The European Commission has asked the Government to abolish the exemption of the Voluntary Health Insurance Board (VHI) from certain EU rules on non-life insurance.
This follows a complaint to the commission by Vivas Health that the VHI is unlawfully pursuing insurance activities without being subject to the EU's first non-life insurance directive.
If the commission receives no satisfactory reply within two months, it may refer the matter to the European Court of Justice.
In a statement today, the commission said it takes the view that the VHI has changed substantially since it was set up in 1973 and no longer qualifies for an exemption under the relevant EU Directive.
The First Non-Life Insurance Directive allows certain public monopoly bodies, particularly health insurance providers, to be exempt from EU rules on competition.
"The commission's decision follows a complaint alleging that the VHI is unlawfully providing insurance without being subject to the EU Directive."
The EC's Internal Market department, headed up by former finance minister Charlie McCreevy, has already written to the Department of Health urging it to abolish the special status but is now threatening legal action.
Vivas Health tonight welcomed the development.
"Vivas Health issued a complaint to the European Commission as it was clear that the rules under which Vhi was operating was placing us - and all other competitors - at a significant disadvantage," said CEO Oliver Tattan. "Hopefully this will compel the Department of Health to act sooner rather than later and to put all competitors, both current and potential, on a level playing field."