The State-owned health insurer wants to be privatised and is limberingup to meet Government and plead its case. It's certain to be sold, the onlyquestion is when, writes Siobhán Creaton, Finance Correspondent

The VHI has once again told its 1.6 million policyholders that from September 1st their annual health insurance premiums will be going up.

The Minister for Health, Mr Martin, has backed the 8.5 per cent rise just as he approved the 18 per cent rise a year earlier. VHI chief executive Mr Vincent Sheridan says it has "done well" to contain the latest price increase below 10 per cent and sees little prospect of avoiding further such rises in the years ahead.

The VHI has been providing health insurance for more than 45 years. It is owned by the State and currently covers most medical and hospital costs for around 80 per cent of population that buy these policies. Broadly about 50 per cent of Irish people have private health insurance mostly through group schemes at work or through professional associations and many employers make a contribution to their annual premiums.

Mr Sheridan and his team will shortly be seeking a meeting with Mr Martin and his officials to discuss the organisation's future and will be strongly campaigning for the State to cut it loose. In 1999 a Government White Paper prepared for the then health Minister, Mr Cowen, stated that the VHI's business required greater "commercial freedom". This was interpreted as meaning that it should be privatised and would most likely be sold to another insurer.

Five years on it is frustrated that its commercial structure remains intact but is now limbering up to make its case to the Government and push on with pursuing the changes it believes will ultimately benefit its members.

"We haven't had a serious discussion with the Government. We see the need for it. We see it as essential and I'd be surprised if the Government had changed its view. There are political, social and commercial considerations involved that need to be talked through. Now we are saying to the Government let's get into a discussion on commercial freedom."

Mr Sheridan says there are huge conflicts of interest if the VHI were to stay within the State sector. "It was probably the right thing to be when the VHI was a monopoly but even then there were conflicts. The Department of Health is responsible for overall health policy, for private health insurance and the conduct of that market. They are also the biggest provider of health services and they own the biggest health insurance company in the market."

The VHI has been critical of the slow progress in introducing risk equalisation, the system that attempts to ensure that all health insurers pay a fair share of all the claims of the older and sicker members that are insured by Irish firms.

It is seen as a prerequisite to the sale of VHI. The Government considers this the most appropriate means of supporting community rating, which ensures that everyone pays the same premium for health insurance regardless of their age, sex or state of health. The 2001 Insurance Act does make provision for lifetime community rating where people who wait until they are older to take out private health insurance can be charged higher premiums and is something that may be embraced by the sector in the future.

Legislation has been passed to usher in risk equalisation but is likely to be enforced only on the approval of the Health Insurance Authority the independent statutory body established to monitor and participate in the operation of Ireland's private health insurance market. It will shortly begin to examine competitive issues in this market. The HIA will also be assessing the financial performance of VHI and its main competitor, BUPA Ireland, which is part of the British-based health insurance provider, before making a final recommendation to the Minister about the implementation of risk equalisation.

BUPA has bitterly opposed this measure with estimates that it could end up having to pay €20-€28 million annually to the VHI. Reacting to the VHI's latest price increase BUPA Ireland managing director, Mr Martin O'Rourke, once again criticised risk equalisation as "anti-competitive and anti-consumer" and stressed that it would continue to explore every possible avenue to protect its position in the Irish market.

His opposite number in the VHI believes risk equalisation should have been introduced long ago. "We have been critical of the Government in their slowness to introduce risk equalisation but we wouldn't be as critical about the slowness to move on commercial freedom or privatisation because it couldn't move until the health insurance market was regulated in this way."

The VHI chief executive says it is "scandalous" that the introduction of competition in the Irish private health insurance sector actually triggered price increases rather the normal reduction in costs for consumers. This is the Government's fault, he says.

"Competition brought many good things. It brought choice, it improved the level of service that customers get, but also it actually served to drive up the price because the market wasn't properly regulated."

VHI's chief gripe is that even though BUPA came into a market characterised by community rating principles it claims its rival was allowed to charge those premiums but focused on winning younger customers who tend to make far fewer claims.

"Six years ago when VHI was a monopoly, typically for every €100 that came into the market, we were paying around €90 in claims, €7-€8 in expenses and the balance went into our reserves. When BUPA came into the market the cost of our premiums went up a bit because we had to improve our service. BUPA's typical revenue account would show that for every €100 it takes in, it would pay €50 or less by way of claims, probably €20 in expenses and €30 in profits. Somebody has to pay for that."

BUPA disputes these figures, which would suggest it makes about €1 million a week in profits from its Irish business. BUPA Ireland operates as a branch of the UK parent and does not disclose details about its premium income or profitability.

Last year VHI made profits of €14.7 million. It has now sent its figures for the current year to the Department of Health for approval and will issue them at the end of this month.

VHI has total assets of €200 million and with its strong brand and distribution base would be expected to attract offers starting at around €300 million and much would depend on the level of interest from prospective buyers.

It seems certain VHI will be sold it just depends on how long it takes to put the necessary measures in place before the For Sale sign goes up. With the Exchequer finances under pressure the Minister for Finance will certainly be receptive to auctioning off more of the family silver which may speed up the process.