Bupa faces €25m bill over risk equalisation

Health insurer Bupa is facing an annual bill of more than €25 million after the Health Insurance Authority decided in principle to seek "risk equalisation" payments from the company for the first time.

If such payments are approved by Tánaiste and Minister for Health Mary Harney, the bulk of the money will go to the State-owned Voluntary Health Insurance (VHI) company. The money will, in effect, compensate the VHI for the higher age profile of its customers vis-a-vis those of its biggest rival, Bupa.

The authority's preliminary decision follows a review of the industry for the second half of last year. It is understood to have concluded that the risk equalisation system should be triggered because the VHI customer profile now poses a risk to the stability of the industry.

The VHI has more older customers than Bupa. This puts pressure on its business because older customers are more likely to make claims on their health insurance policies.

While the VHI has long argued in favour of risk equalisation, Bupa has always opposed such payments.

Under the terms of the 2003 Risk Equalisation Scheme, the payments cannot be levied on insurance companies that have been in operation for less than three years.

As a result, the newest market entrant, Vivas, will not be faced with the payments because it started operations only last autumn.

The industry regulator is understood to have written to Bupa and the VHI yesterday evening, informing them of its decision in principle to trigger the risk equalisation payments this year.

The move is subject to a 21-day consultation period which started yesterday, although the authority is considered unlikely to change the decision on the basis of any new submissions it receives. While it is also open to the Minister to veto the move, that too is considered unlikely.

Assuming the development goes ahead, Bupa will be faced with a risk equalisation payment of more than €12 million in respect of the first six months of this year.

The money will go into a fund administered by the authority which will, in turn, pass the bulk of it on to the VHI. A small scheme run by the ESB will receive a portion of money from the fund.

While the authority will examine market conditions in the January to June period next autumn, the VHI's risk profile is likely to remain high because health insurance contracts are long-term contracts by nature.

This greatly increases the likelihood that the authority will again impose risk equalisation on Bupa in respect of the second half of this year.

Any payments in such a scenario would be similar in scale to those imposed in the first half of this year.

In a statement, the authority confirmed that it had completed its assessment of the most recent market returns from the insurers and had formulated a proposed recommendation on whether the payments should be commenced.

"The Health Insurance Authority has notified insurers of the recommendation that it proposes to make and, in accordance with the legislation, will allow 21 days for insurers to make representations."

Its report will go to Ms Harney by the end of April.