ECONOMICS:THE SUPREME Court last month ruled in favour of Bupa in its opposition to risk equalisation payments to VHI. The State sought these payments to compensate VHI for its older customers. The Supreme Court verdict was based on the correct definition of community rating within the plan as being across the market rather than across the entire insured population, as sought by the State.

The Supreme Court determined that "the issue before this court is not the intention of the State but the intention of the Oireachtas as the legislature."

The verdict also states: "It is unconvincing to suggest that the Oireachtas would have left such a different meaning to be somehow detected inferentially from the use of a phrase in a subparagraph of a paragraph of a subsection of a section."

Some initial reaction to the verdict was negative with concern expressed that old and sick people would no longer be able to buy health insurance. The three legal protections for health insurance consumers of community rating, open enrolment and lifetime cover remain to protect the old and sick.

Compulsory risk equalisation payments between insurance companies, set aside by the Supreme Court verdict, are a zero sum game. They are transfer payments from one company's consumers to another company's consumers and consumers as a whole are no better or worse off.

The problem with this payment regime was expressed by the High Court and cited by the Supreme Court.

"This scheme involves some elements of anti-competitive behaviour in that the pricing structure of the market is interfered with and entry is less attractive. Therefore competition is distorted."

Distortion of competition may be objectively justified by the legislature. The Supreme Court states: "It must be for the legislature in the first instance to determine the extent to which free competition in the market can properly be interfered with having regard to the objectives of the legislation as therein defined and to choose the suitable means to achieve these objectives as well as decide on the proportionality of those means."

The Supreme Court adds: "Where the legislature adopts legislation which has, actually or potentially, serious implications for the rights of others, one would expect that the basis on which such limitations are imposed could be clearly discerned from the provisions of the relevant Act."

The court continued that "in this context, of even greater importance [my emphasis] is the undoubtedly important implication for Bupa's trading position and profitability once the scheme is applied to it".

Evidence is cited that the scheme would have cost Bupa some €90 million from 2006 to 2008. The High Court also found "that there was a prima facie interference with the property rights of Bupa as guaranteed by the Constitution which the State was bound to justify."

Economists overwhelmingly endorse the importance attached to competition by the Supreme Court. Market forces produce bread on our tables and not the actions of philanthropists, wrote Adam Smith.

The High Court deregulation of taxis in 2000 brought a three-fold increase in service within two years. The anti-competitive provisions of the Air Transport Bill 1984 defended a single airline sector with a little over two million passengers. This year four Irish airlines in a deregulated market will have some 70 million passengers.

Free trade measures such as those introduced in the UK in 1965 and the Single European Market in 1993 have had dynamic impacts on Ireland.

Payments of the magnitude in the Bupa case would have been a serious obstacle to competition. They are also uniquely draconian in this State. We did not require Ryanair to compensate Aer Lingus for disrupting a 50-year monopoly. New entrant bus companies do not have to compensate Bus Éireann for entering the Dublin-Galway, Cork, Waterford and Belfast routes.

Since deregulation, new entrant taxi operators do not have to compensate the incumbents.

The stated objective of the State in health insurance was to assist the old and sick to acquire health insurance. The chosen instrument, payments by Bupa to VHI, involved serious distortions of competition in the name of some social gain.

The assumption made by the State was that Bupa and other new entrants would tend not to insure the old and the sick and that the legal requirements of community rating, open enrolment and lifetime cover were not sufficient to protect the old and sick.

No sick or old people were produced by the State as evidence that Bupa refused them cover, notwithstanding that the State claimed to be in this case acting on behalf of the old and sick.

Proposals from this writer to the Barrington Committee and the joint Competition Authority/Health Insurance Authority body that the State should address directly the health insurance needs of the old and sick rather than undermine competition, received the standard acknowledgement rather than analysis.

There is no evidence that the State contrasted the proportionality of helping old and sick people by distorting competition in health insurance rather than direct enforcement of the rights of such people to health insurance.

An alternative reading of the State's case against Bupa is that it was driven by the Department of Health in order to protect its own health insurance company, the VHI, through weakening its competitors. The Department allowed its ownership role to dominate its role of serving the wider society. The VHI should have been sold to prevent this conflict of interest.

The problem of producer- rather than consumer-driven policy is not unique to the Department of Health. The Department of Transport remains hostile to competition in transport.

It restricts the private sector and then awards most routes, all the subsidies and all the investment grants to its own transport company on the grounds of imputed but unproven social benefits. That department was previously a downtown office of the State-owned Aer Lingus.

The problem of policy dominance by producers rather than consumers is not confined to the public sector. The taxi licensing authorities served the interest of the incumbents before 2000, when they dismissed the value of new entrants and issued platitudes about the social benefits of restricting market entry.

The State spent money, time and effort building a protectionist house of cards around the VHI which collapsed in the Supreme Court. The case seriously harmed Bupa.

Competition between health insurance companies should take place in the market rather than in courts. A health sector whose shortcomings, despite vast expenditures, feature so frequently in the media urgently needs a fully competitive health insurance sector. The Supreme Court affords us the opportunity for a new beginning.

Seán Barrett is a senior lecturer in the economics department at Trinity College Dublin; Paul Tansey is on leave