VHI Healthcare will get a new chief executive in May, when Mr Vincent Sheridan moves from the Hibernian Group to the health insurance operation.
He takes over a profitable operation with 1.5 million customers, about 86 per cent of the hospital insurance market, providing healthcare for more than 40 per cent of the population, with reserves in excess of £100 million (#127 million) and a strong brand name.
He also takes over at a crucial time for the State-owned operation, with decisions to be made on its future ownership, structure and direction, and with new regulation of the health insurance market about to be put in place.
VHI's positive characteristics include its dominant market position, strong IT systems, an excellent database on customers, consultants, hospitals and procedures, a huge network of customers throughout the State, relatively low levels of administrative costs (though these are rising), and good financial systems. On the negative side, its structure as a statutory corporate body limits its operating flexibility, medical cost inflation is rising faster than general inflation, it needs to strengthen reserves, and it has lost its monopoly position in the market since the arrival of BUPA in 1997. Its product/service range is restricted and its pricing changes can be vetoed by the Department of Health.
Mr Sheridan will arrive at VHI too late to influence the terms of the Health Insurance (Amendement) Bill 2000, expected to be enacted around June. This legislation on the regulation of the health insurance market will set the framework within which VHI, BUPA and any new market entrants will have to operate. New entrants would increase competition, protect against unnecessary premium increases and ensure a value-for-money health insurance service.
But Mr Sheridan arrives in time to give leadership in the debate on the future structure and direction of the organisation. In recent months, the Department of Health and the VHI board have each appointed corporate finance specialists to advise on future structure and strategy - Davy and Goodbody respectively.
Structural options include full or part privatisation, part sale to a trade partner, or flotation, while the operational options include new products/ services and partnerships.
The White Paper on Private Health Insurance in September 1999 proposed a Government investment of about £50 million in VHI, and the transfer of its assets and business to a new company with the Minister for Finance as shareholder. This investment, together with existing reserves, would allow VHI to meet full commercial solvency requirements. The statutory corporate body would become a State-owned commercial company.
To be effective, structural change should give the VHI board the strategic autonomy to manage the organisation. It should be able to enter into joint ventures with partners, and to both exploit the advantages of its very valuable customer base and to develop new services/ products to serve that customer base and expand it.
Currently limited to providing health insurance schemes and health-related insurance schemes, VHI wants to expand into occupational health services, dental insurance, comprehensive childcare services and long-term nursing care.
Separate from the decisions on the future structure and direction of VHI, but a major influence on it, will be the new Health Insurance Amendment Bill 2000. Health Minister, Mr Martin said: "The Bill is aimed at enhancing scope for competition in private health insurance business."
The Bill reiterates the State's commitment to the principle of community rating - the cost of the insurance risk is shared across the whole insured community so that older or sicker individuals do not pay more for a given level of insurance cover than younger or healthier people. The alternative is the risk-rating system where older/ less healthy people pay considerably more for a given level of insurance cover than younger or healthier people.
In the Republic's market, open enrolment - where an insurer must take on all customers who apply for cover - and lifetime cover - where an insurer cannot refuse to renew the cover of a subscriber who develops a chronical illness - go hand in hand with community rating.
More controversially, and strongly opposed by BUPA, the Bill includes provisions for risk equalisation. VHI sees risk equalisation as essential to underpinning community rating. BUPA says it would amount to the smaller operator in the market paying the dominant player a subsidy of £20 million over three years.
Risk equalisation involves transfer payments between insurers to spread the claims costs of less healthy members amongst all the companies in the market in proportion to their market shares of the risks. According to the US Society of Actuaries, it aims "to help reduce the effects of either inadvertent or intentional risk selection so that carriers in a competitive market can compete on the basis of both medical and administrative efficiency, and quality of service and care, rather than on the ability to select risk". The VHI argues that in a community rating market without risk equalisation, insurers will have an incentive to target younger, healthier and cheaper risks and will try to avoid older/ less healthy people. Such insurers would be able, over time, to reduce their charges for healthier individuals, who would then be attracted from their existing insurer. The end result, the VHI says, would be a risk-rating system through the back door.
BUPA argues that there is no need for risk equalisation in a highly regulated market that has community rating, open enrolment and lifetime cover, where insurers cannot "cherrypick", subscribers can move freely between companies, and companies can adjust their products and services.
While the Bill provides for risk equalisation, decisions on when and how it should apply, and what transfer payments will be required between insurers will be made by the Health Insurance Authority (HIA), to be set up under the Bill. In deciding when risk equalisation should apply, the HIA can take into account the impact on competition, application of community rating and any other factors it considers material, as well as any material differences in the risk profiles of insurers in the market. The Bill also provides that risk equalisation will not apply to any new insurers for three years, to encourage new entrants into the market. While the Department is adamant it wants to increase market competition, there is a danger that uncertainty on how regulation will work will discourage potential new entrants. Industry sources say the operation of the risk-equalisation process will be the determining factor in encouraging further competition. Estimating that the market "has the capacity to sustain four or five private health insurance companies", one source maintains that risk equalisation was seen by many insurers as a barrier to entry into the Republic's market.
At an operational level, the VHI's financial performance has improved in recent years but it needs to increase its reserve levels. Claims as a percentage of earned premium have fallen from 99 per cent for the year to end February 1996 to 86.4 per cent for the year to end February 2000, and further improvement is expected for the year to end February 2001.
Over the five financial years to end February 2000, VHI premium income has increased by 49.4 per cent to £385 million. Over the same period, claims incurred have risen by 30 per cent to £333 million. VHI's underwriting experience has improved dramatically from an underwriting profit of £2.23 million for the year to end February 1996 to £52.6 million for the year to end February 2001.
But, as the business has expanded, net operating expenses have risen. They have increased by 114 per cent over the five year period to £28.9 million, increasing to 7.5 per cent of earned premiums compared with 5.2 per cent for the year to end February 1996. At February 29th, 2000, VHI reserves stood at £100.4 million. At this level, reserves were some 139 per cent of the minimum solvency requirement set under the EU non-life directive. But, at 26 per cent of premium income, it is still well below the target level for full commercial solvency of 40 per cent.
For consumers the decisions made in the coming months will have a crucial impact on the price and affordability of private health insurance.
