I move: "That the Bill be now read a Second Time."
The key principle upon which we meet health care costs as a society is that the young support the old, the healthy support the sick, and the better off support the less well off. Private health insurance has had a long history of contributing to the cost for individuals of health care in this country. As a result, successive Governments have sought to adopt key principles within health insurance, particularly the principles of the young supporting the old and the healthy supporting the sick.
All types of insurance, be they house, motor, health or other insurance, are based on the principle of pooling risk, with everybody within the pool sharing the burden of meeting the overall cost. Within an insurance pool, the price of an individual's policy can vary according to his or her claims experience and the risk of that person making future claims, as is the case with motor insurance. Therefore, while risk pooling and cost sharing remain, the contribution of each person to the pool rises with his or her risk profile. This is known as a risk-rated model of insurance. When this risk rating is applied to health insurance pools, the inevitable result is that older people and less healthy people have to pay substantially more for the same cover.
In recognition of this, successive Governments and the Oireachtas have been committed since 1994 to maintaining the principle of community rating rather than risk rating of health insurance. The objective has always been that the price of a policy should reflect the risks and costs of the entire pool of insured persons in the community, rather than the risks and costs on a person by person basis. The sharing of risk between younger and older people — who predominantly cost far more in terms of claims — is known as intergenerational solidarity. This means that younger people pay more for health insurance than the level of risk they present would demand, while older people pay less as a direct consequence. The pricing of risk across the community of insured persons clearly requires robust mechanisms to share costs when there are a number of companies in the market.
If a mechanism to share risk and attendant costs is not present, insurers with a less profitable risk profile can quickly find themselves in a perilous position financially. The standard transfer mechanism is known as risk equalisation and it is a key element of health insurance internationally. Only through the use of risk equalisation can solidarity and cost sharing be effectively implemented between the generations who hold insurance.
The Health Insurance Acts 1994 to 2007 provide the statutory basis for the regulation of the private health insurance market in the interests of the common good. The regulatory system is based on the key principles of community rating, open enrolment, lifetime cover and minimum benefit, and it aims to ensure that private health insurance does not cost more for those who need it most. The system is unfunded, meaning that there is no fund built up over the lifetime of an insured person to cover their expected claims cost. Instead, the premium contributed by insured people is expected to cover the cost of claims and expenses in that year.
Under community rating, everybody is charged the same premium for a particular health insurance plan, irrespective of age, gender and the current or likely future state of their health. The only exceptions to this rule are for children under 18 years of age and students in full-time education. Therefore, community rating means that the level of risk a particular consumer poses to an insurer does not directly affect the premium paid.
The system requires "intergenerational solidarity", with younger people supporting older people. It also requires solidarity between healthy and less healthy people. Therefore, younger and healthier people effectively subsidise older and less healthy people, on the understanding that these younger people will themselves be subsidised by later generations when they reach old age or suffer ill health. In effect, older people who have been paying health insurance premiums for many years will have contributed to intergenerational solidarity when they were younger, and could reasonably expect to benefit from it now.
Other important principles are open enrolment and lifetime cover, which provide that, except in limited circumstances specified in legislation, health insurers must accept all applicants for health insurance and all consumers are guaranteed the right to renew their policies, regardless of their age or health status.
One exception to this provision is that they do not apply to certain restricted membership undertakings. These undertakings mainly provide health insurance to certain vocational groups and their families and account for approximately 4% of the health insurance market. Finally, under the current minimum benefit regulations, all insurance products that provide cover for inpatient hospital treatment must provide a certain minimum level of benefits.
The total premium income for the three insurers for 2010 was €1.9 billion, an increase of €300 million or 19% on the 2008 figure of €1.6 billion. As of the end of September 2011, some 2,174,000 customers or 47.5% of the Irish population had private health insurance in the form of inpatient plans. These numbers are broken down as follows: VHI has 1,246,000 customers or 57%; Quinn Healthcare has 458,000 customers or 21%; Aviva Health Insurance has 382,000 customers or 18%; and restricted membership undertakings have 88,000 customers or 4%.
VHI Healthcare's market share has consistently fallen since the market was opened to competition and this trend has accelerated. The fall in market share has been mainly in the younger age groups. Quinn Healthcare and Aviva Health Insurance combined have 47% of market share in the 30 to 39 years age group but only 9% of the over 80s. VHI Healthcare continues to have a much greater proportion of members in the older age groups compared to the other insurers but there is some reduction in the difference. Its number of policyholders under the age of 60 years has reduced by 108,000 in the past year, which amounts to 10% of its under 60s customer base. In the first six months of 2011, the number of insured lives aged over 60 years with Aviva Health Insurance increased from 23,000 to 40,000. In the first six months of 2011, VHI Healthcare had eight times the proportion of members in the over 80 years age group that Quinn Healthcare had and six times the proportion in this age group that Aviva Health Insurance had.
I remind the House of some recent background to the introduction of risk sharing in the Irish private health insurance market. The risk equalisation scheme, affirmed by the Oireachtas in 2003 and approved by the European Commission in the same year, provided a mechanism for sharing the costs of providing necessary care among insurers. While all political parties and most academics and professional bodies, including the Society of Actuaries in Ireland, supported the risk equalisation scheme, the scheme and its supporting regulatory regime were challenged in the courts by BUPA Ireland. These challenges were rejected by the European Court of First Instance and by the High Court. However, they ultimately succeeded when the Supreme Court found the risk equalisation scheme to be ultra vires in July 2008.
The Supreme Court decision did not strike down the principles of community rating, open enrolment and lifetime cover, nor the principle of having a scheme of risk equalisation in place. The court found the scheme to be ultra vires because the legislation did not provide for an explicit link between community rating and the specific mechanism provided in the 2003 regulations. The Chief Justice of the Supreme Court subsequently clarified that the decision which found the 2003 scheme to be ultra vires was not an obstacle to the Government bringing forward a new scheme. Following this decision in July 2008 there was a need for a prompt response to maintain confidence in the market. It was, therefore, necessary to introduce measures to support community rating and to ensure as far as possible that market fragmentation did not become prevalent due to the introduction of plans aimed at younger, healthier lives.
The current interim scheme involving age-related tax credits and a community rating levy was introduced for the three years from 2009 to 2011 to provide direct support to community rating. It achieves this by a mechanism that provides for a cost subsidy from the young to the old. The Bill seeks to continue the scheme for a further year in 2012. The scheme works by allocating tax credits for persons in three age bands and funds this by the collection of an annual levy on health insurance companies based on the number of lives covered by policies underwritten by them. It is designed to be Exchequer-neutral and ensures that every customer has the benefit of a community-rated health insurance premium. Restricted membership undertakings, the membership of which is restricted to employees and pensioners of particular organisations, are excluded from the scheme because their insurance products are not available to the general public. The scheme provides that health insurers receive higher premiums in respect of insuring older people but that older people receive tax credits equal to the amount of the additional premium such that all people continue to pay the same amount for a given health insurance product. In this way, community rating is maintained but insurers receive higher premiums in respect of older people to compensate partly for the higher level of claims.
I emphasise that the scheme is designed so that loss compensation is only applied up to the most popular benefit level in the market which is up to and including a semi-private bed in a private hospital. This means approximately 20% of benefits are excluded and, broadly speaking, these are so-called luxury products, primary care cover and some other benefits. Taking this into account, the scheme allows for insurers with additional costs arising from insuring older people, who have a preponderance of claims, to be compensated for up to but no more than 65% of these additional costs.
The amounts of the tax credits by age group have been chosen such that where an age group gives rise to higher than average claims costs the system should reduce the excess of claims costs by 65%. The choice of a 65% reduction in average claims costs at older ages is designed to strike a balance between reducing the incentive that exists for insurers to avoid older customers while allowing for a competitive market in which individual insurers are not required to share efficiencies in their own claims management with their competitors.
The calculation of the rates for tax credits for the various groups is based on information returns submitted every six months by insurers to the Health Insurance Authority, the sectoral regulator. These returns provide details of claims costs, subject to maximum limits, and these costs are broken down by gender and within ten-year age bands. The authority analyses the information to identify age groups in which the average payment is in excess of the overall average for the market. It also assesses the financial impact on each insurer, a point I will address later on in my contribution to the debate. Then, the authority reports to the Minister with recommendations for tax credits along with associated recommendations for stamp duty rates that are needed to fund the scheme on an Exchequer-neutral basis.
In arriving at its recommendations, the authority has regard to balancing the need to ensure affordability of health insurance for older people with the need to avoid over-compensating any particular insurer. The actuarial evidence available in 2009 indicated that it was from the age of 50 years upwards that the cost of claims of an insured person increases to above the market average. For 2009 and 2010 the scheme provided for a modest level of support for people in the age bracket between 50 and 59 years and this amounted to a tax credit of €200 for each year. The HIA analysis during 2010 indicated that the claims experience of this age group was close enough to the overall market average. This meant that insurers with a higher than average proportion of customers within the 50 to 59 years age bracket would not be disadvantaged by having to cover higher than average claims and so no tax credit was required in 2011 for that age bracket.
On current estimates, the scheme will transfer some €275 million from younger to older lives, that is, those aged 60 years plus, in 2011. Much of this money will stay within each insurance company's funding base given that younger customers are supporting older customers within the overall company structure. It can be seen, therefore, that in a perfectly balanced market with each company having the same ratio of younger to older customers there would be no financial impact, negative or positive, on any insurer. To the extent that any company does experience a positive financial impact it is purely a consequence of having a greater proportion of older customers than its competitors. Insurers for which there is a negative financial impact arising from the scheme are significantly compensated by their lower claims costs.
One key issue for the Minister and for the European Commission is to ensure that there is no over-compensation of any insurer under the scheme. In the case of the VHI, the authority has determined that there was no over-compensation in respect of 2009 and 2010. It also concluded that the net impact of the tax credits and levy which were put in place for 2011 would be significantly less than the estimate of the extra cost of providing cover to older people.
Although it is the greatest beneficiary of monetary transfers under the scheme, due to the older age profile of its customers in 2010, the VHI made a small loss of €3.1 million. Based on current financial projections it is not anticipated this financial position will change considerably in respect of its performance for 2011.
As I mentioned earlier, the interim scheme consists of two elements, namely age-related tax reliefs granted to individuals who hold private health insurance and a levy charged on private health insurance companies to be used to finance age-related tax reliefs. The details of the relief, at 2011 rates, are as follows: for persons up to age 59 no tax credit is paid; for persons aged between 60 and 69 years a tax credit of €625 is paid; for persons aged between 70 and 79 years the tax credit is €1,275; and for those over 80 years of age it is €1,725.
The scheme requires each private health insurance company to pay an annual levy to the Revenue Commissioners. The levy is remitted to the Exchequer and forms part of overall Exchequer funding. It is charged on all adult insured lives and the rate for 2011 is €205. The rate for insured lives under age 18 is €66. As I have stated the scheme is designed to be Exchequer neutral, that is, money in equals moneys paid out.
I would like to emphasise that the levy is charged on health insurance companies in respect of each insured life and not on individual subscribers. It is a matter for the companies whether to pass this levy on to their customers. Neither the Minister nor my Department has any role to play in the settling of premium prices by any of the private health insurance companies, including the VHI.
The main object of the Bill is to continue to ensure that the burden of the costs of health services be shared by insured persons. In order to achieve this, it provides that the current cost subsidy from the young to the old be continued for a further year in 2012. This subsidy, which is in the form of an age-related tax credit funded by the collection of a levy on all insured lives, was introduced in 2009 and has provided significant support for the extra costs of insuring older people.
Before turning to the specific provisions of the Bill I would like to outline briefly how the scheme is intended to operate during 2012. The interim scheme for 2012 will be improved by requiring insurers to submit more detailed information returns by product and year of age. The Minister is proposing the use of five-year age bands from 50 years of age and above for tax credits for 2012, as recommended by the authority in its report on risk equalisation. At the current time, only ten-year bands are used which are somewhat less precise. The more detailed information returns now being provided for will allow for this refinement.
This enhancement to the scheme will be fully consistent with the principle of avoiding over-compensation of the net beneficiary, the VHI, which was a key requirement in order to secure EU approval of the scheme in 2009. The net beneficiary has, of course, been the VHI since Quinn Healthcare and, especially, Aviva continue to have a significantly younger age profile than the market as a whole. The current interim scheme was approved by the EU Commission for the period 2009-12. Despite the existence of the interim scheme, there is significant segmentation of the private health insurance market, with an increasing number of plans being designed, marketed and priced to attract lower risk, namely younger, healthier customers. Competition is effectively confined to this group.
I would now like to turn to the specific provisions in the Bill. These are exclusively technical in nature, providing for a one year extension of the scheme in 2012 with small modifications to allow for a more precise level for support for community rating. Section 2 amends section 6 of the Health Insurance Acts 1994 to 2009 by substituting a revised definition for "age group" and by inserting a new definition of "type of cover". These definitions will facilitate the provision of information broken down by each year of age and also by specific health insurance contracts.
Section 3 amends section 7 of the Act to provide for more detailed information returns to be submitted by health insurers to the Health Insurance Authority. The information returns will be broken down further by each year of age as required and also by type of health insurance cover. In addition, regulations made under section 7 may require separate returns in situations where the benefits payable under a type of cover have materially changed.
Section 4 amends section 7 of the Act to provide broader scope to the Health Insurance Authority in terms of using additional relevant information alongside the formal information returns submitted by the health insurers. This will assist the authority and Minister in performing their respective functions under the Act.
Section 5 amends section 470B of the Taxes Consolidation Act 1997 to make the necessary changes required to extend the age-related tax credit in respect of private health insurance premiums paid by persons aged 50 years and over to include 2012. Section 6 amends section 125A of the Stamp Duties Consolidation Act 1999 to provide for the continuation in 2012 of the collection of an annual levy on heath insurance companies based on the number of lives covered by policies underwritten by them.
I would like to briefly make some points about the vital issue of effective cost control within private health insurance. In 2010 my Department commissioned its actuarial advisors, Milliman, to review the VHI's handling of claims management and cost control. This was in light of a very significant increase in claims costs over a two year period, 2007-09. The review identified a number of means for the VHI to address its claims costs and to make significant savings in this area. The Minister is concerned about this issue and has placed significant emphasis on the requirement for it to be addressed. In particular, the Minister is concerned that any inefficiency in the management of claims is addressed before the introduction of universal health insurance.
The VHI will play a key role in addressing costs in the market, as due to the age profile and health status of its customer base it currently pays out about 80% of all claims in the market as a whole. It has made progress on the reduction of its cost base and has highlighted the recent savings it has made through cost containment measures. It has made annual savings of €100 million over the past two years through reductions in fees to private hospitals and consultants and through savings in administrative overheads. It recently commenced a process of negotiations with private hospitals with a view to seeking further savings in this area. Contracts with consultants are due for renegotiation in mid-2012 and it has informed consultants it will be seeking further savings at that point.
The Bill is one of a number of important elements of reforming the private health insurance market and I would now like to refer briefly to some of those elements. The programme for Government contains a commitment to put a permanent scheme of risk equalisation in place. This is a key requirement for the existing private health insurance market and also in the context of plans to introduce universal health insurance from 2016. The Minister intends to bring forward proposals shortly with a view to introducing a permanent scheme with effect from January 2013.
Any long term risk equalisation scheme must operate effectively, taking as much account as possible of differences in risk profile between insurers; ensure a genuine system of community rating so as to keep health insurance affordable for older, less healthy customers; be approved by the EU Commission; be legally robust and capable of withstanding successful challenge; and be fully in accord with universal health insurance in the future.
The current interim scheme was introduced in 2009 and received the approval of the European Commission in the context of EC state aid rules. Against this background and pending the introduction of a permanent risk equalisation mechanism in 2013, the Government is satisfied with the need to provide a mechanism along the lines envisaged, that is a continuation of the interim scheme for one year in 2012, with the enhancements described earlier. The scheme has made a significant contribution to community rating since 2009 and is, to date, the only scheme which has succeeded in transferring funds from low risk to high risk groups.
I commend the Bill to the House.