On behalf of the joint committee, I welcome Professor Alastair Wood, chairman of the Health Insurance Authority; Mr. Dermot Ryan, chief executive officer, and Mr. Liam Sloyan, head of compliance services, to discuss the issue of risk equalisation. I invite the delegation to commence its presentation. The committee is well briefed on the authority's position following a meeting held some months ago but members invite the delegation to home in on the Tánaiste's decision on risk equalisation and the possible effects for good or ill.
Risk Equalisation: Presentations.
Professor Alastair Wood
As some committee members were not present on the previous occasion, I will briefly review the history before homing in on the Tánaiste's decision.
As members are well versed and familiar with the principle of risk equalisation, a re-run of the previous presentation is not necessary.
As members are well briefed on the principle, I invite the delegation to deal with the period from the Tánaiste's decision to the present.
Professor Wood
We are in the same position as on our last visit to the joint committee. The proposed recommendation to insurers was issued on 12 September and they are allowed 21 days within which to make representations. We are, therefore, not free to repeat everything in the letter because some of the information is commercially sensitive and all of the insurers have not given us permission to release details about profits and such like. We will tell the committee as much as we can without compromising ourselves.
Following our last appearance before the joint committee, some remarks made in reply to questions from it were quoted against us in the High Court during an action taken by an insurer. We must, therefore, be cautious.
Were they correct?
Professor Wood
The action was dropped before it came to court, but we were contesting it.
I said I would say nothing about the history, but I draw the committee's attention to the fourth slide which contains a graph that says it all. The central problem with risk equalisation is community rating in that everybody must be charged the same insurance premium regardless of their age and previous medical history. This is acceptable if all insurers have exactly the same distribution of ages among their clients. However, this is not the case in Ireland. The pink curve on the graph plots the typical claims cost against age. For example, it is easily seen that the claims cost of a 70 year old is five times that of a 30 year old. Everybody accepts this. The problem is that the flat rate premium of a company with the average distribution of ages is represented by the red line. The claims cost of a company with a very small proportion of older clients would be represented by the blue line. This gives a very considerable advantage to a company with a smaller number of older clients.
Figures were leaked to the press last week showing that VHI had 12.5 times the number of over-70s that BUPA had. This is not true. VHI has 12.5 times the proportion of over-70s. If BUPA and VHI were the same size, it would mean that VHI had 50 times the number of over-70s that BUPA has. If the over-80s are considered, it would be more than 100 times if the two companies were the same size. This is a very different distribution of ages and of claims cost. That is all I want to say on the history.
I move on to the seventh slide. There are two problems with community rating. It is possible that predatory pricing occurs, in which the company with the younger age profile charges a very low premium and tries to take market share from the company with the older age profile. We do not think this is happening here. The other problem relates to price following. The insurer with a much lower risk profile chooses to charge a slightly lower premium than its competitors. The lower premium attracts some lower risk members from the competitors but avoids attracting too many high-risk competitors. This forces competitors to increase premiums. The insurer with the lower risk profile follows the increase and the cycle continues. This is one of the big risks. All the insurers end up paying the high risk premium because of price following, which is not in the consumer's interest.
I remind the committee about the risk equalisation process. One of the key measurements is the market equalisation percentage, MEP. The role of the Health Insurance Authority is shown on the slide containing the arrows. If the MEP is less than 2%, no recommendation is required from the authority. If the MEP is between 2% and 10%, the authority must make a recommendation to the Minister. The Minister decides but may or may not commence risk equalisation without such a recommendation from the authority. If the MEP is above 10%, the Minister may implement risk equalisation without a decision of the authority. However, she is required by the Act to consult us.
I refer the members to the table on the history of decisions. For the period ended 31 December 2003, the market equalisation percentage was 3.7%. We decided to recommend to the then Minister for Health and Children, Deputy Martin, that payment should not commence. As the market equalisation percentage had fallen to 3.5% in the period up to 30 June 2004, we recommended logically that risk equalisation payments should not commence. When we considered a wide range of factors, including the increase to 4.7% in the market equalisation percentage in the period up to 31 December 2004, we decided to recommend to the Tánaiste that payments be commenced. The issues which we considered are highlighted on the table. On that occasion the Tánaiste decided, as is her right, not to implement the recommendation. The market equalisation percentage decreased to 4.2% in the period up to 30 June 2005. After we considered that and a range of other factors, we proposed to recommend that risk equalisation payments should commence, but we have not yet received a response from other insurers. We might change that recommendation if the insurers give us a good reason to do so. We have to wait until the 21 day period has elapsed to hear what the various insurers have to say.
In making its recommendation the Health Insurance Authority has to balance the potential advantages and disadvantages of commencing risk equalisation payments. The advantages of such a commencement include possible reductions in the premiums paid by consumers, for the reasons I mentioned. It may also lead to a decrease in the risk of instability in the market because the insurer with the larger share of clients will rapidly become insolvent if nothing happens. The introduction of payments may also help to level the playing field between the various risk profiles. The disadvantages of commencing risk equalisation payments include a possible reduction in competitive pressures on the larger insurer — the insurer with the dominant position. Everyone admits that in terms of numbers, VHI continues to have the dominant position in the market.
I propose to review the Health Insurance Authority's recommendations. After the first two periods, the authority concluded that the possible benefits of introducing risk equalisation payments were outweighed by the possible adverse effects. However, after the third period, which ended on 31 December 2004, the authority took the view that the balance of arguments had changed. Not only had the market equalisation percentage increased, but the trend of the market equalisation percentage was upward. We did not just examine the percentage for a single period. We assessed the average figure over the three periods and reflected on the underlying trend. We considered that the likelihood of a threat to the stability of the market had increased and we examined the financial positions of VHI and BUPA Ireland.
Our concerns about the adverse effects of the commencement of risk equalisation payments on competition diminished after VIVAS Health entered the market and the distribution of sales was altered. On 30 June 2005 the Tánaiste confirmed in the Dáil that she had decided not to commence risk equalisation payments on the basis of one-off factors in BUPA Ireland's return, the differences in reserving requirements and corporate status, the number of insurers and the level of competition, the growth of VHI's membership and profits, and the level of the market equalisation percentage. Such factors had been considered by the authority and have been considered again in the present round. The Tánaiste also indicated on that occasion that she intended to submit proposals about the corporate status of VHI.
It is generally agreed by all commentators that risk equalisation is normally appropriate in a community rated market. If one favours a community rated market, it is a question of when, rather than if, one introduces risk equalisation. Actuarial and economic experts in many countries have stressed that risk equalisation is a necessary concomitant of community rating. The operation of community rating gives BUPA Ireland a regulatory advantage because its age and gender profile is different to that of VHI. Such a regulatory advantage could allow insurers to earn increased profits, or to sustain inefficiencies which are ultimately funded by the health insurance consumer. To put it more bluntly, the abolition of community rating is the only logical consequence of a decision not to introduce risk equalisation. If risk equalisation is not in place, it is certain that the insurer with the larger proportion of older members will get into financial difficulties. If the Dáil and Seanad decide to abolish community rating, insurers can charge risk related premiums, as do insurers in the United Kingdom. Consequently the VHI would have to increase premiums for all its members or draw on its reserves. Its reserves, however, are finite, and one would have to consider how long the VHI could last.
On our proposed recommendation up to 30 June 2005, the market equalisation percentage for this period reduced to 4.2% from 4.7%, which figure pertained in the previous six-month period. On 12 September the authority proposed to retain its recommendation to the Tánaiste that risk equalisation payments be commenced. I will elaborate on the reasons for this recommendation. Although the market equalisation percentage has fallen, it is in line with the authority's view of an underlying trend indicating an increase in the market equalisation percentage. It also fell in the second half of the first year of operation and there is reason to believe there is some seasonality in the settling of claims.
To illustrate more clearly the trend, a smoothed market equalisation percentage can be calculated by taking out the effect of variation in the claims per member. Instead of including the rate of claim per member in the six-month period in question, we included the average over the four periods of six months we now have at our disposal. If this is done, one gets the smoothed market equalisation percentage, which is shown by way of a red line in the graph. It is clearly rising steadily. The smoothed market equalisation percentage is approximately 4.4%. This is probably a better statistic to consider than the actual market equalisation percentage for the six-month period in question because of the statistical variations in the settling of claims.
The other measure we used is the market positive equalisation adjustment. This basically measures the amount of money that would have to be transferred if risk equalisation were in force. The relevant figure was basically unchanged. Although the market equalisation percentage had dropped, the equalisation adjustment in cash terms had moved only from €16.7 million to €16.5 million. It did not move too much and, therefore, it was a logical decision to maintain our previous position. While €16 million may seem a lot to the committee members, they should remember that the total benefit paid in the six-month period was almost €400 million. The percentage is, therefore, fairly small.
We consider the threat of instability arising in the market in the absence of risk equalisation payments to be undiminished. The authority believes the overall interest of health insurance consumers would be best protected by acting to avoid instability. We also considered competition. There has been a high level of premium inflation in recent years. The authority considers that the commencement of risk equalisation payments could potentially benefit competition in the market. BUPA Ireland and VIVAS Health continue to comprise a significant proportion of the total sales.
On the next steps, representations are due from insurers by 3 October. The authority will analyse the representations and will then meet to finalise its decision on whether to recommend to the Tánaiste that risk equalisation payments be commenced. Our report to the Tánaiste is due by 28 October and she is required to make a decision within 60 days of receiving it.
I thank Professor Wood. Do we know how many people over 65 have obtained health insurance since 1 July?
Professor Wood
They would not show up because we were looking at the figures from 1 January to 30 June.
That is the critical issue. If they are not showing up in the period in question——
The professor is clearly not yet in a position to give us the figure.
Mr. Liam Sloyan
That was not included in the statutory returns.
It was not included in the returns.
Professor Wood
I agree BUPA has made efforts to recruit more older people with offers for the over-65 years age group.
Can we establish the number of over-65 year olds who have come into the insurance net?
Professor Wood
Not now.
Will we know at some point?
Professor Wood
They should show up in the next set of figures.
I wish to refer to the leaked report regarding the VHI having 12.5 times more customers aged over 70 years than BUPA does. What is the figure for that percentage?
Mr. Sloyan
If any insurer feels that is a pertinent issue, it can make representations prior to the authority finalising its recommendation before 3 October.
I am not trying to put the Health Insurance Authority on the spot. Surely the most vital figure to establish is the number over 65 years who are taking out insurance.
Mr. Sloyan
It is vital that insurers can write to us and include in their representation——
Professor Wood
We have not yet received the representation but it is open to BUPA to say, to pluck a figure from the air, that 5,000 people aged over 65 years have joined.
It is not enough that one group returns the figure. All three must do so or we will not have an overall picture of the market.
Mr. Sloyan
We will get an overall picture before the recommendation is finalised if we take this matter further.
Professor Wood
To clarify that figure, if BUPA and VHI were exactly the same size, VHI would have 12.5 times more customers aged over 70 years than BUPA. On their current sizes it has over 50 times the number.
Mr. Dermot Ryan
We know the figures at the moment but the Chairman is asking what has been the difference since the restriction on people aged over 65 years taking out private health insurance changed. That changed only towards the end of the period for which we seek returns, namely, the end of June last.
If any insurer has signed up a substantially higher number aged over 65 years since then, it will use the opportunity of the representations mentioned by my colleague to tell us about this. Failing that, we will certainly get the figures in the next set of returns which will be for the period from 1 July to 31 December 2005.
The Tánaiste is to revisit the issue. Will the committee be accorded the courtesy of knowing when the figures become available?
Mr. Ryan
The Tánaiste must decide on the proposed recommendation, which the Chairman outlined, within 60 days of receiving our report. Our report will go to her by 28 October. She must therefore report by the end of the year. The next set of returns is due to the Health Insurance Authority by 30 January 2006.
If insurers have evidence or wish to say there has been a substantial growth in the number aged over 65 years taking out private health insurance, which should impact on the authority's decision, we would welcome this. They will have an opportunity to do so through the representation phase.
Given that there has been competition since 1997 and the authority estimated a 1% per annum transfer, is it fair to assume that by now 8% have transferred?
Mr. Sloyan
The statistics on the consumer survey we conducted bear that out.
Will Mr. Sloyan confirm this, please?
Mr. Sloyan
The Chairman's calculation of 1% per annum is borne out by consumer surveys we have conducted.
In other words, it is accurate to say that from 1997 to date, approximately 8% have transferred.
Mr. Sloyan
The number would be in or around that percentage.
To return to Professor Wood's comment that BUPA could take a figure of 5,000 out of the air, one cannot pluck figures out of the air and throw them to the Tánaiste or bring them into this committee. The system does not work that way.
Professor Wood
With respect, that is not what I said. It is too soon for us to know the figures. In January when the figures come in it will be simple to subtract the number on 30 June from the number on 31 December. That will show us the increase. I said we do not have the information to give the committee an exact figure.
I apologise if I misunderstood Professor Wood. It appears, however, that the figures from June to December, or from January to June, have a significant bearing on this, particularly for the number over the age of 65 years.
The Chairman asked a question about VHI having 12.5 times the number aged over 70 years. Is it 50 times higher for VHI?
Professor Wood
Yes. The absolute numbers are 50 times higher.
I have made this point before. Can we not equate some of this to the history of VHI being a sole trader for 40 years?
Professor Wood
We can.
Surely that has a huge bearing on its clientele.
Professor Wood
The Senator is absolutely right. I was not suggesting that any company had gone out of its way to attract younger members. It may be the case that in ten years' time VIVAS will have a much bigger proportion of younger members than BUPA and BUPA will then be the recipient of a transfer under risk equalisation.
Is there any other country that has risk equalisation where the number of insurers is as low as our own? The report in front of me states many independent experts agree risk equalisation is normally appropriate for community rating. The Tánaiste made the point about the number of insurers and the level of competition. Why are there so few insurers in a market that appears buoyant?
Professor Wood
We have four insurers in the scheme. It is possible that there may be new entrants. The authority is having discussions with a number of companies that are interested in coming into the market. Ireland is a very small country and there is a limit to the number of health insurers a country with a population in the region of 5 million can sustain.
Is that why there was no competition here in the 40 years before the arrival of BUPA? Was it because we had a declining population?
Professor Wood
I do not think competitors could have come into the market until the necessary European legislation was enacted. BUPA's entrance was enabled by an EU directive. It was good that we had competition in the market.
Is there any country in a similar situation to our own?
Professor Wood
I suppose Australia is the closest comparison. The Australians have a number of health insurers. There are a number of continental European countries as well with risk equalisation, but they tend to have a large number of health insurers that tend to be occupational based. It is a little like the ESB scheme where every occupation would have its own health insurance policy. Australia is probably the closest comparison and it is interesting to note that BUPA is in receipt of risk equalisation payments in Australia. Things turn around. For VHI, old people will die off and be replaced by younger people. BUPA's clients are getting older and in the future BUPA could well be net recipients of risk equalisation payments under our scheme. This is not fixed once and for all as it is a very flexible scheme. As the age profiles of the various insurers change, so do the flows of risk equalisation payments.
There is nobody on the committee who is not in favour of risk equalisation. However, with such a small number of insurers in a small market, would it not be much better if that payment could be divided up rather than one company taking such a big hit?
Professor Wood
It depends on the age distribution. VHI is not the only beneficiary; the ESB scheme will also benefit as it contains many older members. Over time, these flows of payments will change with the change in age profiles of these companies and any new companies which may enter.
To be clear on the current market share, can Professor Wood put figures in percentage terms on the membership of the three companies involved?
Professor Wood
VHI has approximately 75% of the market.
Mr. Sloyan
I believe it is a little higher. VHI has approximately 78% of the market while BUPA has approximately 21% and the ESB scheme has a little more than 1%.
Professor Wood
VIVAS has a little less than 1%. However, risk equalisation does not apply to VIVAS as new entrants receive a holiday from it.
The authority asserts that although VHI has 78% of the market, risk equalisation would potentially benefit competition. It proposes to move moneys from 21% of the market to 78% of the market and states this will improve competition.
Professor Wood
Yes, because the introduction of community rating in the Health Insurance Act tied VHI's hands behind its back. It has a large proportion of older members and is not allowed to charge such people more money. Hence, we believe risk equalisation will level the playing field. I agree BUPA is a much smaller company but it has a much more advantageous risk profile.
Traditionally, people stay where they are and do not consider the advantages of changing. If BUPA has such an advantage, why is there not a greater movement towards it from VHI? Why does VHI still have 78% of the market after eight years?
Professor Wood
That is true. However, people are very conservative when changing health insurers, as they are when changing mortgages, banks and so on. We have commissioned two research reports into this issue, the second of which is due to be launched next week. We have just given a copy to the Chairman.
I question these things when I see large increases in premia. When one looks at such a premium increase, one would think that surely there is then a potential for movement. However, this does not happen.
Professor Wood
No. We asked people how big a premium difference it would take for them to change. The answer was that, on average, people were prepared to tolerate a premium of up to 50% higher because they knew the company and had been with them for a long time. There is a belief that if people change, various commitments might not be honoured. However, they must be honoured.
However, that is not factored into the authority's decision on risk equalisation.
Professor Wood
We examine it. We consider it among the many things we consider.
I do not see it in the formula.
Professor Wood
People are very——
If there was more competition within the market, the organisations that deliver the service would be more efficient. They would be obliged to be so, if there was more competition.
Mr. Sloyan
The difficulty with the way competition is currently structured is that the best way of making profits is to attract young people. Without risk equalisation, one makes huge profits, which is what people count.
I agree with risk equalisation but only when there is real competition to reduce premia for the members. However, that does not seem to be the case. The motivation that fires any organisation that is under pressure to cut costs and be more efficient is not there. It does not appear to be in the system because of the lack of real competition generated by people deciding to take the better product. Professor Wood has stated that people will pay up to 50% more just to stay where they are.
Mr. Sloyan
If claim costs are the biggest expense and the risk profile dominates the claim costs, one would imagine that the main incentive for insurers is to get a low risk profile rather than to drive down their operating expenses. That is the situation when community rating does not have risk equalisation.
With regard to the issue of getting insurers to concentrate on reducing their expenses and profits, the question arises as to whether this is likely to happen when the main driver of their profits is the risk profile they have. In such circumstances, are they more likely to concentrate on maintaining a low risk profile? It would be better for insurers to concentrate on matters that Deputy Neville referred to but how likely is this to happen when the main way of making profits is reducing one's risk profile?
Some of us believe the main way of making profits is to apply to the Minister for Health and Children for an increase.
Professor Wood
One could lose clients.
Professor Wood made the point that they will not move unless the Health Insurance Authority goes up to 50%.
Professor Wood
I have just been passed a note by the chief executive. Our latest research shows that this figure is 26%. They will consider moving if it is 26% higher. Therefore, the figure has come down from the previous survey.
Money is not a factor.
Professor Wood
Money is not a factor.
I assumed the political parties are moving across also. People are also changing their minds.
I welcome the delegation. I wondered earlier whether we would see the delegation every six months if the Minister does not do what it requested her to do.
Professor Wood
It is always a pleasure to cross swords with the Deputy.
I have a number of questions because this is a very important issue. What is the Health Insurance Authority's understanding of the meaning of the term "reserved power" in the terms of the Act?
Professor Wood
Reserved power.
Yes, it is the reserved power that the Minister has to trigger risk equalisation. What does the authority understand this to mean?
Professor Wood
I have no understanding of reserved power.
Mr. Sloyan
I do not think it is written in the Act.
Professor Wood
I do not think it is included in the Act.
As I understood it, the term was included in it.
Is the Deputy speaking with regard to a decision by the Minister on risk equalisation?
Yes but Professor Wood does not think it is part of the Act.
Professor Wood
I do not think it is. Will the Deputy explain to us what she understands by reserved power and we will do our best to answer her?
Reserved power is the Minister's discretion or authority. It is an issue for the Minister. The reason I have asked about reserved power is because I wish to ascertain whether the Health Insurance Authority feels its role is to see risk equalisation triggered in the insurance market.
Professor Wood
Not at all, our role is to examine each set of figures independently and afresh and make a recommendation. We have already recommended twice that risk equalisation should not be introduced.
It is a changing market, a point made by the Tánaiste. I am 90% certain that Professor Wood said that once risk equalisation was triggered, it would be impossible to stop.
Professor Wood
It would be virtually impossible to stop. It would require an Act of the Oireachtas or a regulation to stop it.
We need to approach this issue very gingerly.
Professor Wood
Yes, we need to be cautious.
The Chairman spoke about the change that had taken place in the market since, I think, the end of June. Anybody can recruit people over the age of 65 years or look for their custom. With regard to the Health Insurance Authority's recommendation, the fact that it will be a completely different market when it becomes possible for the authority to include the six months provision and that any insurer can recruit people over 65 years strikes me as extremely dangerous. As I understand it, BUPA has recruited a considerable number over that age.
Professor Wood
We have said it is open to BUPA when it writes to us within the 21 day period to say it has recruited a vast number over 65 years and that it expects to——
I find it worrying that the authority is looking at a six-month period that does not necessarily need to include those figures. It could take the view that we do not have to consider them because they only feature at the very end of our six-month period. It appears it is making a recommendation in a vacuum.
Professor Wood
Not at all, we are making our recommendation based on the numbers over 65 years on the books of the various insurers from 1 January to 30 June 2005. In respect of claims costs paid out——
That is what I am talking about.
Professor Wood
In all reasonableness, the people who signed up at the beginning of June would hardly have claimed by the end of June. Therefore, we just cannot say this is the case.
Does Professor Wood understand what I am talking about? It is a very specific time period. Adopting the letter of the law in terms of what the authority is required to do is all that we can expect of it. Let us say that the Tánaiste decided to trigger risk equalisation. Trying to get the genie back into the bottle is almost impossible in a very changed environment.
Professor Wood
If BUPA's recruitment of over-65s has been so spectacular, as the Deputy seems to believe, it could well be the net recipient.
That does not bother me.
Professor Wood
It does not bother me either.
When the Tánaiste made her decision, one of her major concerns related to something that disappoints me about the authority. It has its figures and seems to have enormous sympathy with the number of over-65s and the high risk profile of VHI but it has completely ignored the fact that VHI has 78% of the market. This was a factor in the Tánaiste's decision. Competition is an issue the authority must consider. The competitive effect of risk equalisation does not feature highly on the authority's priorities, as it were. What competitive pressures are on VHI to bring down premia? There is none. If one examines the period of competition, VHI has thrived.
Professor Wood
I would not say "thrived".
If one examines the figures, VHI was in a very poor financial state prior to competition but now has enormous reserves of €300 million according to the last time the issue was before the committee.
Professor Wood
The reserves have been built up by premia paid by VHI's members.
I do not want to labour the point.
We want to move on.
VHI enjoyed it when the risk profile of its members was lower. It has a huge market share. Competition does not feature highly on the authority's agenda. On the authority's role regarding the Oireachtas, is its duty exclusively to the Minister of the day or must it report to this Oireachtas committee?
Professor Wood
It is exclusively to the Minister.
We must move on. VHI will be able to answer a few of these questions.
May I ask a question about the nature of risk?
Mr. Sloyan
Before we move on, the authority gave extensive consideration to competition. It commissioned a substantial piece of research from economic consultants in the United Kingdom in that respect. We also consulted with the Competition Authority concerning our policy. Both it and the York Health Economic Consortium, which researched the Irish market for us, supported risk equalisation in a community rated market. We have examined the competition issue.
As Professor Wood mentioned, they seem to go hand in hand. The Tánaiste has indicated the size of VHI must be dealt with, perhaps by changing the corporate structure, for example. Professor Wood mentioned that the authority is in consultation with possible new insurers in the market. If the authority is able to indicate such, what is the insurers' biggest hindrance or worry? Is it the size of VHI, that it is so much bigger than them and that it seems risk equalisation will serve VHI?
Professor Wood
There are two hindrances. One is uncertainty over whether risk equalisation will be introduced. The other is the future of VHI. They want to know what the Tánaiste will decide to do with it. To return to the Deputy's point on competition, if the Tánaiste were to decide to break VHI into four small companies, for example, in order that there would be five companies of equal size in the market plus a very small VIVAS, and if each of the baby VHIs, for want of a better word, had exactly the same profile of risk as the existing VHI, our decision would be exactly the same. Each of the four mini-VHIs would get a distribution under the risk equalisation scheme but we would have five equal-sized companies in the market.
Mr. Sloyan
On market share, many are quoting the 78% figure. It is important to note that, in the health insurance market, it depends which market share one has. A significant extent of VHI's 78% is composed of 99% of over-80s. People just take the 78% figure and say it is good that VHI has all these people but some of them are costing VHI much money.
What percentage are over 80 years?
Mr. Sloyan
Approximately 99%.
Professor Wood
Approximately 99% of all over-80s are with VHI.
Do I detect a deep frustration on the part of the authority that the Tánaiste has not implemented its recommendations?
Professor Wood
I do not think so. With a committee of five people taking the decision, it only needs one member to change his or her mind for the decision to swing the other way. We are fairly even-minded about it.
It was a 3:2 decision.
The authority says it is not a question of "if" but "when". Is risk equalisation inevitable?
Professor Wood
It is inevitable. If one wants community rating, one must start risk equalisation eventually.
When Professor Wood says the authority is even-minded, would he not agree that it is accepting the arguments of VHI in this regard? I have their arguments here and they are more or less the same as those the authority is putting to the committee.
Professor Wood
Not at all. If we had been here a year ago, we would have been putting forward the case BUPA gave us. We examine the figures, we are independent and unbiased. None of us has any connection with any of the insurance companies. We examine the issue afresh every time and consult with experts. The first two times we decided not to recommend it and the second two times we did. I am not terribly worried about what the Tánaiste does, as it does not make a great difference in what we do.
How would Professor Wood describe the authority's relationship with BUPA and VIVAS?
Professor Wood
Very good.
Has Professor Wood been lobbied by politicians from either side of this debate?
Professor Wood
Not at all. I am almost five years in office and have never been lobbied by any politician of any party. May I ask if any politicians have been lobbied by any insurance companies? It is pretty evident in some cases.
Has the authority made an arrangement with IFSRA? A statutory instrument was produced last year.
Professor Wood
Is this with regard to new entrants?
Yes.
Mr. Ryan
Does the Deputy mean a memo of understanding or something such as that?
Yes.
Mr. Ryan
We are in discussions with IFSRA concerning one.
When will it be completed?
Mr. Ryan
I hope shortly but it is a matter for the two authorities.
I welcome Professor Wood. As I am not a member of this committee, he has opened my eyes to a topic I did not quite understand. Does this whole issue depend on community rating?
Professor Wood
Yes.
It was a decision for the Oireachtas, not the authority, and was easy to take. Does any country not have community rating? Senator Feeney asked a similar question. Clearly, once one has community rating, risk equalisation will be introduced in some form or another. Is it possible to have both?
Professor Wood
I am not aware of any country that does not have community rating.
Mr. Ryan
The United Kingdom has risk rating, not community rating.
Professor Wood
Private insurance in the United Kingdom is risk rated. If someone aged 60 years wants insurance, the person will shell out much money. In the United Kingdom many are in company schemes. When they retire, they can no longer keep up the premia because they are risk rated and must throw themselves on the National Health Service.
Professor Wood has answered the question. In effect, there is not really a question over community rating. I have difficulty with the authority's market equalisation percentage, MEP. I do not understand why it went down in both years. It decreased from 3.7% to 3.5% and then from 4.7% to 4.2%. Professor Wood touched on the issue of seasonality but also touched on the effect of VIVAS. Surely this is incidental.
Professor Wood
VIVAS Health should not have affected matters until the past six months. The numbers in VIVAS Health are so small.
Can Professor Wood explain what is meant by seasonality? This could explain why figures have come down.
Professor Wood
There is a pattern to settling claims. If insurance companies wanted to reduce the MEP, they could suddenly settle many claims at the end of the six month period. That would distort figures as we examine settled claims. The time it takes insurance companies to settle claims varies greatly within companies as well as between companies. There is a statistical effect from this and it might happen that companies are settling quickly or that they are taking a long time to settle.
Will Professor Wood tease out the mechanics by which the recommendations are made? Two matters have emerged, that the Health Insurance Authority consults the Competition Authority and that 26% of those over 60 years would consider moving from one health insurer to another if the premium was very high. This is very interesting and I invite Professor Wood to touch on the elements that led to his recommendation.
Professor Wood
We look at how likely people are to change because one of the threats to the market is the so-called death spiral. Last year there was much coverage in the press of the death spiral. This means that if young people leave a company with an older age profile because of high premiums this leaves a larger proportion of older people at the company and premiums increase even more. Eventually nobody would remain with the company and this is one matter we examine.
We also examine the relative size of insurers and are aware that VHI has 78% of the market. We also consider the commercial status of insurers and realise that VHI has an advantage in that it is backed by the Minister for Health and Children. It does not need to have the same level of reserves as a private company. VIVAS Health is the only genuine company in that it has shareholders whereas BUPA is an international mutual company.
We examine the rate of premium inflation and see if insurers are raising premiums in advance of claims costs and taking a larger profit here than in other countries. The number of insurers and the potential for new entrants is also considered. We also consider the effect of any transfer on premiums. If the transfer of premiums recommended to the Tánaiste under risk equalisation took place would any company leave the market or be driven to the wall? We also consider the size of the market, how it is growing and the effect on the business plans and solvency of insurers. These are factors we take into consideration.
My last question relates to the point raised by Deputy O'Malley. I assume it is in the interests of the State and the Health Insurance Authority to have as much competition as possible and to encourage new entries. Is it possible to have new entries when there is the threat of risk equalisation hanging over all organisations?
Professor Wood
BUPA entered the market when it knew that risk equalisation was on the stocks. VIVAS Health entered when risk equalisation was running. Therefore, companies know about it.
Does Professor Wood still believe it is possible there will be new entrants?
Professor Wood
While we do not want to say too much, we are in discussion with two possible new entrants.
When the authority was set up, what was its remit? Was it to advise the Minister for Health and Children at the time, Deputy Martin? Was any indication given that the advice of the authority would automatically be accepted or that an à la carte approach would be taken as has happened recently?
Professor Wood
We made a recommendation to the Minister for Health and Children and whoever held this post was free to accept or reject this.
Was that clarified at the time?
Professor Wood
Yes.
I refer to a point raised by my colleague, Deputy Neville, on people not switching between companies. I suggest this is because of shadow pricing. In the last presentation by the authority committee members were informed that VHI and BUPA had increased premiums by 98%.
Professor Wood
Both companies increased their premiums by the same amount.
On this basis it is easy to see why people would not switch. As soon as VHI makes an increase it is matched by BUPA. This does not strike me as the policy of a company genuinely competing. If it wanted to be competitive it would not engage in shadow pricing as it is doing and as it has done in the past.
Professor Wood
Companies shadow price because they make a bigger operating surplus if they do so. The figures for 2004 show BUPA Ireland with a gross underwriting surplus of 17.3% of earned premium that year. In comparison, BUPA Limited in the United Kingdom had a figure of 5%. Someone is paying for this and in this case it is the Irish consumer.
I agree with Professor Wood on that point. Can Professor Woods confirm that risk equalisation might result in a slight increase in premiums for BUPA members but would result in reduced premiums for VHI members, of whom there are far more?
Professor Wood
That is assuming that VHI passes this on to its members. The average premium would drop.
Is it correct that VHI is not required to do so?
Professor Wood
It has indicated in writing that it would do so.
Providing the recommendation of risk equalisation by the authority still stands, if the Tánaiste does not accept this in 60 days is it possible that VHI consumers will see an increase in premiums?
Professor Wood
That is a question for the next delegate, Mr. Sheridan, as this is a matter for VHI. Risk equalisation would remove the regulatory advantage that two insurance companies have due to a much younger age profile and this will increase competition.
I apologise for my late arrival and hope I do not pose questions that have been answered in the presentation. I refer to a point made by Senator Quinn and ask the authority if there is an alternative to community rating. On the matter of lifetime community rating, is it fair that a person entering the health market at 20 years of age pays the same premium as one who does not bother to enter until the age of 40? It is at this age that people become more concerned about health. Is community rating the best option for the Irish market?
Each life insurance company calculates the risk based on the type of age profile it has but all of them can operate competitively and can pay claims based on charging an appropriate rate at the time of entry. In Ireland we have favoured the community rating system and it is advantageous to the person entering the market late. I accept that without this system a person of 80 years could not afford to enter the system but should this not be the case? Should someone else have to compensate for one's refusal to enter for a period of 60 years? Has the authority given consideration to this issue? I posed this question to the Tánaiste when we felt she was on the verge of deciding to introduce risk equalisation.
Professor Wood states risk equalisation promotes competition. While this may be the case, does it promote competition at a much higher price? The authority says that the introduction of risk equalisation will lead to a 7% price increase from BUPA and we do not know what will happen with other companies. We must consider the consumer's point of view, which favours competition if it leads to a decrease in price. If community rating is maintained and risk equalisation is introduced, there may be more companies operating in the market but will the consumer pay a higher price for the product?
My next question relates to the risk equalisation formula. What are the component parts in calculating the formula? Is it based on claims experience or age? Are other factors such as market share of companies built into it?
My final question relates to the decision made by the Tánaiste and Minister for Health and Children several months ago. We attended a meeting in the belief we were speaking nonsense because a decision had already been made to introduce risk equalisation. In reality the decision was deferred for a number of reasons such as whether the status of VHI was statutory or semi-State and that VHI is not required to meet solvency requirements. The Tánaiste can resolve the first issue in the short term and I understand the solvency issue is not major as the VHI already has an element of reserves that would meet the solvency requirement. Will Professor Wood explain this in more detail?
Professor Wood
Four questions were asked. I prefer not to answer the third question in this committee as it would take a long time to explain what goes into the formula. It is all laid down.
Will Professor Wood send details?
Professor Wood
We can certainly send details of how it works. Our decision is not entirely formula based. If it were, there would be no need for the Health Insurance Authority as a computer would work it all out and the moment it reached a certain threshold risk equalisation would be introduced.
Professor Wood might just explain the component parts of the formula in a small amount of detail without getting too technical. If risk equalisation were introduced the companies in the market would be concerned about the amount of money that must be transferred. Would the VHI receive enough and would other entrants in the market such as BUPA and VIVAS be asked to pay too much? It is central to the issue.
Professor Wood
We produce a large matrix for all of the insurance companies with male and female in age bands. It consists of many boxes. We examine the numbers in each box and the proportions and consider how the proportions compare with the average proportion for the market as a whole. From that we calculate the market equalisation percentage.
It is based purely on age profile, not on claims experience that might go along with it.
Professor Wood
That is in there too.
That is what I want to know.
Professor Wood
It is certainly there. It is set out in the regulations to the Act. We did not devise the formula. It came as part of the Health Insurance Act.
The Minister determines it and it cannot be manipulated.
Professor Wood
We must operate with the formula given to us by the regulations that accompany the Act. That is the answer to the third question.
Lifetime community rating is an excellent idea. The authority agrees it is unfair that somebody can freeload until the age of 40 years and can then decide that as he or she has an increased risk of requiring medical treatment he or she will begin to pay a flat rate premium to BUPA, VHI or VIVAS. We support the system of lifetime community rating which means that people who join late will pay more. We made that recommendation to the Department of Health and Children and that is our official position.
How would that work in the existing system? How it would work for new entrants is perfectly logical but how can that system be adopted for all of the people insured under the community rating system?
Professor Wood
It would not be possible. It would apply to new entrants.
Mr. Ryan
It would apply only to new entrants. It would not apply to people who are existing health insurance customers.
Would the introduction of risk equalisation for existing participants in the market be necessary?
Professor Wood
Risk equalisation would apply to everyone in the market. If one joins at the age of 40 years and must pay a 50% higher premium than if one had joined at age 60, that premium remains flat until death. It is the same situation.
It is done through the system rather than the company.
I am not clear on that issue.
I want to move on. We can return to Professor Wood if he wishes.
Professor Wood
I can return to questions.
I apologise for arriving late. With regard to risks, has the nature of risk changed during the years, given that people are living longer, hospital stays are shorter, and therapeutic and diagnostic procedures are better? Has this been factored into charges?
Senator Browne referred to the fact that when VHI or BUPA increase their premium the Health Insurance Authority also increases its premium. Is there a cartel approach to this matter?
Professor Wood
I do not think there is a cartel approach. There is price following.
Is there justification for that? Do the companies in the market blindly follow one another? If a service is delivered at a certain level of premium and suddenly VHI or BUPA increases its premium, is it always justified that the Health Insurance Authority increases its premium?
Professor Wood
We do not take such a decision.
It is an awfully stupid question but I thought I would ask it anyway.
Professor Wood
It is up to BUPA and VHI to approach the Minister and it is up to VIVAS to examine the market and decide by how much it would increase its premium. We have no control over these matters.
It is up to what the Health Insurance Authority does as it determines its own route. If the other insurance companies increase their premium——
Professor Wood
There is a misunderstanding here. We are the regulator, not an insurance company.
Does the authority consider an increase is always justified because one insurance company increases its premium? I apologise, I got my toes in a knot.
Professor Wood
Both of the main insurers have increased their premium costs ahead of medical inflation. VHI has increased its claim costs ahead of medical inflation to build up its risk reserve. It is up to that company to decide its policy. It is probably prudent if it expects to be transformed into a commercial semi-State company.
Will Professor Wood answer my first question?
Professor Wood
We do not have control over medical inflation. I wish we had. Medical inflation in Ireland is no worse than in other countries. There is no doubt that people live longer and diagnostics and surgical procedures are getting more expensive. The higher the technology is the more expensive it becomes, and consultants are well paid.
Senator Glynn asked about the nature of risk.
Professor Wood
The number of old people in all insurance companies will increase as people live longer.
What Senator Glynn alluded to was whether risk had changed. The business is not as risky as it once was. Is that correct?
Professor Wood
People still die but they die at an older age.
The risk has changed.
Professor Wood
People live longer and it is true that the older one is the higher the probability that one will require expensive treatment. If one examines the graph we showed——
The risk is the same because people still die.
Professor Wood
We have not seen a change in the nature of risk over the five years we have operated.
I presume the risk has changed to a higher age group.
Professor Wood
Yes. People are more active.
What used to be the risk at 55 years is now the same at 70 but before people lived ten years less.
Does the nature of risk form part of the formula used to arrive at a decision?
Professor Wood
Age profiles and the claims costs of insurers are entered as features of the risks.
The claims profile.
Professor Wood
Yes, and the age profile.
Risk is not as significant now as it was 30 years ago because we are healthier and are living longer.
People get older anyway.
Hospital stays are much shorter than before. Whereas people may in the past have stayed overnight for procedures, they can now be treated in an afternoon. The nature of risk is changing and the cost of insurance must be decreasing. It would be interesting to learn of changes in the analysis of costs of risk over the lifetime of the authority.
Professor Wood
I concur with Deputy O'Malley that people are living longer and that hospital interventions keep them alive. Two years ago I had an operation for an ailment which would have probably killed me 30 years ago. People are being kept alive in order to incur even higher costs at an older age.
The professor missed my point about hospital stays and procedures. The average length of stay has decreased.
Professor Wood
Those are not the only factors. Claim costs have been increasing.
We are getting bogged down. As I wish to give equal time to our next delegation, we will wrap up quickly and move on.
Does the increased inclination to opt for elective treatments compared to 20 years ago form a balancing factor to shorter hospital stays and improved diagnostic procedures?
Professor Wood
It does not enter into the issue. We are solely concerned with claims costs. We do not worry about how they are incurred. Whether a claims cost is incurred from an operation or a diagnostic procedure does not matter to us when we compare companies.
In terms of the MEP, if over the next set of returns the percentage decreases to about 3.7%, will Professor Wood continue to recommend risk equalisation or will he return to his former position on the 3.7%?
A mother may give birth in the morning without complications and leave the hospital by evening or the following morning. The cost is then minimal. Does the professor take such a situation into consideration?
Professor Wood
It is not our job to take that into consideration. Although we report to the Minister for Health and Children, we are essentially a financial body. Regardless of how it is arrived at, a claims cost remains a claims cost.
Does the authority not examine the method by which they are arrived at? If people do not need to pay attention to it——
Professor Wood
Of course, it is audited.
Senator Feeney should finish her question.
I was waiting for the professor to finish to ask him whether he determines how claims costs are arrived at.
I remind members I must give equal time to VHI. We will move on.
Surely the Chairman can understand that we are trying to tease out of the regulatory body information we will not get from VHI.
I understand that but I want members to realise that if someone asks questions, time must be allowed for answers.
As risk equalisation is the same for all insurance companies, it does not make a difference.
I am pressing this issue because Professor Wood represents the regulatory body which should be more proactive in monitoring the three insurance providers. Does the Health Insurance Authority instead wait for them to supply information?
Professor Wood
We do not have that power.
Mr. Sloyan
The claims costs that are to be included are set out in the scheme which was prescribed by the Oireachtas. Some claims costs are not included in returns according to what was laid down in the scheme.
The Health Insurance Authority acts according to the instructions of the Oireachtas and the Minister.
That is the job of the Government.
That is my point. I ask for an answer to my first question. If the MEP percentage decreases over the next set of returns, what recommendation will be made to the Minister?
Professor Wood
That is a hypothetical question. We do not know that it will decrease. The MEP is only one factor of the ten which we consider. We look at the number of competitors in the market and the financial solvency of insurance companies. Perhaps if the MEP fell but a company was seen to be in financial difficulties, we would not recommend change. I cannot answer the question because a dozen factors are involved. The MEP might fall but sales figures or membership levels may also change.
When it was at 3.7%, the Health Insurance Authority did not make a recommendation but when it rose above 4%, one was made.
I want to move on as quickly as possible.
Even though the formula is set down by the Tánaiste, does the authority have discretion over what is to be considered? Is risk equalisation needed with lifetime community rating?
Professor Wood
Yes.
Why is that so?
Professor Wood
If we have community ratings, then risk equalisation will eventually be necessary.
If I enter the market at the age of 20 years and pay the premium throughout my life, why can each company not be considered individually, as is done in the case of life assurance? I do not understand that issue.
Mr. Sloyan
In the case of life assurance, people have built up a fund but separate funds are not set aside for individuals taking out health insurance.
There could be for new entrants.
Mr. Sloyan
Remember that the premiums of younger people are currently funding older people. If we instead put aside that money in order to build up a fund, no money would be available to fund the claims of older people. The advisory group on risk equalisation estimated that £3 billion would have to be invested to start that, based on an assumption that medical inflation rose at CPI rates. As the rate was far in excess, the amount would have to be doubled.
Is Mr. Sloyan saying we cannot turn back the clock on our current form of community rating?
Professor Wood
We are dependent. It is a matter of inter-generational solidarity. The whole scheme depends on young people paying for the medical care of the old. Young people are paying at a much higher premium than is justified by their risk, but they are paying this in the expectation that the next generation will pay for their medical care when they get old.
I wish to put a straightforward question. Does the Health Insurance Authority have any function beyond the terms of risk equalisation? I would have thought the authority would take into account the medical cost of delivery, given that a woman does not stay as long in hospital compared to a few years ago when the average stay was two or three days. Professor Wood mentioned that only claims costs matter to the authority.
Professor Wood
Yes, in calculating whether there is a need for risk equalisation.
Beyond risk equalisation, the fact that an insurance company can throw in any old claim, although a person might have been in hospital for an afternoon rather than a day and a half, indicates a very cavalier attitude. Does the Health Insurance Authority have any function in examining the accuracy of claims and how they are arrived at?
That is a valid question.
Professor Wood
We have a role in that regard. We must ask insurers to certify that their claims are correct and correctly arrived at. In response to the wider question, all the Act states is that we may advise the Minister on health insurance matters generally. We have no power to go to an insurance company that is keeping people for maternity a day longer than another company and ask why it cannot do the same as the other company. It is outside the terms of the Act and we could be sued if we did this.
Let us move on. It is 12.15 p.m.
On a point of clarification, am I right in assuming that there is no variation between insurance companies on length of time spent in hospitals? Is it not the same for all insurance companies?
Professor Wood
There is some variation.
It is very minor.
I thank the Health Insurance Authority for attending for nearly an hour and a half. I am glad VHI representatives were in the Visitors Gallery and heard what has been said rather than having to have everything repeated. We will now bring in the representatives of VHI.
Professor Wood
There are many questions we did not answer. If Senators and Deputies want to write to us or telephone us, we will be glad to expand on the issues.
I am glad to hear that.
That might be construed as lobbying.
Professor Wood
There is a difference between seeking information and lobbying.
I welcome from VHI Mr. Vincent Sheridan, CEO; Dr. Bernadette Carr, medical director; Mr. Willie Shannon, finance director; and Mr. Declan Moran, director of marketing and business development.
Mr. Vincent Sheridan
I thank the Chairman for inviting us to attend before the committee this morning. The last time we appeared before the committee the HIA had indicated its intention to recommend the activation of risk equalisation. This decision was subsequently confirmed and a detailed report was issued. Unfortunately from our perspective, the Minister for Health and Children decided not to accept that recommendation. Since then, a further set of half yearly returns have been considered by the authority and last week it indicated that it again intended to recommend the commencement of risk equalisation to the Minister.
We are here to answer the committee's questions. On this occasion I do not want to spend too much time on the financial and economic arguments in favour of risk equalisation. From what I have heard this morning, the financial and economic case is overwhelming. All independent and economic experts agree on the absolute need for risk equalisation in our community rated market. The committee has met with the HIA, the independent statutory body established by the Oireachtas, which has on two occasions reached the same conclusion. Further, on this occasion the authority has stated that there can be no doubt that the trend lines are not volatile but are clearly established. Rather than spending time on the financial and economic arguments, we want to put ourselves in the committee's shoes and address any concerns it may have. We will answer the committee's questions but we may have a few ourselves.
Perhaps, the first issue to address is the one that sees the fact that VHI Healthcare has an 80% market share as a reason not to introduce risk equalisation. I remind the committee that this issue was specifically addressed by Mercer Consulting which was asked by the Minister to report to her before she reached her conclusions on the last occasion. Mercer Consulting was clear that the size of the insurer or the relative market share of the insurers did not affect the need for risk equalisation.
The point was made by the HIA that we did not have a uniform share of 78%. We have a lower market share of the under-50s and a higher market share of the over-50s. If community rating requires that premiums have to be equalised across age bands, there must be a mechanism to share the cost of claims. Those are the economic arguments. Let us get down to the human side of this. The incidence of health care costs among older age groups is central to this issue. I will, therefore, ask Dr. Bernadette Carr to say a few words about it from a medical perspective.
Dr. Bernadette Carr
I thank the Chairman and members of the committee. Following what Mr. Sheridan has said, the reason VHI is here today is to explain what this issue means to its 1.56 million members and, in particular, the 178,000 members over the age of 65 years. We have heard much discussion about what happens as people get older. Inevitably, as people get older their health care costs increase. That is not to say that younger people do not get sick. However, on average, one's need for health care increases as one gets older.
We estimate that in 2007 VHI will pay out approximately €1 billion in claims. At least half will go to people who are over the age of 60 years. In the past year we spent €111 million on members receiving treatment for cancer; of which €4.3 million related to women who have had a mastectomy for breast cancer. We spend €5.5 million for 13,000 prostate gland operations on men. An individual can go into hospital with colorectal cancer and individual drug treatment for him or her can cost €5,000.
When we look at the discussion that took place on risk and the cost of health care, it is certainly the case that the way health care is being delivered is changing. People are not spending a fortnight in hospital; they are spending a much shorter time. However, what is being done to them is far more intensive. Previously people went into hospital for a heart bypass operation. Heart bypass operations are decreasing significantly. Instead people are having angioplasty and stents, small pieces of metal, inserted into arteries to stop them blocking up in the future. Three years ago one might have had a plain metal stent inserted. Now it is a drug coated stent which is three times more expensive. A stent might cost €1,800.
It seems that nowadays one of the cheapest things that can happen to somebody is to spend five days in hospital and have nothing done. What is really expensive is the technology applied to get people out of hospital earlier. I could give the committee a list of all the other conditions people have and the moneys we spend on health care. That is what it comes down to from our point of view; paying claims for people who are sick. The message we would like to get across to the committee is that this is an issue for our members and those who get sick and will claim in the future.
Mr. Sheridan
There was some talk about the figures in the market and to avoid any doubt, Mr. Declan Moran who is also in charge of our actuarial services, will comment on the make-up of the market.
Mr. Declan Moran
Following from Dr. Carr's point, as one gets older, one costs much more in terms of claims because one consumes much more in terms of health care. If we examine the health insurance market, on average, people under the age of 50 years pay in slightly more than they should and as a result are profit making. On average, those over the age of 50 years pay in slightly less than they should and hence are loss making but it is not a very straight line. The position gets hugely exaggerated as one gets older. To give a simple example, it takes the premiums from seven 25 year olds to pay the claims cost of one 70 year old. If one company in the market is providing cover for all 70 year olds, it is facing an impossible burden in terms of claims costs. That is the position in the market.
If we take the people in the high claims category, those aged from 65 years, the position is that approximately one in nine members of VHI Healthcare are over the age of 65. By comparison, the figure for BUPA is one in 50. That is an enormous difference and an enormous cost and strain on a company to meet that cost. Not surprisingly, if we examine our cost claims for last year, for every €100 we took in we paid out €93 in claims costs. By comparison, for every €100 BUPA took in it paid out €70 and €23 in every €100 is a huge difference. That is the reason BUPA has been able to make windfall profits in recent years. It is down to one factor, namely, a younger age profile. Without risk equalisation to balance that out it is an impossible situation of one company making windfall profits while the other is trying to meet all the claims.
I want to refer to the financial reality with which VHI is faced and the real concern that it is heading into a death spiral. In a community rated market where everybody must be charged the same price, without risk equalisation it is very easy to start heading into a death spiral and once that happens it is very difficult to pull out of it. The situation in Ireland is even more stark in that we have a relatively small number of company funded schemes that generate the vast majority of the profit in the health insurance market and they cover the losses from huge numbers of individual loss making schemes.
I will give two examples that happened recently of two group schemes VHI lost relatively recently. The first one insured 4,000 people. The profit from that one scheme alone covered the losses from 705 other schemes or 12,000 individuals. Another example is a scheme that had 11,050 insured persons and the surplus from that covered a further 120 schemes, which represents an additional 3,500 insured individuals. Without risk equalisation those 15,500 insured persons are being deprived support from those younger 5,000 insured individuals, which would normally happen in a community rated market. That is the position in the market. Our market is much more delicate and volatile because we are unusual in that a single decision maker being a corporate can have a huge impact on the health care costs of thousands of individuals. That situation is unique to Ireland and is not replicated in countries such as Australia where it is much more on the individual rather than the corporate side.
Mr. Sheridan
I would like to address some of the other arguments. An argument that is frequently used and with which people may empathise is that risk equalisation represents dramatic intervention by the Government, that it is using a sledge hammer to crack a nut and is disproportionate. That argument must be addressed. The argument misses the point, which is that the dramatic intervention by Government is the imposition of community rating. That is intervention by Government to achieve what is regarded as a socially desirable objective. Community rating applies the principle of intergenerational support. One can legitimately debate whether this is appropriate or whether a free market, in this context a risk rated market as applies to all other insurance, would be more attractive in Ireland. There appears to be political and social consensus here that community rating is justified. VHI does not have a position on it but there appears to be political and social consensus in that regard. Once we have that risk equalisation is a necessary consequence of community rating and is a consequent Government intervention. It is not in itself the major Government intervention but a consequent intervention to neutralise the negative competitive and destabilising effects of community rating. It stands to reason that if the cost of premiums equalise between young and old, the claims experience of the young and old must also be equalised. Risk equalisation also ensures we have genuine community rating and not a society that is divided into a series of different communities where if we join one community we can avoid the imposition and the need to participate in the intergenerational support.
The credibility of our financial position is also questioned. We often hear phrases to the effect that VHI has been shouting "wolf" for eight years yet nothing bad has happened or that it had profits of €60 million in 2004, fought to break even in 2005 and experienced losses in the current year. We make no apology about this. We regard it as our job to point out the inevitable in terms of what will happen. We pointed out eight years ago that if we had community rating and competition, we had to have risk equalisation or there would be serious destabilising consequences and VHI could not continue in business. The fact that is now coming to pass does not mean we were wrong for eight years but that we saw the inevitably of it. Other experts saw the inevitably of it also and we do not apologise for that but we should not be attacked for pointing out the obvious. It should be realised that what is happening now — we are losing money and we cannot continue to lose money for much longer — is unavoidable and was predictable. Risk equalisation spreads the cost of community rating across the markets.
We are making losses because instead of spreading it evenly across the market the absence of risk equalisation passes the full cost of financing community rating on to VHI. We have two ways of dealing with this. We can pass the cost on to our members and in doing so deprive them of a true community rated price in a community rated market or pay for it out of reserves. Either way, we go out of business. If we pass it on to our members they will not stay with us for very long. Apart from the fact that it is unfair to members, is inequitable and is against the spirit of community rating because it deprives them of a community rated price, it amounts to commercial suicide. The only alternative we have is to re-finance community rating out of our reserves, and that is financial suicide. The board was left to make the decision as to which way it would go. We are paying it out of reserves and we will lose a good deal of money this year. We were not shouting "wolf"; we were predicting the inevitable.
The final issue I want to address, which is important, is the misleading use of language, particularly by our competitors but because they use it it is picked up by others as well. Risk equalisation is referred to as a subsidy from one company to another. It is not a subsidy from one company to another. Risk equalisation represents transfers among different generations of policyholders. Everybody talks about and believes in intergenerational support and about risk equalisation being a subsidy from one company to another. It is not. It is a transfer between policyholders. It ensures that individuals cannot escape the social requirement to participate in this intergenerational support by joining one company as opposed to another. Companies act as the collecting agents and the receiving agents for policyholders.
In terms of what has happened in this market in the past eight years, our competitor over that period has collected most of that intergenerational support and passed on the premiums to collect most of that intergenerational support from its members but there is no mechanism to pass it on to a risk equalisation fund. As a result, it has made huge profits. It has charged its customers the cost of the intergenerational support, but because there is no mechanism, such as a risk equalisation fund, for passing it on, it has retained it by way of huge windfall profits, three or four times the amount of profit that the same company makes in the United Kingdom and three or four times the target we set for our profit.
I assure the committee that we are not scaremongering. The advice from all independent experts is that the recommendation of the HIA must be listened to. VHI Healthcare is not viable without the activation of risk equalisation. That is the bottom line and it is as simple as that. We are a statutory body under the control of the Oireachtas. VHI Healthcare exists to serve its members and the wider Irish public and for no other reason. We do not want any special treatment or privileges but we want a level playing field in order that we can continue to look after our members as we have done since 1957. Without the introduction of risk equalisation we will not be able to do this.
We will compete to retain our members and gain new members but we will respect the right of any company to enter the market and compete against us. We welcome competition. I have been involved in competition all my business life. I would hate to get up in the morning and not have to compete. It adds to the joy of doing business. However, we ask for a level playing field.
I welcome the representatives from VHI. I entered this debate in my mind last year and went through the arguments. I came in on the other side, that of open competition and considered everything else in the market to be subsidies which protected others in the market. However, I changed my mind. I was partially influenced by the experience I had when I was involved in An Post, of which I was chairman for some years. A similar situation presented there. We were obliged to sell and deliver to every place in Ireland at the same price. It would have been easy for a competitor to enter the market and undercut us if it could deliver the service to Dublin alone, namely, to deliver to Dublin city and not to the mountain areas. While my sense of business and background is all in favour of competition and having an open marketplace if we are to have community rating, we must have risk equalisation. I do not have to be convinced of that anymore but the representatives have to make that case strongly, which they have done today.
My query relates to a different issue. VHI has no control over its corporate future. It is not sure in what direction it is moving, or that is a matter for the Government to decide. There is no sign that the Government is in a hurry to make that decision. More importantly, in terms of its current financial position, if it were to come under IFSRA in terms of competing with non-State companies, it seems it would quickly face insolvency were it not to take the necessary steps. I would like to hear Mr. Sheridan's view on the way forward for the company. To where does he see the company progressing? How does he envisage that happening in terms of the company's corporate future? Is the answer to that solely that risk equalisation should be introduced immediately? If not, how does he envisage the company handling the assumption that it will be privatised?
Mr. Sheridan
I thank the Senator for his kind words. There is a degree of consensus and certainty as to where VHI is going at least in the short term. When the Tánaiste referred to wanting to address the corporate future of VHI and indicated she would do that this autumn, we believe she had in mind to move VHI Healthcare from being a statutory body to being a semi-State company. We are totally in favour of this and have been asking for it for some time. However, the Tánaiste may have a slightly different perspective on this. We want to increase our powers to enable us to do more and to bring more value to the market. The Tánaiste is addressing a valid issue raised by our competitors, namely, that if other competitors in the market are subject to meeting solvency requirements, we should also be subject to meeting them. When we asked for this change some years ago we were conscious that these requirements is what it would entail and we agree with this. If we ask for a level playing field on one side, it is right that we should face a level playing field in meeting insolvency requirements.
I will return to the point about IFSRA but staying with the corporate side, speculation arises from time to time as to what is the longer term future of VHI Healthcare, namely, should it stay in State ownership or be privatised. We have a view on this. When a company is fighting for survival as we are, this question is esoteric in that we will not have a future unless risk equalisation is introduced. My view many years ago was that it would have been better for the VHI to have been privatised. The VHI view now, which is not put strongly, is that this is a longer term issue. We have put it to the Tánaiste that in many ways the VHI operates as a mutual. It has been totally financed by the savings of its members and all its reserves come from its members. We look upon ourselves as having only one purpose which is to serve our members. It would make sense for VHI Healthcare to be privatised as a mutual rather than to be owned by some company. That would ensure the retention of a key feature that we believe our members consider to be important, namely, that VHI Healthcare is a not-for-profit organisation. One of the features of health insurance companies around the world is that the majority of health insurance operations are not for profit. That does not mean that companies should not seek to make a profit and fair dues to them if they can operate more efficiently.
There seems to be a view that the nature of health care is such that it suits a not for profit culture and environment. We believe that feature is important to our members and should be preserved. One way to do this would be for us to operate as a mutual. We are fighting for survival and these are esoteric questions for the future. I do not see VHI moving out of State ownership certainly during my working life.
Senator Quinn mentioned the question of IFSRA. If we became a semi-State company and were incorporated, we would be subject to meeting the insolvency requirements of IFSRA. Representatives of IFSRA will not use the term "risk equalisation" because they do not want to get involved in this debate. They made their position perfectly clear when I and officials from the Department of Health and Children met representatives of IFSRA. They were in no doubt in this regard. It stands to reason that we cannot become subject to IFSRA and normal solvency requirements unless risk equalisation is introduced. I believe everybody who knows about this area would accept this. The phraseology IFSRA uses is that if one wants to get an insurance licence from it, one must have the opening solvency requirements and give it robust financial projections. On the occasion we met its representatives, we pointed out that in the market in which we operate we could not give it robust financial projections, in reply to which one of its representatives asked what were we doing wasting their time. I said I wanted that official to point out to the gentlemen present that risk equalisation is essential before it could regulate the market, to which she replied that she would not mention risk equalisation but would simply refer to robust financial projections. Everybody accepts that we cannot be subject to IFSRA solvency requirements until risk equalisation is introduced.
Regarding the indication that the Tánaiste will introduce legislation, I believe her intention is to indicate that the way forward for us is to incorporate but it will take a little time for us to build up our opening solvency position to that level. I believe she would also acknowledge that cannot happen until risk equalisation is introduced.
I welcome the delegates to the meeting. VHI Healthcare has retained 78% of the market in the past eight years. It seems to have a captive market. We have been told that its charges would have to be 26% ahead of its competitors for its subscribers to move elsewhere. Should that be factored into the whole competition area when it is being considered in the context of risk equalisation? In principle I agree with what has been said. Insolvency was spoken about but I understand VHI has a very high level of reserves built up from charges to members. There is concern among and questions are being asked by the public about increases in health insurance. Perhaps I might come to that later.
Is there competition in this business? Is BUPA not chasing VHI's prices? If BUPA wanted to and if it took the same level of profits as it does in Britain, surely it could become very competitive and acquire VHI members? Is BUPA interested in competing with VHI other than chasing its prices and holding a market share of approximately 20%? Is BUPA serious about acquiring VHI's members in that if it operated as it does in Britain, it would make more inroads into the market? BUPA said it has gained over-65 year olds from VHI. Can VHI put a figure on that because it has lost those members?
Costs often concerned me. The first thing one is asked when one goes to a consultant is whether one is insured. Is the growth of the business fuelling medical inflation in the area of fees for consultants, doctors and so on? The medical profession seems to have a different attitude towards somebody who has insurance, whether with VHI or BUPA, than to someone who does not have it. This goes back to a question the previous group was not in a position to answer but VHI might be in a position to do so. Are the cost controls in place ineffective in regard to fees and medical inflation because there is a belief among many medics that insurance will cover anything? Rates will go up and everybody will be happy. One sees this very starkly in the two-tier system in terms of the waiting lists, the person with the medical card and the person who can afford to pay VHI and BUPA fees and, indeed, those who cannot afford to pay such fees but believe they must do so to get a decent level of medical services.
Mr. Sheridan
I hope I can do justice to the Deputy's questions. We have 78% of the market. We made the point that 78% of the market distorts the picture because there are two markets. There is one market for which everybody wants to compete and one for which nobody wants to compete. We have a much smaller percentage of the under 50 year olds than we do of the over——
Regardless of what VHI charges them.
Mr. Sheridan
We had 100% of the market but now have 78%. The Deputy mentioned the business of propensity to move. The Health Insurance Authority spoke about a survey in which people indicated that there would have be a 26% price difference before they would move. I wish to get back to a point my colleague, Mr. Declan Moran, made about the market which does not operate at the level of individual choice. It is a unique market in regard to the way health insurance is purchased. Most of those who buy health insurance do so through their workplace. We do not find competition for a whole lot of business. Therefore, people will not move if there is no competition. As I said here before and elsewhere, to go to one extreme, we do not get any competition for religious orders in Ireland. We never need to defend our pitch for that and for lots of other business.
The real, heavy competition is for the big, corporate companies with the young membership, and I assure the Deputy the competition is as sharp as that one would experience in any market. Mr. Moran gave an idea of how profitable they can be because young people pay too much in a community rated market. If one can target a young, corporate company which might even pay some of the insurance premium, that is where the competition is. The propensity to move there is enormous because very often one is dealing with a purchasing manager who might operate out of the United States or elsewhere. In our economy the number of very large corporate companies with very young workforces has grown enormously since the 1990s. I refer to the Microsofts, Intels and to Boston Scientifics. That is where the competition lies.
VIVAS came into the market recently and people said nobody was cherry-picking. AIB is its major shareholder and as such, it tried to get its staff to join VIVAS. I believe it wrote to its staff three times asking them to join VIVAS. Did it write one letter to a pensioner? It did not. That is the difference between the two markets. We do not have 78% of the large market. There is cherry-picking and people compete for the younger market. The propensity to move is not what one will get from conducting a survey of individuals. The big movements take place at corporate level and that is very tight. Competition there is huge.
I said we really have a dire problem and would lose €25 million to €40 million this year. I have been in business for a long time and have never been involved in or run a company which has reported a loss. I am looking at a situation where VHI Healthcare will report a loss of €25 million. If we have to project for future losses, because risk equalisation will not be brought in, it could be much higher. We have reserves, surpluses we have earned over the years which we have built up very slowly. VHI has been in operation since 1957 and its reserves at their height represented 35% of premium income. If we wanted to get an insurance licence from the Irish Financial Services Regulatory Authority, we would have to have 40% of premium income. That would be the minimum and we would have to negotiate to even get that level. Those reserves took a long time to build up because our target was a 5% surplus of premium income. With premium income rising, the amount that gives by way of additional reserves every year is actually quite small. It goes down very rapidly because when one incurs losses in our business, one loses money but one's premium income still rises so one's solvency ratio goes down rapidly. We will fall down to approximately 27% by the end of this year.
Mr. Willie Shannon
It was 33% at the end of February. We have moved from 35% to 33% and we will be down to 27% at the end of February 2006. We believe that if current trends continue, we will be below 20% by February 2007. Therefore, it is a very serious financial situation.
Mr. Sheridan
We talk about €280 million but that would go very quickly. When it is expressed as a percentage of premium income which is the solvency test — whether one is fit to continue in business — it becomes very worrying at that level. One does not wait around until one goes into work some day to find there are no reserves left. The board must say it would be reckless to continue to trade beyond a certain level of reserves.
One does not just arrive into work some day and find that to be the case. One would expect to know in advance.
Mr. Sheridan
: As Mr. Moran said, we will go from a 33% solvency ratio to 27%. The board has not sat down and said it would be reckless to trade if the ratio goes below 20%. It could be 15% but it will not be 0%.
However, there will be a figure below which the board must recognise it cannot continue in business.
Mr. Sheridan
We broke even last year and will lose between €35 million and €40 million this year. If risk equalisation is not introduced, this loss will escalate. We must get it across to the Oireachtas that this business is in serious financial difficulty. People have been saying this all along in independent reports. Most of them were appointed by the Government and they have come to the same conclusion. The statutory regulator appointed by the Government has made two recommendations and we hope the second will be confirmed. We are not the only ones saying this. This is real and there is nothing——
That is the issue facing the committee, which I cannot grasp. Deputy Neville has asked a question in this regard. VHI could arrive at a point where its reserves cannot support it, as agreed by the board. However, with regard to competition, every year VHI increases its premiums by whatever percentage, BUPA, its main competitor, applies a similar increase. I am in a different business, the licensed trade. If somebody wishes to come into my home town and take me out as a publican, he or she will keep his or her prices lower than mine. However, that does not happen in the health insurance marketplace and I cannot figure this out. As Deputy Neville said, there must be more to this than money. If a company wanted to compete and win a greater market share, it would lower its prices annually. We cannot reconcile this in our minds.
Mr. Sheridan
The central point is what makes our business different from the Chairman's is he operates in a free market and can decide prices. Health insurance is not a free market. There is Government intervention for perceived good social reasons and the Government says we must price on a community rated basis. That puts a different perspective on competition.
Why will VHI's competitor not set its prices lower?
Mr. Sheridan
Deputy Neville's third question was whether there was competition at all because the price increases on the part of all companies in the sector are the same. We do not follow anybody as we set the price. The HIA has examined this issue and has stated there is clear evidence BUPA follows price.
Is BUPA interested in market share?
Mr. Sheridan
No, it is not. It is interested in the market share of people who are young, healthy and who have a low claims history. The reason an entrant into this business has three years free of risk equalisation, even after it is introduced, is to give it an opportunity to build market share. BUPA has effectively said it wants profit, not market share. If BUPA had entered the market eight years ago and had taken the price differential it could have taken against us, which was between 40% or 50%, it would have taken all the market share it wanted but it would have taken the sector it did not want as well as the sector it wanted. Risk equalisation would also have been triggered quickly and, therefore, the goose laying the golden egg would have been killed.
The sensible business course for the company, given the rules set down in the market, was to say, "If we price follow VHI and come in 10% below VHI, we can then go along to corporates where price matters and get the business we want through product design, targeted marketing and distribution activities". BUPA has done this and achieved a very good market share. The company has 20% of the sector it wants.
Is that 20% of the overall market?
Mr. Sheridan
It is 20% of the overall market but the majority of——
Does Mr. Sheridan know the percentage of the market BUPA wants?
Mr. Sheridan
No, but BUPA wants 100% of the young age market.
What percentage of that market has the company?
Mr. Moran
We estimate it is approximately 75% below age 50 years. We have more than 90% of the market above that age.
Is Mr. Moran saying BUPA has 75% of the market?
Mr. Moran
Approximately 75% of the below age 50 years sector. The company sponsored sector is the most attractive and our market share is considerably less than 73%.
Mr. Sheridan
For the sake of clarity, Mr. Moran is talking about our market share, not BUPA's.
I am referring to BUPA's share of the sector it has targeted. Mr. Sheridan has stated BUPA is concentrating on a specific market. What percentage of that market has the company?
Mr. Moran
BUPA has approximately 27% of the under 50 years market.
The company has no control over who purchases its products. It might have a preference.
Mr. Sheridan
One has enormous control in this market. One can avail of product design, benefits favouring younger people.
However, Mr. Sheridan is saying when BUPA maintains community rating, the product is not as favourable.
Mr. Sheridan
The company maintains community rating. It avails of product design, marketing activity, distribution activity and sending its sales force into companies with the younger workforces.
Mr. Moran
We do as well.
Mr. Sheridan
We do not come up against competition in the older age groups.
That is an important point. Is one company's product inferior?
VHI's advertising campaign is excellent. It is running a lovely television advertisement targeted at all age groups.
Mr. Sheridan
All age groups are represented in our advertising. We are not in the business for profit. Risk equalisation is an argument about profit, not competition in the marketplace. The way to generate profit——
How many people aged over 65 years, who did not have previously have insurance, have joined VHI since July?
Mr. Moran
I cannot tell the committee that number. However, we have 178,000 clients aged over 65 years.
Which represents 10% of the company's overall share.
Mr. Moran
That is correct.
What was the percentage before BUPA entered the market?
Mr. Moran
I do not know the exact number but we had 100% of the market. Our overall population has been aging by half a year every year. I do not know what percentage of the population was over 65 years in 1994. However, by comparison, BUPA has almost 12,000 customers aged over 65 years. One in nine of our members is over 65 years and they make large claims while one in 50 of BUPA's members is over 65. At the end of the day, the issue centres on paying claims costs. More than half our claims costs is on people aged over 65 years.
I do not doubt that but the profile of VHI's customers ten years ago prior to BUPA entering the market is important. What has changed? Has the risk to which VHI is exposed increased in that period? Approximately 50% of the population has private health insurance. Has that increased drastically since BUPA entered the market or is it part of the same pool? Has competition made it more attractive for the consumer to have private health insurance and has that distorted the profile?
Is information regarding the number of people over 65 years insured with BUPA available to its competitors? The Minister asked VHI to open its database in that regard.
Mr. Sheridan
I will answer the second question first. Data protection does not allow us issue the names of those insured.
I thought that might be the answer. It is easy for insurance companies to find customers in the younger age group, from the corporate area and elsewhere. However, how can companies, like BUPA for example, become competitive in the over-65 years market when they cannot ask people what company they are with or whether they have insurance? There is no set form through which they can compete. Is that not the position?
Mr. Sheridan
If they had wanted to do it in the past eight years, they could have given a much larger discount on their premiums. They could have targeted corporates with a preponderance of older people. There was much talk earlier I found amusing. A big deal was made about BUPA placing an advertisement for people over 65 years of age. A cynical person might say that was an exercise designed in order that people could make the point made earlier, as it will have no effect on the overall trend of risk equalisation percentages in the foreseeable future. It just makes the point that if BUPA had been open for older members in the past eight years, there would be no need to advertise specifically for members over 65 years now.
Risk equalisation is a self-adjusting mechanism. If the risk profiles change, the transfers will change. Putting in risk equalisation does not mean setting the matter in stone or that so much must be transferred from one set of policy holders to another. Changes in the risk profiles underline the point we have consistently made, namely, the way to get competition in the market is to introduce risk equalisation because it will encourage people to compete across the market and not just to compete for the financial advantages available for younger lives. The result will be beneficial competition in the marketplace, something we do not have currently.
Deputy Cooper-Flynn asked about how the market has been formed since the introduction of competition. Health insurance was introduced in 1957 and BUPA entered the market in 1996. In that period the market grew to approximately 30% of the population and has grown since to 50%. If we tracked economic growth for the period since 1957 to 1996, it would indicate that the growth in health insurance would be the same even if VHI was in the market on its own. BUPA makes the point that its advent into the market gave a great boost to growth in the market. There is no evidence to suggest that in terms of the trend of membership growth relative to the trend of economic growth, although health insurance take-up is very much linked to the economic welfare of the country. As employment went down during the period, from 20% to virtually nothing, the potential to sell health insurance grew enormously.
I accept that point. However, humans being what they are, I imagine that when only 30% of the market was insured, a greater percentage of those insured were older people, because older people are more inclined than younger people to fork out when insurance is more expensive. Is that the case? If VHI could make a profit and survive well when it had 30% of the market ——
Mr. Sheridan
Let me make a correction. It was nearer to 40%.
Even at 40%, if VHI could make a profit when, perhaps, 10% of its overall market was over 65 years, how can it not do so now when its percentages are still the same?
Mr. Sheridan
There is no problem making a profit in this market for a short period of time. We could make a profit by putting up our premiums and by depriving our members of a community rated price. However, we would probably go out of business even more quickly if we did this.
VHI has had community rated pricing all along. Therefore, maintaining that——
Mr. Moran
Our age profile now is older than it was before competition came into the marketplace. We have a larger membership now, but it must be remembered that while we have kept most of our older members and won new members, competition has mainly been taking members from us in the lower age bracket. Our average age of membership now is over 36 years, while before competition it was probably closer to 30 or 31. Part of the reason for this is that the population here is older than it was in 1996. Another factor is that the people leaving us to move to the competition are younger than average.
Returning to the Deputy's question as to how VHI could survive before competition with smaller numbers than today, the proportion of members today in the older more expensive categories is higher——
I asked that question. I asked what was the percentage of members over the age of 65 years ten years ago, but Mr. Moran could not tell me.
Mr. Moran
I cannot tell the Deputy the exact percentage over 65 years, but I can say that the average age profile is older now than it was in 1996.
It is an important point. Mr. Moran should try to get that information for us.
Mr. Moran
We can certainly look for it. This is a competitive marketplace where the majority of claims are for people over 65 years, but one in nine of the members of one company is over 65 while only one in 50 is over 65 in another. We can, therefore, see the difficulty in trying to compete for the company that must pay claims for one in nine as opposed to the company that must only pay on one in 50.
What does Mr. Sheridan think of the definition of unfunded community rating as in the Harvey report, that the premium rates used are set with the objective of ensuring that for the totality of policyholders the cost of claims in any one year is met principally by the premiums paid in that year?
When replying, Mr. Sheridan should also reply to previous questions.
Mr. Sheridan
The report was making a point on the question of unfunded community rating versus a funded system. The HIA made the point earlier. One could not set up a funded health insurance system on a community rated basis. That would mean that if one took a €100 premium from a 20-year old, one would probably have to put €90 of it into a reserve because when the member reached the age of 60 years, he or she would cost the company. If that had been done in the early days, one can imagine what the cost of health insurance would have been. Instead of that, the Government set up community rated health insurance on the basis that it be unfunded in those terms. In other words, unfunded is a pay as you go system in order that the total income each year must pay the total outgoing.
Does Mr. Sheridan then accept the Harvey definition? Does he accept that the unfunded system of community rating is a pay as you go system, that the premiums taken in in a given year must pay the claims in that year?
Mr. Sheridan
That is correct.
If that is the case——
Mr. Sheridan
Then what is the problem?
Exactly.
Mr. Sheridan
The Government has also said we have a community rated market. The difficulty arises if we get to the stage where, with the difference in the age profiles, we must charge at the community rated price. To make it a real community rated market, we must have risk equalisation. We must have transfers between policy holders that go to different companies. If we charged our members a premium that would be sufficient for our income to meet our outgoings, we would deprive our members of a community rated price. For instance, take the case of a 60-year old VHI health care member who joined at 25 years of age and paid more than he should have paid and who is now 60 years old. We could, for instance, explain to him that other companies have entered the market and taken the young people and they do not want to contribute now to the inter-generational support and we will be forced to charge him much more, much nearer the rate for a 60-year old because we must keep our books balanced. This would be very wrong and inequitable on our part. We did that up to September 2004 and if we had continued that policy, we would have lost our customers because our prices would have escalated at a far higher rate than other companies.
There are only two options. Risk equalisation spreads the cost of financing community rating across the market. In the absence of risk equalisation in a community-rated market if all the financing costs must be met by VHI, we can either pass the cost on to our members — as in the example — or we can pay for it out of our reserves and this is the choice we made. We decided not to pass the cost on to our members and deprive them of a community rated price, particularly those members who have been subscribing for a community place all those years. It would also be commercial suicide for to do so and we would go out of business faster. We decided our only other option was to pay out of our reserves but that is not an option either.
The board was placed in an impossible situation. If the cost was passed on to our members, we would be out of business because our members would leave us and with a bad taste in their mouths because we had deprived them of community rating. If we pay for it out of our reserves the company would go out of business because we would lose money. As this was an impossible decision, we chose the option of paying for it out of rapidly diminishing reserves. For the past eight years we have been warning this was inevitable and all the experts were in agreement with us and now the Health Insurance Authority is agreeing with us. There is no point in saying everybody agrees that risk equalisation is necessary for a community-rated market. It is a question of when this will happen. For instance, a man who has just suffered a heart attack needs oxygen immediately and he will not thank anyone who, while agreeing in principle with his need for oxygen, needs to consider when it is the appropriate time to give it to him. Risk equalisation is oxygen for VHI.
How many over-65 year olds has VHI lost to BUPA?
There are two questions.
I have already asked them. The other question was about cost control and medical inflation.
Mr. Sheridan
The issue of the over-65s is a non-event. BUPA stated it had received approximately 1,000 over-65 year olds. Our records do not suggest we have lost 1,000 people over 65 years. We do not keep a separate record stating the numbers of members over 65 years on 1 July. Prior to this date, insurance companies did not take on people over 65 but the law changed on 1 July. We are open for members over 65 years but we do not keep a separate record. It will not make a big difference in the short term and any long-term difference will be reflected in the risk equalisation. We currently have 178,000 members over 65 years and BUPA has 12,000.
I wish to make another point.
Other members wish to speak and the Deputy has had his chance.
One of my questions has not been answered and I ask that the delegation be allowed to answer it. I asked four questions and the Chairman intervened and allowed everybody in before my questions were answered.
I remind the Deputy we are not back in play school. The committee is endeavouring to move through the agenda as best it can. I am trying to allow as many members as possible but it is an impossible task. People want to ask questions. I will allow Deputy Neville to finish his questions and I apologise for this.
Mr. Sheridan
It is a very deep question because it deals with medical costs. The Deputy asked whether medical costs are being controlled sufficiently well and Dr. Carr is the expert.
Dr. Carr
There are two reasons people buy health insurance, to get faster access to the system and in order that they do not have to deal with financial issues when they become ill. Cost control comes in on that latter point. If we are to bring something to the system, we cannot simply pass costs on from hospitals and doctors to members. We act as a common negotiator. When an individual becomes ill, the last thing he is able or wishes to do is shop around for doctors or treatment and this is our role. We negotiate prices with doctors and hospitals, ambulance companies and providers in the system to obtain the lowest possible price for our members. We have managed to maintain costs. External consultants examine how well costs are controlled in our system as against other countries and they have found Ireland is in the top five in terms of control of medical costs.
Price increases to medical consultants have been linked for many years by VHI to the national pay agreements. This is a considerably lower rate than the rate at which costs have risen in the uncontrolled sector. The costs of hospital care for members of health insurance schemes are fully covered because VHI has pre-negotiated prices in order that providers are not free to charge whatever they like.
Mr. Sheridan
The proof of the pudding is in the eating. The cost of health insurance in Ireland is relatively low. It is one of the few things in which this country performs relatively well compared to other countries. The cost of health insurance is a good deal lower relative to other countries and we take some of the credit for this.
I thank the Chairman for being so patient with all members this morning. I am conscious we are all tired and hungry and the day is moving on.
This has been a great morning, even though I was not looking forward to coming here this morning because I feared there would be more repetition. VHI has done itself a great servicethis morning. Mr. Sheridan states VHI is fighting for survival and I can see the fight in him today whereas I could not see it at the previous meeting. It is a good exercise to tease out these issues.
Are the company's reserves at €380 million?
Mr. Sheridan
They are €280 million.
How will the reserves be used if not to keep down the cost of premia? I address a question to Mr. Shannon about the VHI's administration costs. What was the recent increase in these costs and what caused it? What is the cost to VHI of dental and other products and do competitors offer the same products?
I refer to cherry-picking. The advertising campaign is very good and VHI is not behind the door when it comes to advertising. I noticed BUPA billboards recently around the country which advertised it caters for all age groups. I do not know whether it catered for all age groups in the past eight years.
The delegation referred to its older members and members of religious orders who have probably been with VHI since day one. They probably joined VHI as young people and are now old. The onus is on VHI to look after them, whether community rating is in place. I understand VIVAS is looking for the young bankers. What is stopping VHI using its money to do the same kind of cherry-picking while at the same time holding on to its older members and looking after them?
If we seem hard on the delegates today, we do not mean to be. We have done a good morning's work. VIVAS and BUPA will appear before the committee and we will probably fire the Scud missiles at them also. While I had a few other questions, I will leave them as we are running late.
Mr. Sheridan
I will start with the last question first. We compete like mad for all age groups. Some of the comments earlier suggested that some felt we had done too well in maintaining our share of the market after having competition for eight years. We are not behind the door when it comes to competing; we love competition. We are simply looking for a level playing field. There is nothing wrong with competition. We get up earlier than anybody else in the morning to compete and we go to bed after everybody else at night. If any others want to get up earlier than us and go to bed later than us, fair dues to them.
The Senator asked why we need reserves. Ultimately, VHI is an insurance company. This comes back to the issue of IFSRA. Insurance companies must have reserves. The simple way to put it is that we make a promise. Somebody gives us a few hundred euro and we give that person a piece of paper containing a promise. There are reserves to give some confidence to the people receiving such bits of paper that we can fulfil the promise. Unexpected things can happen in life. We might get our premium rates wrong some year, or there might be an epidemic. In the financial world companies need reserves to back up the promises they make. Our reserves are actually much lower than they should be. Nobody ever put money into VHI. The Government never invested in it. All the money has come from our members. Year by year we have managed to put aside some surplus. VHI is a not-for-profit company which means that we try to earn some surplus every year to try to increase our reserves in line with our premium income and that is what we have done.
Does Mr. Sheridan mean VHI will not dip into its reserves when it meets a rocky patch as it is doing here?
Mr. Sheridan
There are different kinds of rocky patches. We are saying there is a systemic problem in the market and not just a rocky patch. Community rating without risk equalisation has meant we cannot trade profitably. We must lose money or go out of business by losing all our customers. We would go out of business quicker that way. It is not just a rocky patch; it is a systemic problem with which we cannot deal. We can only finance for a relatively short period.
The reason I refer to a rocky patch is that I believe risk equalisation will happen, although we do not know what will be the price. When BUPA entered the market, it did so with its eyes open. It knew something would happen at a later stage. We need to establish the fairest way of handling the issue. What would be VHI's reaction if at the end of the year the Tánaiste decided to wait another year?
Mr. Sheridan
We would be devastated. It would be a terrible kick in the teeth. When I say we——
Mr. Sheridan is talking about VHI's members.
Mr. Sheridan
——I am talking about our members. That would necessitate dipping further into their reserves and using up the money they have put aside over all these years. This is not us. VHI is its members. It would be a terrible outcome.
When risk equalisation eventually happens BUPA will need to pay VHI, which will increase its reserves. The market would then be more level and VHI would compete and could build up again.
Mr. Sheridan
No. When risk equalisation comes in, BUPA will pay into a risk equalisation fund the amount it has collected from its members towards inter-generational support. We will take it out because our members need that inter-generational support. That is what would happen. It would be none of this subsidy business. At that point BUPA's pricing and ours would be on the same basis. We have a pricing policy. Rather it is not there at the moment because we are making losses. Our target in the past has been to get 5% of premium income by way of profit. We did not usually quite make it but got close to it most years. That is necessary to allow us to increase our reserves in line with premium income and a little bit more. When we get to the required level of reserves relative to premium income we will drop our profit target to 4% or 3%. We are a not-for-profit business. We do not earn profit for the sake of paying off shareholders to subsidise our business in other markets or to subsidise other products. We need to increase our reserves in line with our premium income, which is our only reason for generating surplus.
I was pleased the Senator asked one particular question about our administration costs, to which I will ask Mr. Shannon to reply.
Mr. Shannon
The administration costs last year were 8.6% of premium income which was up from 8.3% the previous year. The principal reason for this was the introduction of a new renewal and billing computer system, which cost approximately €25 million to develop and install. We incurred what we call depreciation and the installation cost last year. To put the 8.6% in perspective, even though this was higher than in the previous year, it is still significantly below what is the normal administration cost for health insurers around the world. The normal average would be approximately 12%. This compares with BUPA's undeclared administration cost in Ireland of13%. We are very conscious that it increased and we are attempting to ensure it reduces again this year. Fundamentally it is a very low figure.
Mr. Sheridan
We believe VHI can claim to be the most efficient health insurer in the country. As was pointed out by, I believe, someone from the HIA, in the absence of risk equalisation, there is no incentive for other companies to be efficient. Everything depends on the age profile of the members. With risk equalisation the risk profiles would be balanced in which case a huge incentive exists for insurers to be efficient. Once risk equalisation is introduced we will see the expense ratio of BUPA in Ireland reducing.
What percentage of membership opts for those kinds of packages and what does it cost?
Mr. Moran
Most who choose to purchase those products purchase them in addition to their hospital plans.
That is what I thought. Are they not available to members only anyway?
Mr. Moran
No, that is not true. Some of our products, our travel insurance product for example, are available only to our members. However, our dental insurance, primary care and expatriate cover are available to anybody wishing to purchase them. They run very much as businesses in their own right.
Mr. Sheridan
The important point is that they stand totally on their own merits without any cross-subsidy or transfer. We are required to get approval from the Department to offer these products; there is no question of cross-subsidy.
Most of the questions I had have already been asked and I will not repeat them. It is important to ensure those who want insurance are covered. The figures given by the VHI delegation on the third page of its presentation relate to people over the age of 65 years. It speaks volumes that one in nine people over the age of 65 years is covered by VHI and one in 50 people over the age of 65 is covered by BUPA Ireland. Such figures imply that there has been a degree of cherry-picking. I refer to the questions of who is insured and by whom. I do not suggest VHI has been cherry-picking, but I will raise this matter on another day with others.
Dr. Carr spoke about a graph on page 2 of the VHI presentation that indicates VHI has given €111.3 million to its members in order that they can receive treatment for cancer. It also points out that €5.5 million was given to more than 1,300 men who have had prostatectomies. How many of the 1,300 procedures were related to cancer? I appreciate VHI was not the entire underwriter of all the procedures, but I would like to know how many of the procedures with which VHI dealt were cancer-related. How has this figure changed during the years? Everybody talks about women's health and rightly so, but many questions are being asked about men's health nowadays. I have a great interest in the issue, about which I have spoken in the Seanad. If the representatives do not have the relevant information with them, I ask them to forward it to me.
Dr. Carr
All of the financial figures in our presentation are VHI figures.
Yes.
Dr. Carr
I do not have the specific figures sought by the Senator in respect of prostate cancer. I cannot say how many of the 1,300 prostatectomies were cancer-related. Most of the prostate gland operations which are performed on men are related to cancers. Some procedures are performed in cases of prostate enlargement, but in most cases the operations are necessitated by cancers at various stages of progression. We can certainly give the Senator specific figures on the number of prostatectomies which were for cancers. I agree with him that the issue of men's health has been under the table for a long time. It is beginning to achieve prominence and I think it will continue to do so.
I am interested in the difference between the number of prostatectomies funded last year and the number funded five years ago. Is the number increasing, has it levelled off or is it decreasing?
Dr. Carr
There are very few procedures which are being performed to a decreasing extent. I mentioned that fewer coronary artery bypasses were being performed because one procedure had replaced another. I do not think the number has gone down in the case of any of the procedures covered by VHI. That is a reflection not only of the increase in the level of health care provision, but also of the increase in the incidence of most illnesses as the population gets older. The number of procedures being carried out has decreased in hardly any cases. The number of prostatectomies is increasing, particularly as more screening programmes are being introduced.
It is increasing.
Dr. Carr
Yes. The introduction of screening programmes means that interventions are taking place earlier and people are enjoying better outcomes.
I thank the VHI delegation for staying to debate this matter for such a long time.
The joint committee adjourned at 1.35 p.m. sine die.