Risk equalisation - BUPA gears up for long legal battle

There are currently three companies offering health insurance on the Irish market.

For decades the Voluntary Health Insurance (VHI), a State-owned company, had the market to itself. Then in 1996 BUPA began providing competition, followed by VIVAS in 2004.

When there was no competition, people took out health insurance with the VHI. BUPA and VIVAS can now compete for the business of younger, healthier people entering the health insurance market.

As older people are more likely to be make claims on their health insurance, the VHI is exposed to more claims, and is thus handicapped in a competitive sense.

VHI has been paying out €93 in claims for every €100 it collects in premiums.

BUPA, on the other hand, has been paying out just €70 of every €100 that it takes in.

BUPA could charge customers much lower premiums, but this has not been the practice. Instead it has exploited its competitive edge to make enhanced profits.

The VHI's disadvantages are growing with the age profile of its customers, with the result that its competitive position is actually deteriorating.

If it raises premiums, younger potential customers will just turn to its competitors and the VHI's viability will be further undermined.

Currently it estimates that losses in 2006 could run in the region of €25 million, which would threaten the company's solvency.

Two other companies have been negotiating with the Health Insurance Authority (HIA) to enter the health insurance market.

Increased competition should be welcomed, but it would further impinge on the competitiveness of the VHI, unless something is done to bring about risk equalisation within the overall market.

It is not just a question of competition; it is about providing a level pitch on which all can operate.

The HIA recommended last year that the government introduce risk equalisation payments by compelling competitors to compensate the VHI for the older-age profile of its customers.

Health Minister Mary Harney refused to implement the recommendations then, but has announced plans to do so in the New Year.

She introduced a risk equalisation scheme that would compel BUPA to subsidise the VHI to the tune of €16.5m in 2006.

VIVAS which has been able to view the issue from a more detached perspective because it would not be compelled to make compensation payments until 2007 complains that the risk equalisation scheme would damage innovation and undermine competition.

Ultimately, it contends, customers will foot the bill.

BUPA has resisted the introduction of risk equalisation by securing an injunction to prevent its implementation before the High Court can consider the legality of the arrangement. The company contends that the scheme could saddle it with a liability of €161m against a projected profit of €64m.

Representatives for BUPA therefore told the High Court unequivocally yesterday that it would withdraw from the Irish market if the risk equalisation scheme is found to be valid.

The firm believes that it is both unconstitutional and contrary to EU competition laws.

The current High Court case is not so much about the legality of the risk equalisation, as it is about the judicial process. If the injunction remains in force, then BUPA will fight the case in the High Court and the Supreme Court, if necessary.

In some years the whole thing could end up in the European Courts.