More price hikes in store as people struggle for cover

The VHI predicts that up to 200,000 people will cancel private health insurance by the end of 2010

AS PRIVATE health insurance providers instigate another round of price increases, consumers, beset by rising unemployment and a significant drop in incomes, are struggling to keep their cover.

It is no surprise, therefore, that the VHI has predicted that up to 200,000 people will cancel their private health insurance by the end of 2010. But can health insurance providers survive such a drop in cover and are more price rises inevitable?

While the Irish economy may be re-pricing itself, one sector which is stuck on the upward-only price revision button is health insurance. Since 1998, the cost of health insurance has been rising at an annual rate of about 9 per cent, but over the past year this has escalated with all three providers raising their prices considerably – Hibernian by about 22 per cent, VHI by an average of 23 per cent, and Quinn by about 16 per cent – and the latest 12 per cent hike by Hibernian, which comes into effect on October 10th, signals another round of price hikes.

Quinn says it will be reviewing costs from January next year, and according to Dónal Clancy, general manager with Quinn Healthcare, “the significant driver in this decision will be the cost of private beds in public hospitals, medical inflation and the health insurance levy of €160 per adult and €53 per child imposed by the Government this year”.

According to a VHI spokeswoman, “no decision has been made regarding pricing for 2010”, but given that it is facing similar price pressures to its rivals, similar decisions are likely to be taken.

And there is no end to the price rises in sight. Brian Turner, a lecturer in economics at University College Cork, “can’t see prices falling in the foreseeable future”, and he cites a number of factors as being behind the upward pressure on prices, including the ageing population and increasingly advanced medical technology.

He also echoes Clancy’s assertion that the Government’s commitment to move to a full economic costing of private beds in public hospitals will mean higher costs for health insurers.

Against this background of rising prices, consumers will also suffer from Government policy. For the over-30s, health insurance is due to get even more expensive next year following the planned introduction of regulations allowing health insurance companies to charge higher premiums to late entrants. The loadings will affect people over the age of 30 who are taking out insurance for the first time, or who are re-joining after a long time.

And, if the Commission on Taxation’s recommendations are implemented, consumers will see an additional increase in the cost of their cover, as it proposes that existing tax relief on health insurance premiums, of 20 per cent, should be replaced by a fixed amount, so those paying €2,000 for their policy and those paying just €400 will receive the same level of relief. Given that this tax relief cost the Government €321 million last year, it may be a target for cuts.

So it is a tough time for consumers. While health insurers have, to some extent, reacted to the different economic environment in what may be perceived as a positive manner – the VHI for example, is allowing people who have been made redundant to freeze their policies for a year, while Quinn is arranging flexible payment options for members who are finding it difficult to maintain their health insurance – the latest round of price hikes will hurt people who are already struggling to make ends meet.

As a result, the VHI has predicted a 10 per cent decrease in private health insurance coverage by the end of 2010, which would see about 200,000 people cancelling their policies, and the latest statistics from the Health Insurance Authority show that the reduction in cover has started. For the first time since quarterly figures began in 2001, penetration levels have declined, with 13,000 people cancelling their policies in the first quarter of 2009.

“People are choosing to opt out of private health insurance as household budgets get squeezed, and once you give up your policy, you are unlikely to return,” says Prof Colm Harmon, a director of the Geary Institute at UCD.

Harmon sees this as being a worrying aspect of the recent price hikes, because if people can no longer afford to pay for private health insurance, it means more people will need to use the public health system.

“Allowing prices to drift up is counterproductive in the long term, as it will put a lot of pressure on the public system,” he says. Moreover, many of those who have had to cancel their policies are younger, “the kind of folks you want to entice into private health insurance”, he says, which means an increase in the risk profile of health insurers.

However, while it may be the start of a much larger trend, the decline in health insurance coverage is not as significant a figure as one might expect, given the economic circumstances, and Turner maintains that the private health insurance market remains sustainable.

Although consumers may disagree, the economists maintain health insurance is appropriately priced, with Harmon describing it as “actually pretty cheap”, while Turner says it is “still reasonably good value for money”.

Pointing to a “resistance to drop health insurance cover”, Turner says that the demand for it is inelastic, which means that a 10 per cent increase in prices does not always equate to a 10 per cent reduction in policies. Already, people are looking to switch or downgrade their level of cover, rather than drop it altogether.

This is borne out by the fact that while 70,000 people cancelled their cover with VHI in the first seven months of the year, other insurers are still getting new customers. While Quinn is unwilling to disclose its cancellation figures, it does reveal that more than 70,000 members have joined so far in 2009, and of these, 60 per cent, or 42,000, have switched from other firms. Hibernian, meanwhile, has 47,000 new members.

Moreover, while Harmon feels that demand has peaked at a coverage level of about 52 per cent of the population, Turner says there is still demand.

If the forthcoming budget cuts hit the front line of the health service, causing a deterioration in the public system, he suggests that it might lead to an increase in demand for private health insurance, while another possible source of demand may come from the construction of additional private hospitals.

The other issue at stake is the future of the VHI, with recent speculation suggesting that a consortium involving Munich Re and Viva’s former chief executive Oliver Tattan is looking to acquire it.

The insurer needs a massive income boost of between €100 million and €150 million in order to comply with the Financial Regulator’s solvency requirements of 40 per cent of insurance premium income. Where this money will come from is unsure, and the Government has repeatedly postponed the deadline by which it needs to comply.

An outright sale, or private equity cash injection, would solve this problem, and Harmon sees the insurer as being an attractive takeover target, given that it has a Government-mandated subsidy from the rest of market, while it is probably also ripe for significant cost-cutting.

However, given that the VHI has a 66 per cent share of the health insurance market, Turner suggests that such a sale would raise competition issues.

And even if the insurer was sold it would not necessarily lead to cheaper prices for consumers. So, it seems that, at least for the foreseeable future, the only way for prices is up.