Colm’s columns

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.