I move: "That the Bill be now read a Second Time."
I am pleased to have this opportunity to address the House on the Second Stage of the Health Insurance (Amendment) Bill 2016, which was published last week. Over 2 million people in Ireland have private health insurance. Health insurance in Ireland is community rated. This means when someone purchases health insurance, their age, gender and health status do not affect the amount they pay. Older and sicker people pay the same amount as younger and healthier people. Our community-rated health insurance market means the cost of health insurance is shared across all members of the market. Older and sicker people pay much less for health insurance than they would in a risk-rated market. People who are less likely to need health care pay more than they would in a risk-rated market. Our market is based on generational solidarity. Younger and healthier people effectively subsidise older people who may be less well and need more care. This is intergenerational solidarity.
Community rating means health insurers must offer health insurance policies at the same price to everyone, regardless of a person's current or potential health status. There is a limited number of exemptions to this which include lower prices for children and young adults and higher prices for people purchasing health insurance for the first time after the age of 34. Community rating is a very different concept from the usual way of setting insurance premiums in other markets. In risk-rated markets, the premium charged is based on the insurer's estimate of each person's risk, taking into account relevant factors such as their age and existing medical conditions. Healthier people pay lower premiums and sicker people pay higher premiums. The premium for someone who has held health insurance for many years will rise if his or her health deteriorates under a risk-rated system. We can all see the disadvantages and concerns a risk-rated system poses to people who have health insurance.
In 2015, private health insurers in Ireland paid out €2.1 billion in claims. Average claims costs vary significantly for different age groups. In a risk-rated market, people would be charged very different prices for health insurance depending on their age and risk of ill health. In a community-rated market like ours, the risks are shared across the market as a whole. This means health insurance is more affordable for sicker and older people than it would be in a risk-rated market. While community rating does not tell insurers what price they can charge, it ensures that they charge everyone the same price.
We have community rating because we want to ensure the cost of private health insurance is shared between everyone who decides to buy it. Community rating provides all insured people with peace of mind and certainty that if they get sick, their health insurance premium will not increase as a result. The Health Insurance Act requires all insurers to apply community rating. However, older and sicker customers are not shared equally across the Irish market, given the relatively recent arrival of competition. This is the crux of the issue. Some insurers have higher risk profiles than others given that they have a much higher proportion of older members. In a competitive community rated market like ours, insurers have a strong incentive to try to attract low-risk people and avoid high-risk people. Claims costs for older people can be up to 25 times higher than claims costs for younger people.
I draw the House's attention to the statement issued by the VHI welcoming the legislation. It stands in contrast to the prevailing narrative that blanket higher premiums are the only inevitable result from making the changes recommended by the Health Insurance Authority, HIA. From the VHI's statement, we can see that this is not the case.
Insurers, understandably, want to attract healthy people and they do this by advertising in a particular way or by offering additional benefits that appeal to younger and healthier customers. They try to avoid people who are more sick by designing products that do not provide services that older and sicker people are more likely to need. We do not want insurers to compete like this. We want them to compete by offering better health insurance products to everyone at lower cost.
To support community rating and reduce the incentives for insurers to target or avoid particular groups of people, some form of risk equalisation is required. This is a policy view that has been shared across many different sides of this House over the past number of years. Community-rated health insurance systems across the world use risk equalisation to share some of the higher costs of older and sicker patients across the whole market. The US, Australia, Germany and the Netherlands are just a few examples of other countries which use risk equalisation to support community-rated health insurance.
Risk equalisation supports community rating by providing cross-subsidies between insurers with different risk profiles. It aims to equitably neutralise the differences in insurers’ costs that arise due to variations in the age and risk profile of the insurers. Risk equalisation is a transfer mechanism whereby money flows from insurers with healthier customers to insurers with sicker customers. The overall goal is to channel competition in the health insurance market in a way which benefits everyone who wishes to purchase private health insurance. Risk equalisation reduces insurers’ incentives to attract only low risk consumers or to charge higher prices for products that are marketed to high risk people.
A permanent risk equalisation scheme was introduced in Ireland in 2013. Under the scheme, credits are paid to insurers for their older and sicker members. These credits are funded directly by stamp duty levies on all health insurance contracts written. The scheme redistributes funds between insurers to meet some of the additional costs of insuring older and sicker members. The scheme is self-financing and Exchequer neutral. It is how we share the cost of insurance between all insured people and ensure that sicker and older people are not unfairly targeted.
As well as sharing the cost of insurance we also want to keep private health insurance affordable for those who wish to purchase it. This is done in a number of ways. Insurers must compete with each other to attract customers. In a competitive market insurers have a strong incentive to manage their costs and offer insurance at the best possible price. Premiums have increased in recent years. The prices of individual policies have gone up. However, the average premium paid by people buying health insurance has not increased to the same extent. By exploring lower cost options with the same level of cover, people have avoided paying very large increases in premiums that they may otherwise have experienced. The State also provides tax relief at source of up to €200 for everyone with private health insurance.
Supporting affordability in an ageing market is a challenge. The Society of Actuaries in Ireland estimates that the ageing of the private health insurance market accounted for approximately 2.5% of the increase in claims costs each year between 2009 and 2015. This consists of ageing of the overall population, a lower proportion of younger people with cover and a higher proportion of older people with cover. The society estimates that claims costs will increase by 1.7% per year over the next ten years due to market ageing. Attracting younger and healthier people into the market reduces the average cost of insurance across the market.
In 2015, we introduced lifetime community rating. Loadings now apply when someone buys health insurance for the first time after the age of 34. This measure has encouraged and will continue to encourage people to take out health insurance at a younger age. We also introduced young adult rates which encourage younger people to retain their health insurance. I am pleased to say that the number of people insured increased last year by over 100,000 following the introduction of lifetime community rating and young adult rates. This also reflects positive employment trends which are a key driver of the demand for insurance. This upward trend continues with a further increase of almost 18,000 in the first nine months of this year.
Legislation is needed each year to update the amounts of credits paid to insurers under the risk equalisation scheme and the amounts of stamp duty levied on health insurance contracts to fund the credits. The Health Insurance Authority carries out an evaluation of the market and recommends the level of credits that should apply in the following year. This analysis is supported by my Department’s actuarial advisers. I have considered and accepted the recommendations made this year by the authority. Higher credits are required under the scheme next year for a number of reasons. Claims costs have increased. Payments to public hospitals have increased as a result of the changes to charging regimes for private patients in public hospitals. The market has continued to age and insurers must also cover the cost of medical innovations in treatments and new drugs. No changes are proposed to the existing level of hospital utilisation credits provided to insurers under the scheme. These remain at €30 for each day case admission and €90 for each overnight stay.
I propose to significantly increase the age-related credits paid to insurers in respect of older people. Increasing the amount of age-based credits provided under the scheme requires changes in the stamp duty levies. The scheme is designed so that the total amount of credits paid out to insurers is matched by the total stamp duty levied on insurers. The stamp duty on health insurance products will increase by 10%. This means that the stamp duty on advanced cover products for adults will increase from €403 to €444. It is important to note that increasing the stamp duty levies does not increase costs across the market. This is a really important point and one which various commentators in the media need to remember. We need to encourage our insurance companies not to use this as an excuse to hike up insurance premiums and we certainly do not need people defending it as an excuse. All money raised is paid back to insurers in the form of credits. Increasing the credits and stamp duties under the scheme is needed to continue to share costs across the market. The amount of any increase or decrease individual insurers pass on to consumers is a commercial decision for each of them, but the money from this scheme and this stamp duty goes to insurers to ensure we continue with our community-rated scheme, which provides support to older and sicker people with health insurance.
In previous years the revised credits and stamp duties have come into effect from 1 March. This year the proposed effective date for the revised credits and stamp duties is 1 April. This change in date will facilitate the administration of the stamp duty collection by the Revenue Commissioners and provide an additional month’s notice to insurers.
While the changes to the credits will help to maintain existing levels of support for community rating, sometimes referred to as the effectiveness of the risk equalisation scheme, I am pleased to note that further improvements are planned. I am committed to making the risk equalisation scheme as effective as possible in a way that promotes fair and open competition. The introduction of a more refined measure of health status for the allocation of credits between insurers is required. Using diagnosis related group data in the future will allow for better targeting of credits to all people who require higher levels of health care. We need to ensure these credits are getting to where we want them in the market. This will further reduce the incentive for insurers to attract low-risk people and avoid high-risk people. Introducing this change will take time, as there are complex data collection and system issues to be addressed. I have asked my officials to focus on progressing this, in conjunction with the Health Insurance Authority, over the months ahead. I am pleased that the risk equalisation scheme was approved by the European Commission earlier this year as a compatible state aid for the period 2016 to 2020. The scheme underwent detailed examination by the Commission to ensure it is administered in a fair and transparent manner and does not unduly distort competition in the market. As part of the process of achieving Commission approval, two changes to the scheme are proposed in this Bill. First, the Health Insurance (Amendment) Bill 2016 provides for a new objective to be considered by the Health Insurance Authority when recommending the level of credits to apply under the scheme. The net projected average claims costs for all age groups aged 65 and over should not be less than 125% of the projected market average net claims costs. This limits the amount of credits that can be provided under the scheme while allowing credits to increase in monetary terms to reflect any claims cost inflation. As Minister for Health, I must also have regard to this objective.
Second, the measure of reasonable profit, used to ensure that no insurer is overcompensated by the risk equalisation scheme, will be defined as an average return on sales, gross of reinsurance and excluding investment income, of 4.4% or less over a three-year period. Using return on sales to measure reasonable profit has a number of advantages over the existing return on equity measure. It is based on easily observable accounting profit and sales data and it avoids the valuation and allocation of assets between different services. These proposed changes to the operation of the scheme will ensure that competition between insurers is protected.
People are naturally concerned about any increase in the price of health insurance. While both the Health Insurance Authority and I would encourage people to keep their options open and compare between insurers to obtain the best value, I also understand that it can be difficult to make a decision when there are so many products on the market. This is a real problem. There are so many products available offering similar benefits at very different prices. It is not easy to pick the best option when so many products are available. The market needs to be simplified. I am pleased to see that the number of products on the market has reduced in the past year from 381 to 354. I hope to see this downward trend continue and encourage our insurance companies to continue to simplify the list of products that are available to customers so that it is easier for them to compare and to contrast policies and their cost.
This Bill provides further clarity for insurers about when they can withdraw products from the market. It also ensures that when people’s existing plan is withdrawn they will be offered a plan which provides at least the same level of benefits as their current one. These proposed changes will mean that the existing lifetime cover regulations are no longer required and I will revoke them in due course.
I will now outline the specific sections of the Bill.
Section I defines the principal Act as the Health Insurance Act 1994. Section 2 substitutes subsection 7AB(3) with a new subsection that provides that insurers cannot change a plan from advanced cover to non-advanced cover or vice versa except on 1 April each year from 2017 onwards. This is a technical amendment to facilitate the administration of stamp duty levies. Section 3(a)(i) is a technical amendment to section 7E of the principal Act to delete the reference to "bed". Section 3(a)(ii) is an amendment to section 7E of the principal Act which provides that the Health Insurance Authority must have regard to the objective that the projected net average insurance claim payment per insured person for a relevant group of insured persons should not be less than 125% of the projected net average insurance claim payment per insured person for all age groups, which is a point I outlined a moment ago.
Section 3(b) is an amendment to section 7E of the principal Act which requires the Minister for Health to have regard also to this objective. Section 3(c) inserts a new subsection 7E(4) which provides for definitions of "net" in relation to the average insurance claim payment per insured person and "relevant age group of insured persons". Section 4 amends section 7F of the principal Act to provide that from 2016 onwards, a reasonable profit for the purposes of determining over-compensation of a net beneficiary of the scheme is defined as a return on sales gross of reinsurance and excluding investment income that does not exceed 4.4 % per annum over a three-year period.
Section 5 amends section 9 of the principal Act to set out the circumstances when a health insurer can withdraw products from the market. It also provides that when a particular product is withdrawn from the market by an insurer, people holding the product being withdrawn from the market must be offered a replacement contract with the same level of benefits, subject to small differences in excess amounts. Section 6 amends section 11C of the Principal Act. It provides for 1 April 2017 as the effective date for revised risk equalisation credits to be payable from the risk equalisation fund. Section 7 replaces table 2 in Schedule 4 of the principal Act with effect from 1 April 2017. The risk equalisation credits payable from the risk equalisation fund for certain classes of insured persons are revised. Section 8 amends section 125A of the Stamp Duties Consolidation Act 1999. It specifics the applicable stamp duty rates from 1 January 2017 to 31 March 2017 and from 1 April 2017 onwards. Section 9 provides for the Short Title, collective citation, commencement dates and construction of the Bill. Sections 5 and 8 will come into operation on 1 January. Sections 6 and 7 will come into operation on 1 April. All other sections will come into operation when the Bill is enacted.
This annual adjustment of the credits and levies under the risk equalisation scheme provides us with an opportunity to reflect on the role of private health insurance in the health service. One of the first priorities I identified as Minister for Health was the need for a long-term consensus on the direction of health policy. To help achieve this, the Committee on the Future of Healthcare has been established to devise cross-party agreement on a single long-term vision for health care and direction of health policy in Ireland. I have no doubt the current and potential role of private health insurance both as a source of funding for the health service and as a driver of the model of care people receive will be considered as part of the committee's work. I look forward to receiving the committee's deliberations. Through the work of the committee, I hope we will be able to clearly articulate our desired model of care, the implications of moving towards it, and how it can be achieved.
We want to move towards a sustainable public health service that all our citizens can have confidence and trust in that they can access the care they need when they need it. In the meantime, we must maintain our support for the core principle of community-rated private health insurance. By revising the credits and the stamp duties required to fund those credits to take account of market trends, we can continue to provide the necessary support to ensure the costs of health insurance are shared across the insured population. We must not fall into the trap of believing spin on this matter. These stamp duties go into our insurers, every single cent of it, to make sure our sicker and older patients can continue to access private health insurance without being penalised for being older or sicker. It is a principle we, as a House, have valued and it is a principle that should not be used by private health insurance companies to exploit customers.
I commend the Bill to the House.