Mr. Jim Joyce:

We are grateful to the committee and to the Chairman for inviting us to appear before it. I have been chairman of the Health Insurance Authority since 2006 and I am accompanied by Mr. Sloyan, who is the chief executive. The committee has asked for a brief presentation and I propose to be brief.

The functions of the authority can be briefly described as falling into three categories. We have some consumer related functions to do with assisting and informing consumers; statutory functions under the Act which mainly relate to risk equalisation; and a general remit to monitor the market and advise the Minister for Health on health insurance policy issues generally.

Members will be aware that for many years the public policy on private health insurance in Ireland, as in many other countries, has been based on community rating. This means that a health insurance product, subject to some conditions, should be available at the same price without regard to age, gender or health status. Compared with the normal insurance market this is quite a distortion because the premium paid on a normal insurance policy would vary according to risk. For a community rated market to be viable, therefore, it must be supported in a number of respects. We must have open enrolment, which allows anyone to purchase a health insurance contract, and lifetime cover to ensure people have an automatic right to renew.

Another key support is risk sharing, which recognises that where we have community rating a risk-sharing arrangement is required to deal with the different risk profiles of insurers because they are precluded from dealing with the risk profile by varying the level of premium they charge. This is not particular to Ireland. It applies in general to countries that have community rated markets.

Regarding the current state of the market, we would not be able to say that it is in a sufficiently stable or sustainable position, essentially because of the delay in implementing arrangements for risk sharing. There are many reasons for that. As members may be aware, the Supreme Court struck down the originally proposed risk equalisation scheme and the Minster decided, on the authority's recommendation following that, to implement a risk equalisation scheme in January after the scheme had been set aside by the Supreme Court in 2008. It was not until 2009 that we had some risk sharing, with the introduction of the tax credit levy arrangement. Those measures were introduced as an interim arrangement and were to apply for three years pending the establishment of a more effective risk equalisation system. It is not useful to go into the detail of the way the tax credits and so on are worked out, but essentially they are designed to compensate for the higher claims costs for older age groups. When the tax credit has been determined for the different age groups a rate of levy per insured person is then determined such that the system as a whole is revenue neutral. It follows, therefore, that for the market as a whole there is no reason the tax credit levy system should raise premiums on average. There are various other reasons premiums may increase but, as a whole, since the tax credit levy system is designed to be revenue neutral, it should have a neutral effect on average premiums.

The current arrangements represented an important advance, in the view of the Health Insurance Authority, but because there is only part compensation for risk differences between insurers it remains very profitable for an individual insurer to recruit younger, healthier consumers and avoid older and less healthy ones. At the same time, however, the claims rate rises rapidly with age, and this position has resulted in segmentation of the market. The first type of segmentation is between insurers in that the majority of older insured people are insured with VHI. The second type of segmentation is between products within insurers, whereby through marketing, product design and other means older people are frequently sold different products from those sold to younger people. The result is that in the current market older people still pay more on average for health insurance than younger people. The lack of sufficient risk sharing also means that the main commercial incentives in the market for insurers are to manage their risk profile through selection and segmentation rather than, for example, to manage claims and be more efficient. That is not intended as a criticism of insurers. It would be unreasonable to expect commercial bodies to do other than respond to the incentives and so on that face them in the market.

The recently published Health Insurance (Amendment) Bill 2012 contains a number of provisions to strengthen the risk equalisation system and put it on a permanent footing. If enacted, the system would take account not only of age, which is the current position, but also gender, the level of cover provided by a health insurance policy and the level of hospital utilisation. These measures would be an important and necessary support to the operation of community rating, as would be the continued strengthening of the risk equalisation system as things change. What we have found in discussions with people in other countries where risk equalisation applies is that there is no such thing as a perfect system that we can sit back and allow to operate. We must be constantly aware of the need to adjust it to reflect what is happening in the market.

Another feature of the current market to which we wish to draw attention is the rate of premium inflation, which is being driven mainly by increasing claim payments.

On average, the rate of premium inflation has been much higher for older and less healthy people than for younger and healthier consumers both because younger and healthier consumers are less risk averse and more likely to switch to lower cost plans and insurers are incentivised to target younger and healthier people with better value products.

The current economic conditions, together with the premium increases, have impacted on the size of the market which has grown steadily in size for many years since it was liberalised. However, since the end of 2008 the number of people with health insurance has declined at an average rate of just over 2% per annum, which amounts of 50,000 consumers. One of the results of that is that the insured population is ageing and if that were to continue, or even accelerate, the effect on the market could become more significant because, in the long term, and this is what intergenerational solidarity means, the viability of a community rated market depends on a regular influx of new and younger consumers.

Another market distortion arises from the fact that VHI Healthcare is not regulated by the Central Bank as an authorised insurer. While this is of much lesser impact than the absence of a comprehensive risk equalisation system, it is still a market distortion, and the State has undertaken to address it by the end of 2013.

With regard to universal health insurance, as members are aware the detailed parameters of a system have not yet been established but we can say that the regulatory measures discussed earlier would also be essential in the context of a universal health insurance market with competing insurers.

I hope my remarks serve to explain to the committee's satisfaction the reason the Health Insurance Authority is of the view that the best outcome from a regulatory perspective would be the continuing strengthening of the risk equalisation system as proposed in the Health Insurance (Amendment) Bill and other measures to support community rating coupled with the authorisation of VHI Healthcare as a regulated insurer. That outcome would serve to support community rating and proper competition in the interests of consumers generally.