The Health Insurance (Amendment) Bill 2000 - which has just been published by the Government - will contribute to a more competitive and innovative private healthcare market at a time when the burden of public funding of the healthcare system is becoming unsustainable.

But its real importance is that it will clear the way for a fundamental reform of the healthcare system, which is now the single most important policy priority confronting the Government.

The Bill is the first part of a two-phase process. Stage two will involve the conversion of the VHI into a semi-state body with a fully commercial mandate, paving the way for full privatisation at some later stage.

The Bill retains the key features of the present regime which were introduced in 1994 in the wake of the introduction of the EU single market: community rating, open enrolment, and lifetime cover. These principles are designed to ensure the open availability of insurance to the entire community at a reasonable cost.

It also retains risk equalisation. This was always going to be the most contentious part of the legislation - the nettle that the Government had to grasp. The manner in which the Bill deals with the risk equalisation issue, together with the other changes, suggests that the legislation will have a fair wind when it is brought before the Dail in the autumn.

The Bill proposes the establishment of a Health Insurance Authority (HIA), whose mandate will be to monitor developments in the stability of the market and to make recommendations to the Minister. It will have a key role in a decision whether, or not, to impose risk equalisation - which would involve a transfer of funds from an insurer with a better risk profile to one with a poorer risk profile. This amounts to a continuation of risk equalisation as a reserve power - "a sleeping policeman" - which can, on the recommendation of the HIA, be introduced should market conditions justify it. In practice, on current projections it is extremely difficult to see circumstances in which the HIA would impose risk equalisation.

This gets everybody off the hook. The Government was determined to retain risk equalisation, while those opposed to the provision - such as VHI's competitor BUPA which faced large payments to the State company under the existing mandatory risk equalisation regime - claimed it was wholly unnecessary, particularly in the fundamentally different and more buoyant environment for private medical insurance now, compared with 1994, when it was first introduced.

The prospect of risk equalisation manifestly constrained new entrants coming into the market. As recent research demonstrates, it was well-nigh impossible for a commercial insurer to earn a sufficient return on capital in the Irish private medical insurance market with risk equalisation in place. That shadow now appears to have been lifted, clearing the way for new entrants to come into the private medical insurance market. It also sends a strong signal to providers of related products - particularly long-term care insurance - that the Irish market may be worth looking at.

The other key proposals in the Bill are:

Insurers will be permitted to apply late-entry premium loading - charging higher premiums to older people taking out insurance for the first time. This modification of pure "community rating" (the current system under which all ages pay the same rate ) will provide a strong incentive for younger, healthier people to take out private medical insurance cover. This in turn will contribute to a better risk pool, a slower growth in premiums and greater stability to the market. It is also considerably more equitable than the existing arrangements.

The Bill also provides for an extension of open enrolment - the ability to take out private medical insurance to those aged 65 and over, which remedies a discriminatory provision in existing arrangements.

At the same time, ancillary health services - dental, optical - will be risk rated: meaning that health insurers can charge higher premiums to those who are seen as more likely to make a claim.

The net effect of these changes will be to encourage new entrants into the market. This should happen in the near future, now that the spectre of mandatory imposition of risk equalisation has - apparently and very sensibly - been removed.

More generally, the Bill paves the way for the kind of substantive reform of the whole healthcare system which is now imperative. One example illustrates this. Had the Republic's economy grown at the average EU growth rate since the early 1990s, and had we continued to allocate the same percentage of GDP to healthcare as we currently do, there would be a funding deficit of well over £1 billion, compared with existing allocations. In other words only rapid economic growth has allowed us to pay for improved services.

This is one measure of the extent to which the present unsustainable growth in healthcare spending needs to be addressed. Healthcare reform must take into account the difficulties of public funding which will inevitably arise in a less benign economic environment.

Equally important in this regard is the need to identify the key principles on which such a reform should be based. The reality is that the present system is based on an inequitable public-private divide, a set of myths which, particularly for public patients, simply do not reflect the reality of stubborn, intractable waiting lists with individuals having to take out private medical insurance at least in part to insure that they are not denied immediate access to treatment.

The institutional reforms introduced by the Government in recent years provide a platform for this kind of radical healthcare reform. This will be the topic for the Centre for Insurance studies PMI Conference to be held in UCD in October this year.

Prof Ray Kinsella is the director of the Centre for Insurance Studies in UCD's Graduate School of Business.