VHI prices to rise despite any change to risk equalisation

Government report: The Government's new report on the private health insurance sector indicates that whatever happens in the current High Court action over risk equalisation payments, a sizeable number of the two million people with such cover in Ireland face significant rises in their subscriptions.

The report, carried out by BDO Simpson Xavier for the Department of Health, reveals that VHI management believe subscriptions, which have already risen by 98 per cent over the past eight years, will have to increase by a further 50 per cent by 2009.

The company said these 15 per cent annual increases would be irrespective of whether it received millions of euro in payments from its rival, Bupa Ireland, under the proposed risk equalisation scheme.

The report points out that Minister for Health Mary Harney instructed the State-owned VHI last December to address its financial reserves as part of the Government's move to grant it greater commercial autonomy and transform it into a semi-State body. VHI will have to meet commercial solvency requirements under Government reforms.

It is unclear as to whether the 15 per cent price rises forecast by VHI management include provision for boosting the company's financial reserves.

BDO Simpson Xavier in its analysis indicates that the 1.5 million VHI subscribers could face price rises of more than 15 per cent in the years ahead to start to meet future commercial solvency requirements.

A VHI spokeswoman said the decision regarding a price increase for September would be taken later this year. "No decision has been made yet. There are a huge amount of variables involved in any decision regarding price increases in a given year," she said.

Bupa Ireland has said it will not remain in Ireland if a risk equalisation scheme is introduced. However, the company told BDO Simpson Xavier that if risk equalisation payments had to be made, its 440,000 subscribers would face increases of 20 per cent, 12 per cent and 9 per cent.

VHI also forecast, irrespective of the introduction of risk equalisation, that the overall market would decline by 2.3 per cent in the next three years. However, it predicted that medical inflation would be lower and that its diversified products such as dental care and travel insurance would contribute 20 per cent of future profits.

The report says the overall health insurance market has grown by 37 per cent since 1997 but VHI's membership base has grown by only 7 per cent "due to Bupa winning over 90 per cent of new market entrants". It maintains that VHI's membership was ageing at double the market rate and that the company now held 89 per cent of the over-50 market.

The report says if risk equalisation is not introduced, VHI is projecting a 10 per cent decline in membership up to 2009, resulting in cumulative operating losses of €112 million before a writeback of €54 million on its risk reserve.

"Assuming risk equalisation is introduced, VHI is projecting only 4 per cent decline in membership resulting in cumulative operating profits of €86 million including a positive risk reserve adjustment of €54 million and risk equalisation receipts of €83 million, ie VHI still making trading losses without these adjustments," it states. (In other words, profits will largely be generated by revenues such as risk equalisation payments from its rivals, rather than from day-to- day trading.

The report says Bupa could make risk equalisation payments and still remain profitable in Ireland.