Bupa ruling will mean a fairer deal for all

Opinion:The High Court decision to throw out Bupa Ireland's action on risk equalisation against the State should start to bring some sanity to an inequitable health insurance market. That is unless, of course, the decision is appealed or, even more unlikely, Bupa Ireland carries out its threat to pull out of the domestic market.

The State was acting on behalf of VHI, Bupa Ireland's main rival and the largest health insurer with some 80 per cent of the market. A crucial decision on the substantial costs involved in the court decision, which came after an action lasting almost three months, will be decided next Thursday.

It would be hard to find any sympathy for Bupa Ireland. After all, it tried to subvert the well-documented rules for establishing a health insurance company here. These were enshrined in law and the company knew well the potential liabilities if risk equalisation - a scheme whereby health insurers with a larger proportion of older and more costly subscribers are financially compensated by companies with a larger percentage of younger subscribers - was introduced.

In the absence of risk equalisation, it managed to generate substantial profits over the years it has operated here. It claims it will have to pay more than €161 million to the VHI over a three-year period - a figure that is hotly disputed by the VHI, which reckoned the payment will be about half of that - against a projected accumulated profit of some €64 million.

It is difficult to correlate the Bupa Ireland claim - which has not been broken down - with VHI's projection. However, going on the initial payment of some €8 million for the first six months to June 2006 (half of the normal liability), it would appear that the normal annual rate may run at €32 million, or about €90 million for three years.

That is considerably below the Bupa Ireland estimate. Nevertheless, these projected payments still look substantial when compared with Bupa Ireland's recent financial history. Its latest accounts show a rise in earned premiums from €149 million in 2004 to €183 million in 2005. Despite this growth, however, higher claims costs were responsible for a reduction in the underwriting profit before expenses from €45.7 million to €43.5 million and significantly, over a three-year period, operating profit fell for the first time, from €25.8 million in 2004 to €19 million.

But, as has been highlighted in this column before, Bupa Ireland has been run on a very conservative basis, as can be deduced from the British Financial Services Authority (FSA) figures which show a consistent over-provision for claims. The reported profits have, in effect, been understated.

These have benefited the figures of its parent group, Bupa Insurance in Britain. Interestingly, that group paid an interim dividend of £231.4 million (none was paid in 2004) and proposes to pay a final 2005 dividend of £103 million and, perhaps significantly, that represented virtually the whole of its retained profits for 2005. The risk equalisation payment will obviously affect these group accounts, and now the worry must be that this honey pot is about to run dry.

The Health Insurance Authority (HIA) is charged with advising the Minister on risk equalisation. Looking at the financial position of Bupa Ireland and the VHI, it is very surprising that it did not recommend risk equalisation payments sooner. When it eventually got around to it, the then Tánaiste, Mary Harney, decided not to have these payments start in June 2005.

That was a mistake; better to make an unpopular but essential decision sooner than later, when it has time to gather all that unwanted political and legal moss.

Obviously, risk equalisation payments are not sustainable out of Bupa Ireland's projected profits but premium increases are the answer. The HIA reckons that Bupa Ireland will need to have a 12 per cent increase in premiums to maintain a 5 per cent gross underwriting surplus.

It could be argued that these subscribers should consider themselves lucky as they have up to now, in effect, been subsidised by VHI subscribers. The High Court decision brings a more level playing field to the market. Don't forget that the now older VHI members, in their younger days, in effect, subsidised the then older members. Isn't that what a caring society should be about?

Surprisingly, it has been claimed in some reports that the VHI is inefficient compared with Bupa Ireland. Nonsense. Certainly Bupa Ireland is more profitable, generating an average underwriting profit of about €100 on each of its members compared with VHI's €18. However, that reflects VHI's much older age profile - which is consequently more expensive to service.

The only realistic way to judge efficiency is the ratio of administration costs to earned premiums. On this basis, VHI is much more efficient at 8.5 per cent compared with Bupa Ireland's 13.4 per cent. These figures speak for themselves, though the large percentage of group schemes operated by VHI does help them.

The payments to VHI, however, will not, of course, mean a reduction in VHI premiums. Indeed, these will continue to rise well above the rate of inflation, though not by as much as with the absence of risk equalisation.

As VHI is transformed into a more commercial operation, it will have to build up its reserves. At the moment, in this area it has an unfair advantage over its rival. These points, and others, are undoubtedly the focus of discussion with Mary Harney. VHI's solvency ratio fell from 28.7 per cent to 23.2 per cent last year. This is well below its target of 40 per cent.

While risk-equalisation payments will address some of the inequities in operating a community rating system - where everyone pays the same for the health plan they choose regardless of age, problems in the health-insurance market will continue to be factors which will ensure substantial cost increases.

The increase in the building of private hospitals, for example, has rightly been heralded as a move in the right direction in creating more beds. However, unless these new beds replace old beds, they will come at a cost, indeed a substantial cost.

If the new Galway hospital which opened two years ago with 100 beds is any guidance, there are few immediate gains for the operators. Three other private hospitals with 300 beds will be on stream by the beginning of next year.

Medical insurance inflation is running at about 10 per cent per annum and, if the operation of these new beds is mostly financed by the private insurance market, that could add almost as much again. Admittedly a rather gloomy view - but going on past experiences, is it?