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A bitter pill to swallow

This week's savage price incr-eases of up to 45pc piles the pressure on state-owned health insurance company VHI and its chief executive, Jimmy Tolan.

The January VHI price increase has become something of a new year ritual. Every year, usually during the first week of January, the VHI trots out its annual above-inflation price increase.

By now it has all acquired a certain predictability, with the VHI blaming some combination of an ageing population, higher charges for public hospital beds, the Government's refusal to compensate it for its older customer-base and medical inflation for yet another raid on its customers' pockets.

However, even by the standards of previous years (the VHI upped its prices by 8pc in January 2010), this week's price increase was a shocker.

While the VHI claims that the price increase for the Parents & Kids plan, which is purchased by 60pc of its customers, was "only" 15pc, customers who had opted for its Plans B, C, D and E face increases of between 21pc and 45pc.

There is particular anger over the VHI's decision to increase the price of its Plans B and B Options by 35pc and 45pc respectively, as these are the two plans which are most popular with elderly customers.


Not surprisingly, the VHI price increases, particularly of Plans B and B Options, provoked outrage. However, the VHI's decision to put the boot into its elderly customers is an entirely predictable and long-delayed response to the botched liberalisation of the Irish health insurance market in 1994.

The VHI had a legal monopoly of the Irish health insurance market for the first 37 years of its existence. This monopoly was abolished by the 1994 Health Insurance Act, which allowed other companies enter the market.

Ever since the VHI was founded in 1957, the Irish health insurance market has been based on the principle of community rating, where everyone, regardless of age or the state of their health, pays the same premium for the same level of cover. In effect, younger, healthier customers subsidise older, sicker ones.

Community rating was relatively easy to enforce when the VHI had a legal monopoly. It became much more difficult once the market was opened up after 1994. As the former monopoly provider of health insurance, the VHI already had a large number of older customers on its books when the market was liberalised.

This created a huge incentive for new entrants to target younger customers and leave the VHI with the older customers.

As younger people are healthier they tend to make fewer health insurance claims and, under a system of community rating where everyone, regardless of age, pays the same price for the same cover, they are highly profitable for the health insurance companies.

Indeed it was precisely to prevent this from happening that the 1994 Act provided for "risk equalisation", where companies with a disproportionate number of older customers, (the VHI), were compensated by those with a disproportionate number of younger customers (the new entrants).

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Unfortunately few things demonstrate the ineptitude and incompetence of the Irish political and administrative elites over the past 17 years than the on-going saga of risk equalisation.

Despite the provisions of the 1994 Act, nothing happened for more than a decade as BUPA, which entered the Irish market in 1996, fought risk equalisation every inch of the way.

It was only the revelation in April 2005 of the windfall profits being made by BUPA's Irish operation that finally embarrassed the government into introducing risk equalisation.

However, the implementation of risk equalisation was then delayed for a further year while BUPA unsuccessfully appealed the decision to the High Court.

BUPA then sold its Irish operation to Quinn Insurance at the beginning of 2007 but appealed the High Court decision to the Supreme Court, which ruled in its favour on a technicality in July 2008.

The government then introduced a special levy on all health insurance policies, a sort of risk equalisation-lite. This levy currently stands at €205 for every adult taking out health insurance and €66m for children.

Unfortunately, the health insurance levy doesn't compensate the VHI for its older customer base. In fact, it doesn't even come close. According to the VHI, it merely reduced 2010 losses on claims made by its 129,000 customers aged over 70 from €170m to €147m.

With the government either unwilling or unable to grasp the risk equalisation nettle, it is difficult to resist the conclusion that Tolan has decided to force its hand.

The huge price increases in Plan B and B Options premiums announced this week will do two things. Firstly, by shattering the inertia of many of its older customers, they will persuade many of them to switch to other health insurers.

For the VHI, which currently insures 82pc of the over-60s market compared to an overall market share of 62pc, that is an outcome to be wished for devoutly.

Secondly, by creating such an intense political controversy it will oblige the Government to finally address the related issues of risk equalisation and community rating.

Under the terms of the 1994 Act, the other health insurers are obliged to accept customers switching from the VHI regardless of their age or state of health. If these older VHI customers do decide to switch, then their new health insurance company can't impose any waiting period before they make claims for the treatment of pre-existing conditions.

Is the VHI, frustrated by the failure of successive governments to implement risk equalisation, seeking to impose its own solution to the problem of its disproportionate number older customers? By doing so it has effectively killed off community rating, supposedly the cornerstone of the Government's health insurance policy.

What is certain is that a large-scale exodus of older customers from the VHI would boost its profits, while an influx of older customers would hit the Quinn and Aviva bottom lines hard.

It's a high-risk strategy for the former boss of fruit distributor Fyffes, but Tolan obviously feels that he doesn't have any choice.

With the VHI needed to increase its solvency ratio from the current 22pc to 40pc in order to meet EU solvency requirements, it can't continue haemorrhaging losses on its older customers.

Unfortunately, the vertiginous rise in VHI premiums is resulting in a steady loss of its younger customers. The VHI lost 120,000 customers in 2009.

When it publishes its annual results later this year, the VHI is almost certain to reveal that it lost even more customers in 2010.

This means that, while it is shedding customers at an alarming rate, these are the younger, profitable ones it needs rather than the older, loss-making ones it doesn't.

In fact, the VHI ended 2009 with more customers aged over 60 than it started the year with. Will the 2010 results paint a similar picture?

Is this a case of natural ageing or are its rivals, in addition to cherrypicking younger, more profitable customers, also "dumping" their older, loss-making customers on to the VHI?

By announcing such massive price increases in Plan B and B Options premiums, Tolan seems to be repaying Quinn and Aviva in kind. With the Government committed to injecting up to €100m into the VHI in order to allow it to meet its solvency requirements in advance of its privatisation, it is in no position to object to Tolan's new hard line.

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