VHI does have issues of inadequate cost management and generally increasing prices but a large part of their problem is caused by the age profile of their customers and the age profile of the customers who are leaving them.
A very simplified example to explain their problems:
Divide private health customers into ‘young’ and ‘old’. Young customers cost their health insurer an average of €200 a year in medical expenses and old customers cost an average of €2,000 a year.
If VHI has 50% young and 50% old, they can charge €1,100 (50% * €200 + 50% * €2,000) to all customers and break even.
However, if a competitor arrives in the market and manages to attract mainly young customers away from VHI, so that VHI now has 40% young and 60% old customers, VHI’s cost of providing cover has increased to an average of €1,280 (40% * €200 + 60% * €2,000) just because of the age profile change. So, they have to increase their premium to €1,280 from €1,100 just to break even after the age profile change.
Meanwhile, if their competitor has an age profile of 80% young and 20% old, their average cost is only €560 (80% * €200 + 20% * €2,000) – so they can charge the same as VHI and make a huge quiet profit – or charge less than VHI to attract more customers away.
As VHI lose more and more young customers (either to a competitor or now when cover is just too expensive generally), their age profile is getting worse and worse from a cost perspective – so their prices go up more – so they lose more customers and their age profile gets worse still – so their prices have to go up more... and so it goes on until VHI goes out of business or some form of risk equalisation is brought in.
And while yes, the new competitors are notionally open to all ages, the young can be attracted in all sorts of ways – by focusing on corporate schemes, offering better maternity/family benefits, offering treatments like physiotherapy, alternative treatments etc. I’ve read interviews with some of VHI’s competition and they are really quite disingenuous with ‘it’s a level playing field without risk equalisation, we are quite happy to take older members etc.’ when the reality is that young customers are much more likely to switch insurers – older customers just don’t like change anyway but I think they also often have a misguided view that VHI will reward their loyalty by looking after them when the time comes.
Risk equalisation would try to compensate insurers (most likely just VHI in the short term) for having a more costly membership profile without compensating them for more expensive cost base, deals with providers etc. – I think some way will have to be found to do this but it is horribly complicated - and apparently illegal according to our supreme court.
