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Ireland loses health insurance case in European court

The landmark case has implications for the future of VHI Healthcare, the State-owned private health insurer.

VHI headquarters on Abbey Street, Dublin
VHI headquarters on Abbey Street, Dublin
Image: James Horan/Photocall Ireland

IRELAND HAS LOST a case at the European Court of Justice (ECJ) today regarding the country’s health insurance industry.

The ruling has major implications for VHI Healthcare as the firm will now have to obtain authorisation from the Central Bank.

As a result, the State-owned company will also be subject to the regulator’s capital requirements for the first time.

VHI Healthcare chief executive Jimmy Tolan said the decision by the ECJ is not unexpected and the company believes that Central Bank regulation is both “strategically imperative” and “in the best interest of its customers”.

Tolan added that the VHI will now need to raise additional capital in order to meet the regulator’s solvency requirements.

Minister for Health Dr. James Reilly echoed the sentiment’s of VHI’s CEO.

“It has been known for some time that any judgement by the European Court of Justice on this matter would have implications for the future of the VHI,” he said, adding that “significant preparatory work” had already been undertaken by his department.

What was the case about?

In 1973, the EU First Non-Life Directive was implemented but Ireland negotiated a derogation for the Voluntary Health Insurance scheme. That meant the legislation could be applied differently – or not at all – to the group.

Effectively, the VHI was not required to obtain an authorisation from the Central Bank as an insurer and, therefore, did not have to hold the same level of solvency capital as its counterparts.

However, as the company evolved, the derogation should have ceased, according to European Union lawmakers.

The case was brought against Ireland by the EU Commission as it deemed the VHI was carrying out its business activities contrary to EU legislation.

The issue was first raised by European lawmakers in January 2007 and action was taken within two years after several advances were made to ask Ireland to rectify the matter.

The ruling

Today, the ECJ determined that Ireland has not fulfilled its obligations under European law because it failed to apply insurance legislation to all insurance undertakings on a non-discriminatory basis.

The court found that Ireland was in breach of EU obligations because it continued to exempt VHI from regulation by the Central Bank despite the fact that it had obtained the power to provide “health-related” services, act as an agent for an insurer and carry out “activities of an advisory or consultative nature”.

Once these activities commenced, the derogation should have ceased, said the court.

As Ireland lost, it also must pay the costs of the court case for both itself and the Commission.

What will it mean for VHI Healthcare?

As the derogation will no longer apply to VHI Healthcare, it will need to be authorised by the Central Bank.

For this to happen, the company will need to have sufficient levels of regulatory capital in reserve. It also must show the regulator that it has a robust three-year business plan in place to ensure it can maintain those levels of capital.

At present, the VHI is not in a position to satisfy these requirements. The Government says changes to the Irish health insurance market in 2008 saw VHI lose out on risk equalisation payments, leaving it unable to build up its solvency reserves.

And what about VHI customers?

The VHI will continue to trade as normal and will continue to offer health insurance and pay claims.

However, the Government has decisions to make about how to address its regulatory position.

What will it mean for the health insurance industry in Ireland?

Again, the Government has to examine the ECJ’s ruling and take legal advice on the matter. Minister Reilly said the decision by the court will affect the private health insurance market as a whole and a co-ordinated response is necessary.

An effective system of risk equalisation needs to be worked out for a more evenly structured market.

At the moment, the Irish health insurance market is community rated. That means all customers pay the same price for the same health insurance product, irrespective of health status. This benefits older and sicker people, as well as reducing the incentive for insurers to “cherry-pick” lower-risk customers.

However, the VHI currently pays out about 80 per cent of the total claims in the Irish market.

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