Q&A

Why does the Government want to change the health insurance market?

It doesn’t really have a choice. The system in place was never designed to be permanent, having been developed in 2008 after an earlier “risk equalisation” scheme was successfully challenged by Quinn Insurance in the courts. Risk equalisation is the mechanism which reflects the Government’s belief in “community rating”. This, in turn, sees health insurance costing the same for everybody, regardless of their age or medical condition. The Government calls this “solidarity”, in that it means younger people help to pay for the cover of their older neighbours.

So what will the new system involve?

Well, it’s back to risk equalisation, albeit in a different form as yet unclear, which the Government hopes will be sufficiently robust to withstand legal challenge. Risk equalisation means insurance companies with more young customers (Quinn and Aviva) will make cash payments to those with older customers. As things stand, VHI has 82 per cent of all over-60s and 94 per cent of over-80s who have health insurance. Customers in this category naturally have a greater claims incidence and are thus more expensive to maintain.

Younger customers make more money for the insurers because they make fewer, less expensive claims. For example, VHI customers aged over 70 have been shown to have average claims that are five times higher than those of the remainder of its customers.

What is the most significant change under the new proposals?

The precise details remain vague but the most striking element is the Government’s plan to sell the VHI, which has been in State ownership since its establishment in 1957 and controls 65 per cent of the market.

Why does the State need to sell the VHI?

Strictly, nobody is forcing a sale but the Government argues that the market will be fairer if all health insurance companies are in private hands. It may not, for example, be deemed even-handed if the Government continues to own a company (VHI) that receives payments from privately owned competitors under risk equalisation.

Minister for Health Mary Harney said yesterday that she had received many expressions of interest in VHI over the years and is thus optimistic that a sale can be achieved. The firm’s pre-sale appeal will be enhanced by an injection of funds by the State, possibly of about €300 million, which is needed to bring the firm’s reserves (its financial cushion) up to levels deemed appropriate by the European Commission.

Who might buy it?

In theory, potential buyers could include Aviva, but another international player is probably more likely. A sale should happen before 2013, with the Government to appoint financial advisers over coming weeks.

But isn’t VHI loss-making and thus unattractive to buyers?

Yes, in 10 months in 2008, it lost a cool €73.8 million, while its two competitors were profitable in the same period. The ratio of claims to premiums at the company was about 95 per cent at that stage, while it was closer to 70 per cent for Quinn and Aviva.

Ms Harney said she had yesterday asked VHI to examine its costs but, more fundamentally, the Government will also look at how the distribution of older customers can be more balanced against the three insurance companies. This is difficult because of issues of personal freedom and contract, so the Government will be seeking further advice on it in the context of a VHI sale.

How will VHI staff be affected?

The positions of VHI’s 900 staff are secure, according to Ms Harney. In fact, an expansion of VHI’s services, such as offering its travel insurance to customers other than its own policyholders, could lead to a rise in staff numbers. And when the company is sold it is possible that staff will receive a share of the sale price.

Will the market change immediately?

No. From the financial perspective, a temporary system of tax relief and a levy to support the cost of older people’s insurance claims will remain in place until 2011. A further transitional system will be instituted from 2012, with the new, permanent scheme to take effect in 2013.

How will benefits be affected in the long run?

At the moment “minimum benefits” are specified in official regulations, covering things such as access to a semi-private room in a public hospital. The Government now wants these minimum benefits to be extended to areas such as GP cover and health screening, or other preventive health measures. Minor procedures such as blood tests could also be covered. The ultimate goal is to avoid hospitalisation as far as possible with a view to saving money. The market regulator, the Health Insurance Authority, will now consult with the health insurance players on this issue and will report back to Ms Harney.

How about costs? Will health insurance be more expensive under the proposed system?

It’s impossible to say for sure at this stage, but international and domestic trends point towards increased healthcare costs due to ageing populations and growth in more costly treatments. But Ms Harney argues that the new system by itself will not raise the cost of health insurance. In fact, she said yesterday older people will in future pay less than they would have done in the absence of the new scheme, while younger people will pay no more.

One key change that will be the subject of industry consultation is the idea of “lifetime cover”, whereby people are encouraged to take out their health insurance policy at a young age with a penalty applied to those who wait until they are older.

Could health insurance be made compulsory as part of the new arrangement?

At the end of last year, about half the population of the Republic, or 2.2 million people, were covered by health insurance. The Government says it wants to keep cover voluntary but it is looking at the best way of applying its funds in the health services.