Minister for Health Mary Harney has announced a range of reforms for the private health insurance market, including a reduction in the so-called risk equalisation payments that VHI's rivals will be obliged to pay it.
The measures brought to Government today arise from reports by the Competition Authority, the Health Insurance Authority and the Barrington report published today.
Ms Harney said they represented "a major reform" of the health insurance market.
VHI statement
"The fundamental issue of creating a level playing field in the market is being brought forward to the earliest possible date," Ms Harney said in a statement.
The Barrington report said existing and prospective participants cannot make a return on their business in the Irish market.
It proposes that a more limited and transparent form of risk equalisation should be introduced, which is not regarded as a subsidy to the State-owned VHI.
Risk equalisation is designed to compensate VHI for the fact that it has an older client base more likely to claim, and more likely to have higher claims, on health insurance premiums than companies with a young client base.
The Barrington report also recommends that the so-called system of community rating, where people of all ages pay the same premiums for similar private health cover, should continue.
VHI immediately expressed concerns about the Minister's proposed reforms, which include a reduction of 20 per cent in the proposed risk equalisation payments owed to it by rivals Quinn Healthcare and Vivas.
"'In recent years the market has been subjected to a significant degree of uncertainty because of legal challenges to the regulatory framework and threats to leave the market," Ms Harney said.
"The changes will remove uncertainties for existing operators and will hopefully encourage new entrants into the market. These are steps to place the VHI on a more secure and stable footing."
The Minister said it was "not in the interests of VHI staff or customers or the wider health insurance market" that it should continue to occupy its "current anomalous status" as an unauthorised insurance undertaking.
She said today's package includes "important new pro-consumer measures being taken to make it easier for people to understand and select insurance plans and to switch between insurers".
Ms Harney said the Government has "an open mind" on the future capitalisation and ownership of VHI and that specialist technical advice would be sought on this issue.
Under the new measures, State-owned VHI will become a conventional insurer authorised by the Financial Regulator by the end of 2008. A derogation from normal insolvency requirements currently enjoyed by VHI will cease at that time.
The Departments of Health and Finance will report to the Government by mid-December on how this can best be achieved, Ms Harney said.
A VHI Bill will be published immediately to allow the group establish subsidiaries to operate its ancillary activities such as travel insurance and 'Swiftcare' activities.
EU Internal Market Commissioner Charlie McCreevy recently threatened legal action against the Government over its failure to restructure VHI. He also warned that the European Commission could begin a separate State aid investigation into the unlimited guarantees that the VHI currently enjoys from the State.
In a letter to Ms Harney in December, Mr McCreevy expressed concern that VHI is not subject to the same regulatory conditions as its competitors in the Republic.
In a statement this evening, VHI said its chairman and chief executive will meet with Ms Harney tomorrow and that the board will meet afterwards.
A "detailed statement" will be issued after that meeting.
"Our initial fear is that these proposals will seriously undermine community rating and create the prospect of large price increases for health insurance in this country in the longer term," VHI said.
Dr Liam Twomey, Fine Gael
It said the announcement of a further dilution of risk equalisation would serve to increase the profits of other insurers without any requirement for them to generate increased efficiency in their own operations or in the delivery of healthcare.
Competition in such circumstances is of "no benefit to the market" and was, on the contrary, "socially undesirable".
VHI also said the removal of its derogation from normal solvency requirements by the end of 2008 may well be rendered impossible by the dilution of the risk equalisation formula.
It had always advocated the removal of the derogation once the proper regulatory and legislative environment was in place, it said.
Plans had been in place to comply with the Minister's decision to remove derogation by 2012. A "reversal" of this policy had "serious implications", VHI said.
The new regulations will come before the Dáil tomorrow.
Fine Gael health spokesman Liam Twomey said he would call for a debate on the proposals, which he said should not be rushed or guillotined through the House.
"To introduce an extensive reform package such as this, without discussion, so close to an election shows scant regard for private health subscribers and there is a lack of clarity around the Minister's reasoning."
Mr Twomey said several questions arise, including the impact of the proposals on the cost of health insurance in Ireland.