Colm’s columns

Colm Rapple
Irish Mail on Sunday, May 31, 2009

The private health insurance business is in a state of flux. Mary Harney is still awaiting EU approval for her tax and levy plan with which she hopes to salvage community rating while VHI, having lost €63 million last year, is looking for an injection of €100 million from a cashed strapped exchequer.

Worse still, all of this is happening in the absence of any long-term strategy. The Department of Health is still working on it. But the plan isn’t expected to be finalised for two or three years.

In the meanwhile premiums continue to soar, with no end in sight for hard pressed consumers. Despite a 23% premium hike VHI expects to generate only a modest surplus this year and even that is very much dependant on the performance of its investment portfolio.  It doesn’t expect premium income to cover the cost of claims.

Quinn Healthcare increased its premiums by 16% this year to help cover the cost of the Minister’s tax and levy plan. Hibernian Health imposed a much more modest 6% but that possibly reflects a desire to build up market share. General inflation may be low but according to VHI figures, medical costs will rise by about 15% this year.

No-one is particularly happy.

It’s all a sorry mess and much of it can be attributed to our health minister’s ideologically fuelled attempts to introduce free market norms into the business that is far better suited to being run as a State monopoly. There may not be many such businesses but there are a few and health insurance is a good example.

Privatisation, and the promotion of competition, is not always the best solution and certainly not for health insurance, particularly when the stated aim is to retain what is know as community rating.

Even the expert group of very free marketeers set up by the Minister to report on how to make the business profitable for investors recognised that the concept of community rating “is inherently at odds with an open and free market”.

Community rating requires insurers to charge the same premium to all clients irrespective of age, gender or medical history. That’s patently anti competitive but it is generally seen as fair and it is the accepted public policy of all political parties. Without community rating older higher-risk individuals would be charged far higher premiums than their younger and lower-risk children.

But the spread of gains and loses would be a bit more complicated than that.

Many older people would be forced out of the health insurance market altogether and have to fall back on the public health system. The extra costs would have to be met from higher taxes which would likely bear heaviest on the young.

No-one would really gain.

The debate has been going on for the best part of a decade and a resolution seems to be as far away as ever. It is generally recognised that community rating can’t work without some way of subsidising a company, like VHI, that has a far higher proportion of high-risk customers. We’ve seen what can happen. New entrants such as BUPA did very well by targeting younger customers. It could keep its premiums lower than VHI and still make a handsome profit.

Low risk customers gained a little but not half as much as high risk customers lost.

That’s where risk equalisation comes in. The object is to take money from companies with lower risk customers and give it to those with higher risk ones thus ensuring that companies won’t benefit from targeting profitable niche markets. That sounds sensible enough.

The EU Courts thought so but the system proposed by the Department of Health was finally shot down last July by our own Supreme Court. So the stop-gap solution of levies and tax reliefs was devised. It was to be introduced on January 1 last but it has still to get EU approval. If approval is granted the system will be back-dated to January 1.

Insurers will be charged a levy of €160 per adult and €53 per child but will be granted extra tax credits for customers over 50 years of age. It’s a very blunt system of risk-equalisation and, while it will result in the transfer of funds from the smaller insurers to VHI, it is not going to halt the upward march of premiums.

Misplaced government policies has resulted in EU pressure for VHI to convert into a profit making entity. The conversion is overdue but it needs at least €100 million in fresh capital to meet solvency requirements. There are no current plans to privatise VHI so the Government is being asked to put up the money. The National Pension Fund might view it as a worthwhile investment. But whoever puts up the money will be looking for a return. VHI will, in future, be expected to produce a profit and that can only come at the expense of its customers.

Competition among three profit maximising companies in a relatively small market with one predominant player isn’t going to bring premiums down. The ideal would be to have health professionals competing with one another for business. Instead we’ve got limited competition between health insurers for customers.

It’s time to look at the alternative, a State supported universal health insurance scheme. There are plenty of models to choose from but it’s time for Mary Harney to make up her mind or pass the job to someone else.

By Colm Rapple
Irish Mail on Sunday April 29, 2007

Medical insurance premiums are set to soar as a result of the Government decision to force the rapid commercialisation of VHI while significantly weakening the concept of community rating under which all comers, irrespective of age, gender or propensity to illness must be quoted the same premium for a specified level of cover.

Following the publication of the Barrington Report on the sector the measures were pushed through the Dáil in less than an hour setting the wheels in motion for the privatisation of VHI and a major restructuring of the health insurance market that will inevitably mean significantly higher premiums.

There are alternatives, of course, but this latest report doesn’t pretend to have explored them. It’s the work of a group established by Health Minister, Mary Harney a little over three months ago. Given its composition and terms of reference it was inevitable that it came up with recommendations aimed at enhancing the profitability of the privately owned medical insurers at the cost of higher premiums to consumers.

The three person group was chaired by Colm Barrington, managing director of Babcock & Brown, the Irish subsidiary of the Australian based global investment company which acquired Eircom last year. The other group members were Seamus Creedon and Dorothea Dowling. Mr Creedon was a director of KPMG in London and previously the first chief executive of Bank of Ireland’s insurance subsidiary, Lifetime. Ms Dowling is best know for her work in the estabishment of the Personal Injuries Assessment Board of which she is chairperson. She is group liability manager with CIE.

The group was charged with deciding if the medical insurance market as currently structured could provide an adequate return for insurance companies and, if not, what could be done about it.

They concluded that the sector isn’t sufficiently profitable and that the solution is to privatise VHI and curtail the scope of community rating. That’s what their range of recommendations boil down to. In what are likely to be her last days as Minister for Health, Mary Harney has moved to introduce some of those recommendations. She hasn’t mentioned privatisation but that must be the inevitable outcome unless her decisions are reversed.

In line with the Barrington recommendations Ms Harney wants the VHI to become a fully commercial operation by the end of next year. It is currently a statutory body owned by the State and not subject to the solvency requirements imposed on private insurance companies.

Private companies are required to maintain a reserve of at least 40% of their premium income. VHI had been building up its reserves by imposing extra premiums on its members but it began to run them down again a couple of years ago. Lower solvency requirements are expected to be introduced later this year with new EU directives and Barrington estimates that VHI would require an injection of about €100 million to meet the new rules.

VHI was supposed to have until 2012 to reach the target but Ms Harney now wants it reached next year. The best approach, according to Barrington, would be to transfer ownership of VHI to its members effectively privatising it. In the process the extra funding could be raised on the market. Unlike a mutual insurance company or building society VHI is not actually owned by its members so the State could actually sell it and take the proceeds directly into the Exchequer but the Barrington Group believes that a transfer to members would be fairer.

There would be no bonanza involved. It is estimated that each members’s share might be worth €400 or €500.

Undoubtedly that is what Mary Harney would like but she is not saying so. She can’t do it before the election and she may not be there to do it afterwards so she doesn’t have to commit herself.

But its time that the alternative government did. There are other options. The obvious one is to maintain VHI in state ownership and use it as the base for a universal medical insurance scheme for every citizen. That’s the only way to ensure true community rating and to start dismantling rather that enhancing our current inequitable two-tier health system.

The Barrington report admits that community rating “is inherently at odds with an open and free market” and that it will inevitably come under pressure and that eventually a State supported universal insurance scheme will have to be considered. In other words the maintenance of community rating is simply not compatible with the limited, and therefore flawed, free market model that the Barrington report proposes.

It recognises the flaws and comes up with all sorts of ways to limit and curtail community rating. All of the changes are designed to enhance profitability and, in consequence, push up consumer premiums. For instance, it is proposed that community rating would only apply to insurance cover for access to at best semi-private services in public hospitals. As a result low risk groups would get cheaper cover for private hospitals while high risks groups, including the elderly, could end up paying appreciably more.

It is also proposed that an exemption from community rating would apply to certain high risk individuals. Smokers are mentioned but if an exemption is applied to smokers how long would it take before it is extended to people who are overweight. And how long after that before other perceived high risk categories are included and community rating becomes the exception rather than the norm.

Medical insurance is a central prop of our ailing health services and these proposals involve a fundamental shift in its structure pushed by a minister from a minority grouping with a distinct ideological bias. They deserve much more debate. Hopefully it will become an election issue.

Colm Rapple
Irish Daily Mail     February 1, 2007

Health minister Mary Harney has every reason to welcome the proposed take over of health insurer BUPA by the Fermanagh based Quinn Group. It seems to satisfy her desire to maintain and promote competition in the health insurance market. But the operative word is “seems” and it will do so at a cost.

The Minister may be happy but consumers have less to be cheerful about. In a complicated market like health insurance, competition doesn’t necessarily mean lower premiums.

At worst Quinn’s entry to the market may serve to destroy the policy of community rating under which health insurers must charge the same premium to all irrespective of age, gender or other risk profile.

At best the move, if it goes ahead, will leave premiums higher than would otherwise have been the case.

Sean Quinn has a good eye for profitable opportunities. He heads a diverse empire spanning a range of interests from cement manufacture, glass production, plastics, hotels, property and insurance. The group entered the insurance market in 1996 about the same time as BUPA opened its Irish operation.. Quinn Direct contributed €576 million revenue to group coffers in 2005 and made operating profits of €108 million.

The opportunity in health insurance is clearly predicated on the belief that Quinn will be treated as a new entrant to the market and will not have to pay any risk equalisation levy for three years. BUPA estimated that it was going to have to pay €161 million over the next three years. That’s why it decided to withdraw from the market.

If Quinn can get a further 3 years exemption, it’s clearly on a winner. Without risk equalisation BUPA hoped to make a profits of over €60 million over the next 3 years. Quinn should be able to do much better than that. By using even a small proportion of that profit to hold premiums down, it can hope to gain market share at the expense of the VHI.

VHI has a higher proportion of members in the older age groups who are more likely to make claims. New entrants included BUPA have appealed more to younger people. Risk equalisation payments are designed to compensate for this imbalance.

While benefiting greatly from its younger membership BUPA has continued to fight against the notion of risk equalisation and is even appealing last November’s decision that it would have to make such payments with effect from January 1, 2006. But the delay has served it well.  It has made an estimated after tax profits of over €100 million in Ireland over the past ten years. It did that by maintaining its premiums just below those charged by the VHI so that it made maximum profits while retaining a small competitive edge.

The Quinn Group is clearly planning to do the same. It has already shown its hand by promising to freeze premium levels this year. Without risk equalisation it can well afford to do so but it won’t bring VHI premiums down.

Indeed because of the Government’s decision to transform it from a statutory body into a State-owned company it is going to have to build up its reserves. At last count they were down to 23% of premium income. That has to be increased to 40% by 2012 under the government plan at a cost of at least €170 million. It will have to come from premium income.

With or without the Quinn Group, VHI will have to continue increasing premiums not only in line with medical costs but also providing for additions to its reserves. All the Quinn Group has to do, as BUPA did in the past, is track those increases while keeping it’s premiums a little lower. It can’t refuse older members but by skillful targeted marketing it can hope to attract a good share of younger consumers.

The consumer will be the loser unless risk equalisation is applied immediately to the Quinn Group. BUPA estimated that it would have to pay about €50 million a year. VHI put the figure at nearer €35 million.

Whatever the figure, any transfer from the Quinn Group to VHI would help to reduce VHI premiums to the benefit of consumers. If the Quinn Group doesn’t have to make any risk equalisation payments, the money saved is more likely to be taken as profits than be given back in reduced premiums.

That maybe why Quinn Group spokesmen have been unwilling to say if the deal is dependent on it getting that exemption from risk equalisation. Either way there is nothing for consumers to celebrate.