Last week, the VHI approached the Department of Health for talks on its "commercial future" , a euphemism for privatisation, writes Fintan O'Toole.
At the same time, the VHI looked for an increase in premiums from its members of 8.5 per cent. If this is approved by Micheál Martin - and there is little doubt that it will be - VHI charges will have increased by almost 50 per cent in 2½ years. Which raises a fundamental question: if competition reduces prices to the consumer, how come medical insurance in Ireland gets more expensive?
It is an article of faith for most economists nowadays that competition and privatisation inevitably ensure a better deal for the consumer. Fat, smug monopolies suddenly have to fight for customers. They cut out unnecessary costs, get their act together and treat consumers with more respect. The customer, who now has the power to choose, gets better service and lower prices.
This is broadly true in much of the marketplace, but with certain crucial qualifications. The choice has to be genuine. The consumer has to know the difference between one product and another. The number of competitors has to be high enough to stop the emergence of a cosy cartel of operators who effectively rig the market between them. And the marketplace in question has to be open enough that it is genuinely possible for a new player to come into it with different ideas.
If these conditions don't exist, then all that happens is that a monopoly is replaced by what economists call an oligopoly. This is what has happened in broadcasting, for example, where the illusion of competition often masks the reality of a lot of different stations offering the same bland programmes.
The simple and undeniable reality of the health insurance market in Ireland is that the introduction of competition, and the preparation of the VHI for privatisation have triggered price increases rather than price reductions. Because medical inflation is so high, we've got used to paying higher and higher VHI premiums. In that context, it's easy to miss the fact that even allowing for medical inflation, health insurance costs have risen dramatically.
The extra rise has two sources. One is the arrival of BUPA as a competitor. BUPA has not been particularly successful. Its market share is around 10 per cent, and remarkably few of its customers seem to have switched from the VHI. But it has targeted younger people, mainly through group schemes in high-tech companies. These are the people who pay now for services they are most likely to need in 30 years' time. By taking them out of the VHI, and leaving the State-owned body with the older sections of the population, BUPA has pushed up premium costs for the rest of us.
The other factor is that the VHI has been on the road to privatisation since 1999, when the Government decided to make it a commercial company. To make the VHI an attractive proposition for potential buyers it has to have significant cash reserves. Slowly, and with very little fuss, the VHI has been salting more and more money away. In the last five years, its reserves have almost doubled to €182 million. In 2002, it put away €14.7 million. In 2001, the figure was €28.2 million.
To be a solvent insurance company, the VHI should be taking in a little more in premiums than it is paying out in claims and salaries. For a public body with no need to generate profits for shareholders, this is all it needs to do. It did it for decades with no great problem, with the exception of the period in 1987 and 1988 when huge health cuts created a sudden rise in demand on the private hospital system. There is no reason why it could not continue to do so.
A private commercial company, however, needs large reserves of cash. The VHI reckons that as a commercial outfit, it will need reserves equivalent to 40 per cent of its income from premiums. So whereas in 1997, before the privatisation plan, the VHI's reserves were 20 per cent of its premium income, last year they were 31 per cent. Where does the money for these reserves come from? The pocket of the subscriber, of course.
There is no reason whatsoever to think that premiums will be cheaper if and when the VHI is sold off to the private sector. On the contrary, the buyers who will shell out around €300 million will want to make their money back fairly quickly and to return healthy profits thereafter. Given that they're hardly likely to get hospital consultants to charge a private company less than they charge the State, the only way to make those profits is to push premiums up even faster.
And secondly, why should BUPA have to compensate the VHI for leaving it with the older, more expensive members (the so-called "risk equalisation" policy) if the VHI is just another private commercial business? BUPA would have a very strong case for saying that such a policy is an improper interference in the competition between two private, profit-driven companies. Yet without risk equalisation, VHI premiums will rise even faster.
Privatisation may not make everyone sick, but it will certainly make it more expensive to stay healthy.