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Dan White: Prices are falling so why is cost of health insurance going up?

At a time when the cost of just about everything else is going down, the VHI yesterday announced a whopping average eight per cent price increase.

The price hike, which comes into effect from the beginning of next month, will push up the average monthly cost of VHI cover for a family of four by €180 per year or €15 per month.

And it isn't just the VHI which is pushing up its prices. Last October Aviva, formerly Vivas, increased its prices by 12pc while Quinn Healthcare jacked up its prices by 15pc at the beginning of this month. The latest VHI price increase comes after the whopping 23pc price increase of January 2009.

Increases

Taken together these two price increases mean that the cost of VHI cover has risen by almost a third in the space of just 13 months.

So why are health insurance costs going one way while most other prices in the economy are going the other way?

The first reason is demographics. Much as I hate to have to tell you on this bleak and cold January day, none of us are getting any younger. In fact the Irish population is ageing by an average of about four months every year.

As we get older we tend to be sicker. This means that older people tend to make more health insurance claims.

As the former monopoly health insurance provider, VHI has proportionately far more of these older customers on its books than its rivals. By comparison Quinn and Avivas, who only entered the market after it was liberalised in 1994, have a far higher proportion of younger, more profitable customers.

Liberalised

Further complicating matters is that when the health insurance market was liberalised 16 years ago, the government insisted on "community rating" where everyone, regardless of age, pays the same price for the same policy.

However, in order to prevent the "cherry picking" of younger, more profitable customers by new entrants, the 1994 Health Insurance Act also provided for "risk equalisation" with companies such as the VHI, which had a disproportionate number of older, loss-making customers, being compensated by the new companies who had a higher proportion of younger, more profitable customers.

Wisdom

Successive governments then refused to implement risk equalisation for more than a decade. When this Government finally did so, the method it chose was struck down by the Supreme Court in its infinite wisdom. The Government's response was to impose a €160 per adult levy on all health insurance policies in the October 2008 budget.

While the health levy temporarily plugged the hole in the VHI's finances it made health insurance even more expensive, leading directly to the January 2009 price increase.

Even worse, the levy meant that most of the cost of the VHI's disproportionate older customer base, about €170m last year, would be met by its own younger customers rather than the rivals who have benefited from targeting younger, more profitable customers. This is utterly perverse.

Luxury

Now there are growing signs that soaring costs are beginning to make health insurance unaffordable for many people. With hundreds of thousands of people after losing their jobs and many others after taking pay cuts, health insurance is beginning to look like an unaffordable luxury. Last year 120,000 customers left the VHI, While some of those moved to other companies, a significant proportion gave up their health insurance entirely.

Health insurance is best thought of as a voluntary tax. With health costs soaring and the Government unwilling or unable to address the issue of risk equalisation, it is a tax that a growing number of us are no longer willing to pay.


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