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News / June 18, 2009

EC authorises health insurance tax scheme

by Guy Hiscott

The European Commission has authorised, under EC Treaty state aid rules, an Irish scheme of levies and tax relief in the health insurance sector.

The objective of the scheme is to promote intergenerational solidarity by decreasing the risk differentials for health insurers between old and young customers.

The Commission concluded that the measure was in line with the EU Framework for state aid in the form of public service compensation and as such compatible with Article 86(2) of the EC Treaty. In particular, after the Irish Authorities agreed to amend the scheme, the Commission was satisfied that none of the insurers would be overcompensated for the discharge of the public service. The scheme is a temporary replacement for, and very similar to, the previous Risk Equalisation Scheme, which was annulled by the Irish Supreme Court.

Competition Commissioner Nellie Kroes said: ‘Consistent with the earlier decision on the Risk Equalisation Scheme, the Commission continues to recognise the wide margin of discretion Member States enjoy in the organisation of health services. The Commission supports aid in the form of justified and proportional compensation linked to the performance of public services.’

The scheme concerns private medical insurance (PMI), which is subject to special regulation in Ireland. Insurers are obliged to accept a customer who wishes to conclude an insurance contract (open enrolment), cannot terminate the policy against the will of the insured (lifetime cover) and must apply the same premium for a given insurance policy regardless of the risk (age, health status) represented by the insured. Policies must offer a minimum benefit level prescribed by law (minimum benefit). It follows from these obligations that insurers cannot risk-rate their policies, which in turn can result in imbalances on the market if their risk profiles are different.

To address this problem, the scheme introduces tax relief for individuals, the amount of which increases with age. The relief is paid directly to the insurer that the individual chose for taking out PMI cover. It is financed by a flat rate levy on all insurers, payable after each insured life. The combined effect of the levy and the tax relief is that the insurance of older lives becomes cheaper and that of younger lives more expensive for insurers, while community rating is maintained vis-à-vis customers. As a consequence the scheme decreases the incentive of insurers to avoid high-risk older lives and cherry-pick low risk younger lives; furthermore it compensates insurers with a worse-than-average risk profile.

Due to its worse risk profile, the state-owned Voluntary Health Insurance Board (VHI) will be a net beneficiary of the scheme, while its competitors will be net contributors.

This decision is without prejudice to the Commission’s ongoing investigation into the Irish health insurance market and the VHI’s continued exemption from the applicable non-life insurance directives, a matter which is being examined separately by Commissioner McCreevy and DG Internal Market and Services.

The non-confidential version of the decision will be made available under the case number N 582/08 in the State Aid Register on the DG Competition website once any confidentiality issues have been resolved.