JOINT COMMITTEE ON ENTERPRISE AND SMALL BUSINESS debate -
Wednesday, 21 Feb 2007

Health Insurance Report: Discussion with Competition Authority.

Acting Chairman

I welcome Mr. WilliamPrasifka, Mr. John Evans, Ms Jacinta MacDonnell, Mr. Ciaran Quigley and Mr. Stanley Wong from the Competition Authority.I also welcome Ms Ann Fitzgerald, Director of Consumer Affairs and interim Chairman of the National Consumer Agency. Ms Fitzgerald is joined by Mr. Roderick O’Mahoney of the Office of the Director of Consumer Affairs.

I draw attention to the fact that members of the committee have absolute privilege but this same privilege does not extend to our visitors. Members are reminded of the parliamentary practice that they should not comment on, criticise or make charges against any person outside the Houses or an official, either by name or in such a way as to make him or her identifiable. Members who wish to make a declaration in relation to any matter before the committee may do so at the commencement of their contribution.

Mr. William Prasifka

I will make a very short opening statement on our report on private health insurance. I thank the committee for the invitation and we are very pleased to be here.

In December the Minister for Health and Children requested the Competition Authority to report to her on further measures to improve competition in the private health insurance market. In January this year the Competition Authority delivered a report to the Minister and two weeks later, on 13 February, that report was published. In the report the Competiton Authority makes 16 recommendations for promoting competition in the private health insurance market in the State. We recommend that VHI's exemption from prudential regulation should be ended as soon as possible so that it becomes subject to the legal solvency requirements in corporate structuring rules that apply to other health insurers in Ireland.

We recommend that a package of measures should be introduced to provide consumers with useful and timely information to enable them easily to compare alternative private health insurance products and to promote consumer awareness of the ease of switching health insurer. I will ask my colleague to complete the opening statement.

Ms Jacinta MacDonnell

We recommend that VHI Healthcare should discontinue its practice of cancelling its multi-trip travel insurance when its members switch health insurer. We recommend the minimum benefit regulations should be modernised and that the Health Insurance Authority should be allowed to approve limited cover plans to allow more innovation in the market. We recommend that the Health Insurance Authority should be given wider powers to enforce the health insurance Acts and be formally assigned the function of promoting the interests of consumers and to implement a switching code. On the issue of risk equalisation we recommend that the exemptions for risk equalisation payments should be clarified.

Implementing the recommendations we have outlined and the others contained in the report will help promote greater competition in the market and benefit consumers. However, it is important to realise that even by making all these recommendations a reality, competition will still be limited by the key principles on which the market is based and therefore more fundamental measures may be required in the future.

Deputy Hogan

I welcome the Competition Authority to the meeting. One recommendation is that the exemptions for risk equalisation payments should be clarified. I ask for amplification of that statement. The principal reason the authority is here is the developments in Fermoy and the purchase by Quinn Direct of the customer base of 450,000 built up by BUPA in this jurisdiction. What is the position? What role is envisaged for the Health Insurance Authority in relation to this welcome development which will retain some element of competition?

A number of suggestions have been made that VHI should be broken into three segments in order to assist a more competitive health insurance market. What is the view on that? What impact would it have on premia? Suggestions were made that it would increase premia to existing customers. Is that correct?

Mr. Prasifka

On risk equalisation, an issue has arisen as to whether Quinn Direct qualifies for the three-year exemption. We had examined this issue prior to the entry of Quinn Direct to the market. Our report was delivered prior to that development and we had identified the whole issue of whether a new entrant by way of purchase of an existing company should qualify for a three-year exemption.

Risk equalisation is to protect community rating and for ensuring stability in the market to ensure that community rating can be viable going forward. If a book of business can be continually exempted from community rating simply by new entry by purchase and sale, there is a potential to undermine community rating and risk equalisation. It is not the role of the Competition Authority to give a legal opinion about the health insurance Acts — that is, for others — but we have identified a lack of clarity here. We state in the report that clarity should be given with a view to dealing with the regulatory gaming situation whereby the book could be continually transferred to gain exemption from risk equalisation payments. Simply put, if one allows that, one has to rethink the whole approach of risk equalisation.

Deputy Hogan

Has a legal opinion been sought from the Attorney General? If so, what is the outcome?

Mr. Prasifka

No. It is not our role to offer an opinion on the health insurance Acts, but we have said in the report that this should be clarified and, if necessary, amendments to the underlying legislation or statutory instruments should be put in place with a view to dealing with the regulatory gaming issue.

Deputy Quinn

I know Mr. Prasifka is not in a position to offer a legal opinion but it would strike me that somebody buying an existing company would buy the obligations, liabilities and assets. Is Mr. Prasifka saying from his preliminary view of the legislation that it is less clear than it would be for the purchase of a trading company?

Mr. Prasifka

Yes. I think it is less than clear. The legislation specifically refers to an exemption for a new entrant, a new insurer in the market.

Deputy Quinn

Is Quinn Direct a new entrant? If one buys the book of an existing business and gets an instant customer base of 400,000, this is hardly analogous to somebody starting from scratch and becoming a new insurer.

Mr. Prasifka

It all comes down to the legal interpretation which we do not feel qualified to get into. We have noted that there is an issue here which should be clarified. If not, then there is the potential to undermine the whole risk equalisation system.

Deputy Quinn

Following Deputy Hogan's question about the breaking up of VHI, is this Aer Rianta mark II?

Mr. Prasifka

The Competition Authority report contains 16 recommendations, one of which is not to break up VHI. However, we note that in going forward there may be a need to look at fundamental structural issues, one of which may be to look at breaking up VHI. There are some simple reasons this issue arises. The report was written at a time when VHI had 80% of the market and we were looking at the potential exit of the second entity from the market. It is not surprising in a market with this level of concentration, where there is also a commitment to look at competition, that normal competition with significant rivals would not be possible in the short to medium term; therefore a structural remedy should be considered. In this report we do not endorse that, we do not recommend it, but we say it is something which potentially should be looked at into the future.

In doing so, a number of very critical questions have to be asked. One has to ask if ultimately the market will be better off with a structural remedy. Effectively, there are two large countervailing considerations. The first is that, generally speaking, with greater diversity in the market and less market concentration you will get more competition and that could drive efficiency. In the health insurance market, though, buying power can often be seen to work very much for the benefit of consumers because the buying power on behalf of the insurance companies can be a significant factor in restraining the growth of health care costs. Those two broad considerations must be looked at. In this report we do not endorse either approach.

Deputy Hogan asks what impact a breakup would have on premia. That is what the analysis should look at. Would the breakup of VHI drive efficiencies or would it dilute buyer power? On the other hand, would there be other ancillary costs? It is a rather complicated question and we do not come down with a recommendation that it should be done. We simply note that in the context of this market it may be something that should be considered at a future date.

Deputy N. O’Keeffe

Did the Competition Authority take into account in its assessment the decision of the High Court? What is the view on that? Did it consider the age profile of BUPA's book of customers as against that of VHI? How did premia compare between them? Who was getting the best value for money? Was the same level of cover available to all who availed of this facility? Which book carried the most liability? We hear much about age profile but from the day we are born we start getting older. When a car gets older the insurance goes down, but when a person gets older health insurance goes up.

Mr. Prasifka

Of course we looked at the court decision, which affirmed the decision to go forward with the risk equalisation scheme. However, we did not second guess or do an independent analysis of the court decision or of the risk equalisation scheme in general. We simply accepted it as part of the health care environment in which we had to analyse, just as there are many other elements such as the fundamental commitment to community rating.

As we say in our report, many major decisions have been made which drive competition in the private health insurance market — risk equalisation, community rating, the role of the public and private sectors, the fact that private health insurance is voluntary. One could easily do a fundamental root and branch re-examination of all these considerations. We did not do that. We did not do it for risk equalisation. We accepted it as part of the health care landscape. That is the market we were asked to analyse and we accepted that.

Looking at risk equalisation and the impact it will have on competition, there are several important factors which arise from the report. We understood that there was a lower profile for BUPA than for VHI.

Deputy N. O’Keeffe

You mean age profile.

Mr. Prasifka

Yes, a lower age profile. We understood that this gave them some form of regulatory advantage. We also looked at the market in which VHI had certain regulatory advantages as well. It made it a somewhat difficult market for us to analyse from a competition perspective. With the introduction of risk equalisation, that will necessarily mean an increase to the cost base of BUPA and VIVAS. The dominance of VHI and the fact that it has been consistently pricing at a margin above VIVAS and BUPA would indicate some element of inertia in the market, some element of market power that VHI may be enjoying. If one considers raising the cost base of new entrants, one looks at a potential reduction in competition in the market. We looked at the court decision, we accepted risk equalisation as part of the health care environment and we saw that potentially the introduction of risk equalisation, which might be completely justified for other reasons, would have an effect of reducing competition, for the reasons I stated. Does that answer the Deputy's question?

Deputy N. O’Keeffe

Did Mr. Prasifka compare like with like — the BUPA premium with the VHI premium?

Mr. Prasifka

What has tended to happen in this market is that new entrants have followed the lead of VHI in terms of pricing and providing products. That is characteristic of a market in which there is a single dominant player who has a legacy advantage from having been the State monopoly over a period of time.

Senator Leyden

BUPA treated its customers very shabbily. It built a large client base over a short period, on the basis that it would be there for the long haul. Quite a number of its clients had left before the business was sold to Quinn Direct. That being said, we are fortunate that Quinn Direct is coming into the market and it should have a period of grace to become established in this business. I see in its advertisements that it encourages older clients to join. Similarly VHI does not exclude older people.

Breaking up VHI would be against the best interests of its customers. There would be triplication of boards and of costs. VHI should look to more efficient and effective organisation which could be monitored by the Competition Authority. VHI has provided a tremendous service over the years and it would be counterproductive to split it on the basis of the BUPA saga.

Acting Chairman

Does Mr. Prasifka wish to comment?

Mr. Prasifka

No, I do not have any comments on that.

Deputy N. O’Keeffe

Profit is very important for the success of any organisation. Over the years VHI's profits were taken out by various Governments to fund the public health service. It had not built up reserves.

Acting Chairman

We are here today to discuss the insurance report.

Deputy N. O’Keeffe

Mr. Prasifka is very anxious to answer the question.

Mr. Prasifka

The Competition Authority generally in analysing a market does not look at the profitability of each company. As I understand, that is an exercise that will be done by the Barrington group, at the request of the Minister. That is not something we would look into.

Acting Chairman

This is an issue to which we will return. I thank Mr. Prasifka.