The results of a court judgment due in Luxembourg next week could have a significant impact on private health insurance here, writes Martin Wall, Industry Correspondent
A long-awaited court judgment to be delivered in Luxembourg next week could have significant implications for the future of the private health insurance market in Ireland.
The European Court of First Instance will rule on an appeal brought by Bupa Ireland to a European Commission decision on the Government's establishment of a controversial risk equalisation scheme in the Irish market.
If the Bupa case is upheld, it could, depending on the terms of the ruling, have a significant impact on the traditional structure of the private health insurance business here.
According to some sources, it could also possibly have implications for the Government's VHI reform plans.
Risk equalisation is essentially a compensation scheme under which companies such as the VHI, which has a larger number of older subscribers (who tend to claim more frequently), would receive payments from rivals with a relatively younger membership profile.
The Government believes that a risk equalisation scheme is necessary to underpin the concept of community rating in the health insurance market under which everyone pays the same amount for similar products, regardless of age.
However, Bupa Ireland always opposed the risk equalisation scheme and argued that it would force Bupa to make payments of tens of millions of euro to an already profitable larger competitor, which is also owned by the State.
Bupa contended that the operation of a risk equalisation scheme would ultimately make its business in Ireland unviable.
The case effectively dates to January 2003 when the Department of Health submitted proposals to introduce a risk equalisation scheme to the European Commission for approval under rules governing State aid.
The Department argued that the risk equalisation scheme did not represent a State aid.
In May 2003 the Commission, having considered the notification from the Government and also having heard representations from Bupa, found that the payments involved in the proposed risk equalisation scheme were limited to the minimum necessary to compensate insurers for services of general economic interest obligations. It said that therefore they did not involve State aids in the sense set out under EU law.
In August 2003, Bupa applied to the Court of First Instance for an annulment of the Commission's decision.
Bupa argued that the decision of the Commission had been incorrect and that the risk equalisation scheme did constitute a State aid.
Bupa brought its action against the Commission. However, Ireland and VHI Healthcare as well as the government of The Netherlands subsequently joined in the case as interveners in support of the Commission decision.
The case before the Court of First Instance is only one of two challenges to the risk equalisation scheme which the Government is facing.
A Supreme Court ruling is also pending in an appeal brought by Bupa regarding the legality of the scheme. The High Court rejected the Bupa case in November 2006 following a lengthy hearing.
So even if the Court of First Instance upholds the Commission's argument that the risk equalisation scheme did not constitute a State aid under European law, the Government is not totally out of the woods in relation to legal challenges.
However, if the Court of First Instance backs the Bupa argument, the consequences for the Government and the operation of the health insurance market could be significant.
The full impact of such a scenario is hard to assess at this stage as it would depend on the nature and extent of any ruling.
However, any decision of the court which dealt a fundamental blow to the concept of a risk equalisation scheme could, in the view of the supporters of the scheme, have major implications for the traditional community rating system in the Irish market.
The Government and the VHI have argued strongly that risk equalisation is absolutely necessary to underpin community rating.
VHI has contended that without risk equalisation the concept of community rating would not survive and that, in effect, a risk-related market would be created in Ireland.
Under a risk-related market, as in the UK, subscription rates rise dramatically as the insured person gets older. Some informed sources have argued that even a win for Bupa on "technical" grounds could have significant implications.
If, for example, the Court of First Instance struck down the method in which the Commission had approved the risk equalisation scheme and forced the Government to repeat the process, what would the implications be for the risk equalisation payment liabilities which have grown up over recent years?
The Government triggered the operation of the risk equalisation scheme in January 2006 and over the intervening period Bupa and later the Quinn group (which bought over its business) have seen their liabilities reach around €40 million.
Figures produced by the industry regulator would suggest that up to the end of June 2007, the VHI stood to receive around €32 million in risk equalisation payments, mainly from Bupa. The figure is now likely to stand at more than €40 million.
While the meter on risk equalisation payments has been running for two years, the actual payment of money under the scheme has been frozen until the outcome of the Supreme Court case is known.
The amount which VHI will receive under risk equalisation will be an important feature in the Government's forthcoming decision on how a financial injection required by the company to boost its reserves should be funded.
Under Government plans, VHI will lose its existing derogation from solvency requirements and become a conventional insurer authorised by the Financial Regulator, Ifsra, by the end of 2008.
It is being argued widely that this will require a substantial injection of capital, estimated by some at between €100 and €200 million, to bring its reserves into line with industry norms.
A successful outcome in next week's judgment and subsequently in the Supreme Court could allow VHI to receive the outstanding risk equalisation payments and ease the difficulties of bringing its solvency ratio up from its existing 27 per cent to the 40 per cent sought by Ifsra.
However, if this money is not forthcoming, the only other options may be for the State to provide the money or to go to the markets by selling part of the company.