45 Further analysis of survey data reveals that while those who take out VHI

are more likely to be dissatisfied with the NHS, their dissatisfaction is tied to broader sociopolitical values that emphasize individual responsibility, free mar-ket principles and consumer sovereignty (Calnan, Cant, Crabe, 1993). Propper’s study of the demand for VHI in the United Kingdom also stresses the impor-tance of political belief in determining choice sets, and of income and health in determining choice between the NHS and VHI (1993). Another study finds that users of private health care, and VHI subscribers in particular, are less support-ive of the equity goals of the NHS and increases in NHS spending (Burchardt, Hills, Propper, 1999).

Overall, the evidence regarding waiting lists and VHI in the United Kingdom is inconclusive, and links between them may be tenuous, given that waiting lists have continued to rise while VHI coverage has declined. Perhaps the most obvi-ous explanation for the decline in VHI coverage is that premiums are expensive and have consistently risen above the rate of inflation. A recent report found that while 40% of NHS users are worried about waiting for treatment in future years and concerned about a decline in services, the number of people subscribing to VHI is only slightly higher now than in 1990 because many subscribers think VHI cover is too expensive (BBC, 2000). The replacement of full hospital coverage by health cash plans (HCPs),⁸ and the largest insurer’s decision to exclude routine coverage of NHS pay beds on cost and quality grounds (Buck et al. 1997)⁹, may also have contributed to the decline in VHI subscriptions in the United Kingdom.

1.4 The regulatory framework for VHI in the European Union

In recent years the EU regulatory framework for VHI has become an increasing-ly important aspect of VHI public policy, largeincreasing-ly as a result of a series of Euro-pean Commission directives aimed at creating a single market for life and non-life insurance in the European Union. This section outlines recent regulatory developments at the EU level.

1.4.1 Background

Prior to the introduction of these insurance directives, there were two main models for the supervision of insurance operations in the member states:

ma-8 HCPs are very different from traditional VHI policies. Designed to pay the subscriber tax-free cash benefits towards a wide range of treatments (including hospital stays, optical and dental care and some alternative treatment such as homeopathy and acupuncture), they cover a fixed percentage of treatment costs up to an annual ceiling, and patients can spend the money however they like. HCPs are popular because they pay out whether subscribers use the NHS or opt for private treatment, they are generally much cheaper than VHI policies, they have no age-related or regional premium differ-ences and one premium can cover a whole family (Papworth, 2000). But HCPs do not provide full protection, and their cash benefit levels are unlikely to cover the full cost of private treatment.

9 This decision was prompted by the 1989 NHS reforms, a key consequence of which was that the newly formed NHS trusts began to charge commercial rates for private beds, leading to problems for many insurers.

Section 1 Context

terial regulation and financial regulation (Freeman, 1994). Material regula-tion is based on the premise that if insurers are sufficiently controlled in the type of business they write and the level of premiums at which they write, there can be no question of insolvency. This model applies in Germany, where the supervisory body scrutinizes policies before they are offered for sale, re-stricts price competition by enforcing compulsory tariffs and only permits in-surers who specialize in health insurance to operate in the field of VHI. Fi-nancial regulation, as practised in the United Kingdom, is concerned with en-suring that the insurer remains solvent; the supervisory authority’s role is re-stricted to examining detailed financial returns on business. As a result of the introduction of the European Commission’s insurance directives, the focus of regulation has moved from material to financial control ( CEA, 1999).

The first generation of insurance directives (1973) allowed insurance compa-nies to set up a branch office or an agency in another member state ( European Commission, 1973). The coordination of legal and financial conditions allowed authorization to be obtained more easily. The second generation of insurance di-rectives (1988) realized the principle of the freedom to provide services, allowing insurers to provide services in another member state without setting up a branch or agency in that member state ( European Commission, 1988). However, this free-dom was limited to the cover of risks that were small enough not to require spe-cial protection. As a result, VHI was excluded from the freedom to provide servic-es. The third generation of insurance directives, culminating in the third non-life insurance directive of 1992, extended the freedom to provide services to all types of risks, including those covered by VHI ( European Commission, 1992).

1.4.2 The third non-life insurance directive

In theory the third non-life insurance directive was to be adopted by member states’ national law on 1 July 1994, thereby creating a single market for VHI in the European Union and completing the process of economic integration start-ed in the early 1970s.

Article 5 of the directive confirms EU insurers’ freedom to:

• establish a branch or agency anywhere in the European Union (under the rules on establishment) and

• sell their products anywhere in the European Union without a branch presence (under the rules on the freedom to provide services).

The third non-life insurance directive also introduced the following key changes:

• a single system for the authorization and financial supervision of an in-surance undertaking, including the business it carries out either through branches or under the freedom to provide services, by the member state in which the undertaking has its head office (home country control) (Article 9.1);

47

• financial supervision that include verification of an insurer’s state of sol-vency, of the establishment of technical provisions and of the assets cov-ering them in accordance with the rules laid down or practices followed in the home member state under provisions adopted at Community level (Article 9.2);

• the abolition of national controls on premium prices and prior notification of policy conditions (Articles 29 and 39).

Article 29 of the directive states that:

Member States shall not adopt provisions requiring the prior approval or systematic notification of general and special policy conditions, scales of premiums, or forms and other printed documents which an insurance un-dertaking intends to use in its dealings with policy-holders. They may only require non-systematic notification of those policy conditions and other documents for the purpose of verifying compliance with national provi-sions concerning insurance contracts, and that requirement may not consti-tute a prior condition for an undertaking’s carrying on its business. Mem-ber States may not retain or introduce prior notification or approval of pro-posed increases in premium rates except as part of general price-control systems ( European Commission 1992).

Article 39 applies this rule to member states where a branch is located or serv-ices are provided.

The case law of the European Court of Justice (ECJ) (José García and others v. Mutuelle de Prévoyance Sociale d’Aquitaine and others) demonstrates that insurance monopolized by a member state’s social security system falls out-side the scope of the third non-life insurance directive ( ECJ, 1996). The direc-tive applies to all other insurance and does not distinguish between for-profit and non-profit insurers.

1.4.3 The general good

Governments are no longer allowed to apply material regulation in the insur-ance sector, as this could impede competition among insurers. Consequent-ly, consumer protection has been reduced to financial safeguards against the negative consequences of insolvency. However, under certain circumstances, a member state may invoke the general good to justify national regulation. Ar-ticle 54.1 states that:

Notwithstanding any provision to the contrary, a Member State in which contracts covering [health risks] may serve as a partial or complete alterna-tive to health cover provided by the statutory social security system may re-quire that those contracts comply with the specific legal provisions adopted by that Member State to protect the general good in that class of insurance, Section 1 Context

and that the general and special conditions of that insurance be communi-cated to the competent authorities of that member state before use.

Recital 24 to the directive indicates the type of measure that a member state might take in order to protect the general good, noting that:

Whereas to this end some Member States have adopted specific legal provi-sions; whereas, to protect the general good, it is possible to adopt or main-tain such legal provisions in so far as they do not unduly restrict the right of establishment or the freedom to provide services, it being understood that such provisions must apply in an identical manner whatever the home Member State of the undertaking may be; whereas these legal provisions may differ in nature according to the conditions in each Member State;

whereas these measures may provide for open enrolment, rating on a uni-form basis according to the type of policy and lifetime cover; whereas that objective may also be achieved by requiring undertakings offering private health cover or health cover taken out on a voluntary basis to offer standard policies in line with the cover provided by statutory social security schemes at a premium rate at or below a prescribed maximum and to participate in loss compensation schemes; whereas, as a further possibility, it may be re-quired that the technical basis of private health cover or health cover tak-en out on a voluntary basis be similar to that of life assurance… ( Europe-an Commission, 1992).¹⁰

What this seems to suggest is that where VHI substitutes for statutory health in-surance, constituting the principal means of protection for some sections of the population, the government may invoke the general good in order to adopt or maintain regulations to protect the public interest, in so far as they do not un-duly restrict the right of establishment or the freedom to provide services.

The concept of the general good is based on the case law of the European Court of Justice, which has never actually defined the general good, preferring to maintain its evolving nature ( European Commission, 2000a). For this rea-son, the concept is not defined by the third non-life insurance directive either.

The absence of a clear definition has led to confusion and tension between the European Commission, member states and insurance companies ( CEA, 1997;

Mossialos, Le Grand, 1999).

In 2000 the European Commission issued an interpretive communication re-garding the general good ( European Commission, 2000a). The communication analyses the concept of the general good as developed by the case law of the European Court of Justice and systemizes this doctrine and the ways in which

10 Since the recitals to a directive have legal force as an aid to interpretation, they shed light for the reader on the intentions of the Community legislator.

49