Risk Equalisation and Competition in the Irish Health Insurance Market

The analysis contained in the YHEC report indicates that the report did not consider adequately the role of competition in the market for health insurance. This is a major weakness and appears in part to be due to a late deletion of competition from the report's final research brief by the HIA.(p.90) The evidence on the average age of BUPA Ireland members, 38 years and VHI members, 44 years provides no basis for transfers from BUPA Ireland to VHI. In the case of females between 38 and 44 years health expenditures decline with extra years. The regressiveness of the transfers and cross subsidies in Irish health insurance under community rating is illustrated by the internal transfers from low cost profitable Plans A and B within VHI to high cost loss making Plans C, D and E. Under the proposed transfer of €34m a year from BUPA Ireland to VHI a low cost BUPA essential health insurance cover with a premium of €272.39 would be levied to cross subsidise VHI Plan E costing €1,316.33 per adult. The price of the most expensive subsidised product under the HIA proposal is 4.8 times the price of the product to be levied in order to finance the cross subsidisation. The average BUPA premium was €327 while the average VHI premium was €435. The price of the average product to be subsidised is therefore 33% greater than the price of the average product to be levied to finance the cross subsidisation. CSO data confirms that expenditure on health insurance rises over all ten income deciles. Incomes in the top decile are 10.1 times those in the bottom decile but health insurance expenditure is 22.9 times greater. Section C of this report deals with the HIA letter to BUPA Ireland requiring the equalisation payment of €34m annually from BUPA Ireland for transfer to VHI which had operating profits of €73.3m (before unexpired risk reserve) in their accounts to February 2004. The HIA presents no analysis of the rationale for the payment. It mistakenly asserts that consumers as a whole will be better off from levying one firm in order to cross-subsidise another. It asserts without evidence that the payments required are significant, rising, likely to rise further in the absence of risk equalisation and that in their absence the stability of the industry will be threatened. While there is recognition of possible withdrawal from BUPA Ireland of some younger members because of the price rise in order to finance payments to VHI there is no recognition in the letter of the benefits of competition to health insurance consumers. Section D examines the competition issues neglected by both YHEC and HIA and the benefits foregone by the anti-competitive levies imposed on BUPA. The Irish health service is characterised by high costs and rent-seeking by producers which are extreme by EU standards. The scope for immediate cost savings and further future leveraged savings in a high cost health service is therefore large but these benefits are foregone by regulators adopting the anticompetitive levies recommended by the regulator in this sector.