Róisín Shortall (Dublin North West, Labour)

I am pleased to address the House on the taking of Second Stage of the Health Insurance (Miscellaneous Provisions) Bill 2011. As Senators will be aware, the Bill passed through all Stages in the Dáil last week without amendments. The main object of the Bill is to continue for a further year in 2012 to ensure the burden of the costs of health services is shared by insured persons. The Bill was supported by all sides in the Dáil.

Senators will be familiar with the commercial aspects of insurance where the risks of adverse events and the associated costs which arise when some of these events occur are pooled or shared among the total number of people participating by way of paying an insurance premium. The commercial aspect is very much in evidence when one considers travel insurance, for which older people pay more than younger people, and motor insurance where the reverse is the case. The variation in pricing is due mainly to the greater frequency and higher cost of claims which insurers must meet for higher risk customers. Therefore, while there remains some element of risk pooling and cost sharing, the contribution of each person to the pool rises with his or her risk profile. This is known as a risk rated model of insurance.

When the risk rating model is applied to health insurance pools the inevitable result is that older and less healthy people have to pay substantially more for the same cover. In recognition of this, successive Governments and the Oireachtas have been committed since 1994 to maintaining the principle of community rating rather than risk rating of health insurance. This mirrors the approach we take on overall funding for health care costs where the young support the old, the healthy support the sick and the better off support the less well off.

Private health insurance has had a long history of contributing to the cost for individuals of health care in this country. As a result, successive Governments have sought to adopt key principles within health insurance, particularly the principles of the young supporting the old and the healthy supporting the sick, and have therefore supported the community rating of health insurance policies. The objective has always been that the price of a policy should reflect the risks and costs of the entire pool of insured persons in the community, rather than the risks and costs on a person-by-person basis. The sharing of risk between younger people and older people - the latter predominantly cost far more in terms of claims - is known as intergenerational solidarity, that is, younger people pay more for health insurance than the level of risk they present would demand, while older people pay less as a direct consequence.

The pricing of risk across the community of insured persons clearly requires robust mechanisms to share costs when there are a number of companies in the market. If a mechanism to share risk and attendant costs is not present, an insurer with a less profitable risk profile can quickly find itself in a perilous position financially. The standard transfer mechanism is known as risk equalisation and is a key element of health insurance internationally. Only through the use of risk equalisation can solidarity and cost sharing be effectively implemented between the generations who hold insurance.

The Health Insurance Acts 1994 to 2007 provide the statutory basis for the regulation of the private health insurance market in the interests of the common good. The regulatory system is based on the key principles of community rating, open enrolment, lifetime cover and minimum benefit and aims to ensure that private health insurance does not cost more for those who need it most. The system is unfunded, meaning there is no fund built up over the lifetime of an insured person to cover his or her expected claims cost. Instead, the premium contributed by insured people is expected to cover the cost of claims and expenses in that year.

Under community rating everybody is charged the same premium for a particular health insurance plan, irrespective of age, gender and the current or likely future state of their health. The only exceptions to this rule relate to children under the age of 18 years and students in full time education. Community rating therefore means that the level of risk that a particular consumer poses to an insurer does not directly affect the premium paid. The system requires intergenerational solidarity, with younger people supporting older people. It also requires solidarity between healthy and less healthy people. Younger and healthier people effectively subsidise older and less healthy people on the understanding that these younger people will themselves be subsidised by later generations when they reach old age and-or suffer ill health. In effect, older people who have been paying health insurance premia for many years will have contributed to intergenerational solidarity when they were younger and can reasonably expect to benefit from it now in their older age.

It is worth pointing out that in December 2009 when the three insurers in the open market, Aviva Health, Quinn Healthcare, and VHI, attended the Joint Committee on Health and Children to discuss the health insurance market all three expressed full support for community rating. Where they differed was in regard to how community rating should be supported. I would point out it is recognised internationally that community rating requires a mechanism to discourage or prevent insurers from engaging in the practice of cherry-picking lower risk and therefore more profitable customers.

Other important principles in health insurance are open enrolment and lifetime cover which provide that, except in limited circumstances specified in legislation, health insurers must accept all applicants for health insurance and all consumers are guaranteed the right to renew their policies regardless of their age or health status. An exception to these provisions is that they do not apply to certain restricted membership undertakings. These undertakings mainly provide health insurance to certain vocational groups and their families and account for approximately 4% of the health insurance market. In addition, under the current minimum benefit regulations,all insurance products that provide cover for inpatient hospital treatment must provide a certain minimum level of benefits.

I refer to market statistics. The total premium income for the three insurers for 2010 was €1.9 billion, an increase of €300 million, or 19%, more than the 2008 figure of €1.6 billion. As of end-September 2011, 2.174 million people, or 47.5% of the Irish population, had private health insurance in the form of inpatient plans. These numbers are broken down thus: VHI had 1.246 million, or 57 %; Quinn Healthcare had 458,000, or 21%; Aviva Health had 382,000, or 18%. Restricted membership undertakings accounted for 87,000 people, or 4%.

VHI Healthcare's market share has consistently fallen since the market was opened to competition and this trend has accelerated. The fall in market share has mainly been in the younger age groups. Quinn Healthcare and Aviva Health combined currently have 47% market share in the 30-39 age group but only 9% of the over 80 age group. VHI Healthcare continues to have a much greater proportion of members in the older age groups compared to the other insurers but there is some reduction in the difference. Its number of policyholders under the age of 60 years has reduced by 108,000 in the last year, amounting to 10% of its customer based aged under 60 years. In the first six months of 2011 the number of insured persons with Aviva Health aged over 60 years increased from 23,000 to 40,000. In the same period VHI Healthcare had eight times the proportion of members in the over 80 age group than that of Quinn Healthcare and six times the proportion in this age group than that of Aviva Health.

I wish to remind the House of some recent background to the introduction of risk sharing in the Irish private health insurance market. The risk equalisation scheme, which was affirmed by the Oireachtas in 2003 and approved by the European Commission in the same year, provided a mechanism for sharing the costs of providing necessary care among the insurers. Although all political parties and most academics and professional bodies, including the Society of Actuaries, supported the risk equalisation scheme, that scheme and its supporting regulatory regime were challenged in the courts by BUPA Ireland. These challenges were rejected by the European Court of First Instance and the High Court in Ireland. However, they ultimately succeeded when, in July 2008, the Supreme Court found the manner in which the risk equalisation scheme was implemented to be ultra vires.

It is important for the House to note that the Supreme Court decision did not strike down the principles of community rating, open enrolment and lifetime cover or, indeed, the principle of having a scheme of risk equalisation in place. The court found the scheme to be ultra vires because the legislation did not provide for an explicit link between community rating and the specific mechanism provided in the 2003 regulations. The Chief Justice of the Supreme Court subsequently clarified that the decision which found the 2003 scheme to be ultra vires was not an obstacle to the Government bringing forward a new scheme. Following the judgment there was a need for a prompt response to maintain confidence in the market. It was necessary, therefore, to introduce measures in order to support community rating and ensure, as far as possible, that market fragmentation did not become prevalent due to the introduction of plans aimed at younger, healthier lives.

The current interim scheme of age-related tax credits and community rating levy was introduced for the three years from 2009 to 2011 in order to provide direct support to community rating. It achieves this by way of a mechanism which provides for a cost subsidy from the young to the old. This Bill seeks to continue the scheme for a further year in 2012. It is designed to be Exchequer-neutral and ensures that every customer has the benefit of a community rated health insurance premium. Restricted membership undertakings are excluded from the scheme as their insurance products are not available to the general public.

The scheme was approved by the EU Commission for the four-year period 2009-12. In announcing its decision to approve, the Commission referred to the wide margin of discretion enjoyed by member states in the organisation of health services. It acknowledged the important role of private health insurance in the overall health system in Ireland. For this reason, and particularly in view of the special obligations to which it is subject - community rating, open enrolment, lifetime cover and minimum benefit - the Commission concluded that private health insurance qualified as a public service.

The Commission went on to find that although the interim scheme constituted state aid it was compatible with the Single Market because it satisfied the conditions laid down in the EU framework for state aid in the form of public service compensation. These conditions are focused on ensuring the public service, in this case the provision of private health insurance cover, is clearly defined and the basis for the calculation of the compensation provided under the scheme is established in advance in an objective and transparent manner. The conditions also focus on ensuring that arrangements are in place for avoiding overcompensation including provision for repayment in the event of any such overcompensation.

The interim scheme works by allocating tax credits for persons in three age bands and funding this by the collection of an annual levy on health insurance companies based on the number of lives covered by policies underwritten by them. The scheme provides that health insurers receive higher premiums in respect of insuring older people but that older people receive tax credits equal to the amount of the additional premium. This ensures all people continue to pay the same amount for a given health insurance product. In this way, community rating is maintained but insurers receive higher premiums in respect of older people to partly compensate for the higher level of claims.

The scheme is designed so that loss compensation is only applied up to the most popular benefit level in the market which is up to and including a semi-private bed in a private hospital. This means that approximately 20% of benefits are excluded and broadly speaking these are so-called luxury products as well as primary care cover and some other benefits.

Taking this into account, the scheme allows for insurers with additional costs arising from insuring older people, who have a preponderance of claims, to be compensated for up to, but no more than, 65% of these additional costs. The amounts of the tax credits by age group have been chosen such that where an age group gives rise to higher than average claims costs, the system should reduce the excess of claims costs by 65%. The choice of a 65% reduction in average claims costs at older ages is designed to strike a balance between reducing the incentive that exists for insurers to avoid older customers, while also allowing for a competitive market in which individual insurers are not required to share efficiencies in their own claims management with their competitors.

The actuarial evidence available in 2009 indicated it was from the age of 50 upwards that the cost of claims of an insured person increases to above the market average. For 2009 and 2010, the scheme provided for a modest level of support for people in the age bracket 50 to 59 years which amounted to a tax credit of €200 for each year. The Health Insurance Authority, HIA, analysis during 2010 indicated the claims experience of this age group was close enough to the overall market average. This meant that insurers with a higher than average proportion of customers in the 50 to 59 age bracket would not be disadvantaged by having to cover higher than average claims so no tax credit was required in 2011 for that age bracket.

On current estimates, the scheme will transfer some €275 million from younger to older lives, those aged 60 years plus, in 2011. Of course, much of this money will stay in each insurance company's funding base given that younger customers are supporting older customers in the overall company structure. Accordingly, in a perfectly balanced market with each company having the same ratio of younger to older customers, there would be no financial impact, negative or positive, on any insurer. To the extent that any company does, in fact, experience a positive financial impact, this is purely a consequence of having a greater proportion of older customers than its competitors. Insurers for which there is a negative financial impact arising from the scheme are significantly compensated by their much lower claims costs.

A key issue for the Minister for Health and the European Commission is to ensure there is no overcompensation of any insurer under the scheme. The net beneficiary has, of course, been VHI since Quinn Healthcare and, especially Aviva, continue to have a significantly younger age profile than the market as a whole. In the case of the VHI, the HIA has determined there was no overcompensation in respect of 2009 and 2010. It also concluded the net impact of the tax credits and levy which were put in place for 2011 would be significantly less than the estimate of the extra cost of providing cover to older people.

Although it is the greatest beneficiary of monetary transfers under the scheme due to the older age profile of its customers, in 2010 VHI made a small loss of €3.1 million. Based on current financial projections, it is not anticipated that this financial position will materially change in respect of VHI's performance for 2011.

The interim scheme consists of two elements, namely, age-related tax credit granted to individuals who hold private health insurance and a levy charged on private health insurance companies to be used to finance these credits. At 2011 rates, the amounts of the tax credits for persons up to age 59 sees no tax credit is paid; for persons aged between 60 and 69 years, a tax credit of €625 is paid; for persons aged between 70 and 79 years, the tax credit is €1,275 while for those aged 80 years and over it is €1,725.

Each private health insurance company is required to pay an annual levy to the Revenue Commissioners. The levy is remitted to the Exchequer and forms part of overall Exchequer funding. It is charged on all adult insured lives and the rate for 2011 is €205. The rate for insured lives under age 18 is €66. The scheme is designed to be Exchequer neutral - money in equals money paid out. The levy is charged on health insurance companies in respect of each insured life and not on individual subscribers. It is a matter for the companies whether to pass this levy on to their customers. Neither the Minister nor my Department has any role to play in the setting of premia prices by any of the private health insurance companies including the VHI.

The interim scheme for 2012 will be improved by requiring insurers to submit more detailed information returns by product and year of age. The Minister is proposing the use of five-year age bands from 50 years of age and above for tax credits for 2012, as recommended by the HIA in its report on risk equalisation. At present, only ten-year bands are used which is somewhat less precise. The more detailed information returns now being provided for will allow for this refinement.

Despite the existence of the interim scheme, there is significant segmentation of the private health insurance market with an increasing number of plans being designed, marketed and priced to attract lower risk, that is younger, healthier customers only. Competition is effectively confined to this group. This means older and less healthy people have less choice and inevitably face higher premium costs. I have heard it said that a risk equalisation scheme will be proven to be effective when insurers begin to advertise for older customers or customers with a particular chronic disease. In an ideal situation, an insurer will be assured that risk equalisation will provide sufficient compensation for taking on new customers who are suffering from a chronic illness, for example, diabetes, and even allow for making a reasonable profit. In that situation they will seek to provide the best care package at a competitive price and so attract new customers.

That certainly is not the case in Ireland's private health insurance market. While health insurance is one of the most heavily advertised products on television, it is all directed at the low-risk groups. This Bill is one of several important elements of reforming the private health insurance market. The programme for Government contains a commitment to put a permanent scheme of risk equalisation in place. This is a key requirement for the existing PHI market and also in the context of plans to introduce universal health insurance from 2016. The Minister intends to bring forward proposals shortly with a view to introducing a permanent scheme with effect from January 2013.

I will now turn to the specific provisions in the Bill. These are exclusively technical in nature, providing for a one year extension of the scheme in 2012 with small modifications to allow for a more precise level of support for community rating.

Section 2 amends section 6 of the Health Insurance Acts 1994 to 2009 by substituting a revised definition for "age group" and by inserting a new definition of "type of cover". These definitions will facilitate the provision of information broken down by each year of age and also by specific health insurance contracts.

Section 3 amends section 7 of the Act to provide for more detailed information returns to be submitted by health insurers to the Health Insurance Authority. The information returns will be broken down further by each year of age as required and also by type of health insurance cover. In addition, regulations made under section 7 may require separate returns in situations where the benefits payable under a type of cover have materially changed.

Section 4 amends section 7 of the Act to provide broader scope to the Health Insurance Authority in terms of using additional relevant information alongside the formal information returns submitted by the health insurers. This will assist the authority and the Minister in performing their respective functions under the Act.

Section 5 amends section 470B of the Taxes Consolidation Act 1997 to make the necessary changes required to extend the age-related tax credit in respect of private health insurance premiums paid by persons aged 50 years and over to include 2012. Section 6 amends section 125A of the Stamp Duties Consolidation Act 1999 to provide for the continuation in 2012 of the collection of an annual levy on health insurance companies based on the number of lives covered by policies underwritten by them.

I will briefly make some points about the vital issue of effective cost control within private health insurance. In 2010, my Department commissioned its actuarial advisers, Milliman, to review the VHI's handling of claims management and cost control. This was in light of a very significant increase in claims costs over a two year period between 2007 and 2009. The review identified a number of means for the VHI to address its claims costs and to make significant savings in this area.

The Minister is concerned about this issue and has placed significant emphasis on the requirement for this to be addressed. In particular, the Minister is concerned that any inefficiency in the management of claims is addressed before the introduction of universal health insurance. The VHI will play a key role in addressing costs in the market, as due to the age profile and health status of its customer base, it currently pays out about 80% of all claims in the market.

The VHI has made progress on the reduction of its cost base and has highlighted the recent savings it has made through cost containment measures. It has made annual savings of €100 million over the past two years through reductions in fees to private hospitals and consultants and through savings in administrative overheads. It has recently commenced a process of negotiations with private hospitals with a view to seeking further savings in this area. Contracts with consultants are due for renegotiation in mid-2012 and VHI has informed consultants that it will be seeking further savings at that point.

Subject to Government approval, the Minister intends to move quickly in the new year to prepare the necessary legislative changes in order to introduce a permanent scheme of risk equalisation to come into effect from 1 January 2013. I look forward to participating in debates with both Senators and Dáil Deputies when that legislation is going through the Houses. In the meantime the Government is satisfied of the need to provide a mechanism along the lines envisaged, that is, a continuation of the interim scheme for a further year in 2012, with the enhancements described earlier.

The scheme has made a significant contribution to community rating since 2009 and is, to date, the only scheme which has succeeded in transferring funds from low-risk to high-risk groups. For that reason, I commend the Bill to the House.