Health Insurance Market: Presentations
Deputy Gormley: I thank the delegation for coming before us. In the presentation by the VHI it was stated price-following was designed to maximise profits which would lead to windfall profits for BUPA Ireland. We were told profits would be above average, €38 million in 2004. To what extent is BUPA Ireland generating windfall profits? How does Mr. O’Rourke respond to the claim made by Mr. Sheridan when he came before the committee that there is no transparency in its finances? When Mr. O’Rourke talked about a cross-subsidy, he mentioned that a lot of plans were incontestable. Is this a matter the Competition Authority should examine?
Mr. Hayes: I will take the question on contestability while my colleague, Mr. Niall Devereux, will respond to the question on windfall profits and price-following. The Competition Authority has not yet examined the issue of health insurance. On contestability, the facts speak for themselves. We have hardly any products sold at that level of the market.
Mr. Niall Devereux: We welcome the opportunity of coming before the joint committee to set the record straight. On price-following, allegations have been made that BUPA Ireland is engaged in this practice to maximise profits. Mr. O’Rourke has mentioned BUPA Ireland is a not-for-profit organisation. It is a mutual organisation to the extent that if it were wound up, profits would have to be given to like-minded charities. This does not seem to gel with the allegations made.
When we entered the market in 1997, a family of two adults and two children would have enjoyed savings of €44 on the cost of the entry plan of the VHI. Eight years later the price differential has increased to €154, a three and a half fold increase. This does not gel with the allegation of price-following.
At the meeting last week this matter was explained and the Deputy has given a good summary. Allow me to use the example of a dominant insurer such as the VHI. If it were to increase its prices by 10% and BUPA Ireland’s claims costs were to increase by 6%, BUPA Ireland would increase its premiums by 10% in order to maximise profits. Clearly, that is not the case.
If one’s revenue increases by a figure greater than one’s claims costs, profit margins will increase each year. BUPA Ireland has been involved in the market since 1997. As finance director, I can assure the joint committee that its profit ratio has fallen every year since we came to Ireland. It fell in 1998, 1999, 2000, 2001, 2002, 2003 and 2004. We do not see this as a threat to its stability, rather we see the need to provide for greater efficiency to ensure market instability does not put our future under threat. Price-following is not happening, at least not in BUPA Ireland.
We welcome the opportunity to set the record straight on the issue of windfall profits. The joint committee has received a schedule from the VHI which is grossly inaccurate. Our competitors do not know the number of claims that BUPA Ireland paid in 2004 and an arbitrary figure seems to have been applied. The number of claims is materially misstated.
Basing a schedule of profits on claims paid is not only misleading but also in breach of accounting principles whereby revenue and costs must be matched. The schedule does not do this. It shows that BUPA Ireland enjoyed windfall profits of €38 million last year. After tax, the profit we achieved in Ireland, adding all operations together, was €20 million. It is laughable that the VHI suggests we enjoyed profits over and above the norm. This figure is twice the profit we actually made. I hope the joint committee dismisses the document presented last week. If anyone wishes to receive further information on our profits, we would be pleased to accomodate him or her.
Mr. O’Rourke presented the cumulative profit after tax figure of €70 million generated since BUPA Ireland entered this market. If we open up the VHI’s accounts for 2004 and compare the profits it generated, we can see that it generated more profit in one year than BUPA Ireland did in eight in this market.
We have a solvency requirement. Of the cumulative profit figure of €70 million, €55 million is set aside to underpin solvency and the future of our business. After eight years we have €15 million of free profit, that is, profit that can be invested in healthcare. That is the philosophy that drives our organisation. On a like for like basis the VHI generated a profit figure of €75 million in that year but it does not have a solvency requirement, an issue VIVAS is taking to the European Court. The accounts presented today represent a fair view of the activities of BUPA Ireland since we entered the market.
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Deputy Gormley: I thank VIVAS for coming before the committee. The difficulties of competing with a State player such as VHI were referred to earlier. What might be the consequences for the market if VHI were privatised, in the delegation’s view?
Mr. Hayes: Operating risk equalisation in a market with a dominant player is not conducive to good competition. A market needs to be created with a number of like-sized players where there can be vibrant competition. A pure privatisation of the VHI will not address the dominance problem. One of the advantages of the VHI being in State ownership is that it is within the gift of the State to create immediately a vibrant marketplace. If the VHI were privatised, that option would be lost.
Deputy Gormley: VIVAS Health would obviously favour the introduction of life-time community rating, as exists in Australia. What would be the effect of introducing that?
Mr. Loughman: The experience in Australia was that there was a large increase in the number of insured lives across all age profiles. If the same thing were to occur here, it would mean that there would be more balance in the age profiles of the competitors in the Irish market. Assuming that there were only three insurers when it occurred, we would tend to get a more equal spread of those new members coming into the market, which would bring a more balanced age profile. We obviously have no difficulty with that.
Deputy Gormley: I put a hypothetical question to the Health Insurance Authority when its representatives appeared before this committee. If it could occur, would VIVAS Health take high risk patients rather than taking money from people through risk equalisation and giving it to VHI? BUPA representatives said they would be happy to do that.
Mr. Hayes: Our whole philosophy is to offer our products to people of all ages. We are in the business of trying to increase our market share to create more dynamic competition. If there were an opportunity for VIVAS Health to take a proportional amount of VHI customers, then we would engage with that option.
Deputy Gormley: Regardless of risk profile?
Mr. Hayes: I do not think a solution to the problem is to transfer all the older people from one insurer to another. That amounts to shifting deckchairs on the Titanic. It is more important to create a dynamic market with people of similar age profiles across the portfolio. If there is a chunk of the VHI book available to us which will create that dynamism in the market, then clearly we will be interested.
Deputy Gormley: Does it not make good business sense to attract the people with least risk? This goes to the core of the argument.
Mr. Hayes: I have been asked a few times if we had looked at the dynamics of the market before we joined it. I always confirmed that we did so. We were aware of community rating and we welcome it. We are not suggesting any change to community rating and all our products are designed for and are available to people of all ages. Any suggestion that because we are a for profit company we are proposing a risk rated market is totally without foundation. We are very happy with community rating within the marketplace.