THE ECONOMICS OF COMPETITION IN HEALTH INSURANCE- THE IRISH CASE STUDY.



The case made in the White Paper is that " any process, whether deliberate or
accidental, which gives rise to significant differences in risk profiles" would cause per capita
claims costs to spiral for insurers left with a higher proportion of less healthy individuals.
"This, in a community rated environment would lead to significant market instability and
erosion of public confidence." (WP, 41). Competition in the health insurance market would
be restricted to "distribution, brand customer responsiveness, product innovation, claims
management, purchasing efficiency and administrative efficiency." (WP, 42).

The Government's risk equalisation proposals are due to come into force in June
2002. They will be implemented by equalising casemix index scores within each age and
gender category. Casemix is a measure of the relative resource intensity of a group of claims.
The number of claims in each category is multiplied by a weighting factor which indicates its
relative cost. The White Paper's prescribed minimum equalised benefits are based on VHI
schedules because they represented established market practices at that time."

III THE DEVELOPMENT OF PRIVATE HEALTH INSURANCE IN IRELAND.

The Voluntary Health Insurance Board was established in 1957. Its purpose was to
provide insurance for health services for the richest 15 per cent of the population who were
not entitled to free public hospital services. In 1979 the top income group became eligible for
free hospital accommodation and in 1991 this was extended to hospital consultant services.
Membership of VHI has increased from 288,496 in 1968, ten years after its foundation, to
697,346 in 1979, 1,289,262 in 1991 and 1,464,757 in 1999. In the year ended February 1999
VHI had subscription income of £343m and accumulated reserves of £87m. (WP, 80).

The extension of full eligibility for the public health services to the richest 15% of the
population in 1991 was a regressive measure. The Household Budget Survey 1994-1997
indicates that the richest third of households spend ten times as much on health insurance as
the lowest income third. Only at the seventh decile does private health insurance expenditure
exceed the average over all households. The benefits sought by the state from community
rating in the Irish health insurance market are therefore heavily skewed up in the income
distribution scale. The market being regulated is a discretionary one in a system where all
persons, no matter how high their incomes, have full eligibility for hospital and consultants'
fees.

The private health insurance market was opened to competition by the Health
Insurance Act, 1994. In 1999 there were 1.556 million members of private health insurance
schemes, of which 1.465m were in VHI, giving it a 93.6% market share. There were three



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