Competition in the Irish Private Health Insurance Market

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9. STRUCTURE OF THE HEALTH INSURANCE MARKET Summary 9.1 The recommendations in the Report are intended to increase competition in the PHI marketplace. Nevertheless, consumer choice will remain relatively limited in the absence of new market entrants. In view of these market circumstances, the question arises as to whether the radical step of splitting Vhi Healthcare into two or more entities should be considered. This would increase competition and consumer choice (it would not, of itself, affect the scale of risk equalisation transfers). While the precise dynamic benefits that would flow from the resulting increased competition are difficult to predict, they are likely to be significant and wide ranging, affecting areas including pricing and product innovation. It would also greatly reduce or eliminate any existing buyer power of Vhi Healthcare. However, there would be obvious difficulties, costs and risks involved, for instance; loss of economies of scale, extinguishing the brand, possible financial weakness of the new companies and regulatory and logistical issues. Furthermore, Vhi Healthcare’s members have chosen their insurer and their views should be considered. In this context, it is quite unclear, so far as the Authority is concerned, whether the economic benefits of splitting Vhi Healthcare in terms of enhanced competition feeding through to better value for consumers would outweigh the costs and risks involved. Furthermore, detailed implementation plans would have to be considered, including the transitional economic and financial costs of implementation. In the Authority’s view, the main determining factor in this matter should be consumer benefit. It is recommended that the Minister for Health and Children should commission an independent study on the issue of splitting Vhi Healthcare into two or more successor entities. A Structural Approach to Vhi Healthcare 9.2 Structural change can be the simplest, most effective means of promoting a competitive market. Structural change in health insurance could be accomplished by splitting Vhi Healthcare into two or more smaller health insurers. The new companies would compete both with each other and with other health insurers in the market. Such a course of action would transform the Irish market, with three or more firms, each holding a substantial market share that would be competing vigorously for custom, compared to the current situation where a firm holding a 75% market share tends to act as a price leader to competitors holding market shares of 22% and 3%. 9.3 An assessment of the efficiency gains and losses associated with a break-up of Vhi Healthcare should include three aspects: productive, allocative and dynamic efficiency. Breaking up Vhi Healthcare would result in the duplication of certain roles and tasks currently provided by the single entity, Vhi Healthcare, i.e. a lower level of “productive efficiency”. The extent of the efficiency loss depends on the importance of scale economies in the sector. In any case, any loss of productive efficiency would be offset by an increase in “allocative efficiency”. 133
Breaking up Vhi Healthcare would diminish the market power of the broken-up incumbent and result in a market where firms upstream and downstream may compete more vigorously for custom, through lower prices and improved service. A further offsetting factor would result from efficiency gains due to dynamic factors. A competitive market drives firms to seek cost saving efficiencies and innovations in the productive and administrative process. 9.4 Splitting Vhi Healthcare into separate entities involves a number of regulatory issues. If market entry alone is relied on to create a more competitive health insurance market, it may be years before the market evolves to the extent that the full benefits of effective competition are realised. Addressing the position of Vhi Healthcare in a structural fashion, by breaking it up, would be more likely to deliver the benefits of competition to consumers than relying on market entry, notwithstanding the potential difficulties and timescale, which may be encountered in practice with the “break-up” course of action. The argument in favour of breaking up Vhi Healthcare is strengthened by the supposition that the VHI successor companies would begin to compete both against each other and against other firms in the market more or less immediately after the split is effected, whereas other solutions may take much longer to deliver the benefits of competition. 9.5 The successor companies would require authorisation from the Financial Regulator before they started trading. This requires that these companies hold the necessary level of solvency reserves at the time that they are applying for an insurance license. The issue of financial capital must therefore be addressed before a splitting of Vhi Healthcare can be implemented. 9.6 The splitting of Vhi Healthcare requires a specific Act of the Oireachtas. If this legislation were drafted with the same rights for policyholders as those applying to insurance companies it would. require an application to the High Court by the directors of Vhi Healthcare under Section 13 of the Assurance Companies Act 1909. Policyholders would have to be written to informing them of the proposed transfer and why it is in their interests that the transfer be approved. Policyholders would have a right to be heard by the Court before the transfer is sanctioned. Customers of Vhi Healthcare have actively chosen to place their health insurance with Vhi Healthcare. The Court would have to decide between the individual citizen’s right to choose insurer and the State’s right to decide what was in the best interest of all citizens. Customers could circumvent the impact of the split if they actively decided after the transfer to rejoin one of the entities. 9.7 The issue of who owns the successor companies is important. If the State owns the various companies there remains the issue of a potential conflict of interest of owning the various companies whilst also regulating the health insurance market and setting the price of private beds in public hospitals. Alternatively if the successor companies were privatized, the companies could decide to remerge unless there was legislation in place preventing this occurring. However, such a putative merger would be subject to competition law concerning mergers. 9.8 Breaking up Vhi Healthcare would also give rise to a number of costs and risks and these must be weighed against the anticipated benefits. 134
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A Report to the Minister for Health
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CONTENTS TABLE OF FIGURES _________
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CONSUMER ATTITUDES TO SWITCHING ___
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EXECUTIVE SUMMARY AND RECOMMENDATIO
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As a result it does not have to sat
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Recommendation 7 The Minister for H
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indicates that consumers of PHI hav
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Recommendation 13 The Minister for
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is quite unclear, so far as the Aut
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1.4 For the next number of months t
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other insurers were to enter the ma
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2.6 Private health insurance (PHI)
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2.17 Open enrolment and lifetime co
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• 2001: The Health Insurance Auth
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Figure 2: Annual Change in PHI memb
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of medical inflation and the higher
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VIVAS Health is rising steadily. In
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• Table 1 below shows the annual
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Figure 6: PHI Products BUPA Ireland
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• Work-based group schemes where
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from year to year and also during t
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3. DEFINING THE PRIVATE HEALTH INSU
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Figure 7: Key features of Related H
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price increase unprofitable by a hy
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4.6 Aspects of the exemption from i
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and quarterly management accounts t
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Table 4: Regulation of PHI Firms 48
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4.31 This is a positive step. Just
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obliges Vhi Healthcare to seek appr
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4.41 In the regulatory approval pro
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4.50 However, the Authority is clea
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Unfunded Lifetime Community Rating
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President of the Society of Actuari
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− The main other deterrent at pre
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o The former members of the Advisor
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materially affected by any seasonal
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It may also be noted that the propo
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4.94 There are 37 health insurers i
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Interviews with Possible New Entran
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have shown that new sales and switc
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not binding on incumbents and no in
Page 83 and 84: 5.33 In this context Vhi Healthcare
Page 85 and 86: 5.44 As the former incumbent monopo
Page 87 and 88: 5.52 Vhi Healthcare’s first mover
Page 89 and 90: • Psychological costs 6.5 Transac
Page 91 and 92: 18-24 9% 13% 25-34 34% 19% 35-44 31
Page 93 and 94: 6.24 The provision of renewal notic
Page 95 and 96: The HIA publishes on its website a
Page 97 and 98: Recommendation 10 Following consult
Page 99 and 100: Recommendation 11 The insurance com
Page 101 and 102: Regulations were established to aff
Page 103 and 104: transferred and the amounts require
Page 105 and 106: Buyer Power and Concentrated Market
Page 107 and 108: The Supply of Private Medical Facil
Page 109 and 110: VIVAS Health claims that Vhi Health
Page 111 and 112: approval on coverage of facilities
Page 113 and 114: Supplier-Induced Demand 7.36 The Vh
Page 115 and 116: Questions Relevant evidence Irish P
Page 117 and 118: to restrict individual choice of pr
Page 119 and 120: 8. CONCENTRATION AND MARKET POWER I
Page 121 and 122: gives us some indication of the com
Page 123 and 124: wishes to retain the flexibility to
Page 125 and 126: largest price increase that is prof
Page 127 and 128: scheme. Employees may be under the
Page 129 and 130: elevant regulatory requirements, ex
Page 131 and 132: Table 7 Vhi Healthcare Financial Re
Page 133: • There is limited buyer power fr
Page 137 and 138: expertise and other staff resources
Page 139 and 140: APPENDIX 1 Other forms of health re
Page 141 and 142: APPENDIX 2 Report of UK Government
Page 143 and 144: Australia Ireland Public hospital U
Page 145 and 146: Australia Ireland Risk equalisation
Page 147 and 148: 1.22 The Irish data is not split at
Page 149 and 150: Conclusion of normal claim payments
Page 151 and 152: APPENDIX 3 Consumer Attitudes to Sw
Page 153 and 154: Survey Respondent factors promoting
Page 155 and 156: APPENDIX 5 OECD Review of PHI The O
Page 157 and 158: not-for-profit insurers has posed c
Page 159 and 160: 114. Private insurers have not impl
Page 161 and 162: APPENDIX 6 List of Submissions The
Page 163 and 164: Understanding and Comparing Private
Page 165 and 166: Benefits Outpatient Cover Cover for
Page 167 and 168: Dobson, P., M. Waterson and A. Chu,
Page 169: Vhi Healthcare (2005), Annual Repor
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Competition in the Irish Private Health Insurance Market

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