I welcome Mr. Martin O'Rourke, managing director of BUPA Ireland, Mr. Niall Devereux, director of finance and development, Mr. Sean Murray, director of marketing, Ms Ann Broekhoven, director of health services contracting, and Ms Annie O'Donnell, director of sales and operations. I ask Mr. O'Rourke to commence the delegation's presentation on risk equalisation in the health insurance market.
Health Insurance Market: Presentations.
I thank the committee for inviting us to make this presentation. We intend to keep it short because this is not the most exciting topic even though it is of great interest. Most of the points I wish to make are covered in the document we have circulated and I will concentrate only on the most salient points.
BUPA provides private medical insurance to 2 million people and we hope many more will join. Our business has no other objective. We speak on behalf of our colleagues who are not here because they are busily working in Fermoy. I will begin by introducing the company and in particular BUPA Ireland, and will speak about our support for community rating and its benefits for the consumer. I will also discuss the subsidy being sought by our competitors and deal with a number of issues that are relevant to our business.
Members may not be aware that BUPA as a group is a not-for-profit providence society. It is not a mutual organisation, is not owned by anybody, and has no shareholders to whom dividends must be paid. If it were to be wound up, the money would go to charity. Any profit that is made must be reinvested in hospitals or some form of health care provision.
BUPA Ireland is not as far down the road as we would like to be in terms of the services we bring to the market. We are proud of our health at work business which is the way forward and at which we are pre-eminent. We are also proud of our health insurance business. We would like to be involved in clinics at this stage which was our ambition for the year if the regulatory issue had not arisen.
By any international standard, the market for health insurance in Ireland is characterised by very low competition. Tens of companies, including the five major names, AIG, AXA, Allianz, CGNU and Norwich Union, examined the market and expressed an interest in the Blue Book, the insurance book in which companies signify their interest in offering health insurance. They looked at the market and said, "Thanks but no thanks". Therefore, we represent the face of competition today and acknowledge that the new entrant, VIVAS, has followed us into the market. It is a very difficult time for entrants because those who said "Thanks but no thanks" are waiting on the sidelines while we fight a case in the court of first instance and our competitor, VIVAS, is also dealing with a complaint.
According to the Central Statistics Office, our customers are those on lower pay. Approximately 93% pay less than they would on the dominant player's plan B. This is the market from which we collect money and which we have contested and created. There are now 600,000 more with health insurance than before we came.
Our after-tax profit is some €70 million in total since we entered the market. Until this year we depended on our parent company for solvency, a figure of €67 million before the new rules reduced this amount to €55 million. There is very little free profit in the company. We can continue in this way because we do not have shareholders looking for a pay-out and can continue on low profits. Our profit is on a downward trajectory because we want to increase the numbers with health insurance. It is important in terms of our ambitions for the market to attract people of all ages and we do. If we get involved in nursing homes, we need older members who will avail of them. We must attract new subscribers, not just those already registered with our competitors.
We have brought fantastic value to the market and will take questions in this regard. We will make a presentation but it is more important that committee members ask us questions. It is a source of great pride for all of us in Fermoy and Dublin that our expertise is sought after throughout the world. Each delegate has visited some part of the world to impart his or her own particular expertise. We have loaned people to businesses in difficulty and won awards for excellence, including a European Union award for being the best place in which to work. We have developed a high quality company, one which is not easily replicated and of which we are proud.
What does it mean to have instability in a market? What happens and what are the conditions? We have lived through a monopoly becoming unstable and the recovery. We know what it takes to build a company, make products and sell them in the face of intense competition. We are the only ones who have done so to date.
I would like to clear up the issue of community rating in order that we are speaking the same language. At the last meeting committee members were exasperated that the issue was not clarified. I want to make it as simple as possible. Let us imagine I am selling a pen. I must sell it at the same price to everybody. That is what community rating means. If one is young, one must subsidise the old and every plan subsidises those covered by it. There are over 40 community rated plans on the market and in every one of those young people subsidise old people. Any other definition of community rating does not accord with the law.
I could sell the pen to the Chairman for €10. One could also sell it for €8 which might attract more younger and older people because one might have better cost containment. That is what community rating means and it cannot collapse unless Dáil Éireann decides to get rid of it. There are over 40 products on the market and no evidence that anyone is not community rating its products. It is up to consumers to decide which they want. If somebody wants to change over to us from the VHI and get products for €10, we cannot turn him or her away because he or she is sick, old or weak in hospital, etc. We must still take him or her on board and pay for him or her. That is what community rating is, nothing else. It is not what is done in Germany, Holland or Australia; it is what we do here in Ireland. It cannot collapse, unless politicians decide to do so. That is their prerogative. I have covered the rest of the issues raised on the page which deals with community rating.
Competition between insurers is about bringing people into the market. Competition has been good for everybody. Before we came into the market, if one was on plan A or B and needed heart surgery or a complex procedure, one was obliged to pay £1,000 out of one's own pocket. Therefore, one paid for one's insurance and also £1,000 to the Blackrock Clinic or the Mater Hospital. If one was on plan A and a member of the less well-off segment of private medical insurance, one paid £6,500. This is in no way critical of the dominant player but a statement of fact.
We have included a copy of the rule book in the documentation provided. Competition has got rid of this situation. We introduced an essential health care philosophy to the effect that everybody had to have cover for every item of care and our competitors followed suit. That is what competition entails. When we entered the market, people paid balancing bills. One could have received a bill for €800 from a private hospital. Our competitors covered approximately 87%, which meant one had to pay the other13%, even if one was in hospital for a fortnight.
There is a worthwhile alternative to the State as a result of competition. It has brought health care within the reach of those who could not previously afford it. Some 93% of our members pay less than they would on plan B. On average, our subscriptions are 41% less than those of our competitors if one divides income by members. That is competition. We are making a slight profit and if anybody thinks we are making too much, he or she should try to gain consumer confidence and sell the products at a cheaper price.
We do not detect any appetite for a return to a time when excesses on out-patient claims continued to increase with the result that people were unable to claim. People value the benefits we have brought in our Health Manager products. They are able to get back 50% of their out-patient expenses from the word go. As one will not hear such facts in these debates, we are mentioning them now.
I lived through a time when there was a serious threat to the fabric of the market in Ireland. However, we have brought reserves into it, not just for ourselves. Our competitors have grown their reserves by €243 million since our arrival. The Chairman extracted this information at the joint committee meeting last week. Our income this year will not be €200 million. I am providing the committee with an idea of where we are in this business in terms of our size. As we are backed by a figure of €2 billion, a figure of over €2.3 billion underpins the market. I acknowledge that VIVAS has also entered the market.
As legislators, committee members know far better than I what happens when there is competition in a market for the first time. They have experienced it with Ryanair and in the telecommunications industry. There is always a clamour for protection. On page 7 of our presentation we have provided the joint committee with three quotations from our main competitor since 2001, about the imminent demise of the world as we know it, including the national health system. Members should then examine page 13 of the presentation where they will see our competitor's profit before and after the introduction of competition and will note that its profits rose after its introduction. The more it needed risk equalisation, the higher its profits went. The figures are taken from its accounts.
These are the facts of the matter and this is what competition has done. We would love to have the VHI's profits and, as a competitor, I am sure VIVAS would also love to have them. However, for every year since we entered the market, the VHI's gross underwriting profit has been greater than our income. That is the scale about which we are talking.
We will not sell products unless we are affordable. In income terms, the people who buy our products are at the lower end of the market as is proven by the Central Statistics Office. We must make our products affordable to them. We must also look to the customers we attract and ask if they are now getting as good a deal as they did when they first joined. We can say the savings for a family on our essential product have increased from €44 in 1997 to €164 today. These figures which are all verifiable demonstrate the level of increased savings we bring to families. More than 600,000 Irish consumers are not foolish or misguided but make rational decisions. They deal with quality companies.
I will not take for an instant from the reputation of our main competitor which built most of the market before BUPA Ireland arrived. We acknowledge this. The fact that State organisations tend to look for subsidies across every sector is also relevant. However, that was not the solution for which the Government opted when there was instability in the VHI and the entire system nearly collapsed. I was there and know what it felt like.
In this regard, it is important to consider what happened with Aer Lingus and Ryanair. Their models were similar but then one came in with many cheaper products which brought in others. Its products were community rated from start to finish, with people of all ages using them. The other airline was an established, dignified and very good player which was rightly held in great affection. However, Aer Lingus really blossomed with competition and professional management. It now has a clear strategy, is taking a clear route and subsidies have been ended.
Some Deputies told me in the past week that they believed the subsidy being sought from us would be a collection based on the last eight or nine years, the time we competed with the VHI. This is not the case and it would be an ongoing annual subsidy. One of the proposal's serious problems is that it is difficult to state precisely what the sum would be. However, we reckon it would be approximately €220 million over the next four years. Members should think about this. For the next four years they are asking people in Fermoy to work in a situation where the first €220 million they earn would be for the benefit of people working in Kilkenny and Abbey Street. This is not a highly motivating factor for anyone, even if it could be justified, which is not possible.
I wish to discuss risk equalisation which we call a subsidy. BUPA Ireland wishes to be as clear on this point as possible. I hope all committee members understand this has nothing whatsoever to do with community rating. It is not in any way, statutorily or otherwise, connected with the price of any product. Every product on the market is available because the company putting it forward wishes to do so and wishes to compete with it. It can change the product without difficulty if it does not like it. This is a straightforward subsidy not connected to market stability. The only destination we can see for it is to join the other €243 million added to the profits prior to the VHI's privatisation.
On a lighter note, when we saw the report on the Chairman's party, Fianna Fáil, in the newspapers yesterday, we mused that it might have been a good idea for it to follow the example of the ESB and form a health insurance plan for its 20,000 members. As the age profile of party members appears to be older, it could come to us for the €2 million subsidy which apparently is being sought for the ESB. It would not be obliged to account for the money or state what it had done with it. It would not be obliged to give anything back to its members; it could just keep it.
We are not actually encouraging this move but I use it to highlight the ridiculousness of the current situation. No one suggested that the ESB was about to collapse or that community rating as we knew it was going to die until BUPA Ireland started in Fermoy. Suddenly, the VHI and the ESB saw great problems in the ESB. The mutual affection did not stretch to the period before we joined the market when no one subsidised it. In classic economic terms, this is purely rent-seeking and not connected with the price obtained by either the ESB or the VHI. If someone has different information, I would like to see it. These are the facts.
The most outrageous feature of this proposal is that this year, while we will make €17 million profit, €34 million is being sought from us. As a proposition, this does not and cannot work. The graphs on pages 21 and 21A of our presentation illustrate the impact on the profits of BUPA Ireland and the VHI, had this mechanism been in place since 2002. They show that had there been risk equalisation, BUPA Ireland would have lost money every year while our main competitor's profit levels would have increased. These are the facts. If our competitors take the view that we have customers which they want, it is called competition.
The Health Insurance Authority has stated older people do not join the system. I suggest that not only do older people not join the system but that our main competitor actually has people on plans C, D and E who are incontestable, by which I mean it is not possible to provide viable products and compete for them because the VHI uses cross-subsidisation systems.
I draw the joint committee's attention to page 19 of our presentation and it is important to note that the figures did not come from us. They were produced just before competition was introduced. Moreover, I am sure the Chairman could get documentary evidence to demonstrate that the situation had not changed in the previous ten years, right back to the VHI's recovery programme.
The table on page 19 outlines the VHI's income and expenditure accounts by plan for the year ending 23 February 1997. The third row from the bottom lists the surplus or deficit for each plan. It can be seen that those on plans A and B subsidised those on plans C, D and E. This was the position before BUPA Ireland entered the market. The calculations were made by the advisory group on risk equalisation which examined community rating as it was defined in law rather than by any particular actor in the market. Committee members must ask themselves why those on low incomes on plans A and B were obliged to subsidise those on plans C, D and E. As a committee with the power to get the information, we are putting this to the members. We are not looking for information belonging to our competitors. It is for the committee to decide but it would suffice for the committee to determine the matter. We will work on our market information. This body on the report of the advisory group——
I must ask Mr. O'Rourke to shorten his presentation to allow for questions.
On page 20 the body has shown the effect on premia of the less well off people on plans A and B if risk equalisation was introduced. One must replace these with the 90% of people in BUPA Ireland who are below the level of VHI's plan B product. We are happy to take questions as we do not wish to go through all of the presentation in detail. My colleagues and I are here to answer the questions of the committee as honestly as we can. We appreciate the committee's invitation.
Thank you.
The presentation was detailed and contradicts much of what the VHI delegation told us last week. Risk equalisation was in the Irish market when BUPA entered it and is also in the Australian market. What is the difference between risk equalisation here and in other markets in which BUPA deals?
The history of risk equalisation in Ireland is that, in the 1994 Act, there was an enabling provision that risk equalisation might be introduced if the market was not working. There was no firm marker on the introduction of risk equalisation. When we entered the market in 1996 with a quite different proposition, one community-rated plan and cash plans, our competitors objected. We were implored to stay in the market and told risk equalisation would be examined. In this process of examining risk equalisation, we were called into the Minister's office in 1998 and told there was a bill for us. Ours was a loss-making company. I will be very clear on this as this is not the version of events the committee heard in either of last week's presentations. We had to explain in great detail, as we did in 1996, that we could not have a proposition in a market, no more than AIG, AXA, Allianz, CGNU or anyone else, with the regulatory proposals that were there. Let us get that off the table. We cannot be asked to do what no other company on earth can do. We cannot be asked to earn €17 and hand €34 to VHI.
Unfortunately, the Health Insurance Authority changed the terms of reference for the group that was going to report on competition, which was a significant absence in the York report. We have a company in Australia, on which we will give the committee a run down. The Chairman correctly stated there are serious problems there. Over 70% of Australians had private medical insurance. I can refer back to this business to 1969 or 1970. To help "fairness", they introduced, not risk equalisation, but risk pooling for a limited group of people, namely those who were over the age of 65 and those who had spent 35 days or more in hospital. The Australian market collapsed to less than 30% and, of the 90 competitors, only 40 were left. The Australian Government intervened by giving a 30% rebate to consumers who bought health insurance and by penalising those who did not and were above a certain income. This is the Australian model and it is not for us to suggest to the committee or the Dáil which model to adopt. The chairman of the Health Insurance Authority drew the attention to the dangers. After the Australian Government intervened, the market rose but started to fall again. AXA moved out of Victoria, and BUPA got the company. None of the for-profit companies would buy it but it suits us because we can have nursing homes, hospitals and that type of thing.
If I am to understand Mr. O'Rourke properly, risk equalisation in Australia only applied to those over 65 and patients who spent over 35 days in hospital in any one year.
It is risk pooling and not risk equalisation.
This was the only pooling of the different companies. Did this include psychiatric patients?
If they were in for more than 35 days.
Was this a contributing factor to the what happened in the market?
Taking it in the aggregate, the insurers who fled the market cited the difficulties with the regulation, such as pooling and its unpredictability. This was only one part of the problems there.
What were the other issues?
The main issues were restrictions on product design and government control of prices and input costs. They were unable to negotiate certain input costs or put their prices above a certain level without government approval. It was quite different from Ireland. They could not collect from the market to cover their risks.
VHI used to operate under similar circumstances of price restriction before BUPA entered the market.
It is a moot point as to whether the Minister is the person who ultimately makes the pricing decision at VHI. This was not always the case. I am dogged with a long memory on the matter. The ministerial approval for VHI prices was only introduced in the 1990s. For many years beforehand, there was no approval process whatsoever. Perhaps the Deputy remembers this.
All these companies more or less collapsed and the government gave a rebate, as Mr. O'Rourke said, after which the market improved again but it has levelled off subsequently. What is contributing to this levelling off?
When one decreases the degree of competition in any market through excessive regulation, one misses out on many aspects that bring consumers into the market, such as modernity. People have difficulty making investments and bringing in new benefits, for example, new equipment etc. One finds that the state system ends up with better equipment than the private system, something that has happened in Australia from time to time. People will say that this is not really an alternative to their state system at all. Rather than waiting for four months for the private system, they can do far better and have immediate access through the state system to a MRI or PET scan machine, for instance, although I do not know whether this is an issue. Once we start restricting markets, we prevent people having access to alternative medicines and day cases because the state says one must do this or that regardless of whether it makes sense. These restrictions are problematic and why legislators have committed the future of the country to competition across sectors.
Is BUPA's accounts separate for Ireland and the UK?
That is a fascinating issue. The European Union has decided for very good reasons what accounts must be kept. The Union must examine the balance of what encourages competition and what is in the consumers' interests, not the competitors' interests. We produce all of the accounts that are required by the Financial Services Authority, the Health Insurance Authority and all the statutory company accounts we are required to submit to the Companies Office in Dublin. The information we provide about our claims is unparalleled in this market. To the people who say we are being secretive, we must have a level playing pitch. We are playing on the European Union, national and FSA playing pitches. Our competitors have their own playing pitch and do not have to observe any of this, yet we must compete with them.
One of the features of competition is that if competitors are seeking measures, it is seldom for one's own good. That is the nature of competition. When we started in the market, it was said we would make no money and would be finished in a week. Then there was the allegation of cherrypicking, which was untrue. Our competitors are entitled to operate in the way they do but one cannot legally cherrypick and we did not do so. When we were successful, it was said €10 million of free profit after ten years equalled a windfall. We are up against these allegations but produce every statutory item required. Our competitors cannot dictate what we produce.
I thank the delegation for coming before us. In the presentation by the VHI it was stated price-following was designed to maximise profits which would lead to windfall profits for BUPA Ireland. We were told profits would be above average, €38 million in 2004. To what extent is BUPA Ireland generating windfall profits? How does Mr. O'Rourke respond to the claim made by Mr. Sheridan when he came before the committee that there is no transparency in its finances? When Mr. O'Rourke talked about a cross-subsidy, he mentioned that a lot of plans were incontestable. Is this a matter the Competition Authority should examine?
I will take the question on contestability while my colleague, Mr. Niall Devereux, will respond to the question on windfall profits and price-following. The Competition Authority has not yet examined the issue of health insurance. On contestability, the facts speak for themselves. We have hardly any products sold at that level of the market.
Mr. Niall Devereux
We welcome the opportunity of coming before the joint committee to set the record straight. On price-following, allegations have been made that BUPA Ireland is engaged in this practice to maximise profits. Mr. O'Rourke has mentioned BUPA Ireland is a not-for-profit organisation. It is a mutual organisation to the extent that if it were wound up, profits would have to be given to like-minded charities. This does not seem to gel with the allegations made.
When we entered the market in 1997, a family of two adults and two children would have enjoyed savings of €44 on the cost of the entry plan of the VHI. Eight years later the price differential has increased to €154, a three and a half fold increase. This does not gel with the allegation of price-following.
At the meeting last week this matter was explained and the Deputy has given a good summary. Allow me to use the example of a dominant insurer such as the VHI. If it were to increase its prices by 10% and BUPA Ireland's claims costs were to increase by 6%, BUPA Ireland would increase its premiums by 10% in order to maximise profits. Clearly, that is not the case.
If one's revenue increases by a figure greater than one's claims costs, profit margins will increase each year. BUPA Ireland has been involved in the market since 1997. As finance director, I can assure the joint committee that its profit ratio has fallen every year since we came to Ireland. It fell in 1998, 1999, 2000, 2001, 2002, 2003 and 2004. We do not see this as a threat to its stability, rather we see the need to provide for greater efficiency to ensure market instability does not put our future under threat. Price-following is not happening, at least not in BUPA Ireland.
We welcome the opportunity to set the record straight on the issue of windfall profits. The joint committee has received a schedule from the VHI which is grossly inaccurate. Our competitors do not know the number of claims that BUPA Ireland paid in 2004 and an arbitrary figure seems to have been applied. The number of claims is materially misstated.
Basing a schedule of profits on claims paid is not only misleading but also in breach of accounting principles whereby revenue and costs must be matched. The schedule does not do this. It shows that BUPA Ireland enjoyed windfall profits of €38 million last year. After tax, the profit we achieved in Ireland, adding all operations together, was €20 million. It is laughable that the VHI suggests we enjoyed profits over and above the norm. This figure is twice the profit we actually made. I hope the joint committee dismisses the document presented last week. If anyone wishes to receive further information on our profits, we would be pleased to accomodate him or her.
Mr. O'Rourke presented the cumulative profit after tax figure of €70 million generated since BUPA Ireland entered this market. If we open up the VHI's accounts for 2004 and compare the profits it generated, we can see that it generated more profit in one year than BUPA Ireland did in eight in this market.
We have a solvency requirement. Of the cumulative profit figure of €70 million, €55 million is set aside to underpin solvency and the future of our business. After eight years we have €15 million of free profit, that is, profit that can be invested in healthcare. That is the philosophy that drives our organisation. On a like for like basis the VHI generated a profit figure of €75 million in that year but it does not have a solvency requirement, an issue VIVAS is taking to the European Court. The accounts presented today represent a fair view of the activities of BUPA Ireland since we entered the market.
I welcome the delegation from BUPA Ireland and congratulate it for the service the company has provided in Ireland in recent years. I do not remember as far back as Mr. O'Rourke. The point BUPA Ireland makes is that it plays by the rules of the European Union. Risk equalisation is acceptable under EU competition rules. This is a recognition that health insurance is providing protection that requires particular measures to ensure the market works and protects individuals availing of it. I do not agree risk equalisation is a plot against BUPA Ireland or any competitor. I am curious why representatives of BUPA Ireland are before the committee now. The company entered the market in full knowledge of the legislative framework in place which dates back to the rainbow coalition. Competition was encouraged on the basis of community rating and an enabling facility for risk equalisation should the need arise.
The Health Insurance Authority is independent of the Government. The role of this committee is to provide for risk equalisation, if necessary. There is no doubt that these are and have been the rules of the game since the beginning, although it took a while for the structures to become established. I have a difficulty with the idea that BUPA Ireland can state it does not like the rules. I know if the joint committee was moving in the opposite direction on this issue, the delegation would not be here complaining.
I will ask my questions together as I am conscious others wish to speak. Will Mr. O'Rourke clarify the number of older subscribers with BUPA Ireland? It is a new company with a product to sell and even if it does not sell directly to younger people, it is inevitable and realistic to presume younger subscribers dominate.
Mr. O'Rourke seems to suggest that BUPA Ireland will not pull out. I was shocked when I heard that it was to do so. I presume the workers in Fermoy were more concerned in case they would not get other jobs. I do not hear that message today and perhaps the company regrets it but I would like Mr. O'Rourke to comment. To me, that smells of blackmail. As a public legislator, I do not like this and I am uncomfortable with it.
I accept that initially the company had higher profits compared to turnover because the business was being built and the pay-out was not as high. The company's profitability is still good and presumably better than in Britain. Will Mr. O'Rourke provide us with the figures? BUPA Ireland has had eight years in which to build, much longer than I or many others expected. I do not begrudge this to the company but it has had plenty of time to prepare for risk equalisation. While Mr. O'Rourke quoted a figure of €34 million, he stated he was not aware of what the amount might mean. Perhaps he will explain what he meant.
The European Commission stated it would not object to risk equalisation as a form of state aid but clarified in its decision that a warranty was not being given in terms of the European third non-life insurance directive.
I understood we had operated with full knowledge of the rules reasonably well at the beginning but I will go over the matter again quickly. We entered the market with an entirely different proposition, whereby risk equalisation would be seen as a reserve power depending on the operation of the market. Health insurance contracts were defined differently when we entered the market. The current regulatory base is different from what it was. Even if what Deputy McManus stated was true, we took a case to the European Court on the state aid aspects. As she stated, the function was to allow competition but this is the only company which has tried to make a go of it. Our view is that the rules do not allow for competition. That is what the market is stating.
The Health Insurance Authority reports to the Department of Health and Children, as does the VHI. We also deal with it. We have mentioned what the Chairman stated about the position in Australia.
As there is a vote in the Chamber, we will suspend the sitting.
Sitting suspended at 10.35 a.m. and resumed at 11.05 a.m.
We were dealing with questions from Deputy McManus and had clarified that the European Union had not given blanket approval. We have also clarified that the rules under which we operate are not the same as those in place when we entered the market. We made our position on the rules clear to the Department of Health and Children in 1996 and it stated they were not written in stone. We made our reservations known to officials in Brussels who told us the rules were open to negotiation and could be changed easily.
In what way did the rules change?
The rules changed when a new Act was introduced in 2001 which altered the nature of health insurance contracts. The rules changed certain innovations and outlawed a number we had introduced. The introduction of risk equalisation was made mandatory, except where the Minister for Health and Children was presented with strong evidence against it. Previously, the power to introduce it was a reserve one.
I thank Mr. O'Rourke for that clarification.
We have been working in an evolving environment. Clearly, the changes in the rules have not led to large companies entering the market. We are still the only act in town in that regard.
We have dealt with the issue of the HIA and the VHI reporting to the same Minister. I was asked a question about the number of older people insured by BUPA Ireland but I do not have the relevant information to hand. I can, however, deal with the question by referring to the York report prepared by the HIA. It states the average age of BUPA members is 38 years. The average of VHI members is 44. We will be happy to provide the figures for the joint committee at a later date.
I draw attention to comments from the OECD. Any company which enters a market puts its best foot forward and uses the facts as best it can. The Government's White Paper——
We have read that document and I accept the point Mr. O'Rourke is making. We have his point in written form.
The Deputy has read it, for which I thank her.
Taking a blanket average age in a community rated market is not the correct approach.
As I accept Mr. O'Rourke does not have the information to hand, I will await further details. I also asked about profitability in Ireland in comparison with other countries.
I will deal with that question in time.
The next question I wish to answer relates to the assertion that BUPA Ireland threatened to pull out of the market. We have not been in contact with the Government, either verbally or in writing. We have been dealing with the Health Insurance Authority which, as Deputy McManus said, is an independent organisation.
It is not simply a question of me saying it. Is Mr. O'Rourke saying the authority is not independent?
It is an organisation established by the Government. It is a statutory organisation.
Does Mr. O'Rourke accept it is independent?
I do not know what the Deputy means by that question. Of whom is the organisation independent?
It is independent of the Government.
It is definitely independent of BUPA Ireland.
Is it independent of the Government?
It is appointed by it. There are different levels of independence. All of the members of the HIA are appointed by the Government. They are not appointed by us. We have no role in their appointment. The HIA is certainly independent of BUPA Ireland.
Has Mr. O'Rourke doubts about the independence of the HIA vis-à-vis the Government?
No, I am just clarifying that it is a statutory body appointed by the Government. It is not an independent body, unconnected with the Government.
I was dealing with the question of BUPA Ireland pulling out of the market. We have not been in contact with the Government. Our submission to the Health Insurance Authority was not different from what we had stated in 1998 when a risk equalisation Bill had been prepared for us. It was not different from statements we had made in 1996 or the way in which other companies had acted in reality.
We are in it for the long haul and will continue to fight to remain in the market. We have no intention of leaving it and can only be pushed out. It is not our intention to leave and we have never stated it was. We simply indicated the facts, that no company making €17 million in profit could afford to pay a bill of €34 million.
In regulatory battles such as this both sides use their own rhetoric. Our competitors, who are not short of the same rhetoric, said their companies would be bankrupted.
I am aware of that. I have concerns on other issues. What is the level of profitability in Ireland relative to the UK? Does Mr. O'Rourke claim to be fully compliant with the requirements of IFSRA on the provision of information? Is IFSRA satisfied that this is the case?
I make it clear that we have never threatened any Minister, as it would be improper to do so. We produce facts rather than issue threats.
I am not up to speed on the level of profits that are made in the UK. The organisation there is separate. I would be surprised if ratios could be compared. Market structure and, I am sure, profitability here is closer to Spain and Australia. There is no evidence to suggest we make higher profits than we ought but, if this was the case, the competitive response would be to undercut us by offering a superior product to the consumer.
I am not a business person. I asked a simple question and am surprised that the answer is not available.
I am not here to report on the UK. I came to present the BUPA Ireland position. I do not concern myself with and do not have figures for the UK.
Would it be incorrect to presume that it is about 5%?
Quite possibly.
In this country.
Mr. Devereux
In terms of the loss ratio of BUPA Insurance Limited, the percentage of its income that it pays out in claims, based on the latest accounts, is 77%. That is not far from the ratio paid out in Ireland. If our forecast for this year is correct, we will have a loss ratio of 77%. The difference between profitability in Ireland and the UK is not significant. BUPA Insurance Limited is a mature business which has operated for 50 years. The loss ratio of a growing operation matures over time. The history of BUPA Ireland's profitability indicates we are going in that direction. If all assumptions are correct, we should merge this year.
We would be happy to present figures to the committee but we do not have them.
I will be satisfied upon a response to my question on IFSRA.
The VHI reports to the Department of Health and Children. The new entrant, VIVAS, reports to IFSRA. We report to the Financial Services Authority on health insurance. A regulatory mish-mash exists. The only contact we have with IFSRA concerns our company dealings, that is, BUPA Ireland Services Limited and BUPA Ireland Limited, which run the branches. We provide IFSRA with all information required and hold an open dialogue.
Like other members I welcome the representatives from BUPA. As some of my questions were asked by others, I wish to seek clarification on certain matters. Is it correct that when BUPA entered this market it was aware of its basis on community rating? Was BUPA aware at that time of the principle of risk equalisation?
Yes we were.
When Mr. O'Rourke referred to "we" on a number of occasions, I presume he referred to BUPA Ireland.
That is correct.
Does BUPA Ireland underwrite insurance policies here?
BUPA Ireland is here on a European licence, the third non-life directive. We use the BUPA Insurance Limited licence, as do a number of companies within BUPA. BUPA International uses the same licence to sell to 190 countries.
The company that underwrites the insurance in Ireland is BUPA Insurance Limited.
The underwriter is BUPA Insurance Limited, not BUPA Ireland.
Where is that company registered?
It is registered in England and Wales.
It also underwrites insurance in the UK.
It does so for 190 countries with the exception of Spain, Australia, Hong Kong and Thailand, all of which have their own companies.
I am not au fait with insurance matters. If that company underwrites insurance, does it not also make the profit or loss on the insurance?
We have always argued that this is so. It is the company which must report to the FSA, following which the FSA discusses matters with us. The same applies to every insurance company operated under a branch structure in this country.
Where does BUPA Ireland earn its profits?
The Deputy is eloquent in making a point which we have attempted to make for eight years. BUPA Ireland shows the prescriptions that it collects, the claims it pays out and, if it was a stand alone insurance company, the profits it would have earned. Essentially each organisation within BUPA works on a stand alone basis.
I do not understand this matter. If BUPA Insurance Limited underwrites the insurance, where does BUPA Ireland enter the picture?
BUPA Ireland enters the picture in the same fashion as Norwich Union.
Disregard other companies and explain to me precisely where BUPA Ireland enters the picture in terms of BUPA Insurance Limited.
BUPA Ireland is a branch of BUPA Insurance Limited. It uses the licence and reporting mechanism of the parent company.
BUPA Ireland takes insurance from person A in Ireland which goes to the UK. If a claim is made, BUPA Ireland in turn makes a claim against the insurance company, which pays out. Is this correct?
No, we register and operate a branch here. BUPA Ireland is effectively BUPA Insurance Limited operating in Ireland. The money comes to us and is lodged into the bank account in Fermoy. Claims and salaries are also paid out of that bank account.
Mr. O'Rourke described the mechanics but I am not clear on the distinction between BUPA Insurance Limited and BUPA Ireland. I understand the rationale but not the actual figures.
The figures of BUPA Insurance Limited include those of BUPA Ireland.
The figures for this country are clearly delineated.
I do not think they are clearly delineated. It does not work this way under European rules. As is the case for other insurance companies, the figures reveal other businesses sold in branches throughout the EU.
In Mr. O'Rourke's presentation, he said that Australia did not have community rating.
If I did say so, it was not my intention. A form of community rating exists in Australia.
Mr. O'Rourke went on to explain pooling for over 65s. Might he explain, in simple terms, how this is different from community rating and risk equalisation in Ireland? Apart from the use of different terms, the principle of community rating is that risk equalisation will be used.
The biggest issue with regard to Australia is that it does not have to comply with the European third non-life directive. It is not the relevant enabling statute for Australia. The second item is that its community rating system is quite different from the system here. In simple terms, its product flexibility in terms of the different products it offers is quite different from what applies here. Its facility to negotiate prices and its facility in terms of input costs is more limited than is the case here.
Community rating has a different meaning in almost every country. No insurance system is totally risk-rated because the whole principle of insurance is that there must be a pool of people, some of whom will be sick and some of whom will be well. In this country, more than 40 different pools are represented in products. In Australia, there are many more. In terms of the way its pooling system differs, as I recall, from the outset the Government there invested some money to help with the transition.
I accept the point Mr. O'Rourke is making but as a general principle, if a country has community rating, which is the case here and in Australia, although the way it is applied might be different, risk equalisation underpins it. In other words, if one section of the population has a low claim base and another has a high claim base, in order to keep the community rating principle, those who are burdened with a high claim base would have access to the profits from the low claim base.
The type of scenario the Deputy outlined is one where there is no pricing flexibility on the part of the company concerned. There are insurers with a limited amount of money per person. In countries like Holland, for instance, an insurer might get €400 per person but the insurer would have no control over such income or claims. There are other countries that would apply a form of risk pooling. It is not true to make the bland statement that risk equalisation is connected with community rating. Major international studies have been done in this area and it is clear that there are different systems in place throughout the world. In most countries what we are doing would not be regarded as community rating. I do not believe there is any part of Europe that would regard our system as community rating in the sense that it would be supported by any pooling mechanism.
Is Mr. O'Rourke telling the committee that if a person under 20 years of age in a particular band pays a premium of X euro and a 64 year old pays the same premium, that an element of balance is not needed to ensure that is workable?
It emerged at the last committee meeting that our competitors, the dominant players, said they were not subsidising across products. That would mean that the people on plan A, who by my estimation are approximately 30% younger than those on plan E, are not subsidising plan E. That would be their claim, and the community pool would be much younger in that regard. That is not causing any problem. There is a pool of people paying into one of those products and another pool of people paying into the other product. That is not a problem.
Does Mr. O'Rourke have any figures on the number of people who have moved from the VHI to his company or to VIVAS? If he has, will he give us a breakdown of their age profile?
The figures from the Health Insurance Authority indicate that 6% of people have moved. That figure may have increased to 7% since it produced its report. That figure is fairly normal by international standards. There are no major movements in health insurance. I do not have figures available but they can be obtained through the authorities, which would independently examine the figures. If they are available, I can try to provide them to the committee. That is not a particular issue for us.
Does Mr. O'Rourke know whether 25% of those over the age of 50 have moved to BUPA or have they stayed with the other company?
It would have to be examined by product. Hardly anyone in plans C, D and E would have moved to us because they are not contestable. The people coming into the market make up the contestable market in Ireland and the VHI is getting the lion's share of the young people in that regard. It would get a much younger age profile than we would of the new people coming into the market.
If I could act as the devil's advocate, they would argue that they have the lion's share of the elderly population as well.
Unfortunately, we cannot turn back the clock. The people whom it has, particularly those in plans C, D and E, are the age they would have been had we not come into the market. It has been collecting subscriptions from those people for 40 years and it is duty bound to continue to do so to pay the claims in respect of each of its products.
Mr. Devereux
Regarding the transfer of people from the VHI to BUPA Ireland, there are many examples of that and, as Mr. O'Rourke said, we can refer to figures. I know of a particular case where a 72 year old can transfer freely from the VHI to BUPA Ireland, and we welcome people of all ages. If we check all the public transcripts, particularly what was said by the former Minister, Deputy Martin, on radio, he continuously welcomed old people. That is what we do in BUPA Ireland. We are here for everybody.
I can give numerous examples of that. A 72 year old who was 37 years with the VHI, who was paying the community rate and building up reserves, joined us in 2002. Two years later we paid out €40,000 in claims. Some people would say that is unfair and ask why BUPA Ireland did not get the age reserves from the VHI in respect of that person when the person transferred across but we do not complain about that. We say that is competition and the economics of insurance. Another example is that of a 59 year old who transferred and within two years of transferring, we paid out €160,000 in respect of that person. We have received income of approximately €3,000. We gladly do that without quibble.
We all welcome that but in making my point I was trying to ascertain facts on the number of people in particular age group cohorts — those over the age of 50 or 60 — who have transferred. Are those figures available?
I understand the Health Insurance Authority has done that exercise by age cohort.
You might get that information for the committee.
Yes.
I welcome the representatives of BUPA and compliment them on a very clear presentation. As I understand it, when BUPA entered the market, the legislation referred to risk equalisation should the need arise. Is that correct?
Broadly.
It has since changed——
Yes.
——with the introduction of the Health Insurance Authority Bill.
Yes, that is the case, should the Minister deem necessary, depending on the operation of the market.
Mr. O'Rourke also made the comment that rules do not allow for competition. Is he saying the rules, as they currently apply, do not allow for competition?
I was going even further and pointing out that the market is saying that because of all the operators who applied to enter this market and who said they had an interest in offering health insurance here. There are many high class companies like AIG, AXA and Alliance. Alliance is selling health insurance to people outside Ireland from Ireland and is on record as having done a very intensive study which indicated that these rules do not allow competition.
Would Mr. O'Rourke be concerned about the competitive nature of the Irish market if the current rules remained in place?
More important than my concern about it, the HIA research has shown that consumers continually believe there is not enough competition. They have not got a sufficient number of insurance companies or products. Our own research corroborates the HIA research.
The company profit ratio is falling but Mr. O'Rourke does not appear to be too concerned about that.
We do not have shareholders to serve. We took a deliberate decision this year that we would not pass on our cost increases to consumers because the price increase would have been too high. We regard it as a major challenge to try to get as much competition as possible between providers so that we reduce the actual costs. One could sit back and say costs are going up or decide how they could be brought down. Tendering and so on would come into that.
As a long-term strategy, if the company continues in the way its profit ratio appears to be going, it will hit trouble.
There is no doubt that we have to take long-term actions and plans and we have a long-term strategy in place but it includes much more than just health insurance, for example the health of our workers. This year, we wanted to operate clinics. We have two clinics we wanted to open, but we have been embroiled in a dispute on this matter for the past three months.
While we would all be somewhat suspicious of a competitor providing the opposition's figures, Mr. Devereaux said the figures given to the committee last week by the VHI were based on the number of claims paid, rather than a match of revenue and costs. Could he explain briefly what he meant by that point? I did not understand it.
Mr. Devereux
By all means. The relevant accounting principle is the principle of accruals, which says that one should match one's revenue and costs. That accounting standard states that accounts must be prepared on a cash and non-cash basis. Preparing accounts on a cash basis entails taking the revenue minus the claims paid in that year. To prepare accounts in accordance with accounting conventions, an estimate of claims that have been incurred for that year, but which have not yet been reported, must be added to that. That outstanding claims provision needs to be added to the claims paid figure in order to obtain the correct result.
In a growing business which BUPA Ireland is — we would have an average increase in our membership base of 25% per annum — the difference between claims paid and claims incurred, which are all the claims that relate to that year, is very significant indeed. It is quite misleading to present the figures in the way they were presented. It is not in accordance with proper accounting standards. The final result is that our profits after tax last year were €20 million. That conclusion said that our profits in excess of the norm were €38 million, but clearly that cannot be the case.
Comparisons have been made with the situation in Australia as regards risk pooling and community rating. To be clear, is Mr. Devereaux saying that no market is the same as our one?
Absolutely.
The report is with the Minister and is ready for a decision. What kind of imaginative proposals would Mr. Devereaux be prepared to make? For instance, would he be prepared to take on VHI customers as part of the solution, and particularly customers of a certain age range?
I want to be totally clear about this, Chairman. To grow our membership base and to look at our long-term strategy, internally we had the desire — it did not come to fruition for different reasons — to take over the ESB business. I do not mind saying it, although it is a commercial item. The committee knows what the impact of that would be. It was not a problem for us. When Deputy Gormley asked us a similar question, we said that we would be quite happy to take on the older plans C, D and E from the VHI. We would have no difficulty whatsoever in doing so.
I can hear a "But" coming.
This is the problem. Deputy Gormley put it to our competitors and he put it on the record of the Dáil. We can provide the record as to what the response was. We do not see people getting older as such a major issue. It is a question of the balance of benefits. People do not realise that it might be a major issue if there was the same proportion of older people as younger people, but there is not. Unfortunately, some of us drop off along the road before we reach 60 years of age, more of us do so by the age of 65, and more still by 70. People are living a lot longer, as the OECD report stated. We provided the documentation to the committee. They reckon that the impact on costs from ageing alone is far less than it is from the impact of increased technology. That is in the Government's White Paper, so we are not making it up. It is reckoned that the impact of ageing will only be 0.5% per annum up to the middle of this century.
The VHI is our competitor and deserves it. I am not complaining about the VHI in any way. Earlier on we acknowledged the marvellous contribution the VHI had made before anyone else was there. However, the VHI has a 41% premium on average. In other words, if one finds out what the average person pays, taking all the people and dividing it into the income, the VHI has a 41% premium on average. It has huge negotiating power compared to us. We are on record as saying that we would be more than happy to take over the VHI's three oldest plans C, D and E, and put those members on to our books.
I also welcome the BUPA delegation. I apologise for being absent for the earlier part of the BUPA presentation because I had to attend another meeting. Much of what I wanted to ask has already been covered, so I will be brief. I read somewhere — it may have been in BUPA's documentation — that BUPA's profits were €70 million over ten years. I was surprised to see that BUPA does not have shareholders, although I thought it did. It is not a mutual company. I realise that €70 million over ten years is not an awful lot but where do BUPA's profits go? What happens to that money?
We do not want to be ag buaileam sciath but we have made a pretty serious commitment in this country. It is important to cover some of the areas where we have put the money. The free profit is quite low. In general, the principle in BUPA is that if one makes a profit it must be ploughed back into health care. It does not get ploughed back into anything else. What have we been doing here? We have been encouraging healthy living through the Phoenix Park run, Grow for mental illness, Cork City Sports and Dublin City on Ice.
Mr. Seán Murray
We recently made a €2.5 million commitment to Cork University Hospital to fund a new research centre there over the next number of years. These are the sorts of things into which we have been putting the money. We have encouraged debate about the health services through supporting a national health summit, an occupational health and safety summit and various other activities.
Mr. O'Rourke mentioned two clinics that BUPA was proposing to open. Would they be taken out of this pool also?
Yes, and we would get money from the general pool as well.
I want to get a sense of balance. I recall that last week the Chairman asked what the VHI's profits were over that term. Can Mr. O'Rourke recall that?
Their pre-competition profit and their post-competition profit are shown.
I will examine the figures in due course. I was a little puzzled last week. I posed a question to the HIA which said that 80% of the VHI's members were in plans A and B, while 20% were in plans C, D and E. The HIA agreed when I said the less well off were subsidising the better off. The VHI disagreed with that, however. How does Mr. O'Rourke see it?
We know what the situation was at the time of the recovery programme. The committee has access to that recovery programme, which shows a serious transfer from the less well off to the better off. We know what the situation was at the time of the production of the advisory group's report, which showed the same thing. We are not privy to the figures which our competitors have today, but we do know that they conflict in the evidence last week with what the HIA said.
Could the same happen with BUPA Ireland?
The same could happen to BUPA Ireland, but we would be in breach of one of the BUPA guiding principles that every product should wash its own face.
Does the VHI also have that rule of thumb?
It would be wrong for us to tell the VHI how to price its products. It is not our affair. The VHI is competing with us and it would be very wrong to do so. However, we would draw attention to what way the subsidies are going. We must pay great attention ourselves to ensure that we do not do the same thing. After all, it is at that end of the market that one makes it affordable for people. All the people who go into plans C, D and E — irrespective of their ages — go to the VHI.
May I ask about the York report? Mr. O'Rourke does not agree with the findings that risk equalisation should be brought in. Who commissioned the York report?
The York report was commissioned by the Health Insurance Authority.
It paid for it.
Yes.
Deputy Devins said the VHI would argue it has the largest share of the senior members in the health insurance market and I agree with him. We have all grown up with the VHI which was around even before some of us were born. Therefore, it has the largest share of the market because it was the only health insurance company we had until BUPA and then VIVAS came in. Is it not fair to say it has the older end of the market? Some day BUPA will have a share of the older market because people joining it now will stay with it. Will BUPA then say it cannot operate within these strict lines and that it needs money from somewhere to subsidise it? If it did, it might be perfectly acceptable.
It is certainly not something we would envisage. This is not something which comes upon one suddenly. The ageing of one's membership does not happen suddenly and in my experience over the years, it grows by not more than about one third of a year each year. That would be if one was getting a low membership input. It is not that one wakes up some morning and gets a shock. One prices it into one's products each year. In one's strategic reviews, one makes sure the cost containment systems are in place to mollify it. Ageing is far less a problem than the OECD says, with the proliferation of technology, the greater use of services, etc. The ageing was classified as less than about three or four other items. While it might be convenient to put it forward as such, it is not the problem.
There is a perception, whether right or wrong, that BUPA came along and got the young end of the market. I spoke about this last week. I am a VHI member simply because I grew up with it. I was on my parents' membership and then I took up my own. I am too lazy to change. I am happy with the VHI which gives me a good service. Young people going to BUPA will stay with it. What is wrong? Did something go wrong in the VHI? Did it miscalculate premiums which it must now factor in? Has it not factored in what the membership will cost it today over the past 46 or 47 years?
Obviously, it has been collecting the subscriptions from the market for that period of time. Without damning it with faint praise, this shows it has not been miscalculating but has been making serious profits out of it, which we would like. We have already gone on record as saying we are quite happy to take its older clients.
Would Mr. O'Rourke accept risk equalisation if it was not coming with a very expensive price tag or is he against it at any cost?
We in BUPA Ireland are not ideologues. We have a very clear view that in the European Union, in so far as one's system is a substitutive one, a risk equalisation scheme can be prescribed. We have made our position on that very clear to the courts. It will be a matter of public record shortly and I am sure our competitors already know it. We have already made that position absolutely clear. We do not see it as our duty, nor is there any precedent in the EU, to subsidise the freely made products sold in the marketplace in competition to us, particularly where the prices of those products give an average revenue of 41% more than we get.
We do not see any connection between that and the European Union third non-life directive. It is not an ideological issue. We are not saying risk equalisation is bad. We have never said that, even though we have been parlayed as saying that. We have said that what is attempted in Ireland is wrong.
The issue has been extensively covered. I refer to page 13 of BUPA's presentation which shows post competition and pre-competition. Are there any other elements, such as controls, which influenced that change other than the fact that BUPA came into the market?
The most important competitive effect has been the effect on consumers. Consumers now have confidence that the product they will get will be an alternative to their national health system. They will have full cover. In terms of any other controls, there is open enrolment in the marketplace. It means we must accept people of any age from the VHI, irrespective of their health status, without any medical fees — just a straight transfer, even if they are in the hospital. That is another control. There is lifetime cover which means people cannot be thrown out of their insurance scheme. These are all good social policies which we laud, just as we laud community rating as a good social policy. I hope I have dealt with Deputy Neville's question.
On the VHI and profitability, what is the source of that information? Mr. Devereux found fault with the VHI presenting BUPA's profits based on what he felt was an inappropriate accounting mechanism. I note profitability is defined as earned premium less claims incurred and does not also build in a factor for claims of which one is notified in that year.
That includes claims incurred. The source would be the annual accounts
I thank the BUPA delegates for the presentation. They made a few valid points. By way of bringing value to the market, they have clarified the issues for me. It is not about cherry-picking. If there had been risk equalisation in 2004, what would be the effect on BUPA and the advantages for VHI?
The net effect would be that we would be loss-making. Page 21 of our presentation refers to our operating profit. We would be loss-making. Page 21(a) refers to the impact on ourselves and on the VHI. We do not know where the VHI is in 2005 and 2006.
I suppose one would have to put up charges to break even.
Putting up charges in the cost sensitive segment of the market, that is, for people who previously refused to take out health insurance because it was too expensive, is not an option. One cannot ask less well-off people on lower incomes to pay an additional fee for the better-off because they were not able to afford the other prices. By making our prices more expensive, they will certainly not be able to afford them.
Mr. O'Rourke is making the point that in that situation year on year, BUPA would be arriving at a loss and would not be in the marketplace.
Absolutely. I emphasise that the amount of churn we have — churn refers to people who buy into insurance but who must leave — to grow our membership is significantly more than I have experienced in the previous 25 to 26 years in the business. The reason is that we are at the price sensitive end of the market. These are people who can afford to pay insurance one month but who cannot afford it the next one.
I thank BUPA for its presentation.
I welcome Mr. Cecil Hayes, chairman, Mr. Stephen Loughman, finance and actuarial director and Ms Maria-Teresa Kelly Oroz, head of legal and regulatory of VIVAS.
Mr. Cecil Hayes
I thank the committee for its invitation to VIVAS Health to attend today to present our views on risk equalisation. I would also like to convey the apologies of Oliver Tattan, CEO of VIVAS Health who, due to a prior overseas commitment, cannot be present.
It is our firm view that the commencement of risk equalisation payments would be bad for consumers and would kill competition and innovation in the market. The committee will be aware that a form of risk equalisation has been present on the Statute Book since 1994, and that competition has existed in the market since 1997. Since its creation, the Health Insurance Authority has been in a position to examine the market in terms of stability and competition. Based on its assessments, it has made two previous recommendations against the implementation of risk equalisation as it did not see any evidence of market instability.
The HIA is mandated to carry out a review of the dynamics of the market every six months. Despite the minimal information available on the market impact of VIVAS Health, the authority chose the first available opportunity — nine weeks after our launch — to deem there to be sufficient market instability to warrant the possible implementation of risk equalisation. The authority's conclusions contained the serious caveat, "subject to the information available". It is astounding that it acted at this first opportunity without waiting for any further developments in what is now a three-player market before making its recommendation.
Seeking to address the issue of risk equalisation without first addressing the problem of the dominance of VHI in the health insurance market is premature. The Tánaiste and Minister for Health has committed to resolve the issue of the future structure of the VHI before the end of the year. The dominance of the former State monopolist is the biggest challenge to competition in this market and there is a need to resolve this issue before moving to any consideration of starting risk equalisation payments.
I will take a few minutes to tell the committee about VIVAS Health. VIVAS Insurance Limited, or VIVAS Health, is a non-life insurance undertaking that has been authorised and is regulated by the Irish Financial Services Regulatory Authority. It received its authorisation to trade pursuant to the third non-life directive in October 2004. In addition, it is on the register of health benefit undertakings held by the Health Insurance Authority of Ireland. VIVAS Health is the only health insurance company to be regulated by both the HIA and IFSRA as an insurance company. Positive market dynamics are already evident from the added competition brought by the entry of VIVAS Health to the Irish private health insurance market.
Consumer choice and expanded health care options are the cornerstones underlying the VIVAS Health proposition. The three core principles that underlie our business philosophy are: to be the first insurer to cover new facilities, medicines and procedures in the market; to educate the market on the options available on health insurance products by the use of financial advisers; and to meet the needs of individual and corporate consumers by tailoring of plans.
I will illustrate these by way of some of the innovations we have brought to the market since our launch. VIVAS Health provides cover for more medical facilities, hospitals and treatment centres and more services, such as CT and MRI scans, than any other insurer. It is the only health insurer to provide cover to the only private accident and emergency facility in the country, in the Galway Clinic. It is committed through its policy to increasing health care capacity by providing support to new ventures in the health care arena.
VIVAS Health is committed to introducing new types of insurance benefit and for the first time Irish consumers have access to new and emerging treatments abroad. This is an example of just one of the many new types of benefit delivered by VIVAS Health which also provides benefits for the most extensive range of day to day medical practitioners in the market.
VIVAS Health has chosen to work with financial advisers to educate and expand the market. Financial advisers can now, for the first time, provide their clients with information on health insurance options available to them. The use of this indirect distribution channel allows VIVAS Health to efficiently and effectively reach the marketplace.
The tailoring of plans to meet different needs is a key objective of VIVAS Health which was the first health insurance company to create plans tailored to the specific needs of individuals and families through its range of plans for different life stages. It has also launched the first plans tailored by profession, for nurses and teachers. More such plans are being developed. VIVAS Health has delivered lower prices for plans that provide benefits that are similar to, or better than, those of our competitors. This includes the cheapest hospital plan on the market.
Market dynamics must support the innovation that VIVAS Health has brought to the market, innovation which has been eagerly endorsed by consumers and medical providers alike. The primary focus of our presentation today is risk equalisation and its effect on that competition. VIVAS Health opposes the commencement of risk equalisation payments as not being in the best interests of the consumer.
It is incomplete to have a rational debate about risk equalisation payments and whether they are in the best interest of consumers without an evaluation of the market structure that operates in Ireland. The implementation of risk equalisation at a time when the State-owned player has approximately an 80% market share does not recognise the negative effects this move would have on smaller market players and consequently on consumers.
VHI enjoys regulatory, structural and scale advantages over its competitors. Such advantages include a large bank of consumers built up over 50 years, integration with the salary deduction payroll systems of thousands of Irish companies, a position of power in the health system and huge brand recognition. These advantages can and have allowed VHI to grow its business in a profitable manner without the added subsidy of risk equalisation payments. Since the arrival of BUPA into the Irish market in 1996, VHI has increased its consumer base by more than 100,000 consumers and has increased its retained profits fourfold, to €330 million.
VHI profits from significant advantages that derive from its dominant market position, as well as regulatory advantages due to its non regulated status. This means the cost to other health insurance companies of attracting consumers is substantially greater than the cost to VHI. The risk equalisation formula ignores this real and substantial cost of doing business in the Irish market.
We acknowledge that research has shown that older consumers are more reluctant to switch health insurer and consequently a new market entrant will enjoy a somewhat lower consumer age profile. However, over time all consumers age. Therefore this advantage is relatively short term and is necessary if other companies are to have a similar overall total cost of doing business with that of the dominant player.
As market share is built, the cost of acquiring customers decreases while the age profile of those consumers increases, maintaining an overall balance. That is as true for VIVAS Health as it was for VHI which has had almost 50 years to build up its membership and BUPA which has had over eight years. Both companies have enjoyed this period to build, without the imposition of risk equalisation, consumer bases of 1.55 million people in the case of VHI and approximately 400,000 in the case of BUPA. As risk equalisation formulae ignore the increased cost of consumer acquisition for new entrants and the structural advantages enjoyed by the dominant, State-owned VHI, how can risk equalisation be in the best interest of consumers?
The primary beneficiary of risk equalisation payments would be VHI, with the cost of the subsidy to be borne by smaller market competitors whose overall business costs would increase. VHI has publicly acknowledged that even with the introduction of risk equalisation payments, the prices charged to its consumers will continue to increase. It is evident that the minority of non-VHI customers will have to bear a substantial price increase to compensate for the subsidy. The simple conclusion is that all health insurance consumers will pay more for their health insurance if risk equalisation is imposed.
Proponents of the introduction of risk equalisation often point to its operation in other markets while failing to point out that in no market in which risk equalisation operates does one have the market dominance of one player and the structural deficiencies which pertain in Ireland. At the recent IMI conference, the chairman of the Competition Authority, Dr. John Fingleton, stated that:
regulation which prevents competition confers private benefits on existing suppliers who, protected from new entrants, set higher prices, become less efficient, less innovative and less consumer-focused. Such regulation promotes a culture of rent seeking in which firms seek to protect market share by lobbying for restrictions on competition instead of focusing on trying to win further market share.
The implementation of risk equalisation payments in Ireland is neither proportional to the alleged threat to the stability of the market nor in the best interests of health insurance consumers. The detrimental effect on competition in the market, as recognised by the recommendation of the Competition Authority, will lead to reduced consumer choice and increased prices. It defies logic to suggest the introduction of risk equalisation is in consumers' best interests. Risk equalisation payments will increase the cost of health insurance, stifle innovation and kill competition. Risk equalisation payments are ultimately bad for the Irish consumer.
I turn now to the alternatives to risk equalisation. An advantage of the existence of a dominant player which is in State hands is that Government has the power to restructure VHI and recreate a vibrant health insurance market in which a number of participants of similar size compete actively for the overall benefit of consumers. The Tánaiste and Minister for Health and Children has the unique opportunity to address the current market concentration in the forthcoming VHI Bill. In the current market, community rating is perfectly sustainable without risk equalisation payments while sustainability can be enhanced by taking certain actions to expand and improve competition. VIVAS Health advocates strongly the introduction of lifetime community rating whereby people can be penalised for joining the health insurance market late. The market should be expanded and health insurers should be moved towards more balanced risk profiles.
Under its statutory mandate, the Health Insurance Authority should more aggressively inform health insurance consumers of all ages that they should shop around for health insurance and ensure all health insurers are regulated according to the same criteria. The authority should implement strategies similar to those operated by other regulators to facilitate easy switching from the dominant player. Regulatory activity could especially target older members with a view to balancing risk in the market.
It is important in this forum to address some of the many myths that are propagated in support of risk equalisation payments. It is a common myth that VHI welcomes competition. In anticipation of the launch of the first competitor to enter the market since 1996, VHI abandoned its consistent pricing strategy of medical inflation related pricing and applied a predatory pricing approach. VHI set about the deliberate generation of a loss and the reduction of its reserves. There was no evidence of a commercial need to take this action as the business was still growing profitably. The move to generate a loss was designed to create pressure for risk equalisation payments with the advent of a third market player. The payments would clearly not be necessary for VHI if it were to charge a true price. As a State-owned body, VHI chose deliberately to launch its first new range of products in a decade to coincide with the launch of the first market entrant in over nine years. Was this action in the public interest and fulfilling the Government mandate to foster competition?
Another myth is that VHI will become insolvent in the absence of risk equalisation. Since the introduction of competition and without the crutch of risk equalisation, VHI has expanded its consumer base and increased retained profits fourfold — €330 million. A recent myth introduced by VHI is that IFSRA will not allow the company to be regulated as an insurance company without risk equalisation payments. The myth was stated to the committee by VHI recently and must be debunked. VHI is well aware that its solvency position could be changed through the setting of economic premiums and the use of reinsurance to meet some solvency requirement. There is no need for risk equalisation payments to form part of the capital base of VHI or any other insurer.
Another myth is that risk equalisation payments would not affect VIVAS Health. VIVAS Health takes a very long-term view of the market. Our opposition to risk equalisation is based on sound logic relating to the long term rather than to the potential for quick wins against our non-State competitor. Risk equalisation payments do not make sense in the Irish market due to the dominance of one of the players, which is a fact we will not seek to distort for short-term gain. We stress that VHI has had almost 50 years to grow its market without the burden of risk equalisation payments while BUPA has had over eight years. Were risk equalisation payments to commence, VIVAS Health would have only three and a half years in which to grow.
Competition and the liberalisation of markets have been the primary factors of economic growth in Ireland. Consumers across the economy have benefited from the entrance of new players which have opened competition and challenged the status quo of established and often State-owned companies. As stated by the Competition Authority in its annual report for 2004, opponents of reform follow a predictable pattern of economic NIMBYism. The authority stated that while everybody supports competition generally, they say competition should not be allowed in their back yards. The report points out that vested interests constantly argue that they are special, disingenuously suggest they seek only to protect consumers or scaremonger to the effect that the skies will fall if regulation is removed. According to the authority, none of these claims is supported by credible evidence.
The commencement of risk equalisation payments would be bad for Irish consumers and kill competition and innovation in the market. To seek to address risk equalisation without first addressing the problem of the dominance of VHI is premature. The Tánaiste and Minister for Health and Children has committed to resolve the issue of the future structure of the VHI before the end of the year. The dominance of the former State monopolist is the biggest challenge to competition in the market. There is a need to resolve the issue before considering the initiation of risk equalisation payments.
I thank the committee for its attention. We will be happy to answer any questions members have.
I thank Mr. Hayes for the presentation. As I said to the BUPA delegation, pooling risk is one of the rules of the game according to the arrangement which was put in place in 1997 on foot of the 1994 legislation. While VIVAS Health contends the introduction of risk equalisation at this time would be bad for consumers, I presume VHI would contend it would be very good for its customers of whom there are many. I was not in attendance for the VHI presentation.
VIVAS Health implies the Health Insurance Authority is out to get the company in some way. Mr. Hayes said the authority decided to introduce risk equalisation nine weeks after the launch of VIVAS in the Irish market. Why does Mr. Hayes think the authority is taking this action if it is not for the good of the consumer? Why on earth is the authority doing that? The company is the only private for-profit health insurer. Who owns VIVAS Health? Regarding the restructuring of VHI, I have no problem, although I suspect it will not happen by the end of this year. In the meantime, let us assume it does not proceed. VIVAS Health is in the market. Let us presume risk equalisation is introduced, as seems likely. How does the company see its future?
Mr. Hayes
On the first question, regarding the HIA, I was illustrating several facts. Risk equalisation has been on the Statute Book since 1994, and competition was introduced in 1997. The authority had two opportunities to examine the market and recommended that there was no evidence of instability. That was a look-back not only regarding the six-month view but over a longer period. We entered the market, and the authority suggested there was now evidence of instability such as would warrant a recommendation for risk equalisation. However, the recommendation had a serious caveat in stating, "based on the information available to us". We therefore asked, if the recommendation was so qualified for the introduction of risk equalisation payments, which there is no mechanism to withdraw, why the authority did not use the time available to it to consider a longer period during our involvement in the marketplace. There was no compulsion for it to respond within a set time. It had an ongoing mandate to review the dynamics of the market every six months. That is my point. I was very concerned about the proposed caveat in the recommendation, "based on the information available". I was surprised the authority did not use the opportunity to collect the information for the next six months and thereafter, which would have meant its recommendation was based on more solid ground.
The Deputy also asked who owns VIVAS Health. Approximately equal shares are owned by Allied Irish Banks, which is our largest bank, the IIU company, which is Dermot Desmond's investment vehicle, and by management. The third question related to what would happen if risk equalisation were introduced. When we evaluated the market, we had the same information available to the Health Insurance Authority and recognised that, since the introduction of competition, there was no evidence of instability in the marketplace. Therefore, it seemed there would not be any major change in that scenario in the near future.
However, the view we have taken regarding our involvement is long term. We intend building up our brand and business over the long haul. If we have to operate in a market that includes risk equalisation payments, we will do so and try, within those additional constraints and cross-subsidies to VHI, to continue to offer our customers what we believe is the best value in the market for the widest possible cover. That will be a challenge, but we will take it on. There is no question of our withdrawal from the market if risk equalisation is introduced.
Thank you very much.
I thank the witnesses for attending. The Competition Authority's view of regulation and risk equalisation is that, because of the importance of community rating, some system of risk equalisation would be necessary. What is VIVAS Health's response?
Mr. Hayes
Perhaps I could make an initial point and then pass over to my colleague. We are saying the market structure in which we operate must be dealt with as a starting point before any consideration of risk equalisation. Our review of international markets where it operates suggests that nowhere else does a state-owned player have 80% of the market. As I tried to illustrate in my presentation, the significant benefits that have accrued to VHI over its 40 years or so of operating in Ireland mean the cost to new entrants such as VIVAS Health of building up a brand and acquiring customers is very significant in comparison. The best thing for competition is to try to get a market of several equally large players. The only way to do that in the short term is to address the structure of VHI.
What Mr. Hayes is saying is that he disagrees with the Competition Authority.
Mr. Hayes
No, I am saying that before any realistic consideration of risk equalisation payments, one must restructure the market. I know the phrase "put everyone on a level playing field" is bandied around, but that is what we are saying.
Ms Maria-Teresa Kelly Oroz
I would like to clarify something. The Competition Authority stated in its recommendation that to sustain community rating, risk equalisation was a necessity. However, it also stated that the present regulatory system and risk equalisation were barriers to entry and were hindering competition. It made some allegations regarding the market concentration of having a State player in the market and the impact on competition. There were several caveats regarding what the authority had stated previously on risk equalisation.
There is one other point. I gathered from the presentation that those who came in later in life would be loaded.
Mr. Hayes
If that is the message I conveyed, I did not express myself as clearly as I had hoped. We suggested that, as part of an alternative to a risk equalisation system, one might introduce lifetime community rating. In essence, its effect would be that people who decided to join the insurance system later in life would be charged a penalty for that late entry. The entire philosophy behind community rating, as articulated to the committee earlier today, is that there is effectively a cross-subsidy between younger and older people.
That would affect those who currently cannot afford to enter because of their income levels. Often at a younger age people have much lower income levels than they will have as they progress in their careers. One is penalising people because of their levels of income at an early age, when they could not afford to join a health insurance scheme. Those who can afford at an early age to take out such insurance are giving an advantage to those who cannot now afford it. In other words, would there not be some inequality regarding opportunities to join a scheme? Those who do not have the opportunity because of income levels at a young age would be penalised for that.
Mr. Hayes
I do not think that is what I am saying. Perhaps my colleague might answer.
Mr. Stephen Loughman
I will make two points on that front. First, since entering the market, VIVAS Health has delivered the lowest cost plan to make it more affordable for people to access health insurance at any age. The issue of lifetime community rating is broadly supported by health insurance companies in this market. It is intended to address the issue where people deliberately decide to free ride the market, not to take out health insurance at younger ages and not to contribute to inter-generational solidarity. Such people make a smart decision, in a sense, to wait until a certain age and then take out health insurance for the first time. It is true that this might happen for financial reasons, but it is more likely that people will decide they will get more benefit out of the market, taking out more than they put in, by following that type of route.
What evidence does Mr. Loughman have for that? I find it difficult to understand that somebody would strategically decide, at 25 years of age, not to take out health insurance until the age of 45 because he or she does not expect to get ill.
Mr. Loughman
We believe this does happen in the market. In Australia, for example, before the introduction of lifetime community rating a large number of people had not taken out health insurance because they had a certain amount of time before its imposition. Another large number of people took the opportunity to take out health insurance during that time, however, and greatly expanded the market at all ages across the population. There were people who were waiting for a later stage before joining health insurance plans.
I welcome the VIVAS deputation. VIVAS has an impressive line-up of backers. Presumably it did considerable market research before entering the Irish market. I assume that from that market research it found out that we have community rating in Ireland and also that there was the possibility of risk equalisation. Did the company at any stage make representations to the Minister as regards risk equalisation before the Health Insurance Authority recommended that it should be implemented?
Ms Kelly Oroz
We discussed a wide number of themes with the Minister regarding certain competition issues in the market, one of which was about risk equalisation, prior to the Health Insurance Authority making its recommendations.
My question specifically is about whether VIVAS made representations to her to the effect that it did not want to see risk equalisation implemented.
Ms Kelly Oroz
Our position when we were talking to the Minister was that we were not opposed to risk equalisation in theory when there was a more equally balanced share among all the players in the market, with the risk of market instability to one of those players.
In its presentation VIVAS said it sells its product through financial advisers. Is that correct?
Mr. Hayes
That is correct.
Is that the only way the company sells it?
Mr. Hayes
That is not the only way. People may buy the product from us directly.
Does VIVAS reimburse the financial advisers?
Mr. Hayes
We do.
To what extent?
Mr. Hayes
The average commission to our financial advisers is 6%.
That is an added cost which the other two players in the market do not have. Is that correct?
Mr. Hayes
That is not correct. We are trying to plug into a very efficient distribution mechanism so that we can get our product to as wide an audience as possible. If we were to attempt to deliver it purely through our own resources, the investment required to impact on that marketplace would be significant and prohibitive. The other reason for choosing independent financial advisers is that one of the cornerstones of our philosophy is that consumers need to be educated as regards health insurance and know the choices that are available. That body of regulated financial advisers is expert in many types of insurance and is in a position to give such advice and explain the options to a wide market segment.
The point is made on the very last page of the presentation that if risk equalisation were to commence, VIVAS would only have three and a half years before it made the payments. Is it not true that this would only come into play if the company had made a substantial profit?
Mr. Loughman
It is not a question of profit. The risk equalisation calculations are based on the company's claims payments and on adjustments as regards the different age profiles. People taking out insurance for the first time are more likely to be younger, as are people who switch companies, generally speaking. We expect VIVAS to have a younger average membership for a number of years and therefore we anticipate being a contributor to the risk equalisation scheme, if it were to be imposed, after three and a half years.
Why does VIVAS make that assumption when BUPA, for example, was in the market for eight years before it was asked to contribute?
Mr. Loughman
The way the regulations are structured means that we expect to have a three and half year moratorium.
Yes, a honeymoon period.
Mr. Loughman
We are aware of the regulations and the expected time interval before making payments.
Mr. Loughman appears to be suggesting that VIVAS will be making payments after three and a half years, but it could possibly be six, seven or eight years.
Mr. Loughman
No, the regulations stipulate, in effect, that if risk equalisation were to commence, we would participate in the pool after three and half years. We expect to be a net contributor to the pool for at least some time during our initial period.
Mr. Hayes
The issue with risk equalisation, certainly with a start-up business, is that it is only looking at one aspect of our costs, which is claims. We are acknowledging that as a new insurer, it is likely that we will have a lower claims cost in the initial years. That is why we expect to be net contributors after three and a half years.
However, risk equalisation does not take into account that we incur substantive costs in terms of trying to build our business. When we say we will be net contributors to risk equalisation out of profits, that is not correct. We will be net contributors to risk equalisation because one part of our total cost of business might be lower in percentage terms than that of VHI, but totally ignoring the other costs of doing business. That is why we maintain that risk equalisation will stifle competition, because if it does not take into account the totality of doing business in the market, how can other entrants be encouraged to come in?
How long is VIVAS in the market?
Mr. Hayes
Since 20 October 2004.
What is the average age of its members?
Mr. Loughman
The average age of our members is in the same ballpark as was mentioned earlier. It is between BUPA's and VHI's average age. I believe, from recollection, that it is approximately 39.
It is 39.
Mr. Loughman
I emphasise that this is from recollection. I would need to confirm this.
Mr. Hayes
An ancillary point is that as a start-up business we recognise that a number of our customers might be coming from more established competitors. Because every bit of business to us is new business the age profile is considerably higher than the corresponding average age profile for the new business of some of the more substantive players in the market. We are getting a substantial number of families, for example, where the adult members might be in their mid to late forties or fifties. That is an important point to make in terms of new entrants. It is not the case that all our business is coming from a pool of 20 to 30 year olds. That would be folly. A substantive amount of our business relates to people who are switching from existing competitors because they find the products, choices and value we can offer more attractive. Therefore, we build a similar profile in terms of age pretty quickly.
I wanted to find out the average age, relative to these other factors. I thank Mr. Loughman.
I thank VIVAS for coming before the committee. The difficulties of competing with a State player such as VHI were referred to earlier. What might be the consequences for the market if VHI were privatised, in the delegation's view?
Mr. Hayes
Operating risk equalisation in a market with a dominant player is not conducive to good competition. A market needs to be created with a number of like-sized players where there can be vibrant competition. A pure privatisation of the VHI will not address the dominance problem. One of the advantages of the VHI being in State ownership is that it is within the gift of the State to create immediately a vibrant marketplace. If the VHI were privatised, that option would be lost.
VIVAS Health would obviously favour the introduction of life-time community rating, as exists in Australia. What would be the effect of introducing that?
Mr. Loughman
The experience in Australia was that there was a large increase in the number of insured lives across all age profiles. If the same thing were to occur here, it would mean that there would be more balance in the age profiles of the competitors in the Irish market. Assuming that there were only three insurers when it occurred, we would tend to get a more equal spread of those new members coming into the market, which would bring a more balanced age profile. We obviously have no difficulty with that.
I put a hypothetical question to the Health Insurance Authority when its representatives appeared before this committee. If it could occur, would VIVAS Health take high risk patients rather than taking money from people through risk equalisation and giving it to VHI? BUPA representatives said they would be happy to do that.
Mr. Hayes
Our whole philosophy is to offer our products to people of all ages. We are in the business of trying to increase our market share to create more dynamic competition. If there were an opportunity for VIVAS Health to take a proportional amount of VHI customers, then we would engage with that option.
Regardless of risk profile?
Mr. Hayes
I do not think a solution to the problem is to transfer all the older people from one insurer to another. That amounts to shifting deckchairs on the Titanic. It is more important to create a dynamic market with people of similar age profiles across the portfolio. If there is a chunk of the VHI book available to us which will create that dynamism in the market, then clearly we will be interested.
Does it not make good business sense to attract the people with least risk? This goes to the core of the argument.
Mr. Hayes
I have been asked a few times if we had looked at the dynamics of the market before we joined it. I always confirmed that we did so. We were aware of community rating and we welcome it. We are not suggesting any change to community rating and all our products are designed for and are available to people of all ages. Any suggestion that because we are a for profit company we are proposing a risk rated market is totally without foundation. We are very happy with community rating within the marketplace.
Deputy Devins covered the questions I wanted to ask, so I will just make one comment. The general public seems to have a total lack of confidence in the public health service. We have a great number of people with private health cover. There are very astute people behind VIVAS Health. Due to both of these factors, I am quite sure that the company will prosper with or without risk equalisation.
I apologise for missing the presentation but I had another meeting. I welcome the fact that VIVAS Health is in the market. The more competitors out there, the better.
We have heard presentations from the VHI, BUPA and VIVAS Health. It is important that the committee assesses those presentations before it makes any recommendations to the Minister. We have been given plenty of food for thought and we need to have some input on where we are going with health insurance.
Mr. Hayes
I thank the committee for giving us the opportunity to make our presentation today.
The joint committee went into private session at 12.38 p.m. and adjourned at 12.45 p.m. sine die.