Mary Harney (Dublin Mid West, Progressive Democrats)

I am pleased to address this House today on the Second Stage of the Voluntary Health Insurance (Amendment) Bill2007.

Though this is a relatively short Bill, it provides for the most significant changes to the provisions governing Voluntary Health Insurance, VHI, since the board was established 50 years ago. In the intervening period there has been only one other significant 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. It recognised the board's right to select its health care providers and to refuse to cover providers where it considered it appropriate not to do so. 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 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. The directive provided, inter alia, for the opening of the health insurance market to competition. In that respect it differed significantly from the first non-life directive dating from 1972. That directive specifically recognised the position of the Voluntary Health Insurance board and the common good role it alone had played as a monopoly provider of health insurance cover to both the segment of the Irish population that did not have a statutory right to free hospital services and also those encouraged to take out insurance notwithstanding such a right. The 1972 directive specifically granted the board, along with a number of 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 derogations granted under the first directive. Consequently, the VHI has continued to operate as a statutory body that is exempt from meeting the prudential requirements of the Financial Regulator. Notwithstanding this, the VHI board maintains significant levels of technical reserves, amounting to €292 million at the year ended 28 February 2007. While this is a large sum and well above the minimum requirement of the EU, 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 Irish Financial Regulator.

The 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 that this position confers a competitive advantage on it. Although the present statutory arrangements also prescribe a number of significant disadvantages for the VHI, the Government recognises that the derogation cannot continue. It considers that it is in the best interests of the health insurance market and VHI that the company attain authorisation as an insurer in the shortest possible timeframe and be subject to the same prudential regulation as other commercial insurers operating in the market.

The proposed changes to the VHI Acts are consistent with the policy set out in the White Paper on health insurance, published in 1999. It recognised the need to give full commercial freedom to the VHI, placing its relationship with the Minister on a more appropriate footing and removing its exemption from meeting solvency requirements. The White Paper set out the policy context and the options for the VHI and specifically identified the need to fundamentally change the basis of the relationship between the Minister for Health and Children and the VHI. It provided that the VHI should operate in accordance with strict commercial criteria, be a market-driven, customer focused company capable of competing in the liberalised private health insurance market and exploit new business opportunities subject to it continuing to provide indemnity insurance for private health care.

The provisions of the Bill also reflect the general thrust of the recent recommendations of the Health Insurance Authority, the Competition Authority and the Barrington Group regarding the VHI, as set out in their reports on competition in the private health insurance market. They also address matters raised by other market stakeholders including the 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 emphasised the need to address the VHI's derogation as soon as is feasible.

The provisions of the current Bill are very much focused on providing the VHI with a structure that is more appropriate to the competitive market in which it now operates and one that will oblige the board to pursue early authorisation and provide a statutory framework that will facilitate this process. Since its establishment the board's primary function has been to provide health insurance and that will continue to be the case.

I will now outline the sections and principal features of the Bill. Though a relatively short Bill, it encompasses significant provisions most of which are directly related to enabling and obliging the VHI to attain authorisation.

The primary purpose of the Bill 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 the VHI. It will, of course, 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 to the population. 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 amends section 2 of the Voluntary Health Insurance (Amendment) Act 1996. Section 2, paragraphs (a) and (b), remove the requirement to obtain ministerial consent for the board's health insurance schemes. Paragraph (c) provides for the board's determining premium increases, having regard to its obligations and outgoings. I will comment further on this when outlining the third repeal contained in the Schedule to the Bill.

Section 2, paragraph (c), also provides for a strengthening of the obligation on the board to attain a level of reserves that would facilitate securing authorisation. One of the primary purposes of this section is to oblige the VHI board to have regard to solvency requirements for authorisation and to focus on attaining this objective. The section provides a clear obligation on the board in respect of the building up of reserves by a date appointed by the Minister. I intend to move an amendment to this subsection on Committee Stage that will specifically require the board to attain authorisation by the end of 2008.

Section 3 provides for functions of the board. The first subsection 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 number 4 of the Schedule of enactments being repealed. This subsection does not therefore confer any additional powers on the board. The second subsection provides for the board's engaging in new activities, subject to the consent of the Minister. I intend to move a Committee Stage amendment that will result in the provisions of this subsection taking effect only after the VHI has attained authorisation. This amendment will also facilitate removal of the requirement to obtain the Minister's consent from the subsection, given that the VHI will then be subject to prudential regulation by the Financial Regulator.

Section 4 provides for the board's forming, establishing or acquiring subsidiaries to perform any one or more of its existing functions, other than those set out in section 3, paragraph (b), and section 2 of the Voluntary Health Insurance (Amendment) Act 1996, these being new activities and health insurance respectively. It is a requirement, where authorisation as an insurer is being sought, for the applicant to be a stand-alone entity, that is, engaged only in activities relating directly to the insurance business. The section provides for the VHI to establish separate subsidiaries to undertake the company's activities under section 3(a).

Given the proposed amendment to specify that authorisation is to be attained by the end of 2008, and that authorisations can be granted only to incorporated bodies, I will also table an amendment on Committee Stage to provide that the VHI establish a subsidiary under this section to carry on its health insurance business. This subsidiary and any others that would require authorisation by the Financial Regulator will seek authorisation. The VHI is already subject to regulation by the Financial Regulator for its ancillary businesses, including its travel insurance business.

Section 5 will allow the board to form, establish or acquire subsidiaries to undertake activities outlined in section 3, paragraph (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 4 and 5 will enable the VHI to put in place a holding company structure which is a necessary step towards attaining authorisation for its health insurance business.

Section 6 provides for terms and conditions of persons employed by the board's subsidiaries. It covers subsidiaries to be established to perform existing functions and those that may be established following authorisation. Section 7 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 the 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 8 provides for the repeal of the enactments specified in the schedule attached to the Bill. Section 9 provides for Short Title, collective citation and commencement. This is a standard provision. It allows the Minister determine the appropriate times for the 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 refers to section 18 of the Voluntary Health Insurance Act 1957. That section provided for borrowing by the board in very limited circumstances relating only to current expenditure. In the context of introducing the broader borrowing provisions contained in section 7 of this Bill, I am advised that 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 current 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. The exemption, however, is not available to other cash plan providers. It is necessary to put all existing and potential cash plan operators on an equal footing.

The Health Insurance Authority and the Competition Authority have addressed the matter in their reports on the market. 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 general practitioner services, outpatient services and the supply of drugs.

As recommended in the White Paper, the question of whether cash plans should be subject to the requirements imposed on indemnity-based health insurance contracts will be kept under review. 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 premium 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.

In order for any insurance undertaking to be authorised, the Financial Regulator would have to be satisfied that the organisation has full independence in designing its products and the price its sets for those products. In a competitive market it is no longer appropriate for the Minister to have any involvement in these commercial decisions.

In the 11 years since the enactment of the 1996 legislation the Minister has only once refused to approve a proposed increase. This resulted in two increases being required the following year. My stated policy for a considerable time has been that decisions on products and pricing are matters appropriate to the board, given that it is best placed to make these decisions.

The fourth repeal covers section 14 of the Health Insurance (Amendment) Act 2001. That section gave the VHI the powers to engage in certain health related activities. It is being repealed as those functions are now encompassed in section 3, paragraph (a), of this Bill, with related provisions on the establishment of subsidiaries under section 4.

The VHI is a major provider of health care to a significant proportion of the population. We must ensure that 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. I believe that the provisions of the Bill will have a positive effect on the management and staff of the VHI, be good for its consumers and for the development of the health insurance market. The European Commission through its internal market Directorate General, which has responsibility for the insurance directives, has been kept informed of the evolution of the Bill and the Commission has taken a keen interest in the development of the Irish health insurance market.

I congratulate the VHI and its staff on the successful delivery of health care to the population for 50 years since it was established in 1957. I commend the Bill to the House.