Jimmy Devins (Sligo-North Leitrim, Fianna Fail)

I move: "That the Bill be now read a Second Time."

This year, Voluntary Health Insurance, VHI, celebrates its 50th anniversary, having been established under the Voluntary Health Insurance Act 1957. This Bill provides for the most significant changes to the provisions governing VHI since the board was established 50 years ago. In the intervening period, there has been only one other substantial amending Act, the Voluntary Health Insurance (Amendment) Act 1996.

The main provision of that Act provided an enhanced commercial framework for the board providing health insurance cover to its members through provider agreements while maintaining the obligation on the board to provide such cover. It also provided for ministerial consent to premium increases determined by the board in the context of the board meeting its liabilities and providing for reserves as it saw fit.

The 1996 legislation was enacted in advance of the completion of the regulatory framework for health insurance that opened the market to competition, put in place by the passing of the Health Insurance Act regulations at the end of March 1996.

The development of the regulatory framework arose in the context of implementing the EU third non-life insurance directive which provided for the opening of the health insurance market to competition. It differed significantly from the first non-life directive dating from 1972. That directive specifically recognised the position of the VHI board and the common good role it had played as a monopoly provider of health insurance cover to people who did not have a statutory right to free hospital services and those encouraged to take out insurance despite having the right to free treatment. The 1972 directive specifically granted the board, with several similar health care providers in Europe, a derogation from meeting the prudential obligations to be met by most insurance undertakings.

While the third directive opened the market to competition, it did not remove the derogation granted under the first directive. Consequently, VHI has continued to operate as a statutory body, exempt from meeting the prudential requirements of the Financial Regulator. Notwithstanding this, the VHI board maintains significant levels of reserves, amounting to €292 million at the year ended 28 February 2007. While this is well above the minimum requirement of the European Union, it is approximately €140 million short of the level that established insurers with VHI's premium and claims experience would be required to maintain by the Financial Regulator.

VHI finds itself in the anomalous position of being both the market leader in the health insurance market and being an unauthorised insurer. The company's competitors consider this position confers a competitive advantage on it. Although the current statutory arrangements also impose several restrictions on VHI, the Government recognises the derogation cannot continue. It considers that it is in the best interests of the health insurance market and VHI that the company attains authorisation as an insurer in the shortest possible time and be subject to the same prudential regulation as other commercial insurers.

The proposed changes to the VHI Acts contained in the Bill are consistent with the policy set out in the 1999 White Paper on health insurance. It recognised the need to give full commercial freedom to VHI, placing its relationship with the Minister on a more appropriate footing and removing its exemption from meeting solvency requirements.

The Bill's provisions also reflect the general thrust of the recent recommendations of the Health Insurance Authority, the Competition Authority and the Harrington group on VHI, as set out in their reports on competition in the private health insurance market. The Bill addresses matters raised by other market stakeholders, including VHI's competitors. The European Commission has also taken an interest in developments in the market having regard to overseeing the operation of the insurance directives, complaints made to it by other market participants and the provisions of the treaty. The Commission has recently emphasised the need to address VHI's derogation as a matter of urgency.

The Bill's provisions are focused on providing VHI with a structure more appropriate to the competitive market in which it now operates and one that will oblige the board to pursue early authorisation. They also provide a statutory framework that will facilitate this process. Amendments during the Bill's passage in the Seanad were directed at providing the required structure.

Since its establishment the board's primary function has been to provide health insurance and that will continue to be the case as provided for under section 2 of the 1996 Act. The Bill's primary purpose is to oblige the board to achieve authorisation from the Financial Regulator as an insurer and to provide it with a structure that supports an application for authorisation. This involves giving commercial freedom on products and pricing to VHI. It will, under the parent Act and in accordance with the memorandum and articles of association of any relevant subsidiaries, be obliged to continue to provide health insurance. The Bill also provides for amending the definition of a health insurance contract in respect of cash plans.

Section 1 is a standard section providing for definitions relevant to the Bill. Section 2 provides that section 13 of the Assurance Companies Act 1909 and section 36 of the Insurance Act 1989 will not apply to VHI. These provisions are associated with the proposal in section 7 that is to allow the board of VHI to establish a subsidiary company for the specific purpose of carrying on its health insurance and health related insurance schemes. The intention is that the board will, on an appointed day, transfer all its health insurance business to the new subsidiary. This transfer will take place within the VHI group of companies. The transfer will not affect any of the rights or entitlements of existing VHI health insurance policyholders on the transfer day.

Section 13 of the Assurance Companies Act 1909 and section 36 of the Insurance Act 1989 are intended to protect the interests of policyholders in circumstances where one insurance company is taken over by another, or where one insurance company merges with another. As the transfer proposed in the Bill does not involve any external company, these provisions should not apply. The Bill, when enacted, will provide the statutory basis for the transfer of the health insurance business from the VHI board to the new subsidiary established for that purpose.

Section 3 amends section 2 of the Voluntary Health Insurance (Amendment) Act of 1996. Sections 3(a) and 3(b) remove the requirement to obtain ministerial consent to the board's health insurance schemes. Section 3(c) provides for the board determining premium increases having regard to its obligations and outgoings.

A significant change to the 1996 Act is that the substitution proposed under section 3(c) also imposes an obligation on the board to attain a level of reserves that would facilitate securing authorisation and that this be achieved by the end of 2008. The Government decided in April that VHI should become an insurer authorised by the Financial Regulator by the end of 2008. The Government does not believe it is in the interests of either VHI or the health insurance market that its anomalous status as an unauthorised entity should continue for any longer than necessary. One primary purpose of this section is to oblige the VHI board to have regard to solvency requirements for authorisation and to focus on attaining this objective.

Section 3(d) sets out the means by which the board may accumulate the reserve required to secure authorisation from the Financial Regulator. The Government considers it appropriate that VHI should have the maximum flexibility in how it achieves the level of solvency required to satisfy the Financial Regulator. Regarding subparagraph (e) contained in the insertion in section 3(d), the provision of any capital by the State, either by way of loan or in return for shares, would only take place on an arm's length commercial basis. The Government and the European Commission would have to be satisfied in advance that any such investment by the State did not constitute a state aid.

In April, the Government agreed the Departments of Finance and Health and Children should seek specialist advice on how VHI could be authorised by the end of 2008. The consultants are due to produce a report for the Departments by the end of this month. Following receipt and consideration of it, the Departments will provide a report to the Government before the end of December. The Government is determined VHI should be authorised by the end of 2008 and the measure provides accordingly. It is prudent to allow in section 5(b)(ii), having regard to legal advices received, a limited latitude to provide for a situation where it is not possible to achieve this objective by the specified date, but only where there are good and sufficient reasons.

Section 4 provides for functions of the board. Section 4(a) replicates section 14 of the Health Insurance (Amendment) Act 2001 as regards activities in which the board may engage. That section is being deleted under No. 4 of the schedule of enactments being repealed. It also provides for the board having a services company to provide staffing and other services to the board and its subsidiaries.

Section 4(b) provides for the board engaging in new activities. However, the qualification on authorisation is to ensure VHI does not extend the scope of its functions beyond those it already engages in until after authorisation is secured. The Government's view is that VHI should not expand into new areas of activity such as pensions or life insurance until after authorisation.

Section 5 provides for the board forming, establishing or acquiring subsidiaries to perform any one or more of its existing functions other than health insurance. It is a requirement, where authorisation as an insurer is being sought, for the applicant to be a stand-alone entity, engaged only in activities relating directly to the insurance business.

Sections 6 to 13, inclusive, provide for the transfer of the health insurance activities of the current VHI board to a subsidiary company to be established for this purpose. Section 6 consists of a provision to enable the Minister to set a date for the transfer to take place. Section 7 provides for the transfer of the health insurance business and health-related insurance schemes to the subsidiary to be established for that purpose. This statutory provision is required for the transfer because the VHI board, as a State body rather than a conventional commercial insurance company, is not covered by the insurance Acts which would otherwise apply. This section is linked to section 2. The rights of members and staff are not affected in this instance. The process of securing High Court approval for the transfer is long and complex and not without risk, as it would allow parties which might claim to have an interest in the transfer to intervene. If this were to happen, it could seriously threaten the objective of having VHI authorised by the end of 2008.

Sections 8 to 11, inclusive, are standard provisions governing the process of transferring business. Section 12 allows the Minister to appoint a day on which staff will be transferred from the VHI board to the services company subsidiary to be established for the purpose of employing the staff of the group and its subsidiaries.

Section 13 sets out the conditions under which the existing staff of the VHI board will be transferred to the new services subsidiary or any other subsidiary established by the board. Although it is intended to transfer all staff to the services subsidiary, the section gives the board a degree of flexibility in having the power to transfer staff to another subsidiary if it so decides. The section also provides statutory protection for the terms and conditions of employment of existing VHI staff.

Section 14 will allow the board to form, establish or acquire subsidiaries to undertake activities outlined in section 4(b) once authorisation has been achieved. To the extent that any of these companies require to be regulated by the Financial Regulator, they too will be subject to such regulation. In summary, sections 5 to 14 will enable VHI put in place a holding company structure which is a necessary step towards attaining authorisation for its health insurance business.

Section 15 provides that the board is to submit reports every six months on its share of the health insurance market. Section 16 covers the borrowing powers of the board and its subsidiaries. This section allows the board or a subsidiary to raise or borrow money for the purpose of performing its functions. It specifies a limit on borrowings to apply to VHI and its subsidiaries. In order to allow the board scope to meet the prudential requirements of the Financial Regulator, the limit does not include any additional borrowings which may be used for the purposes of attaining authorisation.

Section 17 provides for the repealing of the enactments specified in the Schedule attached to the Bill. Section 18 provides for the short title, collective citation and commencement. This is a standard provision which allows the Minister determine the appropriate times for commencement of the various sections and also the repeals set out in the Schedule.

The Schedule provides for repeals relating to four existing legislative provisions, the first of which refers to section 18 of the Voluntary Health Insurance Act 1957 which provided for borrowing by the board in very limited circumstances relating only to current expenditure. In the context of introducing the broad borrowing provisions contained in section 16 of this Bill, the current provision needs to be repealed.

The second enactment to be repealed is an exemption for cash plan providers contained in the health insurance Acts. Typically, cash plan payments are made directly to the insured person, provide limited cover for out-of-pocket expenses and do not extend to indemnity cover. The definition of a health insurance contract includes an exemption from the definition for the products of two cash plan providers. The exemption was provided on the basis that they were limited to offering community-rated cash plans with a limited focus on hospital services. It is necessary to put all existing and potential cash plan operators on an equal footing.

The change proposed will limit regulation to the minimum necessary to protect the community-rated indemnity market. It will enable cash plan providers to design their products so as to be exempt from the regulatory framework under section 2(a) of the health insurance Acts or to be subject to only limited regulation. This would include an exemption from the requirement to meet minimum benefit levels and to participate in risk equalisation where offering contracts covering GP services, outpatient services and the supply of drugs. We will keep under review the question of whether cash plans should be subject to the requirements imposed on indemnity-based health insurance.

The third repeal is of section 3 of the Voluntary Health Insurance (Amendment) Act 1996, a section that obliges the VHI board to notify any proposed increases of health insurance premia to the Minister and gives the Minister the power to direct the board not to implement increases. Freedom on pricing is an essential requirement for an insurer which is subject to prudential regulation by the Financial Regulator. Decisions on products and pricing are appropriate to the board which is best placed to make these decisions.

The fourth repeal covers section 14 of the Health Insurance (Amendment) Act 2001, which section gave VHI the powers to engage in certain health related activities. It is being repealed as those functions are now encompassed by section 4(a) of this Bill, with related provisions on the establishment of subsidiaries under section 5.

VHI is a major provider of health care for a significant proportion of the population. We must ensure it is obliged to meet the appropriate regulatory requirements. All of the many reports commissioned on the health insurance market since the introduction of the third non-life directive have supported the course we are pursuing. The provisions of the Bill will have a positive effect on the management and staff of VHI, be good for its consumers and the development of the health insurance market. The European Commission has been kept informed of the evolution of the Bill and taken a keen interest in the development of the health insurance market.

I congratulate VHI and its staff on the manner in which it fulfilled its functions for the 50 years since it was established in 1957. I commend the Bill to the House.

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