Patients need a more equitable health market

Opinion: It would be so easy to become blase about the legal confrontation between the State, acting on behalf of the interests of the largest domestic health insurer, VHI, and its main rival, Bupa Ireland.

After all, haven't the many issues been explored ad nauseam, with poles of differences between health insurers and their subscribers?

Nevertheless, it would be wrong to ignore these very important issues, as the cost and the availability of essential health services will become even more of a problem in this decade and further ahead. Regardless of what happens, the costs for patients will continue to escalate considerably beyond the rate of inflation.

The question then is: can these cost increases be minimised? Probably, provided there is a more equitable market among the contenders.

Bupa is now more transparent with its figures but it still does not publish some vital statistics. Thankfully, these are deducible from the latest unpublished filings to the British FSA by its parent Bupa Insurance. First, it has to be said that Bupa Ireland is not as profitable as it was. Indeed, it is feeling the competitive pressures. But second, and more importantly, it is still very profitable compared with VHI and its British parent.

The statistics tell the tale. Bupa Ireland's earned premiums increased from €149 million in 2004 to €183 million in 2005, but because of higher claims costs, the underwriting profit before expenses was reduced from €45.7 million to €43.5 million. And looking at the past three years, operating profit fell for the first time, from €25.8 million in 2004 to €19.0 million in 2005. It also indicates that its price increase was not sufficient to maintain its level of profitability.

In contrast, VHI had a debilitating experience. While earned premiums were up from €869 million to €920 million, underwriting profits were more than halved from €62.8 million to €27.7 million because of much higher claims costs, reflecting the older age profile. And after administrative costs, the operating losses were increased from €12.2 million to €50.8 million.

What is most significant about VHI's results is the reduction of its solvency ratio from 28.7 per cent to 23.2 per cent at a time when the company's policy is to turn itself into a commercial operation by 2012. This is well below its target of 40 per cent.

What is clear from the raw FSA statistics is how much more profitable Bupa Ireland is even though its ratio of administrative costs to earned premiums is much higher at 13.4 per cent against 8.5 per cent for VHI. Significantly, it generates an average underwriting profit of around €100 on each of its members compared with VHI's €18.

Bupa Ireland is part of Bupa Insurance, which must be pleased with the latest results from its Irish operation. Excluding Bupa Ireland's figures from the UK operation shows its Irish operation as more efficient - using administrative costs as a percentage of premiums - with a ratio of 13.4 per cent compared with the UK's 16.7 per cent.

Indeed, the British Bupa group must be feeling very flush with funds. A note in its accounts shows that it paid an interim dividend of £231.4 million (none was paid in 2004) and it proposes to pay a final 2005 dividend of £103 million or virtually the whole of its retained profits for that year.

Bupa Ireland appears to be run on a very conservative basis. It can be deduced from the FSA figures that it has consistently over-provided for claims, thereby understating its reported profits. In 2002, for example, the claims ratio amounted to 70.9 per cent but the amended ratio came to 63.6 per cent. In 2003 it was 77 per cent compared with 66.7 per cent, and in 2004 the original was 77 per cent while the outturn was 68.7 per cent.

It could be argued that the combined real profits were €30 million higher than that reported in those years. Interestingly, the projected claims ratio in the 2005 accounts is 83.6 per cent but the outturn will not be known until next year's FSA returns. This is the highest rate so far.

The Government believes that risk equalisation - now being challenged in the High Court by Bupa Ireland because it would, in effect, have to make large transfers of funds to the VHI - is essential to maintain a community-rated market where everyone pays the same amount for the same insurance regardless of age. Bupa Ireland has threatened to pull out of this market if risk equalisation is introduced.

The Bupa group is in the Australian market, which operates risk equalisation. It is perhaps ironic that Bupa, which has a 10 per cent stake in that market, may be ready to increase its share there. It, and others, are understood to have expressed an interest in Medibank, which has a 28 per cent of the Australian medical insurance market that has about 40 players, unlike our domestic market with only three. The Australian government has decided to privatise Medibank, Australia's largest health insurer, which three years ago was in a financial mess but is now profitable.

That scenario contrasts starkly with our system, with no risk equalisation, and a limping VHI, destined to further envelop subscribers in our private health insurance market and, considering the escalating costs, make subscribers question the very usefulness of that market.