EU Internal Market Commissioner Charlie McCreevy is to take legal action against the Government over the unlimited guarantees it offers State health insurer VHI.
A commission source confirmed that Mr McCreevy's decision to issue formal notice of infringement proceedings to the Government followed examination of a complaint relating to the VHI made by Vivas Health, a private health insurance company which recently entered the Irish market.
A letter is being drafted and is expected to be put to commissioners next week, before being sent to Dublin. The Government will then have 30 days to respond.
This letter would mark the first stage of legal action at European level that could end up at the European Court of Justice in Luxembourg.
Vivas Health argued that by offering services outside its core business area, such as travel insurance and online retail, the VHI was in breach of a condition set by a European directive.
That condition granted the VHI an exemption from the strict solvency requirements faced by its competitors, provided that the VHI kept to its core activity of health insurance.
In effect, the exemption means that, unlike its competitors, the VHI is not obliged to show that it has sufficient capital to underwrite its business.
Last month Mr McCreevy sent a warning letter to Minister for Health Mary Harney, which listed the different licensing, prudential supervision and solvency regimes that the VHI enjoys as areas of major concern for his office.
He also issued a warning to the Government over risk equalisation, a policy that the VHI's rival Bupa subsequently blamed for its decision to leave the Irish market.
A commission source said yesterday that Mr McCreevy would argue that the derogations enjoyed by the VHI from the solvency requirements that apply to other health insurers are no longer appropriate because it has entered a range of new businesses.
"The derogation is now seen as giving VHI an unfair advantage over competitors in the market as VHI's competitors have to retain more capital to underwrite business," said the source.
In a statement, Vivas chief executive Oliver Tattan said he was pleased by the commission's move which, he said, highlighted "the clear inequalities" in the Irish health insurance market.
He stated that as a limited company, Vivas was subject to all applicable rules of Irish company and solvency law, whereas the publicly owned VHI was exempt from the requirements of both.
Its exemption "clearly provides the VHI with an unfair advantage over other health insurance providers.
"The VHI must not be allowed to continue the practice of running down its reserves and cross-subsidising its other business lines through its health insurance revenue."
A spokesman for Ms Harney said that legislation to "commercialise" the VHI was being prepared.