Bupa says it will leave if forced to subsidise rival VHI

Bupa Ireland, the second largest health insurer, has said it will exit the market if it is forced to subsidise the VHI, its State-owned rival.

In a confidential submission to the health insurance industry regulator the British-based group said: "Bupa would not ever plan to remain in the market under these circumstances."

The Health Insurance Authority will today recommend Tánaiste and Minster for Health Mary Harney to trigger a mechanism under which Bupa would make regular payments to the VHI in recognition of the older and less profitable age-profile of the State company's members.

The Tánaiste is obliged to publish the Health Insurance Authority's recommendation within 14 days and has 60 days in which to make a decision on whether to trigger the payment mechanism, known as risk-equalisation. Health insurers have 21 days in which to make submissions to the Tánaiste.

Bupa sources say it will repeat to the Tánaiste the arguments made in its confidential April 5th submission to the authority, which has been seen by The Irish Times.

In that April submission, Bupa argues that "the commencement of risk-equalisation would be a catastrophic intervention in the market. The effect of this recommendation, if adopted, would be to confiscate efficiently earned profits, inevitably driving Bupa Ireland from the market for the benefit of VHI."

According to Bupa's submission to the authority, it believes it would have to make a payment under risk-equalisation of €33.4 million to VHI in respect of 2004. This would require a 22 per cent increase in prices, which would have the effect of making its typical family policy 14 per cent more expensive than the equivalent VHI policy. It claims that it is currently 10 per cent cheaper in this part of the market.

The risk-equalisation payments would rise to €42.5 million and €49.7 million in 2005 and 2006 respectively, according to Bupa. These payments would, in turn, result in losses of €25 million and €35 million, it says.

"It would be unrealistic for any regulator to expect Bupa Ireland to remain in the market while losses of such magnitude were being sustained.

"Accordingly, the inevitable consequence of the implementation of risk-equalisation would be to force Bupa Ireland out of the market, reducing competition and reducing the choice available to the consumer."

Bupa argues that the health regulator has "made a number of fundamental errors" and is incorrect to base its decision on "the 'possibilty' of a 'threat to market stability' or any other conjectured or theoretical future problem".

Risk-equalisation "would operate against the overall interest of consumers . . . render the dominant insurer's only real competitor unviable, effectively eliminating competition in the Irish health insurance market," it says in the submission.

Bupa, which has 374,000 members, made an operating profit of €24.3 million last year, but is projecting profits of €17.3 million this year. VHI, which made a profit of €62.3 million last year, is budgeting for a loss this year. It has 1.56 million members.

According to figures presented to the Joint Oireachtas Committee on Health and Children yesterday by the chief executive of VHI, Vincent Sheridan, the State company has an 80 per cent share of the health insurance market, while Bupa has 20 per cent.

Bupa - which has been in Ireland since 1997 - has a 27 per cent share of the profitable sector of the market which covers the zero-to- 49-year-old segment and only a 7 per cent share of the loss-making 49-year-old plus market.

Mr Sheridan said: "Bupa entered the market, targeted younger members, did not reduce their prices to reflect the lower claims profile but rather followed VHI prices.

"This has resulted in enormous windfall profits for Bupa which Irish consumers are paying for through higher prices."

VHI estimates the windfalls at €20.2 million in 2003 and €38.3 million in 2004.

The Health Insurance Authority chairman, Prof Alastair Wood, told the committee that the health insurance scheme operated by the ESB for its employees, the ESB Staff Medical Provident Fund, could receive a payment of €2 million if risk-equalisation was triggered.