Representatives of the Health Insurance Authority have been invited to this meeting to discuss risk equalisation in the health insurance market. I welcome the chief executive and registrar of the authority, Mr. Dermot Ryan; the authority's head of compliance services, Mr. Liam Sloyan, and the first emeritus professor of mathematics at DCU, Professor Alastair Wood, who is a member of the board of the authority. I ask Professor Wood to commence the authority's presentation on risk equalisation in the health insurance market.
Health Insurance Authority: Presentation.
Professor Alastair Wood
I understand the joint committee has received a copy of the Health Insurance Authority's documentation. I will refer to various graphs and other statistical data contained in it.
The Health Insurance Authority was established on 1 February 2001. Its five members who are appointed by the Minister for Health and Children take decisions on risk equalisation. It has eight members of staff, including the chief executive and the head of compliance, both of whom are present at this meeting. As it is funded by a levy imposed on the premiums of private medical insurers, it is financially independent of the State. It is important to stress that it is independent of the Minister.
As an independent regulatory body, the Health Insurance Authority has always tried to maintain a level playing field and treat all medical insurers in the State equally. I am slightly surprised that VHI is the only medical insurer being given an opportunity to address the joint committee this morning. Representatives of the other two insurers are in the Visitors Gallery. I do not know whether the committee intends to invite them to speak at a later date.
They have been invited to address the joint committee at a later date. It has been agreed they will have an opportunity to speak on 12 May next.
Professor Wood
That is excellent.
I assure Professor Wood that the joint committee is all-embracing.
Professor Wood
I was slightly concerned.
The members of the joint committee have been living in this committee room for the past few weeks.
Professor Wood
The options within the health care and health insurance systems reflect the culture and values of society. I am sure members of the joint committee are aware that there is a two tier medical system. Just over half the population have private medical insurance and access to an enhanced range of services and treatment. It is clear, therefore, that such services are not available to almost 50% of the public. Nothing like this is encountered elsewhere in the world. It is not possible, therefore, to infer certain things about community rating and risk equalisation on the basis of international experience. The systems in place in other countries are very different. When proposals for change are made, they are judged not only on medical, legal and economic criteria but also on political and cultural criteria. It is difficult to change things in the Irish medical insurance system.
I would like to speak briefly about the evolution of the private health insurance market. The Voluntary Health Insurance Act was brought into force in 1957 — its golden jubilee will be in 2007. In 1992 the third non-life insurance directive opened the health insurance market to competition. The Health Insurance Act 1994 which gave legislative effect to the principles of open enrolment, lifetime cover, minimum benefit and community rating cleared the way for the introduction of risk equalisation. Although the first risk equalisation scheme was introduced in 1996, it was not implemented at that time.
There has been competition in the health insurance market since 1997 when BUPA Ireland entered the market. The Harvey report was published in 1998. In 1999 the original risk equalisation scheme was revoked and a White Paper published. As I have said, the Health Insurance Authority was established on 1 February 2001 by the then Minister for Health and Children, Deputy Martin. The new system of risk equalisation introduced when the 1994 Act was amended in 2001 became active in 2003.
The Health Insurance Authority makes decisions every six months on the basis of the data received from insurers for the preceding six months. The authority will submit a report on the third round of risk equalisation to the Minister for Health and Children tomorrow. I welcome the increased competition in the health insurance market that has resulted from the arrival in the market of VIVAS Health earlier this year. I am glad to see representatives of the company in the Visitors Gallery.
I would like to speak about the features of the health insurance system. Under the non-discriminatory community rating system, premium rates are not risk-related, which is very important. In Britain, for example, where the premium rates for private medical insurance are related to risk, older people or people with a pre-existing medical condition are expected to pay more. As there is open enrolment in the Irish system, health insurance cover is available to everybody under the age of 65 years. If a person under that age applies to join a medical insurance scheme, the company offering the scheme has to accept him or her. It cannot say no.
Lifetime cover is a feature of the system that means a company cannot reject a customer after it has accepted him or her. If one develops a serious condition, needs many operations or has to be given long-term care, the company cannot strike him or her off its list, even if such treatment costs a great deal of money. It has to keep looking after its clients. That the cover of existing subscribers cannot be discontinued is a positive feature of the system. As there are minimum benefit regulations under the system, insurers have to pay a certain minimum benefit.
The graph at the bottom of page 2 of the documentation I have distributed highlights the problem with the community rating system. The blue line reflects the risk rate by age. It is clear from the graph that the level of risk associated with people aged 25 years is low. It is not a surprise that the level of risk associated with people aged 75 years is high. A community rating means insurers charge an average, flat-rate premium as indicated by the red line on the graph. Young people, who may be aged up to 50 years — which is the point at which the blue line crosses the red line — pay more than they need for their medical insurance. They do so because they know they will be looked after when they in turn get old. That is all very well as long as young people continue to join. Unfortunately, our system is an unfunded community rating system and if young people stopped joining, the lower part of the graph would have to be removed and the red line would have to rise. The average premium would rise as it would cover older, less healthy people. It is one of the dangers of the system.
There have been proposals to move to a lifetime community rating. There is nothing to stop someone whose parents lived to 80 deciding that as he or she will remain healthy until he or she is 45, he or she will not join a private medical insurance company until then. Such decisions are very bad news for people who joined at 25 years and happily paid their premiums in the hope that they would be looked after at the same rate later. Inevitably, premiums would have to rise in such circumstances and in the worst scenario insurers would have to withdraw from the market.
We must examine how risks can be separated in the context of open enrolment and lifetime cover. New health insurance consumers are likely to be younger and there is evidence to suggest that younger people are more likely to switch insurers. We have examined the evidence very carefully as it is possible that people will switch to insurers charging lower premiums. We commissioned research and discovered that the switching rate among older people is low, at 6%, and that younger people are more prone to switch. It is also possible to "cream skim", which means insurers can structure products in such a way as to attract younger, healthier people. There is nothing illegal about it. If one offers sports or maternity coverage, one is likely to attract young rather than old people.
There are two dangers in the current system, one of which is predatory pricing, where an insurer with a much lower risk profile chooses to charge a much lower premium. The insurer's hope is to attract low risk customers from other insurers and young people who have not previously been insured. It means the average age of the members of the first insurer will increase which means the premium of the first insurer will have to rise due to the interaction of claim costs and age on the graph. As the premium of the first insurer rises, older members, despite being conservative, will decide that the significant price differential makes it worth their while to switch. As the cycle proceeds, the original insurer could be forced out of the market. While such cycles are rare internationally, they have occurred.
The second danger involves price following. An insurer with a much lower risk profile chooses to charge a slightly lower premium than its competitors. The lower premium will attract some lower risk members from the competitors but avoids attracting many of the older, high-risk members who are very conservative and do not wish to change insurers. Our research proves that older members fear other insurers will not take them on or that cover might not be as good. In such scenarios, competitors are forced to increase premiums while the insurer with the lower premium follows by raising the premium to a greater extent than is justified by the rate of risk and continues to price follow just below the rate of the competing insurer. As a result, all consumers pay the premium suitable for those with the highest rather than the average risk profile. The authority's concern is that one or both of these scenarios may be happening in the Irish market.
The graph on page 4 shows the rate of price increases in Ireland. I caution members that VHI has traditionally increased its prices in September while BUPA has traditionally increased its prices in March. Members can see that BUPA has shadowed VHI's price increases. It remains to be seen which strategy will be adopted by VIVAS, which entered the market in 2004. If one adds up everything and allows for the compound interest effect, it is clear that VHI health care premiums have increased by 98% since BUPA Ireland entered the market while BUPA's premiums have increased by 98%. The cost of the premiums of both companies have risen at a rate ahead of medical inflation. It is no business of the Health Insurance Authority what profits insurance companies make unless those profits threaten the stability of the market.
Risk equalisation is a process which aims to neutralise equitably differences in insurers' costs due to variations in the health status of their members. There are many risk factors which could be included. If one seeks to take out life insurance, for example, an insurer will be very interested in one's lifestyle, smoking and drinking habits and whether or not one is obese. Such factors cannot be incorporated into any workable health insurance risk equalisation formula. While it has been suggested that utilisation of medical services could help to capture these factors, it is difficult to collect data. The effort required by data collection and the level of records hospitals would be required to keep — hospitals, especially private ones, do not all keep records in the same way — mean the approach is currently a non-starter.
The next slides presented to members demonstrate a simple example of risk equalisation. The best thing is to look at the picture at the bottom of page 5 of the presentation. If insurer A has average claim costs of €140, of which €90 is due to risk factors and €50 to other factors such as administration and marketing, and insurer B has average claim costs of €70, of which €40 is due to risk factors, then, assuming we can isolate the claim costs relating to risk factors, the risk equalisation would equalise these costs as €65 for each insurer and leave the other claim costs unchanged. There would have been a transfer from insurer A through the Health Insurance Authority to insurer B and perhaps to insurers C and D. It should not be forgotten that VIVAS has entered the market, although it is exempt from risk equalisation until 2008. The ESB also has a scheme, which is a restricted undertaking of only 29,000 members. If we were to take the decision to introduce risk equalisation, one of the side effects would be the significant benefit to the ESB scheme to the tune of €2 million, which is a great deal of money for 29,000 members.
The role of the Health Insurance Authority which has garnered the most media attention is set out in the slide represented at the top of page 6 of our submission. The authority is also a register of medical insurers and undertakings. The authority has a consumer protection and information role, vets new market entrants and provides general advice on medical insurance matters to the Minister. The role which has attracted most attention involves risk equalisation. The term "MEP", which appears on the slide refers to market equalisation percentage and is derived using a complex mathematical formula based on the data from six-monthly returns. I will not set out the formula, but explain in words that it is the measure of the risk difference between insurers. The Act provides that no recommendation is required from the Health Insurance Authority and no risk equalisation is necessary if the market equalisation percentage is less than 2%. If it is between 2% and 10%, the Minister may not commence risk equalisation without a recommendation from the Health Insurance Authority. Where the market equalisation percentage is more than 10% the Act provides that the Minister, having consulted the Health Insurance Authority, shall implement risk equalisation unless it is not in the best interest of consumers.
The basis for the authority's recommendation is that we must have regard to the best overall interests of health insurance consumers, as provided for in the Act. These interests include to maintain application of community rating across the market for health insurance and facilitate competition. It is necessary to strike a fine balance between the two almost contradictory requirements to maintain community rating and facilitate competition. While competition is in the interest of consumers, community rating is in the interests of the insurance companies. The authority, therefore, must achieve a fine balancing act.
Will Professor Wood explain? Are the concepts of community rating and competition incompatible?
Professor Wood
They are almost incompatible. One could argue that the introduction of risk equalisation would increase competition for older consumers, which currently does not exist. Under the current structure it pays insurance companies to try to recruit younger, healthier people.
Our preliminary view is that difficulties can arise for a community rated market when risk profiles differ significantly. For this reason, the introduction of risk equalisation could be justified in appropriate circumstances, although this may not always be appropriate and could potentially do harm. The authority will always be mindful of the effect on competition.
In taking the decision to introduce or not to recommend the introduction of risk equalisation, we consider a number of factors in addition to the market equalisation percentage. If it were just the market equalisation percentage, the Department of Health and Children would input the relevant data into a computer programme and would take immediate action if the figure produced was higher than 2%. For example, we examine the differences in risk profiles, age structure of the insurers' claims costs and the relative sizes of the insurers. As members will be aware, until 1997 only one insurer, a State monopoly, operated in the Irish market. In addition, we also examine the age and sex profiles and commercial status of the insurers. The three non-restrictive undertakings in the market are different animals. The VHI is a State body or company — members will be more familiar with its precise status than I am — while BUPA, an international company, is a mutual and VIVAS is, for want of a better term, a standard company with shareholders. The commercial status of the three operators, therefore, differs.
We also examine the rate of premium inflation and the number of insurers and new entrants to the market. We are anxious to encourage new entrants because more insurers encourage competition. We examine the effect of any risk equalisation transfer on premiums by asking what would happen to the premiums of the various insurers in the event that we decided for or against introducing risk equalisation. We examine the size of the market and the effect on the business plans and solvency of insurers. We consider a balance of factors because it is a multi factor scenario. However, we do not attempt to attach weightings to them because this is not feasible.
The authority has issued three reports to date. The market equalisation percentage for the first period we examined was 3.7% and we chose not to recommend risk equalisation because we considered the possible benefits of risk equalisation were outweighed by uncertain competitive consequences. In the second period, the market equalisation percentage had dropped to 3.5% and we decided not to recommend risk equalisation for a similar reason.
I have a certain difficulty regarding the third period because we are still in the middle of the process. We held a preliminary meeting at the beginning of March, after which we sent a letter to the insurers stating our proposed recommendation and giving them 21 days to respond. The insurers have since responded and we will meet them later today to finalise our report to the Minister. At the moment, therefore, we are not in a position to reveal our decision in the third round, although it has been leaked extensively to the press since the letter issued to the insurers. The market equalisation percentage for the third period is 4.7% and a recommendation is due by the end of the week, namely tomorrow, after which it must be released by the Minister within 14 days.
I thank Professor Wood for his succinct presentation. Are the three insurance companies in the market happy with the concept of risk equalisation?
Professor Wood
Two of them, BUPA and VIVAS, are not happy with risk equalisation, as was clear from their representations to us after our initial letter. As the Deputy is probably aware, BUPA has taken an appeal to the European Court of First Instance contesting the legality of risk equalisation. On the other hand, it is fair to note that both BUPA and VIVAS were aware that risk equalisation was provided for on the Statute Book.
Were they aware of the decision that anybody entering the market must participate in risk equalisation?
Professor Wood
They were aware that risk equalisation might be implemented at some stage. VIVAS, a new entrant, will be exempt from risk equalisation, if it is introduced, for the first three years. The reason all new entrants are exempt for three years is to give them an opportunity to build up market share.
Professor Wood indicated he does not want to go into the mathematical formula used to determine the market equalisation percentage. Will he briefly outline the basis on which this calculation is made?
Professor Wood
Mr. Sloyan is our expert on compliance matters.
Mr. Liam Sloyan
The market equalisation percentage is equal to the amount which would be transferred between insurers divided by the total claims that are subject to risk equalisation. If, for example, the market equalisation percentage is 4.7% and the transfer was between €17.5 million and €18 million, the number of claims subject to risk equalisation would be approximately 20 times this figure.
How does one calculate the market equalisation percentage?
Mr. Sloyan
Each insurer is allocated the risk profile of the market. One then determines what the insurer would pay in claims costs taking into account the risk profile. The difference between the figure one arrives at and what the insurer pays out for claims is equal to the transfer between insurers. The transfer is then divided by the total claims which are subject to risk equalisation.
What is the risk profile?
Mr. Sloyan
Each insurer is given the market risk profile.
What does the term mean?
Professor Wood
It might help to think in terms of cells. We categorise people according to sex and age — we have age bands. We then look at the numbers in each box, as it were, in each insurer and then take an average over all insurers and determine how the number in the cell for each insurer differs from the average.
Mr. Sloyan
If, for example, 10% of the market consists of people aged over 70 years and only 1% of an insurer's members are aged over 70 years, the insurer in question is given 10% of the over 70 age group.
According to the presentation, both the VHI and BUPA have increased their premiums by 98%, which is in excess of medical inflation. What has been the rate of medical inflation since 1997?
Mr. Sloyan
It can be calculated in a number of ways. Using VHI Healthcare's annual reports, the number of claims incurred per member between the 1997 and 2004 annual reports grew by around 70%.
It has been said risk equalisation is difficult to measure but is necessary in the market.
Professor Wood
We have not yet reached an official conclusion. Our report will go to the Minister tomorrow. It may be necessary in certain circumstances but we must also have regard to competition. There are two benefits to consumers: community rating which is enshrined in the Act and competition which undoubtedly offers consumers a better service and keeps prices down. We must balance the two. There is a fine balance between protecting community rating and encouraging competition.
Mr. Dermot Ryan
I pointed out in a letter to the joint committee that as we were in the middle of a statutory process, we were constrained in what we could say. Much of the information given to us is confidential and we are repeatedly assured it is commercially sensitive. Those are constraints under which we operate in anything we say to the committee. We are anxious to help as much as possible.
We must accept that.
We will avoid that sort of question. Risk equalisation will attempt to increase the number of competitors in the market, similar to the Australian system. Has there been any discussion of changing the community rating system under which a person can come in at 45 years and secure maximum benefits while exposing himself or herself to minimum costs over a lifetime? Is it within VHI's remit to look at the community rating system in order that if a person comes in early, he or she will secure lifetime benefits whereas if he or she comes in later, he or she will pay an added premium?
Professor Wood
We submitted a position paper to the Department of Health and Children on the introduction of a lifetime community rating system whereby people who enter for the first time later in life would pay a higher premium to reflect that they had not contributed in their earlier years. We support the introduction of lifetime community rating.
Would that change the system of risk equalisation?
Mr. Sloyan
Lifetime community rating addresses the matter of a rising risk profile in the market overall whereas risk equalisation is primarily concerned with the separation of risks between companies in order that they address slightly different problems, although there is some interaction.
Professor Wood
There are two problems. If young people stop joining insurance companies, we will be in trouble. Also, if one insurance company has all the young people and the other has all the old people, that will create instability in the market and could lead to a collapse of a company.
Mr. Ryan
Previously when this issue was discussed, there were misunderstandings. It is important that those who pay private health insurance will not suffer increases in charges unless they upgrade their cover. This is a mechanism to attract new consumers into the market at an earlier age to protect the community rating system. It will not impose additional costs on existing consumers.
If a premium was added for those who join a health insurance provider at an older age, would that change the circumstances for risk equalisation?
Professor Wood
We will have to wait and see what effect it has and the numbers who join; we cannot make a prediction. Existing customers will continue to pay the same premium unless they choose a better plan.
Half the population have some form of private health insurance. Are people inclined to join at a young age?
Mr. Sloyan
The average age for joining is in the early 30s, although many join when they are born because they are included in a family policy.
Are people inclined to join at young age when they enter the system?
Mr. Sloyan
People are inclined to join when they are young. Difficulties have arisen in other countries, specifically Australia, where people stopped joining at a young age. We must be aware of that possibility. With the economic boom, people have taken out health insurance in greater numbers and at a younger age. There is no guarantee that would stay the same if economic conditions changed.
Why did people stop joining in Australia? For how long has that been happening?
Mr. Sloyan
In Australia lifetime community rating was introduced which resulted in people joining at a younger age.
Professor Wood
There were also large tax breaks for medical insurance.
Why did the change come about? Why was there a drop off?
Mr. Sloyan
It may have been triggered by increased access to public health care, as a result of which younger people decided they did not need insurance.
I am concerned that Mr. Ryan feels risk equalisation will not impose additional costs on the consumer.
Mr. Ryan
No, I said lifetime community rating would not impose additional costs unless people chose to upgrade. They are different issues.
Could risk equalisation bring instability to the marketplace?
Mr. Ryan
The authority has outlined the considerations it will take into account in arriving at a recommendation on risk equalisation. We are at a particular stage of the statutory process and will make a recommendation to the Tánaiste by the end of April.
The organisation, however, must have regard to market stability. That is one of its functions.
Professor Wood
Maintenance of community rating is mentioned in the Act, not market stability.
In layman's terms, they are the same.
Mr. Ryan
Yes and it could be seen as being in the best interests of consumers.
The company would not want to apply a measure that might drive out a competitor.
Professor Wood
We certainly would not want that. In our opinion that is not likely to happen, despite what one may read in the press.
On what basis has this assumption been made by the Health Insurance Authority?
Professor Wood
Without giving any commercially sensitive figures away, we believe that if risk equalisation were introduced the insurer could still remain in the market and make a reasonable profit.
What kind of financial impact analysis has been done on this?
Professor Wood
We have a 165 page document which will be going to the Tánaiste and Minister for Health and Children tomorrow. Our analysis has been extensive and we also engaged outside consultants on both the actuarial and economic sides.
What impact would additional insurers have on the market for the consumer?
Professor Wood
It would keep competitive pressure on the largest insurer and ensure that price rises are kept to a minimum. The Health Insurance Authority believes competition is good. On the other hand, we must have regard to the instability and community rating factors.
Will Professor Wood give a definition of risk equalisation, as defined in law? I did not hear a clear definition during the presentation.
Professor Wood
In our submission, risk equalisation is described as the process that neutralises differences in insurers' costs due to variations in the health status of their members. Looking at the available data, one insurance company has many older people in its membership, another has very few. One insurance company may have a larger proportion of young people. The Health Insurance Authority is attempting to replace these by the average and calculate the differences.
It is well established that older people spend more on their health insurance.
Professor Wood
No, they spend the same as younger people.
However, they opt for the deluxe products such as plans B, C and D.
Professor Wood
Yes, consumer research indicates this.
As older people may spend more on their insurance and given what has been said about risk equalisation, younger people would be more inclined to purchase the minimum, such as plan A. Is there an element of cross-subsidy between the various plans?
Professor Wood
Yes.
Mr. Sloyan
The risk equalisation scheme only involves equalising claims up to a certain level. There is an effort to rule out any equalisation at this deluxe product level.
In the case of the insurance company with the older customer profile, if all its plan A customers went to its competitor, would the VHI be equally subject to risk equalisation?
Mr. Sloyan
All insurers are equally subject to risk equalisation. The idea is that the insurer would equalise all risk profiles in the market.
If it happened, they would.
Mr. Sloyan
Everyone is equally subject to risk equalisation.
If VHI plan A customers moved to a competitor such as BUPA Ireland, it would receive the risk equalisation attaching to it.
Mr. Sloyan
If VHI has a lower risk profile than BUPA Ireland, the VHI would make risk equalisation transfers.
Mr. Ryan
I must stress we have not made a recommendation on risk equalisation.
I am talking hypothetically. This is our opportunity to question the Health Insurance Authority on this topic.
Mr. Ryan
I accept that. We all know what happens if the authority does not recommend it because the Tánaiste and Minister for Health and Children alone cannot introduce risk equalisation. The Minister can only introduce risk equalisation if the authority recommends it, when the percentages are between 2% and 10%.
The community rating is a feature of the insurance market with which every insurer must comply.
Professor Wood
Yes and open enrolment too.
I got the impression from the presentation that community rating is under threat and risk equalisation is a way of stabilising it.
Mr. Sloyan
We were discussing the legal definition of community rating as set out in the Act. We were also talking about the stability of the community-rated market. When one talks of these, they might be viewed slightly differently.
The problem is everyone mixes them up. Is it fair to say there is not and will not be a threat to community rating in the health insurance market due to the way our insurance system is defined?
Mr. Sloyan
Can one maintain a community-rated market if it is unstable?
Professor Wood
There might be a situation where one of the insurers entered a debt spiral because it was left with older customers and was forced to raise its prices. This would not be in the consumers' interest.
Mr. Sloyan
I will clarify a point discussed earlier. On the issue of competition and risk equalisation, the interaction is complex. Without risk equalisation, an insurer with a lower risk profile could be immune to competition from an insurer with a higher risk profile. The insurer with the higher risk profile would not be in a position to compete on costs as its would be much higher. The argument can be made that risk equalisation would benefit competition in the market.
Does the Health Insurance Authority take into account the enormous size of the VHI's market share? It is equally entitled to go after the young people.
Mr. Sloyan
The relative size of insurers is an issue to be considered. Every insurer is equally entitled to go after young people. One must remember that people who join tend to be younger. A new insurer gets news entrants to the market and the people who joined recently are likely to be a greater proportion of its membership, resulting in a lower risk profile.
Professor Wood
It is not just that some insurers are trying to cherrypick. It happens naturally that those who take out insurance for the first time are approximately 30 years of age. They are younger than the average person in existing insurance companies.
Does the authority believe that risk equalisation could take another form? Rather than having the transfer of money, could there be a transfer of high risk patients between the various insurers?
Professor Wood
That is an extremely interesting proposal. Unfortunately, it is not one that we or the Minister can implement. I understand what the Deputy is saying. If one insurer has 20% of the market share, it should have 20% of all good patients. Will one go through the VHI member list, taking every fifth member and send them to the competitor? How can this be done fairly and allow consumer choice?
One could take the high risk patients. A formula has been worked out for the MEP, market equalisation percentage.
Professor Wood
I agree it is an alternative method of solving the problem. However, I do not know how one can force people to move to a particular health insurer.
I fully accept the need for community rating. However, it is unfair that an individual who joins a scheme at 45 of years pays the same as the individual who joined at 25 years of age. I understand a 75 year old, provided he or she joined at 25, should pay the same as the 25 year old member. However, does this payment gap between the 25 year old and the 45 year old need to be examined?
Professor Wood
As we said in reply to Deputy Twomey, we have sent a paper to the Department of Health and Children supporting the introduction of lifetime community rating. The authority's position is that it is a good idea.
How would it work?
Professor Wood
In practice, various formulae have been proposed. It could be 1% extra each year over the age of 25 years when one joins for the first time.
When will the paper be published?
Professor Wood
It has been sent to the Department and is on its website.
The delegation's presentation has been extremely thought-provoking. It is fair to say young, single males who are members of private health insurance schemes are gaining under the current system, unlike every other aspect of their lives, where they are being crucified, motor insurance being an example. They are the one group which is gaining from the current situation but which might lose out in the proposed risk equalisation system.
What is the role of the Health Insurance Authority in expanding services? I know VHI has recently included dental work in its plans, and no doubt plastic surgery will be a great issue in the future, if not already. People are seeking ever more benefits from their health insurance. What is the Health Insurance Authority's role in encouraging private health insurers to expand their existing medical plans?
Australia and South Africa have brought forward risk equalisation. What has been the effect of prices on policies for consumers, leaving aside tax breaks? I know BUPA has threatened to leave if risk equalisation is introduced. How realistic is this? How would customers be left afterwards?
It is shocking that the cost of health insurance has increased by 98% since the Government came to office, although I will not be political. Perhaps it is purely coincidental that VHI and BUPA have increased their charges by the same percentage. However, I will not be cynical. It indicates to me that there is no competition in the medical insurance market. One would imagine that, when BUPA arrived, everyone expected a reduction in prices and better services. I admit that we now have more choices and better services but we certainly have not achieved better value for money.
I cannot blame the insurance companies since there have been increases from the Government side, for example, accident and emergency charges and various inflationary pressures. However, one could not really say there is a cartel in the private health insurance market. I wonder what role the Competition Authority has. Has it expressed any views on the matter? Surely it is very worrying that when a second health insurer came into the market, prices increased by the same amount, almost doubling over the period. Surely that defies the logic behind bringing in a second provider. We now have VIVAS too and I wonder how many private health insurers the country can accommodate, given the small population. The normal practice would be to bring in as many competitors as possible, leading to a reduction in prices and everyone getting better services. However, that might not necessarily be the case here.
What percentage of people under 30 years have private health insurance? What is the ratio of males to females?
I welcome the delegation from the Health Insurance Authority. I was going to say it was apt and timely that we were having this discussion now but when I hear the delegates say their report is to be given to the Tánaiste tomorrow, I feel the ship has left the harbour.
Are public hospital charges the main driver of increases in health insurance? What has been the level of increases in public hospital bed charges since the introduction of competition in 1997? As we know VHI is free to set prices in the market, subject to ministerial approval, while the other two competitors are price-takers. Is it not VHI's place to undercut the prices of its competitors if it considers them price-followers? What strategies are used to attract new members? Do all three use the same ones? Can they do so? Do they compete directly with each other?
Like Deputy Fiona O'Malley, I am a little concerned about the effect of risk equalisation on competition. I say this because I know from reading the Irish Medical Times and the Irish Medical News that concern has been voiced on several occasions. Some three or four weeks ago I was watching the proceedings in this room of the Joint Committee on Enterprise and Small Business on the monitor in my office. Dr. John Fingleton was in attendance and I understood from his evidence that he had concerns about the introduction of risk equalisation. I cannot quote what he said but that was the impression I got.
From reading various things in recent months, it seems that, if risk equalisation is introduced, VHI will seek approximately €34 million from BUPA.
Professor Wood
We do not agree with that figure which has been mooted in the press.
I got it from the Irish Medical Times.
Very well read.
Yesterday we had delegates saying it had to be right since they had read it in the newspapers but I will not say that. However, there are other unspecified charges in addition. While I am a VHI member, I worry about what this will do to the competition. What will it do to BUPA? Will BUPA Ireland leave the market? That is my greatest fear. I read in the Financial Times this morning that it had been voted one of the top 100 companies in the European Union. I have great concerns. What is the nature of the instability to justify the introduction of risk equalisation?
Further to an answer to a question from Deputy Fiona O'Malley, what is the future of community rating? I have one other little gripe and feel this is the place to make it public. This happened to me a month ago when I was going skiing. Since I did not book my skiing holiday with my Visa card, I was not covered. I heard a lovely advertisement on radio by someone selling travel cover. As I was canvassing in County Meath, I dialled the number in the car and got through. I was asked for my membership number and was told they would get back to me. They read out my name and said there were four other Feeneys, all adults. I said they were all children or students and they replied they were all listed as adults. I said I had told them that two or three years before. When it was rectified I got quite a sizeable amount off my annual premium. I asked the girl, who was lovely to deal with, whether the onus was not on her to ask me about the status of my family every time I renew. I just renew every year. She said that the onus was on me.
I would ask the regulatory body to please ensure that all three companies are user-friendly and that the customers have a better idea of how their annual renewals should be looked at. Perhaps the regulatory body should be educating its members or else the three bodies should be educating their members better.
Professor Wood
Senator Feeney's last question is more for the VHI than the Health Insurance Authority. There is some disquiet among other companies that the VHI is able to offer travel insurance at a reduced rate only to its members.
I was glad to get it.
Professor Wood
The Senator was glad to get it. If she had not been a member of the VHI she could not have got it at that price. Perhaps that could be seen to be anti-competitive, which brings me to Dr. John Fingleton and his concerns about risk equalisation. We have a relationship with the Competition Authority. Perhaps Mr. Sloyan would like to take this matter up.
Mr. Sloyan
We have a consultation process and the Competition Authority submission to it was to the effect that given the overriding importance of community rating as a policy, it saw that some form of risk equalisation scheme was required. That is just to put the Competition Authority's view on record. Also, as regards the complex interaction between competition and risk equalisation, we commissioned a large piece of research from York Health Economics Consortium. It took the view that there was no satisfactory argument against risk equalisation as long as community rating was viewed as a priority.
What was that name?
Mr. Sloyan
York Health Economics Consortium, and the research was commissioned by the authority.
Where is it based?
Mr. Sloyan
It is based in the UK. To underline again the complex interaction between risk equalisation and competition——
Professor Wood
While we are on competition, and to take Senator Browne's question, it is true that VHI and BUPA have raised their premiums overall by the same percentage. However, BUPA was starting from a lower base, so its rates are still just below those of the VHI. Also, we expect matters to change very much with the advent of the third insurer, VIVAS Health. That will help to keep premium increases down, we hope.
The point was made by Senator Feeney that the VHI is free to set prices, so why does it not undercut? That is a question for Mr. Vincent Sheridan when he appears before the committee.
That is not a question for the authority. Perhaps the authority could answer the question on the public hospital charges being the main driver, and as regards the bed charges.
Professor Wood
Mr. Sloyan has figures on this.
Mr. Sloyan
I do not have figures regarding the public hospital charges with me. We can forward them to the Senator.
Professor Wood
We can compile them for the Senator. They are not the only driver, however. The fees paid to hospital consultants are rising quite considerably as well. As the Senator knows the Competition Authority has been looking into this very closely.
As regards strategies for attracting new members I asked whether the three companies can compete with one another.
Mr. Sloyan
Each insurer has its own marketing strategies. That is a matter for the insurers, and what options they choose to take.
Mr. Ryan
Another point on that is that there are minimum benefit regulations. This means they all offer a certain minimum benefit to each consumer.
Professor Wood
Many young people join through company schemes. Sometimes hi-tech companies with a great many young employees will offer free medical insurance. Many young people join in that way.
What of the Australian experience?
Professor Wood
The Australians had a number of unhappy experiences with community rating and risk equalisation. As I said in the introduction, the systems are all very different. Systems used in other countries cannot readily be transplanted to Ireland. They seem to have improved matters by moving to this lifetime community rating system on which Deputy Gormley was so keen. I would not minimise the problems the Australians had with community rating and risk equalisation.
How many private insurance companies does the authority foresee working in Ireland? Ultimately this is a very small country, and there are three already. Could it reach a stage that if there are so many it will become counter-productive?
Professor Wood
We already have a good many insurers if one takes the restricted undertakings into account as well. The ESB has opted to be part of the risk equalisation scheme, and there is also the Garda society and CIE. There are 15 altogether.
Mr. Sloyan
These are vocational groups.
Professor Wood
They are undertakings where the membership is restricted to people in a particular trade or profession or their families.
What percentage of the population has private medical insurance?
Professor Wood
Some 50%.
As regards young people under 30, for example, how many?
Mr. Sloyan
We will have to come back to the Senator on that.
Professor Wood
We have the data but we do not have the figures to hand.
Am I correct in assuming that males under 30 are the smallest group at present in private health insurance?
Mr. Sloyan
I would not be comfortable in assuming that.
Professor Wood
We can forward the exact figures to the Senator.
I want to follow the example of my colleagues and perhaps make a few points. I also have a question or two. I apologise for being late, but unfortunately I had other business to which I was committed.
I often say that I bring my own life experiences to politics. That includes surviving a major health risk some years ago, which helped me to understand some of these issues. I listened, in particular, to what Senator Feeney had to say about the ship having left the harbour. If it has not actually left the harbour, it is certainly steaming up and perhaps this debate should be seen in that context.
I welcome the delegation and the Chairman made the point about what we read in the newspapers. I am not as avid a reader as Senator Feeney and I must talk to her later as to how she finds the time. However, I read The Sunday Times, for example which tells me we will all suffer if BUPA is forced out of Ireland. I read the Irish Medical Times regularly, which talks about an insurance risk equalisation plan defying economic logic. Again, the Irish Medical Times says that a decision looms for the Minister on risk equalisation and in a recent article it states: “There is an extraordinary irony in the fact that the Health Insurance Authority’s recommendation to introduce risk equalisation should be made against a backdrop of universal welcome for new entrants into the Irish banking sector in recent weeks.”
If it is a fact that the published reports on BUPA (Ireland) profitability show the company will be out of business if risk equalisation is to be introduced, I wonder where the rights of the consumers stand. Does the delegation believe this to be true? I am particularly interested to learn if it accepts the BUPA (Ireland) figures, and if the reply needs to be in writing, that is fine. If it does not accept these figures, why not? I do not know whether the authority can commit itself on this, but would it be happy if BUPA left the Irish market? In the event, what effect would this have on consumers?
I was also interested in what was said about the lifestyle community weighting. Is that a new concept and will the authority define for the committee what exactly it means? In that context, does risk equalisation create a situation whereby new entrants are discouraged from entering the market, which will not be good for consumers? Will risk equalisation increase the costs of lower priced plans to the benefit of those on more expensive plans? This is a serious issue and I applaud the initiative of the Chairman in ensuring that these hearings are taking place. That is what the consumers want us to do. We will be calling them voters in 800 days and they will be asking us how we have reacted to these issues.
If 50% of the population has private health insurance and 25% has a medical card, how do we deal with the remaining 25%? I know people who do not have private health insurance or a medical card. They are waiting two years for back operations and they are in agony. Cheaper prices might entice them to get private insurance, but should we be offering them tax breaks to encourage them, as is done in Australia?
Professor Wood
As a private citizen, I am concerned about the fate of the 25% of those who do not have medical cards nor private medical insurance. They are getting a very bad deal. Unfortunately, it is not within our remit to do anything about that.
Deputy O'Connor had many questions. We cannot answer many of them as the matter is sub judice at present. Once the Tánaiste has received the report, it will be released after 14 days. If the Deputy does not see the answers in that report about the profitability of BUPA, then he should come back to us. When we made our first risk equalisation recommendation 12 months ago, the prophets of doom in the newspapers predicted the rapid collapse of the VHI. Both sides like to put spin on the situation.
I am sure The Sunday Times would not be happy about suggestions that it falls for spin. It is not for me to protect the integrity of that newspaper.
I thank the delegation for coming in this morning. I welcome the delegation from the VHI. Specifically, I welcome Mr. Vincent Sheridan, chief executive, Mr. Willie Shannon, director of finance, Dr. Bernadette Carr, medical director, and Ms Siona MacCinna, who is corporate solicitor and secretary of the VHI. I ask that Mr. Sheridan make the presentation on risk equalisation in the Irish health insurance market.
Mr. Vincent Sheridan
I thank the Chairman for allowing us to meet with the committee today. We are here to answer any questions the committee may have, but I will start by addressing the most critical issue facing private health insurance in Ireland today and by extension, private health care in Ireland. This is the need to activate the risk equalisation fund in order to protect our community rated health insurance system.
BUPA has shown opposition to risk equalisation since 1998. Following a Government White Paper on risk equalisation, BUPA mounted a major challenge and it took the Government a long while to follow the policies set out in the paper. BUPA then took the Government before the EU Commission, which accepted that risk equalisation was absolutely essential to support community rating. BUPA is currently taking the Commission to the European Court of Justice. This is a situation where people are very anxious to protect huge profits in the Irish market.
The best place to start is to look at private health insurance against the background of public policy considerations. I believe three public policy considerations exist on private health insurance. The first is the maintenance of community rating as opposed to risk rating as the funding model in Ireland. The second is to encourage competition, which is beneficial to consumers. The third is to maximise the take-up of private health insurance as a voluntary contribution to the health system.
Community rating means that everyone pays the same premium regardless of age, gender or health profile for any particular level of cover. The purpose of community rating is to ensure that health insurance cover is affordable for all. The Government White Paper states:
It provides all insured persons with the peace of mind and certainty that the advent of chronic illness or sustaining serious injury will not render the cost of cover unaffordable. In particular the intergenerational solidarity, which is at the very core of community rating in Ireland, has made insurance accessible to those, such as the elderly and chronically ill, who might otherwise not be able to afford the cost of cover.
Community rating means that young and healthy members, who are less likely to claim, subsidise older and sicker members.
In a risk rated system such as car insurance, price is based on risk. The difference between risk rating and community rating is enormous when applied to health questions. The graph in front of us shows the experience of the cost of health care between the young and the elderly. The line across the middle of the graph represents the community rate. From the graph, it is clear if a company has members at a young age, it will make enormous profit, but the company will lose a lot of money if it has old age members. The difference between the cost of health insurance for a 75 year old and a 20 year old is tenfold. The graph demonstrates, as simply as possible, the absolute need for risk equalisation in a community rated market. Unless there is a system for sharing out the risk of the community, community rating will not work in a competitive market.
There is a consensus among all political parties in Ireland that community rating is the appropriate funding mechanism for private health insurance. I also share this view and the VHI will operate under any system set out in law. However, it is legitimate to have a debate on whether community rating or risk rating is the right funding system. In this regard I urge the committee to be aware that some commentators who oppose risk equalisation are actually opposed to community rating. There is unanimous support from all independent experts for risk equalisation and a community rated market. The graph is very important in terms of explaining why risk equalisation is needed.
Public policy should encourage competition. VHI Healthcare, its management and staff welcome competition and the buzz, challenge and excitement it engenders. It provides us with a better opportunity to demonstrate the level of commitment we have to our members. However, the regulatory environment must operate to ensure that competition is beneficial to consumers which has not been the case in Ireland for the past eight years. Competition has increased the cost of health insurance for Irish consumers. BUPA entered the market and targeted younger members. It did not reduce its prices to reflect the lower claims profile, but rather followed VHI prices. This has resulted in a huge windfall for BUPA but Irish consumers are paying for these profits through higher prices. Prices for health insurance are higher than necessary as a direct result of competition. Somebody must pay for these huge profits, not to mention high operation costs.
The other test of competition is choice for the consumer. There appears to be greater choice as a result of competition, but that choice has been directed at the younger sector of the market through product design, focus marketing and targeted distribution.
Risk equalisation will improve competition in the Irish health care market, slow down the rate of price increases for health insurance and encourage all competitors to compete for business throughout the market which has not been happening. Risk equalisation is essential to and will facilitate beneficial competition. One cannot force people to compete.
In terms of market penetration, 50% of the Irish population pay for private health insurance and we would like to take some credit for this. However, we cannot deny that it is also due to community rating. If community rating is destabilised and we are forced to move into risk rating there will be a significant fall in market penetration for private health insurance. One of the main reasons why there is 11% coverage for private health insurance in the UK compared to 50% in Ireland is because they have a risk rated system and we have a community rated system.
Why is there opposition to risk equalisation when the facts clearly point to its necessity in a community rated market? Why is BUPA opposed to risk equalisation in Ireland when it was quite happy to buy a company in Australia where community rating has existed for many years and risk equalisation operates very successfully? The Australian market is a good comparison because when VHI was established to introduce private health insurance to Ireland the then Minister, Mr. Tom O'Higgins, followed the Australian model "hook, line and sinker", as he said himself. BUPA is quite happy to compete in Australia where there is risk equalisation. However, it generates huge windfall profits in Ireland at the expense of Irish consumers and these profits subsidise its customers in the UK and helps its competitive position there. We have had complaints from other health insurers in the UK asking why we have not sorted out the market in Ireland because they cannot compete with BUPA, which uses its Irish profits to subsidise its business in the UK.
BUPA has clearly and cynically pursued profit in Ireland rather than market share. For a period of time risk equalisation is not imposed on new companies entering the market. This period has been increased from two to three and a half years, and gives them an opportunity to build market share. However, BUPA has not used it for this purpose. As the HIA indicated, BUPA has adopted a price following strategy according to a well-established econometric model called Stackleberg competition. This model is specifically designed to maximise profits. BUPA could have had a huge share of the market if it had used the price advantage available to it in the Irish market. It would have destabilised the market because its share would have grown so big and risk equalisation would have developed quicker. It has been a cynical exercise on BUPA's part.
The financial results set out in table B of the appendix compare BUPA Insurance Limited in Ireland with that in the UK and VHI Healthcare. It is interesting to note that the same company writes the business in Ireland but has generated more than twice the profitability on its business in Ireland than in the UK. The profitability of BUPA in the UK is similar to that of VHI Healthcare in Ireland. It is a scandalous situation in terms of the Irish consumer because this has been facilitated by the regulatory system in place in Ireland and community rating without risk equalisation. The regulatory system has been against stated Government policy for eight years but has not been changed. It is time for that to happen.
Market share is often used as an indicator of whether there is healthy competition in a market. It is far too simplistic to suggest that there is an unhealthy competitive situation in the Irish health insurance market because VHI has 80% and BUPA 20%. This statement is used by BUPA and other commentators but is a total fallacy. As the HIA stated, Ireland has two health insurance markets. The 0 to 49 year old market is an extremely profitable, attractive and competitive. VHI has 73% of that market and BUPA has 27%. The over 49 year market does not have much competition. BUPA must take these people on if approached, but it does not go out to seek them and neither does VIVAS. VHI has a monopoly with regard to religious orders and their age profile. We would welcome anybody who wishes to tackle our monopoly, although we do like our members and will look after them all.
If VHI's share decreased to 60% and BUPA's increased to 40%, people would regard that as a more healthy market. However, if current trends continue VHI would have a 53% share in the 0 to 49 year sector and BUPA would have 47%. In the over-49 year sector, VHI would have 85% and BUPA 15%. That situation could not exist in that the market would be long since destabilised, VHI would be gone out of business, community rating would have collapsed and we would face a risk rated system. It is simply unsustainable and totally unstable to have a community rated market and no basis on which risk is shared.
It is early days for the new third competitor, VIVAS, as the company is only in the market six or seven months. Unfortunately our initial view that VIVAS was solely attracted by the windfall profits it perceived BUPA as earning has been vindicated. VIVAS is backed by a venture capitalist and one of our two major banks. The company is perfectly entitled to do this. There is nothing wrong with it.
However, when VIVAS demands that the Government should forcibly seek to reduce the market share of VHI, one is entitled to ask is this really for the benefit of the Irish consumer or is it to meet the profit aspirations of their backers? Competition works both ways. This particular point is not often made. VHI has every right and intention to compete for every customer in this market and I welcome anyone that wants to compete in it. I wish them good luck if they prove that they can look after customers better than us. However, we also have the right to compete, a right not normally talked about. We are competitive and intend to remain so because VHI exists solely to look after its members.
Over the past two months when one would have thought that VIVAS should be concentrating on persuading the market that it can add value to the private health care market it appears to have concentrated more on complaining about the rules in force. These rules are the same as when it decided to enter the market. In particular, VIVAS has adopted a totally contradictory position on one issue. On the one hand, it is opposed to risk equalisation,which is hard to understand as it appears to be in its interest to have a unique benefit for a period of time. On the other hand, it states that the derogation enjoyed by VHI from normal solvency requirements should end. The irony of the situation is that we are in complete agreement. We are on record as stating that VHI should not have such a derogation. The Government is aware of our views. However, a child could tell that the derogation cannot be ended without the introduction of risk equalisation. If the derogation is ended and VHI is obliged to follow normal solvency requirements in the marketplace, as we believe we should, we would then become subject to IFSRA. We would be obliged to seek an insurance licence from IFSRA and be subject to its regulatory constraints.
IFSRA would not give VHI a licence without risk equalisation in place. It would not be possible for VHI to put forward robust financial projections without risk equalisation. It is nonsense to state that one wants to end the derogation, which we believe to be the correct approach and at the same time that one does not want risk equalisation. One must have risk equalisation in the marketplace if we are to be subject to the same solvency requirements as every other body. I am aware the Government wants the derogation to end and I fully anticipate that if risk equalisation comes to an end, the Minister will seek to put an end to it. We agree with that.
It is not only VHI Healthcare that believes risk equalisation should be introduced. All independent experts who accept that community rating is the system in Ireland and who have considered the issue in detail are agreed that risk equalisation is essential in a competitive community rated market. These experts included the advisory group on risk equalisation established by the Government in 1998, which concluded that risk equalisation is essential to underpin community rating. In addition, the Society of Actuaries has produced two reports on risk equalisation which both supported its introduction. The society's latest report in 2002 concluded that risk equalisation was a logical concomitant to a voluntary health insurance system based on community rating.
The Competition Authority has already been mentioned. In 2002 it accepted that there is a trade-off between the objectives of maintaining community rating and increasing competition and that risk equalisation is necessary to ensure the continued operation of community rating. Only yesterday, a further report was produced by Farrell Grant Sparks Consulting Limited. I have its press release with me which states that community rating without risk equalisation is producing a highly distorted market which has the trappings but not the benefits of competition, other than those accruing to new market entrants such as BUPA. The report goes on to state the current state of play is not sustainable. The most authoritative and in-depth analysis is the study, Assessment of Risk Equalisation and Competition in the Irish Health Insurance Market, prepared for the Health Insurance Authority, HIA, by the York Health Economic Consortium. The report is available on the HIA website and the pack made available to each member of the joint committee includes a large selection of quotations from it.
I must ask Mr. Sheridan to end his presentation fairly soon.
Mr. Sheridan
I have almost finished. The report's conclusion states: "There is no satisfactory case for the non-implementation of risk equalisation as long as there is a fundamental commitment to community rating".
Two further quotations address some of the questions that have already been asked. One states: "If BUPA Ireland is unable to compete with risk equalisation payments taking place, then BUPA Ireland would appear not to be able to provide value for money when bearing the community risk rather than the risks of its younger members alone". The other states: "Market exit by BUPA Ireland is only likely if it has based its plans on a continuing ability to keep the gains from a younger membership", that is, to continue to make windfall profits.
I thank Mr. Sheridan for his robust performance. I am sure that we will have similar performances from the other competitors later. In the meantime, some members have indicated that they want to contribute. I invite Deputy Gormley to speak followed by Deputy O'Connor.
I welcome the delegation to the joint committee. The Minister stated in July 2003 that VHI wanted to be privatised. Does Mr. Sheridan still see privatisation as desirable? What share of the company could the employees expect?
Mr. Sheridan
I wish to make the obvious point that this has nothing to do with risk equalisation. The issue of the future corporate structure of VHI——
Does Mr. Sheridan think that risk equalisation might assist it? If risk equalisation is introduced it might push privatisation. Is VHI waiting for the introduction of risk equalisation before privatising?
Mr. Sheridan
No. I will answer the question, but in terms of health insurance, it does not have anything to do with risk equalisation. The position of VHI on its future corporate structure is that a changed is required. An agreement in principal was reached with the previous Minister that VHI should move from being a statutory body to being a semi-State company. Many technical reasons exist for such a change which would be seamless in that people would not recognise the difference, but which would make a major difference to our ability to carry out and sustain a strategic business approach to our business.
We do not have a view on privatisation. We accept this is a question for the Government. We would be happy to go from being a statutory body to being incorporated as a semi-State company. We have views which we have made known to the Government. I do not wish to go into them because the question is totally theoretical at present, given that we have no indication that the Government wishes to go down that road. If the Government decided on privatisation, we would want to enter the debate as to its appropriate form. However, our position is neutral on the issue. We have views on how it should be done, if it were to be done, but we are quite happy to stay within the public system. Our concern is not with the ownership of the company but with our ability to carry out a strategic business plan.
Is the Chairman of VHI not on record as being in favour of VHI privatising?
Mr. Sheridan
Some years ago, in the context of the publication of a White Paper which also addressed the issue of corporate structure and privatisation, the VHI board stated publically that they favoured privatisation. Since then however, we have been looking at what is essential and what matters in terms of the company's business. The question of who owns the company is not what matters because one way or another, we exist to look after our members. We do not wish to move away from that. We want to be able to have a sensible strategic approach to running the business, which can be accommodated through incorporation as a semi-State company.
There are other issues that remain problematic such as VHI remaining in the State sector. There are conflicts of interest between the Government's role as a provider and policymaker and its role as owner. We believe these issues must be resolved by the Government rather than by us.
What are the implications for the market and VHI if BUPA wins its case in the European Court of Justice?
Mr. Sheridan
I would be more concerned about the implications for community rating. Community rating is not sustainable. We cannot charge a community rated price to our members and remain viable. We charge the community rate and produced a very low price increase in 2004 because we decided that our members were entitled to pay a community rated price in a community rated market. We will lose money this year and if we continue to charge a community rated price in this marketplace, which appears reasonable and what our members are entitled to, we will not be viable and will lose money. It is a totally cynical exercise. I do think that BUPA will win its case because——
Would it be correct to say that if VHI continues to lose money, it will go out of business?
Mr. Sheridan
Of course we will go out of business but our argument is self-evident. Community rating cannot exist in a competitive market if it is not sustained by sharing the risk. Otherwise, the market says that community rating is desirable but it wants VHI to charge its members a rate based on its community, while other health insurance companies are able to charge rates based on their communities. There will be a large difference between VHI's prices and those of its competitors because VHI has older members and its competitors have younger members. Even a child would see that this is not a sustainable arrangement. We are simply facing up to the fact that this type of community rating is unsustainable, which is what all the experts have concluded.
Why has the Government not acted on this in the last eight years?
Mr. Sheridan
It has not acted because of the efforts of a very effective BUPA lobby, which has used every means at its disposal.
What methods has the BUPA lobby used?
Mr. Sheridan
Before I joined VHI, I was a guest at the British embassy where the embassy was openly lobbying on behalf of BUPA. The Government clearly wants competition, as does VHI and everybody else. BUPA says that it cannot compete in the market and that it will leave it. Last week, we apparently witnessed a sensible approach being adopted for the first time when the HSA hopefully appeared ready to recommend the introduction of risk equalisation. BUPA suddenly released its figures, of which it had previously deprived the market by refusing to publish them. These figures show that BUPA will lose money if it is made contribute towards community rating. This is complete nonsense. Of course, BUPA will lose money if it is charging a premium based on its younger membership and is not contributing towards the cost of the risk in the community. In the same way, VHI will lose money if it charges a real community rate and does not have receipts from risk equalisation. All health insurance companies will lose money if they charge community rating without risk equalisation. If VHI or BUPA do not increase their prices and take on the community risk, they will lose money. BUPA also needs to become more efficient.
So if we do not have risk equalisation, we will not continue to have community rating and it will be the end of VHI.
Mr. Sheridan
Yes, that will happen.
Mr. Sheridan said that prices are now higher despite perceived competition. Is he saying that we are not witnessing real competition? Can he explain the reason for higher prices?
Mr. Sheridan
I accept the current mantra that competition is good, provided competition benefits consumers. The way competition has been introduced in the private health care market has not benefited consumers because it has resulted in higher prices. Where have BUPA's profits come from, if not from Irish consumers? Why are BUPA's profits so much higher in Ireland than in the UK? They are higher because Irish consumers pay more than they should. It is easy to see that if one attacks the younger members of the population, choice is not as effective as it might be. So risk equalisation is the antidote to the anti-competitive nature of community rating.
So we will get lower prices with risk equalisation.
Mr. Sheridan
The introduction of risk equalisation will serve to reduce the rate of increase in prices. The drivers of price increases are such that risk equalisation will not reverse them but it will slow them down.
It will slow down the increase in prices?
Mr. Sheridan
It will slow down the rate of increase in prices.
The point Mr. Sheridan is making is that there is competition in the market but he is not really bringing in VHI's financial strength. Is it true that VHI's total reserves at the end of February 2004 were €330 million?
Mr. Sheridan
That figure does not demonstrate great financial strength. If we went along to IFSRA tomorrow, it would say that level of financial strength is not particularly strong for an insurance company.
Is that not the correct figure?
Mr. Sheridan
It is the correct figure.
The committee is inviting VHI——
Mr. Willie Shannon
The figure at the end of 2004 was €278 million. Future claims would be excluded.
That figure represents general reserves?
Mr. Shannon
Yes.
Are reserves for future claims taken into account?
Mr. Sheridan
Reserves for future claims are not taken into account. They are technical reserves.
Either way, we are talking about 40% of VHI's annual income.
Mr. Sheridan
No, the figure represents 25% to 26% of VHI's annual income. There are questions about the minimum level that IFSRA would set down currently for a new entrant into the market but it would be at least 40%, if not 50%. A figure of €300 million seems like a considerable amount of money——
It does seem like a considerable amount of money.
Mr. Sheridan
However, at the ratio——
VHI appears to be going for a lower level.
Mr. Sheridan
I agree with the Chair.
I am thinking in terms of the future presentations from BUPA and VIVAS. We will not all be together in this debate because VHI will make its presentation and BUPA and VIVAS will make their presentations. I am trying to work out VHI's financial strength but Mr. Sheridan is saying that the company's financial strength is not as strong as it appears.
Mr. Sheridan
The financial strength of an insurance company is not the absolute level of the reserves, rather it is the level of the reserves related to the level of the premium income. VHI is run as if it was regulated by IFSRA, so our target in terms of what our reserves should be is currently 40% of our premium income. That has been the situation for many years. We have not achieved that 40% target yet because it is desirable to do it over a slow period. The committee should not forget that VHI started off with no reserves and can only build up its reserves through profits from its members. VHI is a not-for-profit company that aims to grow its reserves to make 5% of premium income by way of profit so that it can build up its reserves in an orderly fashion and keep its financial strength.
I agree with the Chair that VIVAS would make a very strong argument, which I would agree with, that the type of level IFSRA requires for the reserves for a health insurance company is too high. From a regulator's perspective, the level for health insurance companies, particularly in a community rated market, could be much lower. VIVAS has made that argument to IFSRA and it is an argument with which VHI would also agree. At present, IFSRA is not convinced by these arguments, albeit that the Chair is completely correct in saying that BUPA Insurance Limited's — the main worldwide company — level of financial reserves across Europe is less than 40%. The reserves are approximately 25% to 26%. There is no question about its financial strength but there is a question mark over what level of reserves IFSRA requires. If the Chairman has any influence with IFSRA, we would welcome it.
I do not.
Mr. Sheridan
Unfortunately, this is IFSRA's decision.
I am trying to pre-empt future discussions. I am aware people will want to return to this debate.
Mr. Sheridan
There would be no difference——
We expect the Irish regulator to be different than others found across Europe.
Mr. Sheridan
That is the regulator's decision. This is IFSRA's sole prerogative.
I asked a question about what shares could employees expect if privatisation were introduced.
Mr. Sheridan
In the context of the White Paper, and at the time it was an issue of some debate, the board made clear that if VHI was to be privatised by way of sale to a company with shares, it would seek to have an employee share ownership plan put in place for the benefit of staff. Typically, ESOPs are approximately 15% but I can assure the Deputy this is not a driving issue for VHI Healthcare. There is a customer service ethos in VHI Healthcare. I have had this discussion with our partnership forum of staff and management that if it made sense for our customers in the event of privatisation, would the staff be prepared to go without an ESOP. The response has been very positive. If it is a share sale, the staff of VHI will want to be treated like the staff of other semi-State companies. However, if other avenues for privatisation that make more sense to our members or the marketplace are open, this would not be an issue for staff.
I will bank a few questions as we are running out of time.
The Chair said I would be next to ask a question as I must attend the Joint Committee on Justice, Equality, Defence and Women's Rights.
I asked for the main party spokespersons to allow this to happen and it was agreed to.
I will be brief but, in fairness, the Chairman has got the headline of the day.
What was that the Deputy said?
The Chairman told the chief executive what his profits were.
I can assure Deputy O'Connor I am not here to seek attention, only to move the meeting along.
I welcome our guests. A fair point was made about whether it was better to have all the companies here together and the meeting is disjointed in this respect. Listening to a VHI presentation that mentions BUPA more than VHI is interesting and I applaud the delegation for doing so. I will examine the transcript. I am also glad the presentation included VIVAS at the end and am sure it will be happy as a result. The committee must have a combined situation in which we can examine all the issues.
I am interested in what was said as the delegation's presentation was dominated by references to BUPA. Why does VHI not believe the audited figures, which I presume is what has been said? Does VHI have an opinion about how much BUPA Ireland is really making? On a more serious note, if it is being said or implied that the figures are wrong and that some fraud is involved, why do we not confirm that the Garda is examining the issue? There is an implication here if someone says that BUPA's figures are contrived. The chief executive's presentation was dominated by reference to BUPA. As an independent-minded Government backbencher, this interests me. I thank Deputy Twomey for helping me with this.
I do not think we should go down the road of asking one organisation to comment on another organisation's figures. I particularly wish to avoid the word "fraud". We are not discussing this.
It is fair game if we sat through a considerable presentation and heard more references to BUPA than the VHI. I am astounded by this.
Mr. Sheridan
I wish to put on the record that I never said anything about fraud.
I did not say Mr. Sheridan did. I am asking if it is being implied.
The Deputy is going down the wrong road.
Mr. Sheridan
Many of my references——
Just one second please, Mr. Sheridan. I can understand that we are here to debate the issue and to get as much information as we can but we will not go down that road. Nor do I think it was meant in the context Mr. Sheridan suggested, only by way of one company referring to the figures of another.
I was only asking a question.
We are not examining the issue in that context.
Mr. Sheridan
My mentions of BUPA were usually associated with quotes from independent experts. I made the point that we have figures for the first time from BUPA. I will repeat the quote from the independent experts who claim: "If BUPA Ireland is unable to compete with its risk equalisation payments taking place, then BUPA Ireland will appear not to be able to provide value for money when bearing the community risk rather than the risk of its younger membership alone." BUPA may have to raise its prices to reflect the community risk. One may ask the question, why not? Perhaps BUPA must become more efficient. The question about how well its accounts reflect the reality must be put to BUPA.
Mr. Sheridan should be careful in his response. Let us not go down this road. BUPA will have every opportunity to make its response.
I will be careful here.
Good.
I welcome Mr. Sheridan and his colleagues and thank them for the presentation. Mr. Sheridan digressed from his script when he said that the Irish consumer is paying more than he or she should. I will ask Mr. Sheridan the question I put to the Health Insurance Authority. As VHI is the group that is setting the price in the market, is it not up to VHI to compete or undercut BUPA and VIVAS and bring its prices down, forcing them to do the same if Mr. Sheridan believes they are raising their prices because of BUPA? To say the Irish consumer is paying more than he or she should be is very serious. Why are we allowing this to happen?
Mr. Sheridan
The Senator has asked a good question. The way in which competition was introduced into the community-rated Irish market without risk equalisation has caused the consumer to pay more. I isolated this feature because it allows companies to come in, first BUPA and now VIVAS, and make windfall profits by concentrating on the younger people in the market. This raises the price for everyone in the market.
Given our significant price disadvantage, it would be wrong to say that VHI is the market's price-setter. We have a much older population on average than either of our competitors. VHI has a straightforward approach to prices, as they have two requirements. They must cover our claims costs, the payments for the benefits we give our members, and they must generate a 5% profit margin. This is a very low profit margin because we do not have any third parties to pay. We want to make 5% profits to grow our reserves, which we would be required to do if we were subject to IFSRA. Our prices flow from this process. We do not follow, we do not lead, we just price on this basis.
Mr. Sheridan has made the point about VHI having the older end of the market several times, whether they are part of religious groups or others. VHI came on stream 48 years ago and the people who joined it then had no one else to join. Now, they are approximately 50 years older than they were at the time and comprise VHI's share of the market whether it likes it or not. VHI was glad to take these people on and treats them well.
The market has two newcomers and I know that none of us like change. We do not like the hassle of getting up, moving on and going elsewhere. This also plays a role. On page 4 of the VHI submission it is stated that "BUPA entered the market, targeted younger members, did not reduce their price to reflect the lower claims profile but rather followed VHI prices". Why did VHI not compete with BUPA and lower prices to challenge BUPA to do the same? The submission also states that "through product design, focused marketing and targeted distribution, choice has been directed only to the younger sectors of the population". If BUPA were doing something wrong by targeting the younger population the Competition Authority would challenge it immediately. It is easier for BUPA and VIVAS to target younger people because they will listen. Older people are less likely to change. I hear advertisements offering reductions in telephone bills. Although I would love to reduce my telephone bill, I am too lazy to do anything about it. I stay where I am and there are millions of consumers like me. The Health Insurance Authority felt that the figure of €34 million, payable to VHI from BUPA if risk equalisation were introduced, was inflated. How is that figure calculated?
Mr. Sheridan
It does not really matter how a company gets its age profile. It is more profitable to target younger members. If a company is operating in a community rated market and risk is shared throughout the market, there must be a risk equalisation system. It would be foolish to enter the health insurance market and seek customers with higher claims.
For 40 years the VHI had the market to itself. VHI had, and still has, young members who do not make claims.
Mr. Sheridan
In Ireland we have a community rated system but it is unfunded. If one were to start a community rated health system tomorrow, the sensible way would be to invest 90% of a 20-year-old's premium in a reserve fund. Later the policy would be renewed at a much lower price than should be charged. Health insurance is not written on that basis in Ireland. It would have been very hard to get off the ground. In 1957 the average age of VHI's membership was younger and the members enjoyed the benefit of VHI's low claims. It is an annual business. One runs the business on the basis of money that is received each year and the claims paid out. That is the way it is done. If one's claims are much higher than competitors, because of age profile, one cannot charge a community rate.
In a community rated market, where the community should be looked on as a single community, this must be supported by an equalisation fund where risk is shared. Otherwise it cannot work. VHI charged a lower rate last year because it decided to charge a community rated price in a community rated market. That is what our members expected. Now we are proving that the market cannot be stable in that situation because we cannot support it financially. Meanwhile, our competitor is charging a lower price and making big profits. If one wants a community rate one has to share risk. One cannot have community rating without active steps such as a risk equalisation plan.
Everybody has exactly the same rights and responsibilities in a risk equalisation plan. VHI has exactly the same responsibilities to put money into a risk equalisation fund as its competitors. They have exactly the same rights as VHI to take money out. That right depends on the risk profile. I do not know what risk equalisation payments would be. I think risk equalisation would encourage competition across the market. There should be a merging of age and risk profiles. The transfers in the risk equalisation fund would level out and eventually reduce to zero. That would be a healthy market. Competition across the market, with companies providing a good service, is healthy.
Would this benefit competition?
Mr. Sheridan
Risk equalisation would encourage competition in two ways. It will not serve to be a driver of costs as it is now. It would encourage all competitors to compete across the market. It will take away the benefit of targeting younger members. If that were to happen, the market would become level and risk equalisation payments would disappear.
Mr. Sheridan says BUPA targets younger people but it does not have a choice. It needs members and older people are less willing to change.
Mr. Sheridan
It is more complicated than that, Senator. I will not go into it.
Without risk equalisation, VHI will lose a substantial amount of money because it will have to use its reserves. At the same time its premiums will rise dramatically. VHI's costs will be much higher than its competitors. With risk equalisation the cost base for all players in the market should be equal. Therefore all premiums will rise to some degree. Insurance premiums are artificially low because of Government policy. VHI is forced to use its reserves to maintain its services. If the Government regulated the market in the way Mr. Sheridan suggests, there would be a level playing field regarding costs. Premiums would still rise.
Mr. Sheridan
I am making two points. The lack of risk equalisation in this market has driven up costs rather than reducing them. Second, if VHI was to charge a true community rate it would lose money. We cannot make money sustaining a true community rate in a community rated market because of the risk profile we have relative to the market.
As I stated to Senator Feeney, risk equalisation would benefit competition as it would remove the opportunity to make large windfall profits and people would be encouraged to compete for business across the market. It would lead to a healthier and stable financial and competitive market.
I have a question that I will also ask to other witnesses who come before the committee. If there is no risk equalisation the only alternatives are to have a risk related market or a top-up charge for late entrants. A risk related market would be crazy as old people would pay much larger premiums than younger people. What are the alternatives to risk equalisation? If the Government was to get rid of risk equalisation what would Mr. Sheridan see happening in the market?
Mr. Sheridan
We do not have it to get rid of. The two choices we have for funding insurance are a risk rated approach or a community rated approach. We have a risk rated approach for every other form of insurance except for health insurance, where we have a community rated approach. If we have a community rated approach we must have risk equalisation. The option is to go to a risk rated approach. That is a policy option and VHI Healthcare will support whatever funding system the Government decides upon.
Community rating is a social policy based on the concept of inter-generational support. We do not have it for motor insurance. I believe that it is appropriate for health insurance and Deputy Twomey's remarks suggest that he also agrees with that. It is wrong that a 70 year old who could afford to pay for health insurance throughout his or her life cannot pay for it when he or she needs it. That happens in the UK where a risk rated system is in operation. The choices are community rating with risk equalisation or risk rating.
For what is the VHI using its reserves of €300 million if not to bring down prices?
Mr. Sheridan
Our reserves are used to follow the regulatory structure in the market place. I agree with the Chairman's comments and I have debated this with IFSRA, whose requirements for the level of reserves——
Mr. Sheridan has made the point that it is very high, but the reserves could be applied to bring customer costs down.
Mr. Sheridan
Yes, that is true
However, VHI chooses not to do that.
Mr. Sheridan
The decision on the regulatory system in the market is IFSRA's and not ours. Even though we are not subject to it, it would be wrong of us to ignore it.
That is debatable as VHI is not required to do so.
Mr. Sheridan
The current Minister has made it clear that the Government believes the derogation should go. It would be stupid of us to look towards a future without derogation and ignore what must happen in the market place.
The reserves figure is startling and Mr. Sheridan could be accused of feather-bedding and pushing for privatisation.
Mr. Sheridan
I must take up this point. That makes no sense whatsoever. We have no policy objective to follow for privatisation and the Minister is fully aware of that. We are happy to continue to be non-profit-making and believe our members are also happy with that. The level of reserves we seek to accumulate are set by reference to what the independent regulators state are relevant for health insurance companies, and we believe they are set a little too high.
I am amused to hear Mr. Sheridan criticise BUPA for targeting younger people. In its annual report in 2000, the VHI identified its strategic approach as targeting the younger market. Is this still part of its strategic approach? Do VHI plans A and B generate more income than is given out in claims? The VHI was restructured in the 1980s and an advisory group examining risk equalisation indicated that plans A and B were subsidising plans C, D and E. Is this still the case?
Mr. Sheridan
There is a world of difference between targeting younger people to maximise profit as in the accepted Stackelberg competition model. If Deputy O'Malley read the York report——
Mr. Sheridan accuses others of cherry-picking and yet he attempts to do it himself.
Mr. Sheridan
There is a big difference between that and stating that we have an older population. We have an obligation to have young people as members because each young member helps support older members and keeps down their costs. It is not for the purpose of accumulating excess profits, and there is a difference in targeting younger people just to maximise profits as the advantage is not shared among consumers. There is a huge difference between the two——
People in glasshouses should not throw stones. Mr. Sheridan spent much of his presentation criticising BUPA for this policy and when the VHI does it, which it is correct to do——
Mr. Sheridan
We are operating in a market where we serve the consumer, and it is perfectly legitimate for me to state that which we have continuously stated for eight years, which is that targeting young members not with the aim of spreading the risk across the membership but to maximise profits and subsidise the business in another state, is not just wrong, it is scandalous. That is what has been happening in the Irish market. We have had Government support for our position but we have not had action yet. I am confident action will be taken shortly. There is a world of difference——
I am keen to get answers to my other questions and I am conscious that other members need to——
Mr. Sheridan
I apologise. I got carried away with my response to that question. What were Deputy O'Malley's other questions?
Do plans A and B bring in more than is paid out?
Mr. Sheridan
No, there are very few people in plan A and that is not a major market. Plan B is the insurance product with the basic level of benefit by which standards are set in the market. The comment was made here earlier, and it has been made elsewhere, that we make more money than our competitors from our older members. That contradicts the other accusation made against us, that we subsidise and charge higher prices for our lower products. People have a go at us every way in a contradictory manner.
What we do is quite simple. The basic level of benefit is in plan B, which involves basic hospital cover. That price exists across the market as plan B cover also exists in plans C, D and E. Beyond plan B is hospital accommodation and of course we charge a higher premium for hospital accommodation choices. There is no subsidisation in plan B for those higher price products. We make profit on the choice to take higher priced products.
Mr. Sheridan states that categorically.
Mr. Sheridan
I state that totally categorically. To all intents and purposes we are a mutual and we exist to serve our members. Why would we benefit one section of members and not another? We have a joined-up philosophy in the company and we know we exist to serve our members. All of our policies are designed towards that end only, and nothing else makes sense. A board would not stand for it and we would not stand for it.
We will move on because the committee must adjourn by 12.30 p.m.
It is difficult to understand the concepts of community rating and risk equalisation.
Mr. Sheridan
No comment, but I agree.
I thank the delegations for appearing before the committee.
The joint committee adjourned at 12.22 p.m. sine die.