The Government has this week introduced the controversial risk equalisation system to the Irish health insurance market. Health insurer Bupa believes the risk equalisation scheme will cost it €150,000 a day, writes Barry O'Halloran
The effect of this will be that in nine months Bupa will have to begin making payments that could amount to more than €30 million annually to the VHI. This is to compensate the State company for the fact that it provides insurance for a large number of older people, who are more likely to make claims.
Bupa, which made a €20 million profit in the Republic in 2004, is planning to fight the introduction of risk equalisation in the courts. It is due before the High Court in February, and has said that it will take the issue to the European Court of Justice.
At the weekend, its chief executive Martin O'Rourke estimated that the combined cost of compensating the VHI and a long court battle could result in the company having to make a provision of around €150,000 a day, or over €50 million this year.
It is not clear what immediate impact the decision by Tánaiste and Minister for Health Mary Harney will have on consumers.
As the system will take financial pressure off the VHI, some market analysts believe that its 1.6 million subscribers may not face the same level of premium increases as they have in the past.
The VHI increased charges by 12.5 per cent in September, but chief executive Vincent Sheridan said this was to cover the increased cost of medical care.
He claimed the company was meeting the extra cost of insuring older people from its €280 million cash reserves, and warned that if risk equalisation was not introduced, the VHI would be insolvent in 2007.
The introduction of risk equalisation is part of Ms Harney's overall reform plan for the health insurance market that will see the VHI change its status from a statutory body to a commercial State company. In this circumstance, it will no longer have to get the Minister's approval for any proposed price increases.
Bupa has threatened to pull out of the market if it fails to defeat risk equalisation, a move that would leave VHI, which has 80 per cent of the market, with a virtual monopoly. Its next biggest rival would be Vivas, with 1 per cent of the market.
Risk equalisation is designed to ensure that everyone with health insurance pays the same amount for the same level of cover, irrespective of the actual risk of them getting sick.
In order for the system to work, companies with a disproportionately high number of older customers are entitled to compensation from competitors with a larger share of young subscribers. Last September, the Health Insurance Authority estimated that the high number of older people on VHI's books cost it €33 million in the 12 months to the end of June.
Bupa's business in the Republic is five times more profitable than in the UK.
