Saturday 18 November 2017

the bitter pill

Former Fyffes chief executive may find that his 'dream' job is more of a nightmare

The latest VHI price increase will pile further pressure on the state-owned health insurer. With tens of thousands of customers having already let their policies lapse and facing a tough new regulatory regime, chief executive Jimmy Tolan has it all to do.

The Christmas decorations weren't even down when the VHI, in what has unfortunately become a dreary new year's ritual, announced that it was increasing its prices by an average of 8pc. Coming on top of the monster 22pc increase a year ago, this means that the VHI has increased its prices by almost a third in the space of just 13 months.

So is this just a case of a bloated state bureaucracy passing on the cost of its inefficiencies to a captive market? Not quite. In its last set of accounts, for the 10 months to end of December 2008, the VHI recorded administrative costs of €65.6m, 6.6pc of the €981m in claims that it paid out over the same period.

If the VHI is living high on the hog then it's not immediately apparent from its published accounts.

So if it's not administrative inefficiency just what is the VHI's problem?

With losses for 2009 forecast to be at least €80m, it is clear that the VHI has some very serious issues to contend with.


It all goes back to the Government's botched liberalisation of the health insurance market in 1994, which ended the VHI monopoly status. The 1994 Health Insurance Act, which opened up the health insurance market to competition for the first time, sought to reconcile two apparently irreconcilable goals.

Ever since the VHI was first established in 1957, community rating has been the basic principle underlying the Irish health insurance market. This means that everyone, regardless of age or medical history, pays the same price for the same policy.

This is in stark contrast to many other countries such as the UK and many states in the US where health insurance is priced according to the customer's age and previous medical history. Such age or risk-weighting makes health insurance unaffordable for many older and/or sicker people.

When there is only one health insurance company operating in the market community rating works fairly well. To price its policies the monopoly health insurance company merely tots up the total cost of all the claims it expects to pay out, adds a margin for operating expenses and profit, and divides the resulting amount by the total number of its customers.

Competition changes all of that. With more than one company operating in the market there is a huge incentive for new entrants to "cherry pick" younger, healthier customers, who of course make far fewer claims, and leave the incumbent -- in this case the VHI -- with the older, sicker customers.

In fairness, the then Health Minister Brendan Howlin was well aware of this danger and inserted a clause in the 1994 act stipulating that the new, liberalised health insurance market would include "risk equalisation", where companies with a disproportionate number of older, less profitable customers, i.e. the VHI, would be compensated by companies with a disproportionate number of younger, more profitable customers.


The theory was, that by eliminating the incentive to cherrypick younger customers, risk equalisation would preserve community rating while at the same time allowing competition in the health insurance market.

Would risk equalisation have worked -- a former VHI boss once confided to this writer his belief that competition and community rating were ultimately incompatible -- or was the Government attempting to square the circle? Unfortunately we will never know.

For almost a decade after UK firm BUPA (now Quinn Healthcare) became the first new company to enter the Irish health insurance market in 1996, governments of various parties refused to implement risk equalisation.

It was only when details of the extraordinary profits being made by BUPA's Irish arm emerged from UK regulatory filings in April 2005 that the Government was finally stung into action with plans for risk equalisation finally being announced in December 2006.

Unfortunately the implementation of risk equalisation was delayed for a further year by a legal case by BUPA, which immediately exited the Irish market and sold its business to the Quinn Group when the High Court ruled against it in December 2006.

But that was not the end of this convoluted tale. BUPA then challenged the method of risk equalisation proposed by the Government. It was successful with the Supreme Court ruling in its favour in July 2008.

This legal defeat forced the Government back to the drawing board. Its response was to introduce a special levy on all health insurance policies, €160 for adults and €53 for children (since increased to €185 and €55 respectively), in the October 2008 budget. It was this levy that led to the January 2008 price increase.

While the levy was better than nothing, it didn't come close to meeting the cost to the VHI of its older customer base. In this week's statement, announcing its latest price increase, the VHI claimed that it lost €170m on its 280,000 customers aged 60 or over in 2009. According to the VHI, the levy is only recovering about 40pc of the losses generated by its older customer base.

With the benefit of hindsight it is now clear that the liberalisation of the health insurance market in 1994 was mishandled.

More than 15 years later the VHI, with over 1.5 million customers, still has more than two-thirds of the market. This makes it easy for its competitors to cry foul every time the Government seeks to force them to compensate their larger rival for the extra costs associated with its preponderance of older, less-profitable customers. Both Quinn and Hibernian have not been slow to portray VHI as the big, bad monopolist seeking to stifle competition.

Might it not have been better to have broken up the VHI into a number of smaller companies in 1994, each one of which would have had to take the same proportion of older customers on to its books?

As if the problems posed by its older customer base wasn't enough to be getting on with, the VHI is also coping with the EU's solvency requirements for insurance companies.

This will force it to up its reserves from the current 22pc of premium income to 40pc. The VHI calculates that this will require a €100m capital injection.

Given the VHI's unappetising prospects, who in their right mind would want to be its boss? Incredibly jimmy Tolan did, describing it at the time of his appointment as the job he had always wanted.

When he was appointed to succeed Vincent Sheridan in May 2008 he took a 20pc pay cut from his previous job as chief executive of banana distributor Fyffes.

Such was the high regard in which he was held in at Fyffes that he remains a non-executive director of the company. The acrimony which often accompanies such high-level executive transfers seems to be completely absent in this case.

So where does Mr Tolan take the VHI from here? With its new regulator the Central Bank likely to insist that it top-up its reserves sooner rather than later and, with the State unwilling to stump up, perhaps the break-up which should have taken place in 1994 will finally happen this year.

Irish Independent

Promoted Links

Promoted Links

Business Newsletter

Read the leading stories from the world of Business.

Also in Business