The Quinn Group's acquisition of Bupa has solved one problem but it may have immediately created another, reports Martin Wall.

Four years ago the Department of Health moved to close a loophole in legislation which it believed could have allowed a health insurance company pass its business to a subsidiary or other closely linked entity with a view to obtaining additional exemptions from risk equalisation payments.

The Government now faces pressure from the State-owned insurance company, VHI, for further legislation to rule out risk equalisation derogations being granted to companies that purchase existing health insurance operations.

Senior figures in Government accepted yesterday that, while the sudden announcement on Thursday of the Quinn Group's purchase of Bupa Ireland had solved one problem - continued competition in the market was ensured - it may have immediately created another one.

Under legislation, health insurance companies entering the Irish market can seek a derogation from risk equalisation payments for three years.

Companies must seek such an exemption from the Health Insurance Authority (HIA) which regulates the market.

Amending legislation introduced by former minister for health Micheál Martin in 2003 specifically ruled out "a registered undertaking that is an associated company of a registered undertaking" from seeking the three-year derogation. This amendment was aimed at preventing existing operations from creating subsidiaries or linked companies to seek further periods of exemption from the risk equalisation scheme.

However, the legislation said nothing about one company selling out to an unrelated one.

The events of the last 24 hours have seen virtually all the parties call in their lawyers to assess the situation.

Informed sources said last night that much attention will focus on the term "registered undertaking".

They said there may also be an intensive review as to whether the Government had signalled to the Dáil at the time the legislation was passed its view of the intended scope of the measure.

The Quinn Group and Bupa appear quite content that their legal advice means the HIA will have to approve an application for a derogation. Their case is that the former Bupa Ireland management and staff will now be acting as an agent of the Quinn Group, which had no previous involvement in health insurance.

VHI has sought its own legal advice and in the meantime has called on the Government to introduce new legislation if it emerges that the Quinn Group has exploited a loophole to obtain a derogation.

VHI believes that the provision of a derogation in such circumstances would create a precedent that every other operator would follow. VHI fears that this would mean ultimately that no one would ever make risk equalisation payments.

"We have called on the Government to make it immediately clear that the Bupa book of business will remain subject to risk equalisation after the Quinn Group acquisition and that, if necessary, amending legislation will be introduced to ensure this outcome," a VHI spokeswoman said.

Another aspect generating uncertainty is that the Quinn group has not yet sought a three-year exemption. And indeed, when it does so, there is no definitive time period under which the HIA must complete an assessment of the case.

Minister for Health Mary Harney appeared to signal yesterday that she would, if necessary, introduce legislation to close any loophole that allowed health insurers to avoid risk equalisation payments by changing ownership every three years.

She told reporters that the whole market would fail if companies were allowed to avoid the payments by selling up every three years. "That would not guarantee community rating and it would not provide a stable health insurance market, which is what I want to see for consumers."

Earlier, a spokesman for the Minister had told The Irish Times that she had formed no opinion on the issue of the derogation for the new group at this stage but would take appropriate advice after the HIA ruled on the matter.

However, even if the Minister considered in due course that new legislation was necessary, could it be introduced retrospectively to prevent the Quinn Group obtaining a derogation? That question may in turn depend on the interpretation of complex legal and insurance terminology.

For VHI and its 1.5 million subscribers the final determination of the issue will be a matter of great seriousness. Taking Bupa's estimates, the State-owned company could lose out on up to €161 million in risk equalisation payments if the Quinn Group obtains its derogation. The real figures for risk equalisation payments in each year will not be known until assessments of the market are carried out at the time by the HIA. However, the HIA said in a confidential report to the Minister in September that, had the risk equalisation scheme been fully operational in the year to June 2005, VHI would have received €37.1 million for that period.

When the High Court upheld the legality of the risk equalisation scheme in November, VHI said that subscribers could expect that prices would rise at a lower rate than the 12 per cent per annum which has been common in recent times once payments began to flow.

Presumably without such payments, higher subscription increases would be on the cards. And VHI prices are expected to rise significantly in any event this year following the decision by the Government to increase the cost of private beds in public hospitals by 25 per cent.

In 2004, the VHI board decided to fund the absence of risk equalisation payments from its reserves. Such a move would not be sustainable in the long run.

Bupa is expected to owe around €14 million in risk equalisation payments for 2006 when HIA assessments for the year are finalised shortly. There is currently a stay on the company actually having to pay over any money. Bupa is expected to seek a continuation of this stay pending a full hearing of a Supreme Court challenge to the legality of risk equalisation.

The nightmare in VHI headquarters in Abbey St is that the stay will be maintained, leaving it with no risk equalisation payments for 2006, while a Quinn derogation would see it securing no funds from this quarter for the next three years.