That is fair enough. As these amendments touch on the crucial area of risk equalisation and how it will operate and because of the importance I attach to risk equalisation as an integral part of an effective regulatory framework supporting community rating and open enrolment, I will take the opportunity, as the Senator asked, to outline the general considerations governing policy in this area.
Before the introduction of the principal Act in 1994, it had been indicated by successive Ministers that risk equalisation would be a central feature of our health insurance industry and regulatory framework. It is also important to bear in mind that risk equalisation measures are permitted under the European Union's third non-life insurance directive.
Our private health insurance system operates under the principle that insurers must accept all comers irrespective of 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 also means there is solidarity between the young and the old and the healthy and the sick. People do not have to buy health insurance and their trust and confidence in the long-term stability of the system are vital if this solidarity is to be maintained.
This is fine as 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 lower premiums. The other side of the coin is that premiums will inevitably rise for those insurers left with a higher proportion of less healthy and older individuals.
It can be argued in this scenario that the market risk equilibrium would be corrected by the people switching from the higher charging insurers to those with lower premium rates. This is fine in theory but, in practice, the people 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 with the risk that one or more of the affected insurers would collapse. This would seriously undermine public trust and confidence in the stability of the system which is vital in a voluntary, community rated environment such as ours.
Risk equalisation can ensure this type of potential destabilisation does not occur. It aims to equalise differences in health insurers' costs that arise due to significant variations in their risk profiles. It can thereby ensure no section of the insured population is placed at a disadvantage due to the emergence of differences in risk profiles. In our health insurance system, the equalisation of differences in risk profiles is not unreasonable given that insurers cannot be selective about the risks they will cover or the price they will charge. Risk equalisation levels the playing pitch in an area where insurers should not compete in the first place. They can still gain competitive advantage in many other areas, such as customer services, provider relations, product innovation, claims management, purchasing and administrative efficiencies.
Many have said this is a theoretical risk, but we can point to certain experiences internationally which bear out our view that risk equalisation is central to the regulatory framework. Until the beginning of the 1970s, the Dutch private health insurance market was dominated by community rating without risk equalisation. During the 1970s and 1980s the market equilibrium was unravelled by risk selection and premium differentiation. Several private health insurers were caught in a deadly spiral of a worsening risk pool and increasing premiums.
The experience of instability in the Dutch system during the 1970s and 1980s has a parallel in a current difficulty in the German sickness fund. BKK Stadt Hamburg has recently run into serious financial difficulties and has an accumulated deficit of DM100 million. The two primary reasons for this are the relatively high cost of health care in the Hamburg region and the fact that the fund has experienced a disimproving claims ratio due to the loss of younger healthier clients, for which it was not adequately compensated by the existing German risk equalisation system. The resulting increase in premiums has meant it has lost even more younger healthier clients, further exacerbating its difficulties. The German Government commissioned an expert group to review the German risk equalisation system. The group, which reported in February 2001, recommended that the existing risk equalisation system be strengthened.
On the amendments before us, the purpose and intended impact of introducing the term "relevant risk" suggests somehow breaking down the composition of the community rated market for unclear ends. The intended replacement of the term "insured risks" throughout section 9 is very unsatisfactory from my perspective. The definition refers us to section 12(10)(a), but when we get there all we find is that it involves a reference to risks of such class or nature as may be prescribed. This does not take the Legislature very far in terms of knowing what it is actually providing for, nor does it provide much to go on as regards the formulation of regulations pursuant to the Legislature's wishes.
The definition provides the basis for a number of other amendments under section 9 which seek to remove a reference to the risks as represented by the entire insured population who have traditionally contributed to and in their time enjoyed the benefits of intergenerational solidarity through community rating and to replace it with a more selective but unspecified concept of relevant risks. Such an approach does not appear to support the application of community rating across the insured community as a whole and would not, therefore, serve the interests of the common good. That is the basis on which the amendments were rejected in the other House and I am bound to reject them here also.
There is a commitment elsewhere in the Bill which ensures that any regulations that may flow from this Bill, particularly regulations that may flow in relation to risk equalisation, must be brought back to both Houses for debate and approval. In the normal course of events, regulations are laid before the House but they do not have to be debated. They can only be raised by Members through a motion to annul the regulations. Because of the complexity of the situation and the very significant interest among Members of the House, the general public and the various insurance companies, a provision is included in the Bill which ensures the regulations setting up the scheme of risk equalisation to be introduced will come before the House. I will deal later with the scheme itself in the course of the debate on the amendments.
