Principle of community rating in health insurance one of many issues in the VHI's market battle

THE battle between VHI and BUPA is hotting up. In a big VHI advertisement in weekend newspapers, a picture of an old man is featured, with the heading: "To some people your old man is just an old man." The text adds: "But to some healthcare insurers he's just a bad risk."

For "some healthcare insurers" read BUPA, which is currently in negotiations with the Department of Health about cash plans which carry higher premiums for older people. BUPA insists it has the best legal advice that its plans are not in breach of legislation. The VHI argues otherwise.

Ostensibly, the battle is about the principle of "community rating ", namely, that everyone pays the same for health insurance no matter what their age. But other issues are at stake.

It is also a war to win over the Irish public as competition enters the health insurance market for the first time and has major implications for the VHI's future.

The VHI has faced financial difficulties for some years now. The projections of a sharp increase in losses contained in a letter to the Department of Health in July - first reported in The Irish Times on Saturday - were explicitly drawn up without full consideration of what competition would mean.

The advent of BUPA threatens to make things worse for the VHI by introducing competition. It has also put the Department of Health in a difficult position, acting on the one hand as regulator and on the other as the VHI's parent department.

In mid December, the Department wrote to BUPA, saying it wanted to discuss aspects of its market plans. What is at issue is not the plans offering basic health cover but the add on cash plans.

These are a kind of illness insurance plan which provide money which could be used, for example, to make a hospital stay more comfortable by upgrading accommodation or to meet associated expenses of a hospital stay. Premiums are higher for older people, leading to VHI accusations that it threatens the principle of community rating, under which everyone pays the same for health insurance.

The Department of Health and BUPA are now discussing the issue. One possible outcome is that the Department will clear the products, provided BUPA agrees to advertise and promote the basic product and the cash plans separately. The other is that the issue will end up in the courts.

BUPA is standing by its products, believing it has been the victim of misinformation and pointing to the strengths of its basic plans.

Whatever way the ball hops on the BUPA products, the VHI faces major financial challenges. The essential problem is that it has been losing money on its basic business: its cost of insurance claims has out paced premium income. This has left it relying on investment income to support its finances each year, leaving no money to add to reserves.

The projections sent to the Department and drawn up by finance director, Mr John Looney, were that the situation was set to worsen. They showed that the VHI would move into a loss making situation this year (1996/97), with losses rising to £7.22 million next year and £10.4 million in 1998/99.

A statement from the organisation yesterday insisted that the situation had improved since then. Costs had been cut, it said, and it was now trading profitably.

The VHI board has instigated tighter controls on claims, and membership has been rising. New products and improved ways of interacting with the service providers - the hospitals and consultants - are also being examined.

Sources said the overall loss for 1997/98 (the financial year starting next March) was now projected at £2 million, some £5 million lower than the July forecast. But a heavy underwriting loss - the amount by which claims exceed premium income - of £12 million is still projected for next year, with a £10 million return on investment helping the figures. Correcting this underwriting situation and putting the VHI on the road to financial salvation is the key challenge and will not be an easy task.

A row over the way to address these issues was behind the departure of Mr Brian Duncan as chief executive earlier this year. A new strategy is now being developed, with at least some elements on the board believing that annual premium increases well ahead of inflation - the July document factored in a 6 per cent rise a year - should not be imposed on the market. But, as the VHI statement pointed out yesterday, it is already facing higher costs in some areas.

The VHI's relationships with healthcare providers remain fraught. The projections sent to the Department show that a major problem is the lack of budget agreements with 18 private hospitals. This encourages the hospitals to take in as many patients as possible, increasing claims' costs to the VHI and leading to spending of £7 million over budget from 1998 on, according to Mr Looney.

"This situation is not sustainable," he warned.

This will have to be addressed and a new agreement with consultants must also be hammered out next year.

The VHI is still in intensive care. The board has been working in the background for months now and it is up to its members to show that they can chart a way forward.