Business Opinion: Sometime between now and December 26th the Tánaiste will have to decide how she will respond to the latest recommendation from the Health Insurance Authority that risk equalisation be triggered in the Irish market.
If implemented, risk equalisation would see significant payments being made to VHI by Bupa in recognition of the fact that VHI has a significantly older - and thus less profitable - customer base. Without the payments VHI will slowly go bust, with the company itself forecasting insolvency within two years.
However, the chances of a €30 million Christmas present for the VHI look slim. Six months ago the Tánaiste decided not to implement a similar recommendation from the HIA after getting submissions from Bupa and Vivas, the third player in the market.
Very little has changed over the last six months. Bupa is presumably continuing to make very good profits by concentrating its efforts on recruiting young healthy members while VHI continues to lose money. We can presume this because if that was not the case then the HIA would not have recommended once again that risk equalisation be triggered.
Its unpublished report is understood to say that the disparity in the age profiles of Bupa and VHI's members is getting wider and that the cost of this to the VHI is running at around €32 million a year. It also accuses Bupa - as it did last time - of acting anticompetitively and engaging in price following. The HIA points out that Bupa's profit margins in Ireland remain around 17 per cent compared to 5 per cent in the UK.
The view of the HIA is - as it was six months ago - that the damage being done to VHI has reached a level that the compensation payments have to be made. Even though this will have a negative affect on competition - by giving the VHI less incentive to compete with Bupa - it will achieve the wider goal of sustaining a market in which insurers must quote people the same rates regardless of age. This is the principle of community rating on which the Irish private health insurance market is built.
The Tánaiste, however, took the view last summer that it was more important - at this stage - to have vigorous competition in the health insurance market. The fear being that introducing risk equalisation will drive out the other players and discourage new entrants, of which their are said to be a number waiting in the wings. Bupa has threatened to pull out of Ireland if risk equalisation goes ahead, although the Tánaiste is adamant that she was not swayed by their threats.
The reason that the Tánaiste puts such a premium on competition in the health insurance market is that private health insurance is vital to her plans to encourage private sector investment in the health sector. The thinking is that anyone considering building a private hospital or clinic whose patients will be relying on health insurance to pay the bills would prefer to see a couple of competing insurers rather than a system dominated by a state company that is propped up by transfers from the other players.
Given that the various tax reliefs for investing in health services were left untouched in the Budget, one can assume that the Tánaiste remains committed to this course. On that basis it's very hard to see her giving the VHI its Christmas present.
