarification of its product range. BUPA responded on December 19th, still, according to sources, thinking that what was involved was clarification of its range. A day later, all hell broke loose.

It transpired that on December 19th Richard Greene, Mr Noonan's programme manager, told the Fine Gael parliamentary party that the Attorney General had advised of possible problems with BUPA products. BUPA went in to bat in a meeting with the Department on Friday 20th, having heard about the AG's advice on the radio that morning.

BUPA's executive is led by a man who knows Irish health-care. Martin O'Rourke, its chief executive, worked for 25 years with the VHI. He left briefly to work as a consultant before joining BUPA. Accompanied by other senior executives and legal advisers, he started a series of meetings with the Department of Health.

The crux of the talks was the linking of the cash plans to the essential health-care insurance and whether this breached the community rating rules. On December 20th a statement from Mr Noonan made it clear that he still had problems with the BUPA range.

Further meetings before and after Christmas made BUPA believe a way around the problem could be found by changing its marketing.

It wasn't much of a Christmas break for either side. On December 27th, BUPA Ireland's chairman Margaret Downes one of Ireland's senior businesswomen and a member of the board of Bank of Ireland and chairman of cigarette company Gallaher, wrote to TDs defending BUPA.

The next day Department officials held a lengthy meeting at which an article by Garret FitzGerald in that day's Irish Times was high on the agenda. It called for BUPA's products to be banned. VHI directors reckoned the former Taoiseach had taken the correct line.

On December 30th it was rumoured that BUPA and the Department were close to a deal. But a day later the company's hopes were dashed. Mr Noonan returned to town on New Year's eve to announce that he was still unhappy and would move to deregulate BUPA if he had to.

THE "several thousand" subscribers who have signed up to BUPA are still covered, although there is no doubt that the company's arrival has been damaged. Both sides are unclear about whether a deal can be done and the Minister is saying little. More talks are likely in an attempt to avert a legal battle which would stretch past the next election.

The VHI waits anxiously to see what will happen. Either way, the immediate task of the new board members is to find a chief executive; a senior executive from elsewhere in the public service has already turned the post down.

Progress must also be made on developing products to attract younger subscribers and provide benefits in areas such as dental and optical treatments. And the VHI must urgently find a way to deal with health-care providers.

Here its relationship with the Department is key. In many ways the VHI is the Department's downtown office. Recently the Department approved a 9 per cent increase in the cost of private beds in public hospitals, which the VHI must absorb.

The way out appears to be to let the VHI negotiate freely with individual hospitals and health boards. Sources say the attitude of the new board has further strained already poor relations between the VHI and the Department.

At issue in the battle is the entire method of health insurance in the State. BUPA left itself open to criticism for the way it introduced its products. But community rating as operated by the VHI is far from perfect. The VHI currently makes money on its basic A plan and sometimes on its most popular B plan, but loses on the more up-market D and E plans.

The Director of Consumer Affairs, William Fagan, has asked why someone on one of the lower plans should have to cross-subsidise a high-roller going into the Blackrock Clinic. Some VHI board members are believed to have started to question the charges at the Blackrock Clinic, in particular.

Another weakness is that a patient on a more expensive plan can, after a sudden illness or accident, get taken into a public hospital but receive no refund.

BUPA has tried to change the ball game and attack VHI's weaknesses. Its essential plan offers full treatment, up to heart treatment in the Blackrock Clinic or Mater Private Hospital, because these are the only two hospitals offering such a service. Cash plans are then available for those concerned with better accommodation.

Whether BUPA gets the go-ahead or not, a period of major change is likely in the health-care market. There is a serious question mark over the VHI's ability to survive competition. And it must find some way to attract young people.

If BUPA is allowed entry, then change for the VHI will come quickly. But even if BUPA doesn't get the go-ahead, the rules are changing in the health insurance market and the consumer will decide, sooner or later, what products are best.