Analysis: Yesterday's High Court green light for risk equalisation could result in a halt to recent annual premium hikes for VHI subscribers, writes Martin Wall
The decision of the High Court to refuse to delay the implementation of a risk equalisation scheme in the health insurance sector from Sunday will not lead to Bupa Ireland immediately having to pay over millions of euro to its main rival VHI.
However, what the judgment does mean is that the meter which will measure the amount that the company may ultimately have to pay will commence running from the beginning of January.
The actual transfer of money from Bupa to the VHI, via the industry regulator, is already subject of a stay granted several months ago by the High Court pending the outcome of a full-scale legal challenge to the legislative basis for the risk equalisation scheme.
This action is due to be heard from early February.
In effect, what Bupa sought over recent days in the High Court was an order which would block the official commencement date of risk equalisation which the Government has set for January 1st.
Bupa believes that the various legal challenges to risk equalisation - whether in the High Court, Supreme Court or European Court of Justice - could run on for years.
What it did not want to happen was for the meter determining the company's liability to risk equalisation payments to be running while the proceedings were in train.
Bupa has forecast that it could be three years before a final judgment governing the legality of the risk equalisation scheme is finally handed down.
It has estimated that, by that time, it could face a potential contingent liability for risk equalisation payments of up to €161 million. In the same period, it has projected that its profits will be €64 million.
Evidence presented to the High Court in recent days about Bupa's long-term commitment to Ireland in the event of risk equalisation being upheld will undoubtedly have caused concern to its 600,000 subscribers and 300 staff here.
The company said in court that its board had made an "unequivocal" decision that it will not remain in a risk equalisation environment.
It has also signalled that it may have to withdraw even before a final determination on the legality of risk equalisation is made, if the company's potential liability to risk equalisation payments reaches a scale where it would represent an unacceptable risk for the business.
However, it must be stressed that Bupa has given no specific timetable for any withdrawal from the Irish market.
The net effect of yesterday's decision is that it clears the way for the regulator of the health insurance industry, the Health Insurance Authority, to begin preparations for the introduction of risk equalisation.
The authority will, over time, ask the companies in the sector to file returns on their performance for the first six months of next year.
It will then assess the level of risk difference between the companies in the market, and start calculations on how much various undertakings should pay out or receive in order to level the playing pitch.
In essence, risk equalisation involves the transfer of payments from companies with relatively younger subscriber profiles to ones with relatively older memberships. The Government believes that risk equalisation is essential to underpin the concept of community rating where everyone pays the same for health insurance cover regardless of age.
However, in reality, the authority has been doing much of this work as a theoretical exercise for the last year or so. The authority may open bank accounts to which money submitted by Bupa will be lodged.
However, as a result of earlier court proceedings, no actual financial transfers will be made pending the outcome of the substantive court challenge to risk equalisation.
The authority, in a report to Tánaiste and Minister for Health Mary Harney in October, maintained that while VHI has almost four times as many subscribers as Bupa , it has 50 times the number of policyholders over the age of 70.
The authority maintained that the competitive advantage afforded to Bupa - arising from the lack of risk equalisation payments - has facilitated it in making an operating surplus of around 17.3 per cent of earned premium in 2004.
It said that, in the UK, Bupa Insurance Limited had profits of around five per cent of earned premium in 2002 and 2003.
Bupa has denied the charges made by the authority that it was making super-normal profits.
For the country's 1.5 million VHI subscribers, the introduction of risk equalisation holds out the prospect that they may have seen the end of the average nine per cent annual increases in premium costs which they have experienced over recent years.
VHI has said that the introduction of the scheme - under which it would probably receive around €30 million per year - would curb the rate of increase.
However, it has not said that prices would come down.
In the immediate future, Bupa is believed to be considering initiating new proceedings against risk equalisation early in the new year.
Informed sources said that this could involve seeking a judicial review of the decision of Ms Harney last Friday to trigger the introduction of the scheme from January 1st.
This will be separate to the full-scale legal challenge to the legislative basis for risk equalisation which is scheduled to be heard in February.
Bupa has already been fighting risk equalisation on the European front and this action will work its way towards a hearing in the months ahead.
The EU Commission has cleared risk equalisation as being compatible with state aid rules. Bupa is challenging this before the European Court of First Instant.
Yesterday's court ruling, in essence, marked just the opening skirmishes in a battle that is going to be waged for several years ahead.
There are likely to be few immediate effects for the two million people with private health cover. However, in the longer term, the impact on the market here could be very significant.