Little room to manoeuvre in VHI battle battle with costs

THE VHI will have to run fast to stand still in relation to its finances. Put plainly, the health insurer is struggling to keep up with the increasing cost of claims and the advances in medical technology and must both achieve substantial savings and increase its premium levels to keep its finances in order.

Further premium increases to subscribers seem inevitable.

Projections completed by VHI management to support the case for the last price increase show that even on the basis of a 6 per cent increase in premium levels each September, the organisation would still record a loss on it operations of over £500,000 in 1996/97, rising to over £10 million in 1998/99.

New measures and savings are needed to make up this shortfall, the document says.

Sources close to the organisation say that the position has improved since then, with a tighter control on the cost of claims and 1,000 new members joining each week.

The figures present an overly pessimistic picture, according to the sources, and current projections would be more upbeat.

But however much the position has improved, it is clear that the VHI has a longs way to go. The return which the organisation is getting on its finances is effectively supporting its financial position.

Looking purely at its underwriting position, the cost of claims exceeds its income from subscribers substantially.

The underwriting loss is expected, according to the July document, to rise from just under £9 million in the 1995/96 financial year to £10.3 million in the current £17.2 million in 1997/98 and £20.6 million in 1998/98.

Again VHI sources say that these losses are overstated in the light of recent improvements, but however the projections have improved, it is clear that substantial underwriting losses are in prospect.

The letter to the department also warns that the onset of competition could make the position worse if the loses ones who regularly pay premiums but rarely make claims.

This shows the importance to the VHI of the current negotiations between BUPA - whose new products become effective in the new year - and the Department of Health.

BUPA's basic plan is not in dispute, but its add on cash plans may, according to the Department of Health, contravene the Health Insurance Act as older people pay more.

The VHI chairman, Mr Noel Hanlon, has strongly called on the act to concept of community rating under which everyone pays the same for health insurance. BUPA and the department are still in negotiation on the issue.

The VHI has other hurdles to leap. It must continue to control the cost of claims and negotiate new agreements with the private hospitals.

And the document shows that the VHI believes it faces increased costs from those private hospitals with which it does not have annual agreements, and which are not bound by agreement as one of the main financial threats to the organisation.

The danger to the VHI is that if it tries to penalise these hospitals by paying less of the bills incurred in treatments there, the hospitals will increase balance billing to customers.

The organisation must also find money to invest in new products and market development.

And with reserves not far above - the minimum required - the July projections show the reserves falling to £64 million in 1999, £5.5 million below the estimated minimum - there is not a lot of room left for manoeuvre.