BUPA will have to alter its entire health insurance package to avoid being closed down, according to sources in the Department of Health.
It will not be enough for the company to separate its "essential plan" from the controversial cash plans" in order to comply with the community rating requirements laid down in Irish law, the sources say.
The Attorney General, Mr Dermot Gleeson, has given "very strong" advice to the Minister for Health, Mr Noonan - as the official regulator - that BUPA's cash plans are in breach of the Health Insurance Act 1994.
BUPA, which began formal operations in the Republic on December 31st, is due to contact the Department this week to say whether or not it will make the necessary changes.
Mr Noonan has said that if talks fail to resolve the matter he will take "appropriate steps" to uphold the legislation and de-register BUPA. Medical insurance products should reflect "the principle and, practice of community rating'.
Legal advice was sought from the Attorney General once BUPA briefed the Department on it products following their introduction on November 19th. Mr Gleeson sought advice from outside counsel with expertise in this area.
After reviewing the advice, he passed it on to the Minister. According to this advice, even if BUPA marketed its essential plan and its controversial cash plans separately, they would still be "two parts of the same
BUPA could "gracefully withdraw", according to the sources, but they believe the health insurer is more likely to challenge the decision in court. There are no "half-measures" open to the Minister under the 1994 Act, only a major penalty. If Mr Noonan decides against BUPA he must give it 21 days' notice of any intention to seek its de-registration as a medical insurance company before the High Court.
Last night a spokeswoman for BUPA would not comment on the Department's legal position. She said there were "ongoing discussion and efforts are being made to resolve matters".
BUPA sources have hinted that the company is prepared to fight the Government on the issue in both the High Court and the European Court of Justice.
The spokeswoman said the company had taken extensive legal advice on entering the Irish market to ensure it fully complied with "the letter and spirit" of community rating legislation.
"Our products are completely legal. The products we have launched consist of an essential scheme which is community-rated and the same price for everybody, irrespective of their age or health status," she explained.
Cash plans are "different products altogether" and were already on the market in the Republic. "We separated essential hospital treatment from comfort and convenience. Cash plans are there for the convenience of the consumer. They are excluded from the Health Insurance Act."
Meanwhile, Department sources say there was no need for BUPA to have notified them of what was contained in its products in advance of the launch. Under the relevant EU directive on non-life insurance a company may enter the market without notifying the regulator. If it were obliged to do so the Minister involved could use technicalities to delay it from starting in business.