Subsection 6 provides that the protection for individuals against re-serving waiting periods on transferring between insurers shall not apply in the case of members of restricted membership undertakings which have decided not to participate in risk equalisation. An exception to this measure will apply where the person transferring is under 23 years of age. This will safeguard the position of dependants of members of such restricted membership undertakings who, under their rules, can no longer be covered on attaining a certain age.
Section 9 substitutes section 12 of the 1994 Act which provides for risk equalisation arrangements between insurers. The main changes from the provisions made under the 1994 Act are that restricted membership undertakings will have an option in regard to participation in risk equalisation; the Health Insurance Authority will have a key role in determining the timing of the commencement of risk equalisation, that is, within a prescribed field of discretion related to levels of material instability in the reported risk profiles of competing insurers; arrangements for the making of representations to the authority or the Minister in relation to the commencement of risk equalisation; and new entrants to the market will have the option of availing of a three year exemption from risk equalisation transfers between insurance undertakings.
Subsection (1) provides for the Minister to prescribe a scheme of risk equalisation which will set out the details relating to the conditions for its commencement and the terms of its operation. Subsection (2) addresses the undertakings to which any risk equalisation scheme will apply. It also provides for the established restricted membership undertakings to exercise a 'one off' choice to be permanently excluded from risk equalisation. The 1994 Act gave such undertakings an exemption from risk equalisation up to 30 June 1999. Subsection (3) maintains original provisions relating to arrangements for making statutory returns by insurers to the authority. It is the data contained in these returns which will be central to consideration of the commencement of risk equalisation and on the basis of which the magnitude of any transfers will be determined.
Subsection (4) provides for arrangements relating to the making of payments to the authority by insurance undertakings and by the authority to undertakings by reference to matters to be specified in the scheme. It also provides that the Minister shall determine the day when such arrangements are to have effect. In this regard the scheme shall require the authority to evaluate and analyse the returns made to it, prepare and furnish reports to the Minister and recommend, where conditions specified in the scheme are fulfilled, that the Minister ought or ought not exercise the power to determine that risk equalisation payments should commence. The subsection will enable the statutory scheme to provide that, up to a certain specified level of material instability in the risk profiles of insurers, the Minister may only authorise the commencement of risk equalisation transfers between insurers on foot of a recommendation to that effect from the authority. Beyond the specified level the Minister shall authorise such commencement unless there are good reasons for not doing so.
Under subsection (5) the authority, if it considers that a recommendation to authorise the commencement of risk equalisation payments is warranted, shall inform each undertaking of its proposed recommendation. Each undertaking will be entitled to make representations concerning the recommendation and the authority must take account of such representations before deciding the recommendation to be included in its report to the Minister under the scheme.
Under subsection (6) a scheme shall require the Minister to inform registered undertakings of a proposed determination to commence risk equalisation arrangements. Undertakings will be entitled to make representations on why such a determination ought not to be made by the Minister and he or she shall take such representations into account before finally deciding whether to make the determination which would commence the process of risk equalisation payments between insurers.
Subsection (7) requires registered undertakings, when requested, to provide information or details to the authority relating to returns they have made. It also provides that the Minister is entitled to specify the form of, and particulars to be included in, reports being made by the authority concerning its periodic evaluation and analysis of returns from insurers. Subsection 8 provides that registered undertakings which have made representations to the authority or the Minister relating to commencement of risk equalisation shall, when requested, provide information or documentation in support of their representations within a specified time.
Subsection (9) maintains the provision relating to the establishment and maintenance of a risk equalisation fund into which insurers would make payments to the authority and from which it would make payments to insurers. It also maintains provisions concerning the keeping of accounts relating to this fund by the authority. Subsection (10) provides that conditions to be set out under a scheme requiring the authority to make a recommendation in relation to commencement of risk equalisation can differ from conditions under which the Minister shall, unless there are good reasons for not doing so, commence risk equalisation. It also provides that these conditions can be expressed by reference to the amount which would be raised for payment in accordance with the terms of a scheme on account of the nature and distribution of insured risks amongst the undertakings.
The effect of this subsection is to allow for a scheme to specify different trigger points based on the level of market instability evident from the differing risk profiles of competing insurers, as derived from the analysis of their respective returns to the authority. The capacity to set different triggers will enable a scheme to contain a significant field of discretion within which the commencement of risk equalisation can only occur on foot of a recommendation to that effect from the authority. The development of a higher level of instability will require the Minister to authorise the commencement of risk equalisation unless it appears to him or her that good reasons exist for not doing so.
Section 9 also inserts a new section 12A in the 1994 Act. This new section enables the authority to disclose aggregate information derived from statutory returns made to it by insurers but provides that such data related to individual insurers may be disclosed only where necessary for the functions of the authority or the Minister. The intention is to enhance the transparency of the system and to assist the financial planning of insurers. It also includes original provisions enabling the Minister to retain professional advice in relation to his or her functions under a scheme and provides for the manner in which payments due to the authority under a scheme may be recovered.
Section 10 inserts the option for insurers entering the market to avail of a three year exemption from risk equalisation from the date of commencement of health insurance business. The White Paper set out the need for an exemp tion for new market entrants and stated that an 18 month period would be provided. However, it became apparent that a longer exemption period would be required with a view to attracting new entrants. The entry of additional insurers to the market would have the potential to yield significant benefits to consumers, in terms of competition on price, service and insured benefits available. However, to achieve this greater competitive state it is necessary to give practical recognition to the fact that, in order to establish itself with a reasonable prospect of sustainability, a new entrant to the health insurance sector faces considerable marketing, development and operational costs in competing with the two major insurers already operating here. The exemption will not apply to companies that are associated companies of registered undertakings already having availed of the exemption nor to new restricted membership undertakings.
Section 11 deals with miscellaneous amendments such as changes consequent on the deletion of the definition of "ancillary health services". Section 12 is a standard provision which gives the short title and collective citation and provides for the commencement date or dates to be appointed by ministerial order as considered appropriate.
The proposed removal of ancillary health services from the regulatory framework has been carefully considered in the context of facilitating the development of insurance cover in this area. The proposal does not affect the existing eligibility arrangements for health services under which persons are given access to primary care services on the basis of need. It is aimed at giving people who fund their primary care needs on a ‘pay as you go' basis the choice of financing their care by means of insurance.
Under the 1994 Act the definition of a health insurance contract embraced ancillary health services and those associated with a hospital stay, whether in-patient or day-patient. Ancillary health services were defined as including out-patient, GP and dental care. All contracts, whether they provided ancillary cover only, hospital cover only or both, were required to observe the principles of community rating, open enrolment and lifetime cover. In practice, few contracts with anything other than a nominal level of ancillary cover have emerged and there are no contracts that provide full indemnity exclusively against the cost of these services, such as exist in respect of hospital in-patient services. It was considered that steps needed to be taken to encourage the development of new products to fill a clear gap in the market and bring a level of service and choice to the consumer which was not emerging as matters stood. Accordingly, under the provisions of the Bill, any new contracts which solely relate to indemnification against the cost of ancillary health services will not have to be community rated.
The Government stated in the White Paper on private health insurance that the further evolution of private health insurance should include steps to promote the position of primary care in the system. The relatively minor coverage of primary care in health insurance was seen as promoting an orientation towards most costly hospital based treatment by those with health insurance and it is desirable to address this. I hope that it will be possible for insurers to develop plans that will cover areas such as dental care and other health care services where consumers can be open to liability for sizeable expenditure. There is also the prospect that the new arrangements will provide scope for development of preventive and early detection services, which have not been a significant feature of insurance arrangements to date where the focus is on acute care. I have outlined the technical aspects of the Bill which allows for late entry loadings in circumstances to be prescribed. The proposals will impact positively upon those who hold health insurance and the health insurance market.
The advisory group on risk equalisation forcefully indicated that if the flow of young healthy lives into the system was to taper off, the community rates insurers charge would be higher as they would be based on worsening risk profiles. This could have a compounding effect as the resulting higher premiums could cause young healthy people to question the value of their insurance and terminate their cover, thereby accelerating the premium increase spiral. The Government has, therefore, formed the view that there should be an incentive for those who will purchase health insurance at some stage during their lives to join the system at the earliest possible age. This is fairer than the current system because it will reward those who take out private health insurance, place an appropriate premium burden on those who enter health insurance later in life when the prospect of claiming benefits is higher and consistent with the general principle of community rating because a 70 year old person who originally joined the system at age 25 will still pay the same premium as a new entrant aged 25.
The Government has decided to introduce the principle of lifetime community rating. Under this principle insurers will be allowed to charge an extra premium in the form of a permitted percentage loading on their standard community rate to those who join private health insurance for the first time at an older age. For the reasons mentioned, this form of community rating is considered inherently more stable than the current system.
The proposed arrangements aim to ensure late entrants will be liable to pay sufficient extra premiums to make up the surplus they would have contributed to the system if they joined at an earlier preferred age. Regulations to be made pursuant to the proposed legislation will ensure late entrants will not be charged disproportionate premiums and specify the maximum loadings on an insurer's normal community rated premium which will be permitted. Based on actuarial advice made available to me, such maximum loadings will range from 10% between the ages of 35 and 44 to 80% at age 65 and over. Those who hold cover at the time of enactment of the proposed amending legislation will not be liable to the extra age at entry premium loadings allowed.
Though the proposed age loadings will not apply to persons who have private health insurance when the proposed legislation is enacted in respect of their existing level of cover, insurers will be permitted to apply a loading in respect of additional cover taken out where persons move to an insurance plan which offers higher benefits. Any loading in such circumstances is to be limited in its application to the difference between the levels of the plans involved and the maximum level of loading will be prescribed in legislation.
I have outlined the revised arrangements for risk equalisation proposed in the Bill. I will now address the need for risk equalisation in a health insurance system such as that which operates here. Our private health insurance system operates under the widely accepted principles of community rating, open enrolment and lifetime cover. With some exceptions, this means that insurers must accept all comers, irrespective of their age or health status and charge them a standard premium for a given level of cover. In other words, insurers cannot be selective about the risks they will cover or the price they will charge. This is fine so long as all insurers' risk profiles are broadly similar. There is a serious danger, however, that the market could be destabilised if significant variations in risk profiles emerge. For example, if some insurers, by accident or design, end up with a younger/healthier population, they will be able to charge a lower premium. The other side of the coin is that premiums will rise inevitably for those insurers left with a higher proportion of less healthy individuals.
It can be argued that in this scenario the market risk equilibrium would be restored by people switching from the higher charging insurers to those with lower premium rates. This is fine in theory but in practice those who are most likely to switch in this way are those at the lower end of the risk spectrum. This would have the direct effect of pushing up rates even more for the less fortunate insurers, ending up in what could easily become a self-destructive rates spiral and the risk, in extreme cases, that one or more of the affected insurers would collapse. This would seriously undermine the public trust and confidence in the stability of the system which is vital in a voluntary community rated environment such as ours. Risk equalisation is the mechanism which will ensure this type of potential destabilisation does not occur. It simply aims to equalise differences in health insurers' costs which arise due to significant variations in their risk profiles.
The need for risk equalisation in a private health insurance system such as ours is supported by a wide range of national and international expert opinion and experience. In particular, it was supported by the independent advisory group on the risk equalisation scheme which reported to the former Minister for Health and Children in April 1998. The European Union's third non-life directive opens the possibility for member states to introduce specific legal provisions, including risk equalisation or loss compensation as it is referred to in the directive, in the regulation of health insurance business. The purpose of section 9 of the Bill is to enable implementation of significant changes in the arrangements for risk equalisation as originally envisaged under the 1994 Act with a view to addressing concerns about its commencement and impact.
The Department is satisfied as to the necessity for risk equalisation to ensure the stability of our community rated system. Adequate risk equalisation is a necessary complement to community rating. Without adequate risk equalisation, community rating and open enrolment in a competitve market create large incentives for risk selection which would have the adverse effects described. This is not just theory; it occurred in Holland during the 1970s and 1980s when, due to the absence of risk equalisation, several insurers had to be saved from bankruptcy due to being caught in a deadly premium spiral of a worsening risk pool and increasing premiums. Risk equalisation offers the most effective method for reducing cream skimming because it reduces the incentives for risk selection.
In preparing the relevant section of the Bill account was taken of the many views expressed. The Minister is satisfied that the proposed risk equalisation arrangements represent a prudent, fair and balanced approach to a contentious and complex matter. I commend the Bill to the House.