I apologise to those who have been waiting since 9.30 a.m. this morning. We had an important presentation which took longer than anticipated. I welcome the delegation from BUPA Ireland, Mr. Martin O'Rourke, managing director, Mr. Niall Devereux, director of finance, Ms Ann O'Donnell, director of operations and Ms Ann Broekhoven, director of health services contractors. I invite Mr. O'Rourke to commence the presentation. The issue we are discussing is risk equalisation.
Risk Equalisation: Presentations.
I thank the Chairman and committee for inviting us here again this morning. We are sorry we have such a short timescale but we understand that the committee does not have any other option. If our notes are not to the usual standard of reference, we will be more than happy to answer any questions the committee might have. However, I do believe our notes are up to the usual standard of accuracy. We will make our presentation this morning on the basis that we are here representing consumers. We do not have any shareholders or anybody else to represent.
It was stated last week that we are a mutual but we are not. There are no shareholdings of any kind in the BUPA group. We are a provident society, which means that if we are wound up the money has to go to like-minded charities. That is purely for the record in case there was any confusion about that.
We will give a short response to the presentations of last week. We hope to cover the main issue and the new context and to suggest ways forward. We believe there are fundamental problems in terms of what has been proposed to the committee. We are of the opinion that our consumers and those of our main rival believe there are serious problems and all consumers, our own, those of VIVAS and our main rival are denied meaningful competition. Irrespective of the committee's view on risk equalisation and even if were to support the idea, the proposal is deeply flawed and not workable. We put it that the context has changed a great deal since we were last here. Those who understand the market here do not accept the arguments that have been made. We will revert to those later.
We did have VHI here last week. The big issue is risk equalisation. We would like Mr. O'Rourke to clarify if BUPA is only interested in the cream of the market, in other words that the company is specifically targeting a market share that has less risk and greater returns. It would also be fair if Mr. O'Rourke could deal in his presentation with the number of elderly people over 70 years of age who have signed up with BUPA. The impression is that BUPA is not very proactive in chasing that market.
Committee members will remember that we also had the HIA in last week. I would like if Mr. O'Rourke could deal with BUPA's relationship with the HIA. There is evidence to suggest that many insurance experts support the notion of risk equalisation. These include the EU Commissioner, accountants, actuaries and many others. These issues remain unresolved and I would like BUPA to deal with them in its presentation.
We have noted those points. While the presentation might not have covered the relationship with the Health Insurance Authority, HIA, we have noted it and will refer to that issue. We wish to deal first with the problems of the assumptions put to the committee. In Ireland we have a generally accepted form of community rating. On our previous visit to the committee we explained that every insurer sets its own rates for its own products here. That is fundamental.
We must be clear about who these independent experts are and what they are saying. We have seen the lists mentioned by the VHI and HIA and the statements from these people are more equivocal and guarded than they claim. Who has a clear understanding of the EU requirements and the Irish market and what do they say?
The presentation distributed to the committee contains the statement of the former EU Commissioner, Peter Sutherland. He describes as "sham" the arguments advanced to suggest that this economic area of health insurance is not appropriate to competition. Aidan Cassalls, former chairman of the health committee of the European Federation of National Insurance Associations, CEA, is unambiguous about the request for a subsidy here.
Contrary to what was suggested last week, the Competition Authority states that any interference in a market is bad, competition must be allowed to work and the concept of proportionality must be observed. During his time as Director of Consumer Affairs, William Fagan said, "The ability to gain and lose market share is the essence of competition," and that he had seen "no QED" for risk equalisation. Desmond O'Malley, who was president of the Council of Ministers when the directive was adopted, was also unambiguous. He described it as a "draconian regime which is designed to stifle competition". I will not read all the detail here but we have made it available to the committee.
The Commissioner has written to the Government and expects a response. He queries the proportionality of an intervention in the market here. We have included a paraphrase of his statement as quoted in The Irish Times. The academic community in UCD and Trinity says this regime is not needed in the Irish market. Those said to support risk equalisation refer to a community-rated market. That is why I said we must be clear about this point. This is not a community-rated market but one with rules for product pricing. There is no community rate in the market. There is no product that we must make available at a particular price. That is one of the “sham arguments”.
According to its website, the Society of Actuaries supports risk equalisation. It stated this was a concomitant of a theoretical community-rated market but that it had conducted no legal or economic study of this practice. That is a very adventurous proposition and not one we would propose to the committee or endorse.
It is claimed that the office of Mercers supports this, although its New York office states that risk equalisation has been tried on a limited basis in the US and the case for or against has not been proven. The office of Mercers in Ireland is in a different position because it was one of the architects of this draconian regime and formerly had business links with our competitors. This needs to be said.
To quote the advisory group on risk equalisation would have been a decent thing to do. To ask a few former members about their ideas in a document that is not available to us is not the right thing to do. The advisory group was told there would be a hanging and asked what was the most effective way to carry this out. It was not asked whether there should be a hanging. We include its comments in the documentation furnished to the committee.
The group cites the York report which stated that when it was involved in the project the terms of reference were changed to exclude examination of other markets. This is very clear. Equally, and damagingly, it said the Health Insurance Authority conducted some of the research itself and thanked it for that work. That does not reach the academic standards one expects.
The real experts are the consumers. We have also included their statements. They pay their subscriptions to us, VIVAS and to the main State insurer.
Are BUPA's customers mostly in middle age or younger?
We will deal with that. We will welcome questions from the committee members on whether there is one market or several markets, where people new to the market come from and what will happen to VHI.
The evidence for expert support for this proposal does not exist. Those who really understand the issues, who signed the directive and understood its purpose, philosophy and aims, those in charge of competition for the EU and those in charge of the internal market are the real experts, together with the consumers. I have dealt as fully with that issue as I wish. I will take questions later if the Chairman so wishes.
The Chairman also asked about price-following in Ireland and whether we engage in this practice. We issued a statement to the press today, which we have included with the documentation for the committee. When we started, a married couple with two children would have saved €44 by joining our essential scheme. We picked this scheme as a measure because it is the only one we have today that we had when we started and the VHI has had a comparable scheme since we started.
The same phenomenon with different dates applies to the other products. The savings have increased fivefold. Consumers understand that. We did not attract 430,000 people who did not understand our products. We attracted people who researched the facts. Citing percentages misleads the committee.
This committee last week mentioned that there were some regulatory advantages available to BUPA Ireland. We do not see VIVAS, which came in after us, having any regulatory advantage of any sort over us. The only company with a regulatory advantage is the State insurer, which is being challenged in Europe by VIVAS. The Minister has acknowledged all the advantages it has in terms of solvency, State support, governance and generally how it carries out its business. Last week, much was said about how the market actually works. Our view of it is very different.
I would like to give a brief overview of how the market is working. The market has 2 million customers and three insurers. It has one fledgling insurer that has been in place for almost one year, one dominant insurer which holds 80% of the market and one challenger. The market is made up of 20% company paid members where employers pay for their employees' health insurance. The other 80% of the market is paid for by the individual out of his or her own pocket.
We introduced a strategy several years ago within the corporate market to allow for choice. The reason was to give companies the chance to allow their employees a choice between buying BUPA Ireland or VHI cover. It meant that the initial person in a company was making a choice of company with whom he or she had health insurance. It works very well and prevents a big changeover when one decision-maker makes a changeover decision at any one time.
The market continued to grow by approximately 3% per annum. The gap between those employed and those who have health insurance has reduced dramatically since we entered the market. Like any insurance company, we compete in the market by designing our own products, introducing benefits, having cost containment agreements with the hospitals and pricing our products. All insurers in the market use the same criteria to compete. Our major competition is in the individual market, 80% of it. This is where we spend most our money on marketing, advertising and so forth, asking people to call us in Fermoy and, for example, having a stand at the National Ploughing Championships.
Our membership mirrors that of the industry, 80% individuals and 20% company paid. The market is profitable and we are striving for maximum market share. It is not always easy as there are obstacles to growing. Some main obstacles are VHI dominance, the loyalty of its members, salary deduction schemes which VHI operates with some of the larger company distributed schemes, which we do not operate, and the lack of access to retired people who have pension schemes with VHI. When BUPA Ireland goes into a company, we do not meet those people who have retired.
Only 1% of the market per annum transfers between insurance companies, so there is no big shift in membership. We have had companies move to us, not only for price but also service and how we do business. We have also lost companies due to mergers where the parent company decided to opt for VHI insurance. However, this is business. Our aim is to learn from this and compete the following year when renewal comes up.
The Health Insurance Authority research from this year and regulatory changes introduced in the summer show that older people are increasingly likely to switch insurers, probably more so than ever before, and are joining BUPA Ireland in great numbers. The age gap is closing. Before July this year, it was only transfer business that could join BUPA Ireland. Now new members over 65 years of age can join us. The overall revenue per person on the market with VHI is 40% greater than ours, an important statistic. Well over 90% of our members are paying less than the rate of the VHI's plan B. Our claims efficiency has been calculated by VHI as being better than the market average. Our administration costs per person insured are equivalent to those of the dominant insurer. This is despite economies of scale and the establishment costs of our company. Every sale is hard fought, particularly within the individual market, which is a one-to-one sale. It is a tough market and we are striving to continue to grow it.
At issue is the whole area of risk equalisation and the magical figure of 65 years and over. What we picked up from the last meeting was that most of the risk clearly was with persons aged 65 years or over, most of which are with VHI. What is BUPA Ireland doing to move into that particular market to absorb this risk? What is the difference this year compared to last year in this area?
We will spare the committee the bother of having conflicting figures between ourselves, the Health Insurance Authority and VHI. For argument's sake we will say they are right, rather than bringing up other figures, and we will confirm what we know to be the truth. We have to have a fair analysis. A figure of 1% of people transfer health insurer per annum. If one looks across the full book of VHI, 1% of those will transfer per year. Therefore in a normal distribution, the maximum number of people over 65 years of age that would transfer is 1% per annum. I expect the committee would accept this as a reasonable proposition.
That being the case, with people over 65 years of age not being allowed to join until 1 July this year, there was no other source of older members. We had gone to the market, putting out our advertising fairly and squarely, open to everyone, and older people were more reticent to move. We suffered the disadvantage, as Ms O'Donnell said, that in a company we only met people who were not retired. By definition, one does not meet retired employees in a company. For years, we have been looking for VHI to open up its books and to give free access to the names and addresses. However, the change introduced on 1 July has given us an opportunity to go for the new market.
Our belief is that between VIVAS and ourselves, we have the lion's share, 100%, of the people over 65 of years of age who are new to the market. We have members from each age from 65 years to 94 years. We had a very successful campaign. The last time we were before the committee, we said we would buy the three oldest products from VHI if they were supposed to be a big burden. Since it has not come to the table to sell them over several years, we have gone after the members in a serious way. It would have been much easier for us to get our market share by buying them, revising their products and away we go. The proposition that older people are a big burden is not held up by the market which is totally profitable. Looking at the market in its totality, it is profitable, including older people. If we took VHI on board we would be an exceedingly profitable company. Besides the proposition we put forward from July, in the first eight weeks we have got 1,000 people who never previously had health insurance. This is not the busiest period in the year. I am not talking about 1,000 people who contacted us but people who actually joined, aside from transfers. We will open our books to the committee if it wants to see who these people were. We have no difficulties with this. We have decided to go after the market. As members can see, the Health Insurance Authority, after it attended last week, produced the information in a report — I believe it was the following day — stating that older people were now more inclined to move and beginning to do so. It also stated the age difference between us and VHI had closed.
Mr. Niall Devereux
Perhaps I might expand on that point. On page 26 of the HIA report, it states that the median age of VHI consumers is 44, compared with 41 for their BUPA counterparts. The median age in the previous study, which was carried out three years ago, was 44 for VHI and 38 for BUPA. Essentially, that means in the past three years the average age gap, which was six years, has closed to three. If that trend continued, in three years there would no longer be any age difference.
We argue very strongly that the key point is that any difference in age is purely because VHI got its own way when it had regulatory capture and decided the market rules. That is why there is an age difference; it is not because of any cherry-picking. We want to put that idea to bed. While the HIA will not state it in its reports, its research shows that there is no cherry-picking. It is absolutely ridiculous. Both we and VIVAS, on the last occasion, made it very clear we wanted people of all ages, since that is how one grows as an insurance company.
Perhaps Mr. O'Rourke could clarify what he said regarding the regulatory environment.
I will take questions in rotation, bringing Deputy Fiona O'Malley in after Deputy Neville. Please complete the presentation.
Should I deal with the question of ages or complete the presentation?
I want the witness to complete the presentation, after which I will open up the discussion for questions.
We will come back and answer the questions, but we state very clearly that there has been no cherry-picking. We have not encountered any of that in the market, except in VHI's declared strategy, a matter of public record that we have included in our submission.
The issue of "supernormal profits" arises. We are aided on this occasion by information released within the last month by the financial regulator. It is included on page 5 of our submission, and members will see where BUPA Ireland figures in pre-tax profits. Many of the companies in question would not have nearly as many customers as we. It does not bear thinking about. We would love to have the profit per member that BUPA makes in the UK, and we will refer to that. The statutory measures given to the Health Insurance Authority are going down. That is reflected in its research, which shows companies getting closer. We would argue that their converging is not necessarily a good thing for consumers.
To parry the idea of VHI as some kind of victim, let me say it moved profits of more than €300 million into its reserves. We will repeat the figure in case there is any argument. We believe its reserves are €386 million, as published in its accounts. That it might have been split into two does not matter to us. Any company buying it will see €386 million in reserve from 1986, when competition started. We would gladly take VHI's profit for 2004 instead of the entire profit we have inducted since we entered the market. These things must be said. This organisation is in charge of its own destiny, prices, cost containment and finance. The HIA-VHI argument has not put forward any model of how the world might look if they had their way.
We have dealt with the problems VHI claims to have. We mention this since it has been before the committee and we have been asked to respond to what it said. We do not generally deal with that. We have included all its statements in its annual reports from 1995 to date, all stating it would be ruined the next year. While that was happening, it ended up with more than €300 million extra in the kitty, more than 50% more than we will earn this year in revenue. Members must understand the scale of the company, which is large. It is also helpful to consider the profitability of VHI over all those years, which is presented on page 12. Members will gain a sense of how profitable it has become after the advent of competition. We have no difficulty with its becoming profitable and the market becoming more stable.
Having a strategy that it claims will make it bankrupt is not something for which we should be held responsible. There was a big change in what was said last week, which was an argument about profit rather than competition in the marketplace. That encapsulates the difference between us. It is very new and shifting ground. If VHI wishes to transfer profits to us, we will give it ours. We are quite happy to do so, but we do not feel it constitutes competition. The argument is about consumers and competition in the marketplace.
I would like to deal with the issue of percentages, since members were thrown a great many of them last week. Let us take two plans in the marketplace, both from VHI, since members will be more familiar with them. Say one person buys VHI's plan E option and another plan A. To keep things simple, let us assume both make a 10% profit. The profit on plan A is €51 for a married couple and two children, while on plan E it is €207. That is the fundamental problem of risk equalisation. Ms O'Donnell mentioned that more than 90% of our customers pay less than the price of plan B. Can anyone explain how a market of plan As might pay for the claims of people on plan E? It defies all logic. If someone is making a contribution of €51, the figure of 10% means nothing to anyone. There is a great difference between 10% of €51 and 10% of €207.
The percentages belie the fact that VHI is collecting significantly more per person from the marketplace than we — €158 per person more. Our risk, if one expresses it differently, is €158 per head greater than that of VHI. There has been no suggestion that we should share in that. The proposition here is that VHI should get all our efficiencies from claims admitted by the Health Insurance Authority to be the best on the market. There is no proposition that we share risk; that does not arise. That is why the use of percentages has led to the wrong conclusions regarding price-following, which we have shown to be clearly not the case. The consumer is five times better off now than when we started.
Profits are a complete joke, according to the regulator. Cherry-picking simply does not happen in the market, as the HIA has admitted. Risk differentials have never been considered. We start at a disadvantage of €158 per head, since we collect that amount less. We will not read all the details into the record. I know committee members will be enthralled to read some of the information we have given here, which goes back many years, regarding the warnings issued while the profits went up. We will not spend too much time on that. We have said consumers do not accept the argument put forward, and we have included extracts from our research carried out in August 2005. We are more than happy to meet any committee member individually and share this information in greater detail. It is very clear, however, that consumers do not believe a subsidy to VHI, which receives €158 more per person, is reasonable.
The system is deeply flawed, contrary to EU rules, and prevents competition. By now it has become quite clear the EU believes that. It is not confined to the substitutive products, as the EU requires. That is why the EU is saying it is disproportionate. The whole market and the rationale behind it is dominated by VHI. Revenues such as the €158 per head advantage are completely ignored. For example, we have a claim coming through in respect of a very unfortunate individual that will cost somewhere between €480,000 and €500,000. I am sure our competitors also receive such claims from time to time. If, however, we were to feed that claim for one person into the last set of returns, the company would be €500,000 worse off on its bottom line and could expect to pay up to €11 million more to VHI.
This system, whether one is for or against it — a matter to be decided at other fora — is fundamentally flawed. It just does not make sense. The committee saw examples of that on the previous occasion we came before it where a few claims for older people made a massive difference in the payment to VHI. I do not believe it is good enough for the Health Insurance Authority to say the fine should be increased by another €500,000 as well, just for rounding off purposes. This is a fundamentally flawed system and we do not believe in it in any event. Even if we did, and it was operating in a correct market, it would be fundamentally flawed.
The committee needs to know that this is untried. People will say there is risk equalisation in other markets but this is completely different. The entire system here is completely untried and we are being experimented on. I am conscious of the time constraints so I will just deal with how the context has changed in order that members will have an opportunity to pose questions. We have included, on page 16, the fact that the context has changed, how the Minister's decision changed it and how the over 65s, as has been admitted, are changing the market fairly dramatically. We need to have the databases for over 65s opened because it is important that people of all ages benefit from competition.
They have benefited from competition by staying with VHI because they do not have balanced bills now or anything like that and because VHI had to change. However, they should also benefit from the better prices. Many of the other topics I have covered. I am conscious that I may be taking too much of the committee's time.
I remind everybody that there is a division at 12.30 p.m. and we need to get through as much business as possible done before that.
We indicated, on page 22, what is happening in the courts. To update the committee, we have a case in Luxembourg against the State aid and the documentation has been completed on all sides. It is now up to the court to call people in for short verbal presentations and to issue a judgment. We are aware that VIVAS has an EU complaint and I am sure its representatives will talk about that later.
We have instigated High Court proceedings. We have not done these things lightly. We have been here a long time and have tried to work towards obtaining a resolution. The EU Internal Market is carrying out an investigation. It would be premature to have a market intervention at this stage, irrespective of what one thinks as regards the rights and wrongs. Consumers would suffer very badly and it would introduce market instability. It would not be possible to restore the market to the position it was in prior to intervention and the State might well end up being fined heavily. The Government really needs strong players. These are essential for bringing change to the health care system. Competitors need reliable structures and the dominant power of VHI really must be changed.
We are seeking a level playing pitch. We are looking for an end to state support and for the databases to be opened. There is nothing particularly magical about that. Very simple regulations can open the databases in order that older people may get the advantages of competition. We do not have names and addresses of older people but we are supporting them through Age Action week, etc. There is a new ambassador for the aged, Mr. Ronnie Delaney, who is working with us to ensure that older people know they can switch insurers. All of these matters, including solvency derogations, must be dealt with. This position will probably be echoed by our other competitors. We need transparency. The information that is available for ourselves and VIVAS, through IFSRA and the FSA, is far more than that which our competitors are obliged to make available. We provide information voluntarily to the HIA as well.
The business rules to which we are subject are much more stringent. Neither of the two CEOs or MDs who came before the committee this morning would be supported by their boards if either of their respective companies were reported as saying they would be prepared to go bankrupt rather than to charge the premiums needed to survive. That is the essence of the differences between us. None of us would be here if we had said that on the previous occasion.
This is silent State aid and it is something that we draw to the attention of regulators such as the committee. We have never seen any independent accounts for dental or travel costs. We have no idea how these are being accounted for, funded or being reported. The market concentration and the dominance has actually increased. The dominant player is bigger, more profitable and has more customers than ever. Consumers are suffering as a result. There is a stop-start approach at present, with our being obliged to come before the committee every six months. Despite the advantages of competition and the growth in the marketplace — the market has grown enormously——
Ms Ann Broekhoven
Perhaps I could intervene at this point and allude to some of the benefits that have come into the market as a result of competition.
In 2003, the then Minister for Health and Children announced his concern at the growth of MRI scans in the Irish market. We decided to take a different approach to this. due to the fact we are pro-competition, we wanted to drive competitive issues in the marketplace. We undertook a tendering process that focused on setting standards relating to equipment, service level agreements and prices. We have continued this on an annual basis and, as a result, we are now paying less than half of what we paid for MRI scans in 2001. That is not taking any inflation into account. As a direct comparison, we are paying half of what we had previously been paying. We can also get an MRI scan within 24 hours for any of our members. We have service level agreements and quality criteria and have proven that we can drive quality and efficiency in the market.
We have extended this to other services, such as ambulances, some cancer screenings and cardiac procedures. In all cases, we have at least stopped the inflationary tendencies for those services and in many cases have actually managed to reduce the price of procedures.
When BUPA Ireland first entered the market, cardiac procedures such as bypasses were available only to people with the higher level plans. BUPA Ireland introduced an essential philosophy which allowed all its members and eventually everybody in the Irish insurance market to access cardiac procedures in the Mater and the Blackrock Clinic. That is an enormous security blanket for people to possess. We were the first to take on board new PET scanning services, which are used in the detailed analysis of cancer stages, etc. We have introduced non-medical procedures such as manual lymph drainage for people who have had mastectomies and suffer from a severe build-up of fluid in their arms and various other places. This is greatly beneficial for our members. We have provided an allowance for mothers so that they may choose the additional services they want, when having a baby. These include matters such as counselling for postnatal depression, baby massage, nutritional advice, chiropody and physiotherapy.
We get the picture. We have a deadline at 12.30 p.m.
To be fair, I also want to give VIVAS equal time. Therefore I must assume that the presentation is well made. Many people want to ask questions and we can deal with the remaining issues as we go along.
I thank the delegation for coming before the committee. We were informed last week that one in nine VHI members is over 65, while that statistic is one in 50 for BUPA. As one gets older, there are higher levels of claims. The VHI representatives put it to us that risk equalisation represents a transfer among a different generation of policyholders. It ensures that individuals cannot escape the social requirements to participate in this inter-generational support by joining one company as opposed to another. They also made the point that while BUPA is open for all ages, its marketing policy concentrates on younger people and it approaches new companies with young staff and actively promotes itself among them. For every €100 in premium that VHI took last year, it paid out €93 in claims while BUPA paid out €70. This highlights the difference in claim positions. In other words, BUPA pays out 23% less than VHI in claims.
I visited the BUPA tent at the ploughing championships and I was told that there is a 28% saving on switching to the company from VHI. We were informed last week by VHI representatives that the key difference in tempting people to change is 26%. In other words, if BUPA is 26% more competitive, then people will change. Why are customers not changing if there is a 28% difference? I was surprised that this has not happened. I was also informed that BUPA takes the full family medical history of any VHI customer that changes to BUPA. Many people are afraid to change to BUPA because they believe that the company would not provide the same amount of cover as VHI.
I understand that BUPA does not take its profits out of the company but rather that it invests them in the health service. What percentage of BUPA's profits have been invested in the health service in Ireland? What percentage of its profits have been transferred to its parent body?
I welcome the BUPA delegation. Could its members clarify why there is a difference in the mean ages of VHI and BUPA customers? The mean age is 44 for VHI and 41 for BUPA. The witnesses stated that the regulatory environment is tailor-made by VHI to accommodate this. What do they mean? They stated that they hoped that the profit per member in the Republic of Ireland could be equal to that in Great Britain. As accusations are being made that BUPA Ireland is making a huge profit here, I was surprised to hear them say that. The criticism is often levelled at BUPA that it is making much more money here than it is in other jurisdictions.
I was very interested in what Ms Broekhoven had to say. I was appalled that the Health Insurance Authority did not focus on bringing costs down and getting value for money. That is where true competition lies in delivering services. I was delighted to see the improvements delivered for BUPA's members. Has BUPA driven down prices for all insurers? The other issue is the change that has happened since 1 July. BUPA is a commercially driven organisation, as are the other insurers to a greater or lesser extent. I do not think there is anything wrong with going after the lucrative end of the market but I doubt that BUPA is the only player doing that. I am sure that every insurer is concentrating on the lucrative end of the market and BUPA should not be unfairly criticised in that regard. Is BUPA prepared to provide the committee with figures on the number of people aged over 65 on its books since 1 July? The delegates mentioned the databases that were to be opened up. To date, however, they have not been opened up. Why is that the case? Were they talking about the figures for VHI? Do they want access in order that they can go after these people directly?
It was stated that 20% of customers in the insurance market come through companies. Does that mean that an individual in a company does not have the right to choose which insurer he or she wants?
I welcome the BUPA delegation. Am I correct in assuming, from the statements he made earlier, that Mr. O'Rourke is of the opinion that the Health Insurance Authority it is not really independent? The authority stated that not to introduce risk equalisation would be the equivalent of abolishing community rating. Does BUPA agree with that statement? There are approximately 2 million people in the insurance market. What number of clients does BUPA have over the age of 65? What percentage is that of the company's total number of clients? Deputy Neville stated that one in nine VHI clients are over 65, while one in 50 BUPA clients are over 65. Are those figures correct? What is the cost for people aged 20, 40 or 60 in expenses paid out by BUPA?
I am somewhat confused by the statement that risk equalisation is fundamentally flawed. I can understand why BUPA would claim this but I cannot work out the rationale behind it. I presume that when it entered the market, BUPA was aware that community rating and risk equalisation were part of the Irish market at that stage. Am I correct in assuming that one of the subsidiaries of BUPA, which operates in Australia, operates in a market where there is not only community rating but where there is also risk equalisation and that this company has benefited from risk equalisation in the way it is claimed VHI would benefit if it was introduced here?
I hope I have understood all the questions. Deputy Neville is correct that we do not distinguish between customers on the basis of age. He went to the ploughing match and discovered this at first hand.
What of those with a history of health problems?
With regard to the history of transfers, any waking periods that have been served with competitors of BUPA are deemed to have been served with us. One can telephone from the hospital to request a transfer. We have to take such people on board.
With regard to the argument about BUPA only serving younger customers, which I find interesting, the company's advertisements — as highlighted by the Health Insurance Authority's figures — target everybody in the marketplace. One must consider only those customers who transfer, not the market as a whole, and customers aged over 65 were less quick to transfer.
Ann O'Donnell made it clear that our database is accounted for by 20% of customers with company paid policies and 80% who pay directly. While on the subject, I will answer the other question on the company paid sector. The sector breaks down between companies that give the choice to the employee to pick the insurer and companies which state that they will pay for VHI policies only. BUPA has suffered on some occasions and gained on others. However, the increasing trend since we entered the market is that companies are giving employees choice of insurer. These companies tell employees to choose an insurer and that, up to a given sum, they will pay. I hope that answers the question.
With regard to claims efficiency, the Health Insurance Authority admitted that our average cost per treatment day is approximately 17% lower than the market average. While I do not want to get into percentages, because they completely skew the facts, that was the finding of the authority, although I do not have available the figures on which its assessment is based. Ann Broekhoven has provided the committee with the reasons for this, namely, as we are collecting €158 less per customer, we have to be far more efficient or we cannot stay in business.
I fully accept that VHI has more customers over the age of 65. There is no dispute about that. For the sake of argument, I will take to be correct the figures provided by VHI last week to the effect that BUPA has some 12,000 customers in this age bracket and that VHI has over 100,000. However, we do not see this as being relevant because VHI is collecting subscriptions based on the average age of each plan. With regard to plans C, D and E, therefore, VHI collects premiums based on the average age of each plan and it receives €158 more than BUPA. I am not sure why VHI believes, having already been compensated by consumers, that it should be compensated a second time.
That is the fundamental problem. Whether we are talking about plans A, B, C or otherwise, if BUPA has 90% of customers under the age of 50 and 10% of those over that age, and another company has 10% of those under the age of 50 and 90% over that age, surely the company that has 90% of its customers aged over 50 will have more expense than the company with 10% over the age of 50.
That is not the problem. If, for argument's sake, BUPA is left completely out of the equation and one compares VHI's plan A with its plan E, the difference in price is substantial. The age differences are significant but this does not cause any problems whatsoever. The customers buying plan A are paying several hundred euro — I have the figures available for the average age of the people on plan A. Even for 65 year olds on VHI's plan A, the VHI has far fewer claims than for 65 year olds on plan E. There is independent information available on this point. One cannot throw them all in together and claim there is one market because there are several markets. Customers on plans C, D, E come from a completely different economic backgrounds to those on plans A and B. Some 90% of BUPA's products are at that end of the market. Effectively, therefore, VHI has had the plans C, D, and E market almost all to itself. Less then 1% of our customers use our competing product. Therefore, as all we have done is take some older customers from VHI, it is unaffected by our entry to the market. We have offered to take those plans from VHI and we are going after them.
Mr. O'Rourke is saying that the premiums on plans D and E are more than paying the claims. I note the BUPA submission states that the profit on plan E policies is €207 as compared to €51 for plan A policies.
To clarify, I did not say——
In other words, if all of VHI's customers were aged 65 and over, it would make a greater profit. I want to be clear on this point.
I do not have VHI's internal figures on what it is making on each individual plan. However, we know it has adjusted its pricing recently. What I was trying to suggest is that the use of percentages is completely misleading. Some 10% of those paying for BUPA policies pay very little because they pay a much lower subscription.
With regard to Deputy Fiona O'Malley's point, this is essentially the same problem that one comes up against when one tries to compare Ireland and the UK. One could use a percentage to suggest, for example, that as I am 4% heavier than the Chairman, I should be three inches taller. It does not work like that. It is necessary to examine the total figures. Companies charge a certain premium and pay a certain amount of claims, by product. One must look at where the competition——
Is each VHI product profitable in its own right? Must it use plans A and B to compensate? When VHI representatives came before the committee last week, the basis of their argument was that the company needed large numbers of younger customers in the lower plans to compensate for older customers in the more expensive plans. They also alleged — perhaps not as baldly as I will now put it — that BUPA had an inferior product for those over 65. Does BUPA have a product that compares with plans D and E for these individuals?
We will leave it to the market to decide whether the product is inferior.
One could argue the market has already decided.
Before BUPA entered the market, older people on plans A, B and C were denied meaningful access to heart surgery and limb replacement. They had to pay balanced bills on VHI products. They had to go to hospitals for which they had no cover. Our philosophy from day one was that, irrespective of what plan was purchased, the customer had full cover. I will not list all of the innovations BUPA introduced for the elderly because Ms Broekhoven was choked off earlier when listing them.
I remind members that we have 20 minutes in this slot to ask questions. We must break for a vote in the Dáil and I wish to give VIVAS equal time on our return.
Some members may have a difficulty with that because we had allocated time for lunch.
We will try to allow for that. However, I wish to be fair to VIVAS. We have 15 to 20 minutes to ask questions in this slot.
I accept Mr. O'Rourke's point about plans A, B and C and the introduction of additional services. However, those over 65 who can afford them will choose what might be termed VHI's luxury products, plans D and E. Can these products be compared with those offered by BUPA?
Our products are not directly comparable with those of VHI. It would be like comparing an Opel Astra with a Volkswagen. Competition is not about being the same as one's competitors.
I sympathise with Mr. O'Rourke's point of view. However, VHI contends that BUPA does not tailor its products to target the over 65s.
Our contention is that each of our products is targeted towards the over 65s. VHI targets the over 65s by offering them the most expensive products and denying them the benefits available with cheaper plans. It is aware that people in this age group constitute a captive audience who require cover for hip operations and coronary treatment. These customers have been denied access to cheaper products and obliged to avail of the more expensive packages.
I totally refute the assertion that we do not provide for older people. Every person, irrespective of age, can avail of our products. Our position is that if a treatment or procedure is only available in the Blackrock Clinic or the Mater Private Hospital, for example, any customer who needs such treatment will receive it in either facility. If treatment is not available in Ireland, it will be provided elsewhere through our network abroad. It is not BUPA, but rather those who demand that older people must take out more expensive plans in order to acquire comprehensive cover, which discourages the over 65s.
That is an interesting point.
Is it the case that a person who purchases BUPA's cheapest product can avail of any treatment or procedure in this country?
Yes.
Why then would anybody choose one of BUPA's more expensive policies?
One can opt to use a bicycle to travel between Rathmines and the city centre——
Will Mr. O'Rourke answer the question?
It is a relevant analogy. People can purchase a Mercedes or a Rover. Consumers have choice.
I recognise that but I do not comprehend how the cheapest product can offer all possible advantages. Will, for example, a customer on the cheapest plan be able to avail of heart surgery in the Blackrock Clinic? If so, why should any customer opt for a more expensive package?
This is precisely our proposition. However, it does not mean a customer can go into the Blackrock Clinic to get his or her toenails done.
I accept that.
This is our philosophy and part of the package we offer consumers.
There may be a rush to avail of BUPA's cheapest product in the morning.
Is it the case that a person who has been with VHI for 20 years and who is in hospital awaiting a major operation will be accepted as a BUPA customer?
Yes.
I hope VHI management does not hear of this or it will have to launch a marketing campaign in the morning.
It seems that there is a fixation abroad in terms of obliging BUPA to pay a subsidy. We offer the best package for older people because each of our products provides comprehensive services. A person on VHI's plan A, on the other hand, does not have full cover for hip operations or coronary treatment. In this regard, it is the people who can least afford it who encounter difficulty rather than those further up the line.
Mr. Devereux
It happens all the time.
Some people with health insurance have had to endure waiting lists before receiving treatment. Is it not the case that a person on one of VHI's more expensive plans can access treatment immediately and choose to receive it in the Blackrock Clinic, for example, whereas a BUPA customer may have to wait for six months and will have no choice as to location of treatment?
Ms Broekhoven
Our schemes now include a treatment guarantee to the effect that no customer will wait longer than three months for any treatment. This could mean we must provide it in the Blackrock Clinic or the Mater Private Hospital, for example, or that the customer must be treated abroad. One person was recently treated in Belgium and another at the Sloan-Kettering cancer treatment centre in New York. Members may be aware that we have also introduced in recent days a new service called Best Doctors, which allows doctors in Ireland to avail of the knowledge of 50,000 clinical experts in various fields. This will facilitate the provision of cutting-edge treatment.
We have tried to ensure that all our members are guaranteed treatment within the shortest possible period and that they are not forced to seek out treatment options for themselves. We have guaranteed that the treatment we provide will always be at the cutting edge of practice. That is a major innovation in this market.
An older person who is unhappy with a consultant's prognosis can join BUPA and avail of the services of the best doctor in the world. We understand the number of people on VHI's plans D and E constitutes some 9% of its membership, or approximately 160,000. The advantages for those customers, to which Deputy Neville referred, do not apply to the other 1.4 million VHI members. I do not wish to criticise that company in this regard but merely to highlight the differences involved.
If a BUPA customer is unhappy with the prognosis received from a consultant in his or her local or regional hospital and would prefer to be treated in the Mater Private Hospital or the Blackrock Clinic, can he or she opt to do so?
Customers cannot exercise a preference in terms of location. Rather, it is a question of their satisfaction with the course of treatment and diagnosis they have received. For example, one of our patients suffered from a sore hand and, having been informed that nothing could be done to solve the problem, was anxious for a second opinion. Our database allows customers to access more than 50,000 doctors worldwide. However, customers cannot choose a particular hospital. That is between the customer and the consultant.
If a particular facility is available within a customer's region or even within Ireland, is he or she obliged to avail of that facility or is it possible to opt for a consultant in the United States or elsewhere?
That option is available only if the treatment is not available in Ireland.
Ms Broekhoven
For treatments available in Ireland, the Best Doctors programme supports the provision of cutting-edge services. In the case of cancers, for example, our patients have access to the expertise of specialists in the United States who will inform their doctor of the latest developments in treatment. In a small number of cases, there may be a procedure that is unavailable in Ireland which could offer patients a better prognosis. In such instances, customers will be able to avail of such treatment, wherever it might be.
Our approach is different to that of our competitors. We are not supposed to be the same.
I ask the delegates to clarify what they have said in regard to the Best Doctors programme and the transfer of a patient to the Sloan-Kettering centre in New York. From the experience of members who are doctors, we know that while a service may be available in Ireland, some people choose to go to facilities such as Sloan-Kettering which offer cutting-edge technology for cancer treatment and the possibility of being introduced into a clinical trial offering the most up-to-date treatments that may not even be sanctioned in Ireland. People may choose to use their own resources to seek treatment in the United States, not because the treatment is unavailable here but because there is a perception that what is on offer in the United States is much more cutting edge.
Ms Broekhoven
That is absolutely true. Part of the benefit of Best Doctors is that the leading-edge treatment a patient wants to access somewhere else can now be provided in Ireland because we can access the clinical expertise to support our specialists in providing that service. This will hopefully prevent people travelling unnecessarily for treatment.
From a marketing point of view, there have been accusations that BUPA has not been successful in targeting its market. This is an issue I will raise with VHI. One can transfer directly from VHI to BUPA with no penalties or lead-in times. BUPA's product is at least 26% to 27% cheaper than its main competitor and there is full access to any hospital in the country that provides appropriate treatment if such is not available in the patient's local hospital. On these three points alone, it will be interesting to hear VHI's response. BUPA seems to offer a more efficient and cost-effective package but I was not aware of this. I did not see it in any BUPA advertisements.
The delegates should only answer one further question. We have only ten minutes remaining before the Deputies on the joint committee must attend the Chamber for a division.
One of the big disadvantages for a new arrival to a market where previously one could have any car so long as it was black, is that one must try to explain everything to consumers. Many consumers remain with the VHI because they think that it has been good for their families for many years and do not wish to shift, even for the 26% savings. We all do this in other facets of our lives. We do not deny that and VHI did a wonderful job. However, we compete with it and we predict that the decision in July to open up the over-65 market will be important and we believe it will unblock the market generally for us. The HIA has stated there is a greater propensity for older people to shift and that they are doing so. Once that happens, more families will shift, as well as people closer to that age. Thereafter, we believe that more customers will switch from VHI and the rate will increase from 1% per annum. We hope——
BUPA will benefit from risk equalisation.
We will benefit from the argument.
BUPA will benefit from it then.
We believe — most economists agree — that the market is superior to market intervention. After all, we now cover more than 430,000 people. If VHI thinks they are young and profitable, even though the HIA has stated there is little difference, what is to stop it from winning them from us? Why are VIVAS and BUPA the only companies which must compete? Why does it not compete with us? If there is an enormous amount of money to be made — which there is not — why does it not compete? Why did it lose customers? Has that ever been examined? Are we to blame? Are we not supposed to compete for VHI's customers?
Has BUPA lost customers?
Yes we did. We lost one large group because of a merger. It was not a group that offered choice to its members and it went to VHI. We accepted the situation. The company-paid sector only comes to 20% of our market share and we continue to seek individual business as one does not lose a slew of individuals. Strategically it is a much cleverer thing to do, without passing on the cost to our consumers. When we lose customers, we try to get them back. We have not got that group back yet, but we continue to try.
Mr. Devereux
A number of members have asked questions concerning profits and I wish to answer some of them. I am conscious of the limited time. Mr. O'Rourke has made the point that ratios are completely misleading. We should be mindful that 17% of a small amount is a much lower profit than 5% or 10% of a much bigger amount. In reality, in the eight years up to 2004, the profits we made in this market are less than those made by VHI in one year.
A question was asked as to how much money we have made in the market and how much we have paid out. As the joint committee members are aware, we are subject to solvency requirements. Of the €70 million profit we made after tax during that eight year period, we were required by law to put €55 million into reserves. Hence, if we were a public company, after eight years a total of €15 million in profits would have been available for distribution.
A question was asked as to what happened to those profits. The sum of €15 million made over eight years approximates to €1.75 million in profit per annum. Last year alone, we gave €2.5 million to fund a maternity research centre in Cork. Moreover, we have sponsored issues such as the midwifery conference. Ms Broekhoven is more familiar with this issue. We also held the first international health and safety conference here in Ireland last year and will do so again. We sponsored a car safety campaign which highlighted the correct method to secure car seats safely to prevent accidents. That is what we do with our money and that is what BUPA stands for as an organisation.
Deputy Cooper-Flynn asked about profit comparisons with VHI. One must be careful to compare apples with apples. We do not know what profits are made by VHI's plans A, B, C, D and E. However, the Harvey report has stated that plans A and B are extremely profitable while plans C, D and E lose money. In so far as this is the case, we are unable to compete in the market for plans C, D and E because to do so would oblige us to charge prices which are higher than the monopoly price simply to break even. This is not possible and we are locked out of that market. To compare like with like, VHI's profits from plans A and B must be examined. As Ms Broekhoven has already noted, this is where 90% of our customers are situated.
VHI has a provision in its accounts called an unexpired risk reserve which should be put in context as far as its size and significance are concerned. The unexpired risk reserve is a provision which VHI has made regarding losses it expects to make in the future. It books and charges that as a loss in its current accounts. The total amount of those future losses booked in VHI's figures is €104 million, or 70% of our annual turnover last year. Last year alone, in the accounts published a few months ago, €54 million was put aside for this purpose. That is €35 per person in VHI. Hence, any comparisons with VHI need to add that figure back. It is important that like for like is considered and the joint committee is not misled by meaningless comparisons.
I wish to make a point regarding profits per member in Ireland and the United Kingdom. Again it is dangerous to make comparisons. In reality, as Mr. O'Rourke has noted, we would gladly swap the profits made by BUPA in the United Kingdom for the profits made in Ireland. We are a not-for-profit organisation. In the United Kingdom, the profit per member is significantly higher than the profit per member made here. The point is that ratios cloud the facts.
A question was raised regarding the dividend. We are set up in Ireland as a branch of the British company. All of the moneys moving through the bank accounts are owned by BUPA Insurance Limited. Therefore, the concept of dividends does not arise. Money flows through these bank accounts which are controlled by BUPA Insurance Limited. To the extent that a dividend has been paid in this country, we have paid one dividend which came to approximately €6 million. Apart from that, we have not paid any dividends.
The delegates mentioned how the VHI threw a tantrum about going bankrupt rather than passing on the increase in premia. Do they agree that when risk equalisation was mooted recently, the statement made by BUPA to the effect that it would pull out of the Irish market was equally childish? Do they now regret that statement? Hopefully that will never happen. I also want to ask a question on shadow pricing. The HIA informed the joint committee that while accepting there is a difference in costs of basic premia — and BUPA is invariably cheaper as far as some premia are concerned — much shadow pricing is taking place. The joint committee was told that both BUPA and VHI had increased their prices by 97% during that eight year period. This surprised everyone and does not strike me as being real competition. I am puzzled by it.
As regards the Senator's first question concerning the statements made by BUPA and VHI, since 1996 we have consistently stated that if a risk equalisation regime was introduced, it would make competition unviable. We have never deviated from that point. In retrospect, we probably should have used different language.
I had hoped we had already dealt with the issue of price shadowing. We totally reject the idea of shadow pricing because the consumers reject it. They know they received €44 in savings from us when we started out and that figure has now risen to €236 for a married couple with two children.
That is only one example. How does it compare with other products?
Different products were introduced at different stages and I wanted to give a simple example using one which has existed from the beginning. The same dynamic is in place. We continually increase the savings to the consumers' pockets. We completely reject the idea of shadow pricing unless people wish to redefine what is meant by "price following". It is not percentage following. We also reject the Health Insurance Authority and have done so before the courts in terms of the choice of what it did and did not put in to make up its basket. This is a matter of public record and I hope we have dealt with it.
Mr. Devereux
The Health Insurance Authority is concerned with two issues — price following and predatory pricing. Predatory pricing is where the price difference is so great, it is designed to get all the customers from the other provider. This is a bad trend that is not allowed. Price following involves having a price that is just below the competitor and is also not allowed. This leaves us with two options in accordance with what the Health Insurance Authority is saying. These options are to have the same price or a higher price. How can a new competitor come into the market and charge the same price or a higher price when it is competing against a State-owned monopoly that has been in existence for 40 years? In contrast, the Health Insurance Authority encouraged customers to shop around for a better deal on the RTE news last Thursday night. I cannot see what the issue is; it does not make sense to us.
We understand Senator Browne's question and what we are trying to convey is that the savings are increasing across all products. He is welcome to challenge us on any particular product.
Everyone has had a chance to ask questions. I remind members that there will be a vote in the Dáil and I also wish to invite people in straight after the vote and give them an opportunity to put their case. I will suggest to them that they take a break of 15 minutes. I thank Mr. O'Rourke and his team from BUPA for giving us more than an hour of their time and the members for remaining and putting questions to them.
Sitting suspended at 12.35 p.m. and resumed at 13.40 p.m.
I welcome the delegates from VIVAS Health to the committee. They will make a presentation on risk equalisation from their point of view. I welcome Mr. Oliver Tattan, chief executive officer, Ms Maria-Teresa Kelly Oroz, head of legal and regulatory services and Mr. Stephen Loughman, finance director.
Mr. Oliver Tattan
I wish to make apologies for our chairman, Mr. Cecil Hayes, who had another pressing engagement.
I offer the committee's apologies for taking so long to bring in VIVAS Health today. Other matters rolled on.
Mr. Tattan
Our firm view on risk equalisation remains that the payment of these subsidies should not be commenced without first dealing with the dominance of VHI. To do so when there is a dominant undertaking of the magnitude of VHI in the market would clearly be bad for Irish consumers and will definitely kill competition. Since the Tánaiste made her decision regarding the implementation of the risk equalisation subsidy in June 2005, nothing has changed that would imply the need for these payments to commence now. Another matter that concerns us is that every three months, VIVAS Health, as a new entrant to the market, is being dragged through rounds of consultation, each lasting three months. This process is both lengthy and costly to VIVAS Health at a time when we should be focusing on growing our business. The validity of this continuing process must be examined.
I will focus on the issues of international health insurance markets and competition in other liberalised sectors in the Irish economy. On international markets, we have carried out research in markets where risk equalisation or similar schemes have been implemented. In no case could we find a market where the market share of the largest player is over 30%. In Ireland, the market share of the largest player is still close to 80%. The committee members have examples in tabular format before them. In New York, the largest player has 18% of the market but there are 34 competitors in total. In New Jersey the largest player has 30% of the market, there are 22 competitors and in Australia the largest player has a market share of 29% and there are 26 players in the market. In Ireland the largest player has 78% of market share and there are only three players.
In the case of Australia, the Private Health Insurance Administration Council, PHIAC, administers the health benefits reinsurance trust fund, the equivalent of our risk equalisation. This equalises only those over 65 years old and only in respect of chronic illness so it is not exactly equivalent to our system. In that market, any health fund that participated in the risk equalisation scheme had to have at least 5% of market share. The largest player could only be six times as large as any player entering the system. The HIA has stated that VHI is 160 times larger than VIVAS, yet VIVAS is being requested to participate in that scheme. That is not right.
In Australia lifetime community rating has already been implemented and we are concerned that anyone would recommend the start of risk equalisation before lifetime community rating is implemented. An industry commission there, consisting of contributors and recipients of money from the fund, stated that the scheme was a blunt instrument to deal with the issues of equalisation in the market.
In New York there are market stabilisation pools administered by the health bureau in New York. Until 1993 there was a market stabilisation pool based on age and gender and it worked for small groups. That has been revoked and there are now only high risk pools for chronic and catastrophic acute illnesses. This is quite different from our system.
In international benchmarking I have illustrated the many markets and jurisdictions with experience of risk equalisation schemes that have not been studied in this country. We should study these before we make the same mistakes and have to withdraw or change the system later. We have found no jurisdiction where risk equalisation or a similar system is in place and the market leader had more than 30% market share. In the 16 countries examined, the average market share of the largest player was 31.7%. Ireland was the least competitive health insurance market of 16.
Introduction of risk equalisation subsidies in Ireland at this stage is inappropriate and disproportionate. It does not take into account the concentrated structure of the Irish market. In particular, effects of such payments on competition and the likely increase in the dominance of the dominant player have not been adequately measured.
I wish to address the subject of competition and risk equalisation, with particular reference to prices of health plans in the market. A Government that is politically committed to supporting the entry of new players into the health insurance market cannot at the same time impose the extraordinary burden of risk equalisation subsidies. With the introduction of risk equalisation payments prices will increase from their current levels.
VHI has stated to this Oireachtas Joint Committee on Health and Children in April that it will not reduce premiums from their current levels with risk equalisation, and that any moderation of future price increases will be slight. BUPA Ireland has stated that it would need to increase premiums by 22% in order to be able to make risk equalisation payments. VIVAS Health will also, in consequence, need to charge higher premiums if it is made liable for risk equalisation payments, and would need to plan for the introduction of these payments with immediate effect due to the solvency and reserves requirements of the financial regulator.
The consumer will ultimately bear the impact of risk equalisation subsidies yet the authority takes the view that such a scheme is in the best interests of the consumer. The latest consumer research published last week by the HIA states that a premium difference of at least 30% would be required for a consumer to consider switching. Most customers are reluctant to switch now when competitors' prices are lower than those of VHI. The rate of switching will be truly negligible when competitor premiums are the same as or more expensive than those of VHI. The net result will be more expensive premiums for all, a consolidation of VHI market dominance, a lock down of market share as it currently stands and no new entrants to the market.
Health insurance is a non-life insurance product similar to motor, house or travel insurance. For historical and policy-based reasons, the VHI retains a higher market dominance than many State public utility companies. Other liberalised markets have specific competition mandates, including those for gas, electricity, transport and telecommunications yet none was ever introduced for health insurance. While public utility companies carrying out universal service policy objectives are subject to specific liberalisation mandates to encourage competition and to deal with dominance, nothing has occurred for health insurance. In fact it appears that policy vis-à-vis the dominant State player has sought to protect it and to facilitate retention of market share rather than foster competition.
By contrast, if one considers the electricity market, the ESB is currently subject to a specific mandate to reduce market dominance. VHI currently has a larger market share than both the ESB, with 65% market share in electricity generation and six competitors, and Bord Gáis, which has 50% in the corporate gas supply market, the only fully liberalised gas market. Both of these are subjected to a proper competition liberalisation policy that does not exist in the health insurance market. Competition policy for a non-life insurance market should be a higher priority than for utilities, as there is clearly a lesser need for State intervention in any non-life insurance market.
The lack of a coherent competition policy in health insurance is apparent when one considers that under the risk equalisation scheme there is no requirement for the Health Insurance Authority to seek an opinion from the Competition Authority about the likely consequences for competition when deciding on risk equalisation. Every health insurer in the market is subject to different regulatory and compliance legislation. Every health insurer is subject to different solvency requirements while VIVAS Health must save 40% of each premium for its reserves. This refers to 40% of next year's premiums as we must build up reserves to satisfy the financial regulator that we have sufficient reserves to carry out business next year.
At this committee last week VHI stated that it intended reducing its reserves from 40% to 20%. If VIVAS Health were to make such a statement the financial regulator would immediately revoke our licence to act as an insurance company. There is no such constraint on VHI. VHI has been allowed to engage in the supply of ancillary products, such as travel insurance, in a manner not permissible to any other non-life insurance undertaking in the European Union. Insurance companies are not allowed to act as financial advisers but VHI is allowed to do so.
VIVAS Health offers discounts of 25% to 40% to customers over 65 years old compared to equivalent plans offered by VHI. That is available to all those who have been previously insured with VHI. Our benefits are superior and we seek to cover new hospitals, offer more scan centres and offer better overseas cover for treatments not available in this country. New benefits, specifically relevant to those over 65 years, will be announced next week. VIVAS Health will welcome any person over 65 years and urges VHI to write to those on its database over 65 years old to encourage their switching to new providers. Mechanisms such as this to balance risks while reducing VHI's market share would be less prejudicial to competition than the implementation of disproportionate risk equalisation. It can be achieved through a proper liberalisation policy and, ultimately, a more appropriate risk equalisation scheme.
The committee has now heard twice from all of the undertakings in the market and the regulator. However, the committee has not heard from the health insurance companies across Europe which continue to grow in their own markets and yet have failed to enter the Irish market. Where are AIG, Axa, Allianz, Norwich Union and Friends First, all of whom sell health insurance outside Ireland and sell other insurance products in Ireland? Why have they chosen not to sell health insurance in this country? These companies have the expertise, knowledge and resources required to sell it. All of these companies have authorisation from the financial regulator to carry out this type of business in Ireland, yet each and every one has specifically chosen not to compete in the Irish health insurance market, a market that is supposedly profitable for everyone except the VHI.
Clearly, the reasons for this are risk equalisation and the considerable advantages enjoyed by the dominant State company. I can speak from personal experience on this point. While raising capital for VIVAS Health I spoke to many of these insurance companies across Europe. All of them stated that their main boards decided they would not enter a market with the restrictive regulatory environment and the threat of risk equalisation as exist in Ireland, and without a policy to reduce the dominance of VHI. I would like to see the type of report the Industrial Development Authority would offer this committee if it were given a mandate to bring in foreign investment in the form of health insurance companies.
It appears that in recent years more has been done to discourage competition than to promote it and more has been done to dissuade new entrants than to persuade them to enter the market. The Health Insurance Authority stated to this committee that the entry of a new player was a justification for the implementation of risk equalisation. What signal does this send to potential new entrants when it seems that at the first possible opportunity the regulator will act against their interests in favour of the dominant State player?
VIVAS Health believes that commencement of risk equalisation payments at a time when the VHI enjoys extraordinary dominance in the health insurance market is inappropriate and disproportionate. No other international market has implemented risk equalisation with such a dominant player. The triggering of risk equalisation at this time will harm consumers because all premiums will increase and product innovation will be stifled. Risk equalisation will create another barrier to consumer switching and will protect and consolidate the State undertaking's market share.
VIVAS Health does not oppose the implementation of an appropriate risk equalisation scheme once market shares are more evenly distributed and all undertakings are working on a level playing field. Implementing risk equalisation now will signal an end to any new entrants into Ireland with all the innovation and consumer choices they can bring.
VIVAS Health calls for a proper liberalisation policy for the health insurance market to be put in place, for the reduction of the dominance by VHI to be treated as a priority and for the creation of an environment that is supportive and conducive to new entrants. Consumers across the economy benefited through choice and price from the entry of new players, opening competition and challenging the status quo. With the proper regulatory environment health insurance consumers could also have the same.
I thank Mr. Tattan and will open the discussion to members of the committee who wish to put questions.
We had a number of discussions at committee level on risk equalisation. We seem to have three meetings every six months on this issue and many members feel as confused as ever about it. We will even have a brief discussion on it after this morning's session. It seems the positions on it are poles apart and it is almost impossible to work out what exactly is happening.
Many of us believe that risk equalisation forms part of a community rating system. If risk equalisation were abolished and removed completely from the system in the morning, and the Tánaiste were to state she would never implement it, the VHI would make the case that its premiums could increase by anything up to 20% over the following 12 months. If it is now using its funds to pay off the cost of the premiums it would have no choice but to rapidly escalate the cost it charges to its customers. That would cause some people to switch.
VIVAS Health introduced a new element today, the issue of market dominance and the question of how to reduce the dominance of one company. Mr. Tattan spoke about Bord Gáis and the ESB. How would one introduce such a reduction in market dominance in the Irish health insurance system? What sprung to my mind was that the Government could issue a regulation stating that VHI should write to everybody over 65 and ask them to consider switching to its competitors because they offer cheaper packages and the same services, but the truth of that may be challenged by VHI when it hears what Mr. Tattan stated. What ideas does VIVAS Health have with regard to sorting out this problem? Most people believe the most serious problem is that the size of VHI is the main barrier to competition in the private health insurance market. Bearing in mind that VHI has 1.5 million customers who do not want competition to mean their premiums will escalate in the short term, what proposals would VIVAS Health put forward?
Mr. Tattan
I thank Deputy Twomey for that question. I know the committee discussed what were termed "baby VHIs" or what would be formed on the break-up of VHI. Ultimately the question as to how VHI's dominance should be reduced is for the Minister. I believe methods to reduce that dominance exist that do not require changes in legislation or regulation through requiring the organisation to have a strategic plan to reduce its market share. That is a simple matter that would not require regulatory change.
Ms Maria-Teresa Kelly Oroz
If one examines some of the other markets such as gas, telecommunications and electricity, each regulator has a strong competition mandate and an agreement with the Competition Authority with regard to opening up access to the markets to other players, such as access to fixed lines in telecommunications. The board of the ESB has a mandate to reduce its dominance and it stated in its annual report this year that it hopes to decrease dominance from 65% to 60%. Similar provisions for VHI would go some way towards a reduction in market dominance.
The breaking of tie-ins with some of VHI's ancillary products would also go towards freeing up the market and allowing transfers. The travel insurance sold by VHI can only be purchased by VHI members. In one year it leveraged a 26% market share in multi-trip travel insurance and that is similar in effect to Microsoft's tying in its membership. The people making up that 26% will never switch health insurance because they are also locked in with their travel insurance. If one began to disassociate those ancillary products and work on a market reduction, one would begin to see some movement in VHI.
Is that legal?
Ms Kelly Oroz
There are two issues. If one examines the IFSRA code of conduct with regard to insurance undertakings, one will see there is a specific mandate not to tie insurance products together. However, VHI is not subject to the IFSRA code of conduct. The other issue, which was raised with regard to Europe, is that no insurance company in Europe can act as both an insurance company and an intermediary at the same time. We have a problem with the fact that VHI is doing so, and have referred it to the European Commission in Brussels.
Will Ms Kelly Oroz explain that further?
Ms Kelly Oroz
When an insurance company receives its licence, it is only entitled to act as an insurance company. If it wishes to sell ancillary products, such as travel, dental or global insurance in an online retail shop as a broker, in that it does not underwrite the risk itself, it must establish a separate corporate structure, obtain a separate licence as an insurance intermediary and sell through that.
If one examines a large insurance company such as Hibernian, one sees that there are separate structures with separate costs, such as Hibernian Insurance and Hibernian Brokerage, which re-sells other products. One cannot operate both at the same time and we consider the fact that VHI does so, through one company at a much cheaper rate than can be done by anyone else in Europe, to be a State aid.
Are they totally separate or is the situation not similar to that pertaining to the ESB and Eirgrid, for example, namely, that ostensibly they are separate organisations but in reality they are connected?
Ms Kelly Oroz
It is a corporate structuring. If one looks at the corporate structuring of, for example, Hibernian, there is one parent company, but there are four or five different sister companies. Such corporate structuring in itself incurs a cost. The staffing and compliance of those individual companies incurs a cost. Furthermore, they do not tie in their insurance products among themselves.
We would have no problem if VHI was to set up a separate company and bear the costs thereof, including the cost of a license. What we object to is the fact it is using the single insurance undertaking company that is now in operation.
Mr. Stephen Loughman
The accounts of VHI indicate that it made a profit of €65 million last year and it has recently increased its prices by 12.5%. Frankly, we do not see how it is possible, given that scenario, for VHI to predict that it will make losses or will be forced to increase its prices to break even in future.
I apologise for missing the presentation made by the delegation, but I had a prior commitment. The Irish health insurance market is grateful for the presence of VIVAS Health. It is regrettable that the company is currently so small but it can make a valuable contribution to the development of competition within the market.
I was surprised to hear Deputy Twomey assert that the dominance of VHI is something new. It is not a new issue. The size of VHI is a major problem in a market ——
The Deputy misunderstood me.
I apologise. My point is that we are dealing with a relatively young market with a very dominant player and the proposal to introduce market interference measures is risky. Why did VIVAS Health enter the Irish market given that there are no large European operators here? I would also welcome the views of the delegation as to why Ireland is so badly served by health insurance brokers. The dominance of VHI is obviously a major factor in this regard.
VIVAS Health took the risk and entered the Irish market, knowing that there was a possibility of risk equalisation being triggered at some point. Does VIVAS Health believe that risk equalisation does not necessarily have to be triggered because the market needs to change to become truly competitive? What was the company's view of the risk equalisation issue on entering the market?
Mr. Tattan
Before we entered the market there was no discussion about triggering risk equalisation payments. VIVAS Health does not have a problem with the philosophy of risk equalisation. We envisage a situation, some time in the distant future, where risk equalisation could be triggered.
When we researched the Irish market, prior to entering it, we understood that the Health Insurance Authority had a competition mandate and we believed that it would act in the interests of the market by encouraging competitors to come in. However, we got a very rude awakening when, following our entry, the first action by the HIA was to recommend the triggering of risk equalisation payments. That was a complete surprise to VIVAS Health.
When we started to raise funding for this venture, VHI had not engaged in running down its reserves, as it is now doing. That company is effectively using a war chest to build up its market share. VHI had also not engaged in the selling of ancillary products at that time. That is a course open to VHI but not to any other health insurance company in Europe, including VIVAS Health. Therefore, there are a number of issues that were not apparent before we made the decision to enter the Irish market.
The view of the HIA following the entry of VIVAS Health into the market was that competition was taking place because there were three players rather than two in the health insurance market and that the market was able to accommodate another company. In truth, however, the competition is not real. Does VIVAS Health regret having made its decision to enter, following its first year in operation?
Mr. Tattan
Absolutely not. The company is committed to this market and will remain here. All that we are seeking, in the interests of the market and our customers, is proper competition. We want to see Government policy towards VHI and towards regulation fostering competition rather than damaging it, as in the current situation.
Does VIVAS Health believe that Government policy is designed to defend and protect VHI?
Mr. Tattan
I do not believe there is any policy at present to reduce VHI's dominance. VHI states in its annual report that it wants to grow its market share and target young people. There is no evidence that VHI is under any instruction or led by any policy to reduce its market dominance.
Does VIVAS Health think that a requirement on VHI to demonstrate how it will reduce its market share would be beneficial in terms of developing a competitive health insurance market in Ireland?
Mr. Tattan
I believe so. VHI's market share must be reduced. The company must come to terms with that and Government must develop policy to ensure it happens. That will encourage more players to enter the market, bringing innovation in terms of both price and product, all of which will benefit the consumer. However, there will not be more entrants into the Irish market until that policy perspective is put in place.
VIVAS Health is calling for VHI to proactively diminish its market share, perhaps by splitting into different companies, for example, "Baby VHI", "VHI Blue" or "VHI White" and so on. However, VHI has argued that even if it was split into four smaller companies rather than remaining as one large entity, risk equalisation would still be triggered although I believe that splitting up VHI would be a progressive move.
VIVAS Health has demonstrated in its presentation that risk equalisation has worked in countries where there are numerous companies who are of a similar size. That situation means that company X might be the beneficiary of a risk equalisation payment in one year, while company Y might be the beneficiary the following year. Competition would be more successful because companies are of a similar size.
The point made by VIVAS Health that splitting up VHI does not necessarily require new legislation is an interesting one. It suggests the possibility of such a process taking place soon. The parliamentary timetable indicates that if changes in legislation were required, that process would be slowed down considerably. However, VIVAS Health is arguing that the current legislation is sufficient. Does the company believe that four smaller VHI companies would offer real competition or would it be preferable to ask VHI to publish its strategic plan for diminishing its market share?
Mr. Tattan
That is a matter for the Minister but I believe that breaking up VHI into four or more units is an option. Another option that does not require new legislation is to instruct VHI to reduce its market share. There are a number of choices available. However, breaking up VHI will not necessarily bring more competitors into the market, particularly the larger international companies that we would like to see operating here. That is ultimately something for consultation and discussion and for the Minister and this committee to form a view. The case we make today is that something needs to be done about VHI's dominance. We will not see a competitive market that will benefit the consumer until that happens.
It is extraordinary to hear a company that has 1% of the market welcoming the prospect of other international players coming into the market. That shows we need to concentrate time and effort on the future of the health insurance industry.
We will leave that issue until the end of the meeting.
I welcome the deputation from VIVAS Health. How long has the company been in the market?
Mr. Tattan
Just short of one year.
Presumably when it came into the market it made projections as to when it would make a profit.
Mr. Tattan
It did.
Are they on track?
Mr. Tattan
Yes.
Does it have a clear age profile of its consumers?
Mr. Tattan
Yes, it does.
Are they mainly in the younger age group?
Mr. Loughman
The HIA recently published an age profile of VHI and BUPA. Our age profile is very close to that of BUPA today, though not to BUPA when it started its operations.
If risk equalisation is implemented, when do VIVAS Health start to pay? How does it affect VIVAS Health? Will it be a beneficiary?
Mr. Loughman
We will not be beneficiaries of money from risk equalisation.
Would it have to pay?
Mr. Loughman
We would.
When?
Mr. Loughman
We would have to do that after approximately three and a half years in the market.
That is another two and a half years.
Mr. Loughman
That is correct.
Mr. Tattan
We are monitored by the financial regulator, who seeks to understand exactly what is our financial situation. In view of this, we have to carry reserves for the future and take those payments into consideration for the purpose of our projections. It impacts on us immediately. The so-called three year holiday is a misnomer in that regard. Once that decision is made it affects our cost base, our planning, everything we do.
On page 7 of its submission VIVAS Health quotes the Competition Authority as saying in 2002 that the former state monopoly, by which I presume is meant VHI, retains close links with the regulatory bodies. It goes on to state that since that statement was made three years ago the only significant event concerning the issue of competition in the market has been a recommendation from the HIA that risk equalisation be triggered. I suggest VIVAS Health should also have added that there has been a significant political decision that risk equalisation not be implemented. Perhaps we are being given only one side of the story. If it was not for that political decision risk equalisation would now be in place.
Mr. Tattan
We recognise that. We are making the point that we have a sword of Damocles hanging over us every six months as the decision gets remade. I take the point, however.
As Deputy O'Malley said, that sword was hanging there from the moment VIVAS Health entered the market. There was a possibility from the outset that risk equalisation would be implemented.
Mr. Tattan
We do not disagree with the philosophy of a risk equalisation scheme.
Deputy Twomey made the point that we are all getting confused by this. The Tánaiste made a decision. VHI contacted me to say it was not happy but that is democracy. I accept there is a six month cycle. I do not want to be unfair but listening to the presentation it struck me that the different companies should get on with what they are doing as of now. I am not suggesting VIVAS Health is not, but it should be concentrating on growing its market and looking after the consumer, based on the assumption that risk equalisation will never happen. Is that a fair suggestion?
Mr. Tattan
If the regulator is recommending that it should happen——
We have a brave Tánaiste who makes up her own mind and that is what she has done.
Mr. Tattan
It is confusing for us trying to operate in the market to work out what is going to happen next.
Is that the issue then?
Mr. Tattan
It is one of the issues. Others are the dominance of VHI, how the market should be structured and the fact that a policy for the structure of the market is still lacking.
What is Mr. Tattan's attitude toward the regulator? Does he feel the regulator has an attitude? I ask because last week when he was before us I came to the conclusion that he is very anxious to get risk equalisation under way. It must be difficult to be an operator in the market when the regulator has a particular bias. Am I being unfair in saying that?
Mr. Tattan
It is clear the regulator has a bias because he has recommended that risk equalisation be implemented since we entered the market.
Does he consider that it is purely on the grounds that VIVAS Health is the third competitor in the market now?
Mr. Tattan
I do not know about that. Since we entered the market all the recommendations have been that it should be implemented. Despite our size and lack of profitability those recommendations are still being made. Despite what Deputy O'Connor said there still seems to be political uncertainty.
It would be interesting if, as chief executive of VIVAS Health, Mr. Tattan wrote to the committee giving his company's views on how it would implement some of those ideas. He might write to the committee with his ideas for market reduction and improving competition.
We have had many meetings and heard many counter arguments but it all boils down to Government policy. Only one company has clearly stated it wants to get rid of risk equalisation. As a committee we need to look at it and we will be forced to look at it in another few months. The Tánaiste seems to have no great interest in implementing risk equalisation for the foreseeable future. If there are other issues Mr. Tattan would like discussed at committee I ask him to write to us, not to point out what is being done wrongly but to provide ideas on how to face the future. We will also write to other companies and ask them the same question.
Mr. Tattan
I would be happy to do that.
A number of members have spoken during the break and we are reluctant just to sit back for another six months. We thank the representatives from VIVAS Health and those in the Visitors Gallery, the members from BUPA and from VHI, for remaining. The stakes are high to say the least. As a committee we are trying to understand risk equalisation and deal with the suggestion, among others, that the Government reduce VHI's dominance in the market. Everyone has been here for the hearings or has read the transcript from last week. I ask each of the three players to read what the other groups have said, to set out their positions and their proposals on the future of insurance cover and to submit those to us. We recognise how serious this is. We have no mandate nor authority to bring all their presentations to a conclusion or even to make a recommendation. We want to assist to ensure there is competition for the consumer and a level playing field for the suppliers.
In response to what Deputy Twomey said the only indication the Tánaiste has given is a response to the previous risk trigger proposal which she did not reject. It is not fair to make a comment on an expectation of what may happen in future. All she has indicated is how she treated the previous risk trigger. Deputy O'Connor has stated that she is a woman of strong opinion and knows her own mind.
This is a fascinating but fragile area under consideration. I have learned from the Health Insurance Authority that once risk equalisation is triggered, it is very difficult to stop it. Therefore, we must be careful with the issue. There is a group here which is very interested in risk equalisation and which has put in much time and effort into it. However, this effort may not be worth much if it is not focused in some way. We must ensure this happens and discuss it with other members of the joint committee.
I suggest that the clerk writes formally to the three groups involved asking for submissions, presentations and suggestions. We do not wish the same sword to be hanging over our heads in six months' time or further into the future. The next 18 months will be an important time for all of us——
We need to make a strategic recommendation.
Many members here will face serious risks at that time and they will not want to be talking of risk equalisation for another 18 months. I thank the delegates and the joint committee members for their participation in this debate. The joint committee learned today that four groups should not be invited in on the same day as it does not work. The committee regrets this, but in the future we will not invite in groups only to have them waiting for an hour or two hours. I again thank the delegates.
The joint committee went into private session at 2.32 p.m. and adjourned at 2.38 p.m. sine die.