I am pleased to speak on the Second Stage of the Health Insurance (Amendment) Bill 2003. This is a short Bill aimed at facilitating the early submission of a draft risk equalisation scheme for approval by the House, as required under the Health Insurance Acts 1994 and 2001. The need for the further provisions set out in the Bill arises from consultations held with the Health Insurance Authority and matters raised in the course of preparing the detailed risk equalisation scheme.
The Bill has two main provisions. One provides a broad immunity from liability for damages for the Health Insurance Authority when discharging its statutory functions in good faith. The other is directed at ensuring that the temporary exemption from risk equalisation, which has as its objective the encouragement of competition, is available only to new entrants to the market. The other provisions of the Bill relate in a minor way to the procedures that will apply under risk equalisation arrangements and to funding advanced for the establishment of the Health Insurance Authority.
The Health Insurance Authority's principal functions include managing and administering risk equalisation. Under the Acts and the proposed scheme, the authority will also have a key role in determining when conditions are considered to warrant the commencement of risk equalisation payments between insurers. I acknowledge the constructive contribution made by the authority since its establishment in February 2001 to the development of proposed arrangements for risk equalisation.
I do not propose to go into great detail about the need for risk equalisation to support the operation of community rating in the voluntary private health insurance market going forward. This has been extensively discussed in the House. I am satisfied that providing for such a measure is warranted and I trust that most Members will support this draft scheme which strikes a balance between maintaining community rating and facilitating competition. A draft scheme, which will be submitted to each House for approval, is the subject of detailed contacts with the European Commission. I will refer to this important dimension to preparations for risk equalisation in more detail later.
At the general level, the objective of risk equalisation is easily appreciated. It follows logically that, in a market where the principles of community rating, open enrolment and lifetime cover apply, there must be a provision to share risk between competing health. These common good principles curb the usual commercial instincts and incentives that insurers have to select good risks and avoid or discourage bad ones. For these principles to be sustainable, they must be supported by a balancing mechanism that enables insurers with worse than average risks to be compensated for the disproportionate level of the sick and elderly in the insured community they must cover.
From the perspective of insurers, risk equalisation addresses the competitive imbalance that can occur as a result of risk selection, whether this occurs due to deliberate actions by insurers or inadvertently because of the more mobile nature of the young and healthy and employer-paid insurance. In effect, risk equalisation seeks to tackle risk selection as a source of competitive advantage. This is equitable given that the usual insurance levers of underwriting and risk-based pricing are not available to competing insurers.
The consequence of risk selection is that the per capita claims cost and, consequently, premiums begin to rise for those insurers who are left with a higher proportion of less healthy individuals. This is a breach of the solidarity principle, which is fundamental to genuine community rating. Risk equalisation addresses this by limiting the extent to which certain healthier people, by benefiting from lower premiums, or their insurers, by taking a higher profit margin, can gain at the expense of other health insurance consumers. In short, risk equalisation aims to equitably adjust differences in health insurers' costs that arise due to variations in risk profiles.
The detailed preparation of a risk equalisation scheme has been a complex matter which has involved considerable actuarial expertise and legal input. Earlier I acknowledged the very constructive part played by the Health Insurance Authority in connection with work done by my Department on the development of a detailed scheme.
It has also been necessary to approach the formulation of the scheme in a manner that takes account of considerations that apply at EU level. These relate to matters such as observance of general EU legal principles of necessity and proportionality, competition rules and creation of the Single Market. It is widely known that plans for the regulation of our health insurance market have been the subject of fundamental differences with the British United Provident Association, BUPA, which entered the market in 1997. Given this and the fact that the operation of this country's private health insurance market is subject to EU obligations, the regulatory measures to be implemented have attracted close and recurring interest on the part of European Commission services.
My Department has kept the Commission advised of proposed regulatory arrangements. Although the Commission has formally accepted, in principle, Ireland's entitlement to have specific legal provisions in the interest of the common good in voluntary health insurance, as allowed for under the third non-life insurance directive, it has emphasised the need for necessity and proportionality in any measures that may be taken. Furthermore, ongoing representations and complaints by BUPA have resulted in the Commission revisiting the matter on a number of occasions up to and including the present time.
Further to a complaint by BUPA, the European Union's Competition Directorate General is considering a detailed submission made by my Department. This submission makes the case for the necessity of risk equalisation in a market operated on the basis of community rating, open enrolment and lifetime cover, and that it does not constitute state aid under EU competition rules. It remains my Department's aim to obtain an early decision from the Directorate General on the latest complaint and complete the risk equalisation regulatory framework immediately thereafter. It is contending to the Directorate General that it maintain its previously expressed view that risk equalisation does not give rise to particular state aid concerns. While the experience of European Commission services revisiting the matter of risk equalisation on a number of occasions has impinged on the process of implementing a scheme, I characterise recent contacts with the European Union Competition Directorate General as being positive and constructive.
As I said, this is a short Bill and while some aspects are technical, its provisions are relatively straightforward. Section 1 provides for interpretation. Section 2 arises from a request made by the Health Insurance Authority that it have protection from suit for damages corresponding to the statutory protection given to other public regulatory bodies. Accordingly, the provision gives a broad immunity to the members of the authority and its staff where they are engaged in the discharge of their functions in good faith. It has been drafted having regard to a similar provision in the Irish Takeover Panel Act 1997.
Section 3 amends Part II of the Second Schedule to the Defamation Act 1961. As part of its functions, the authority will be required to make reports and recommendations on the question of commencing financial transfers between insurers under a risk equalisation scheme. The effect of the provision is to add the authority to the bodies which have qualified privilege in respect of a copy or fair and accurate report or summary of any recommendation that the authority may produce. Again, qualified privilege of the same nature is contained in the Irish Takeover Panel Act 1997.
Section 4 refines certain procedures that will apply in the steps to be taken after a risk equalisation scheme has come into effect. The limited changes being made arise from consultations with the Health Insurance Authority. The first subsection deals with the requirement for the authority to include in its report to the Minister a recommendation whether he ought to commence risk equalisation payments under a scheme. The legislation, as it stands, makes it clear that recommendations by the authority are for that purpose alone. The amendment is entirely consistent with the current position but clarifies that the authority shall not include a recommendation on the matter in a report where the Minister has already exercised the power to commence risk equalisation transfers under a scheme. The health insurance legislation already contains a provision requiring the authority to submit annual reports with respect to the operation of a scheme, once risk equalisation payments have been commenced. The legislation provides that the Minister shall cause such reports to be laid before each House.
The second subsection relates to the giving of advance notice to parties, by either the authority or the Minister, of its proposed recommendation, in the case of the authority, or the proposed exercise of his powers to commence risk equalisation payments, in the case of the Minister. As the legislation stands, notice in such instances must issue to all registered undertakings which are also given the opportunity to make representations. However, the legislation provides that a scheme may include a provision allowing restricted membership undertakings such as the occupational schemes that apply in the cases of gardaí and prison officers to opt out of risk equalisation. It should not, therefore, be necessary to give notice to undertakings about proposed developments relating to the commencement of transfers under a scheme where such an option may have been used.
Section 5 is concerned with the arrangements in place to facilitate and encourage the entry of new insurers into the market to provide greater competition and choice for consumers. The legislation provides for insurance undertakings which have not yet commenced business to avail of a three year exemption from risk equalisation. The purpose of this is to allow new insurers to establish a critical mass of customers and recover start-up costs before being liable to make any payments in respect of risk equalisation that could arise.
The provision in the Bill retains this measure. The main purpose of amending the existing provision is to avoid a possibility that the exemption could be availed of by a subsidiary or some other form of associated company of an existing undertaking. This approach is considered desirable in order to remove any possibility of an issue of avoidance arising in the arrangements. As there has not been any indication that an associated company of an existing undertaking was intent on or interested in availing of the exemption, the amendment is most appropriately regarded as a precautionary one. It aims to ensure the exemption will only apply in circumstances where the added value for consumers of private health insurance is a genuine increase in the choice of insurers and greater real competition in the market.
As I said, the section retains the three year exemption for new entrants. However, it contains provisions aimed at securing a clearer indication of the commitment and serious business intent to actually follow through on entry to the market on the part of insurers which decide to serve a notice of exemption in the future. In that regard, it requires insurers to be registered with the Health Insurance Authority before serving a notice of exemption and that they commence business not later than three months after the date of the notice. Neither of these is an onerous step and it remains in the hands of the new entrant insurer to decide the timing in relation to becoming registered and subsequently serving a notice of exemption.
Section 6 relates to financial arrangements made in relation to the Health Insurance Authority at the time of its establishment. The ongoing operational costs of the authority are funded by the proceeds of a levy on the premium income of registered insurers. The levy is currently set at a rate of 0.14% of that annual premium income. However, the legislation allowed for the Minister to advance funds to the authority and, during 2001, sums slightly greater than €500,000 were advanced to it in respect of initial costs. As the legislation stands, it is obliged to repay the amount advanced. It considers that costs incurred in its establishment should be borne by the State. The authority is a public body and was established to carry out a public service in relation to the common good aspects of health insurance.
This section maintains the option of the Minister effecting repayment of the €500,000 provided towards establishing the authority. It is clear that the provision is an enabling one and does not mean that part or full repayment will automatically be waived – this will be looked at strictly on its merits.
I commend this short Bill to the House for early enactment with a view to moving rapidly ahead with the introduction of a risk equalisation scheme. The scheme, which will follow enactment of the Bill, will meet national requirements for sustaining the operation of the core common good principles of our voluntary private health insurance system, together with taking account of European Commission concerns about necessity, proportionality and competition.