Currently, Ireland is the only member state to pursue a system of risk adjustment that applies to all insurers in the VHI market. The Health Insurance Act of 1994, introduced by the Irish government to satisfy the requirements of the third non-life insurance directive, set out in law the three key principles that form the basis on which VHI operates in Ireland: community rating, open enrolment and life-time cover (Department of Health and Children, 1999). The Act also permitted, but did not require, the Irish government to introduce a system of risk adjust-ment, referred to in Ireland as a risk equalization scheme (RES). The 1996 Health Insurance Regulations introduced such a scheme, reflecting the government’s view that risk equalization was a necessary support for community rating (Advi-sory Group on the Risk Equalisation Scheme, 1998), and the more recent white paper on VHI set out plans to implement the scheme on the basis of age, gender and prior utilization by June 2002 (Department of Health and Children, 1999).
The Health Insurance (Amendment) Act, which came into force in 2001, estab-lished an independent Health Insurance Authority, giving it discretion to recom-mend to the government whether or not material differen ces in the risk profiles of
113 competing insurers warrant the initiation of risk equalization transfers
(Depart-ment of Health and Children 1999). New insurers can choose to exempt them-selves from participating in risk equalization arrangements for a period of three years from the start of trading in Ireland ( extended from the 18 months original-ly envisaged in the white paper). The RES has not yet been activated.
The purpose of the RES is “to make transfers between insurers with the ob-jective of equalising their risk profiles” (Advisory Group on the Risk Equalisa-tion Scheme 1998). In its submission to this study, the government noted that it sees the RES as:
…a necessary provision in a community-rated/ open enrolment system of volun-tary private health insurance. In a market where open enrolment operates and premiums are community rated, insurers who benefit from risk selection can charge a lower community rate, and/or keep a higher profit margin. Risk equal-isation provides for the equitable distribution of risk between insurers. Without risk equalisation the system of community rating/ open enrolment would be inher-ently unstable. Those insurers who have lower risk members will be required to contribute to a central fund (called the risk equalisation fund), and insurers with higher risk members will receive compensation from the fund … The (proposed) risk equalisation scheme is entirely concerned with a more equitable distribution of risk profile across insurers as the means of addressing the serious dangers to a community-rated system which risk selection represents. It aims to counter the effects of either inadvertent or intentional preferred risk selection, so-called ‘cher-ry picking’ or ‘cream-skimming’ of generally younger, healthier lives.
While the risk equalisation scheme has an objective of equalising risk pro-files between insurers, it also aims to allow each insurer to retain its own claims management/ cost containment efficiencies and to differentiate between differing benefit levels.
If competing health insurers have a strong incentive to select preferred risks, it would be expected that per capita claims costs would spiral for those insurers who are relatively unsuccessful at preferred risk selection or, as a result of it, are left with a high proportion of the elderly or chronically ill insured population. This, in a community rated environment, would lead to significant market instability and lack of public confidence, ultimately leading to the down-sizing of the market. Any such development which would undermine community rating, and the inter-gen-erational solidarity upon which it is based, would be extremely inequitable. This particularly applies to the large number of older people who, having contributed for many years to community rating, could be forced to opt out for economic rea-sons just when they are beginning to need health insurance cover most.
Risk equalisation, as envisaged in Ireland, is to be neutral regarding the flow of transfers between insurers. The flow of funds between insurers un-der risk equalisation will be solely determined by the respective risk profiles
Section 3 Access, equity and consumer protection
of the insurers concerned. As the market develops, conceivably the direction of such flows could change with initial net recipients becoming subscribers to the scheme and vice versa. The ultimate beneficiary of risk equalisation is the in-sured population, particularly the elderly and the ill, who would otherwise be vulnerable to the effects of risk selection. Risk equalisation seeks to remove an insurer’s incentive to select preferred risks, but still allows for competition in many areas, including product diversity, efficiencies in relation to claims man-agement, cost containment and customer service.
The risk equalisation system will not be activated unless and until material distortions emerge between the risk profiles of competing insurers. The details of risk equalisation are to be set out in a statutory scheme which will be brought forward for approval by each House of the Oireachtas (parliament). This will include the provision of significant discretion to the independent Health In-surance Authority, both as regards any commencement of risk equalisation and the calculation of any payments to be made between insurers thereunder.
(Department of Health and Children, 2001b)
In support of the RES, the government notes that there is a substantial body of objective professional and academic opinion that supports the need for risk ad-justment to maintain stability in a community-rated health insurance environ-ment (Departenviron-ment of Health and Children, 2001b).
However, the introduction of the RES in Ireland has been surrounded by controversy. On one hand, it is supported by the independent Advisory Group on the Risk Equalisation Scheme. In a report to the government in 1998, the Advisory Group stated that “based on its own deliberations and on the basis of the arguments made and evidence presented to it, risk equalisation is essen-tial to underpin community rating” (Advisory Group on the Risk Equalisation Scheme, 1998). It is also supported by the dominant voluntary health insurer, Vhi Healthcare, which claims that it will guarantee a fair, equitable and stable market for VHI in Ireland, and that without it, the system of community rating will collapse (Vhi Healthcare, 2001a).
On the other hand, BUPA Ireland, the other major voluntary health insurer in the Irish market, is heavily opposed to the RES, claiming that it is an attempt to
“rig the market to protect the monopoly” (BUPA Ireland, 2000 ). BUPA Ireland’s argument against the RES is that it “penalises cost containment, is regressive from an income distribution point of view and breaches EU law” (BUPA Ireland, 2000 ). In BUPA Ireland’s opinion, the RES would actually destabilize the mar-ket, as it would require BUPA Ireland to compensate Vhi Healthcare by about
€10.2 million, an amount that would make it difficult for BUPA Ireland to re-main in the market (Murray, 2001a).
BUPA Ireland has taken legal advice that suggests it could successfully chal-lenge the government on the grounds that the RES is illegal under the third
115 non-life insurance directive, but it has yet to make a formal legal challenge,
citing expense as a factor in the decision to delay legal action (Murray, 2001a).
The issue of legality does not appear to concern the government, however, which maintains that the third non-life insurance directive permits risk equal-ization and loss compensation schemes in the interest of the general good (see section 5.3.1).