The Riley File – VHI next

With regard to the VHI which was started in 1857 by Tom O’Higgins and has played a big role in Irish Health care, James Reilly has had a big impact on management there since his ascent to the throne in Hawkins House. I have not read a cogent clear exposition on why he thinks that the VHI should be salami sliced and what the effects of that will be immediately and over the next decade. Maybe it is my ignorance but bluster and noise impress me not in the least. I will add my tuppence halfpenny worth here so that those with a platform can ask a few appropriate questions.

A person who has a coherent and clear plan usually is able to set this out in headline detail. Reilly was a student at RCSI so ask him to summarise clearly what he proposes and the likely consequences in every proposal that he makes to a standard that would satisfy Hugh Staunton, the famous erudite neurologist. In summary – No bullshit.

The Irish Times – Monday, July 18, 2011
VHI report claims break-up would wipe €475m off value

SIMON CARSWELL, Finance Correspondent

BREAKING UP the health insurer VHI would wipe up to €475 million in value off the company due to the loss of economies of scale, according to a report commissioned by the company.

The report by IBI Corporate Finance says the company would be left with a loss of €110 million for the three years from 2011 to 2013 if it were broken up, compared with a surplus of €85 million for the same period.

A break-up of VHI would lead to additional claims and operating expenditure costs of about €65 million a year as well as one-off costs of about €14 million, IBI says.

Capital requirements may also be “elevated to reflect the greater uncertainty and weaker financial position” of the smaller insurers.

The company could lose up to €475 million in value in a break-up based on multiple of earnings at international insurers and €302 million based on equivalent values for Irish general insurers, IBI says.

The firm says smaller companies created out of the break-up would have increased cost bases, making it difficult for them to return to profitability.

A break-up of the company also has the potential to increase healthcare costs across the system, according to the report.

“VHI operates on a not-for-profit basis. Should the business be broken up, an acquirer of a mini-VHI will seek to generate a commercial return on its investment,” says the report.

“This is likely to increase premium rates, particularly in a circumstance where overheads and key input costs have increased.”

The Government has proposed breaking up VHI into competing companies under proposals to introduce a system of universal health insurance for all citizens.

The insurer is opposed to the plan, which led to VHI chief executive Jimmy Tolan tendering his resignation to the Minister for Health James Reilly in May.

VHI commissioned the report from IBI after Mr Tolan tendered his resignation. It was completed earlier this month for submission to the Minister to outline the case against the company’s break-up.

The Government has commissioned a separate report by Goodbody’s Corporate Finance and law firm Matheson Ormsby Prentice into the health insurance market.

IBI pointed to the international trend towards consolidation in Holland, Australia, the UK and the US, where there are fewer insurers and more larger firms seeking greater market share.

The report says the rationale for consolidation is to find savings from scale and efficiencies in operational and medical costs.

The corporate financier says breaking up VHI from a legal and regulatory perspective was “likely to be a protracted process”.

The absence of an effective risk-equalisation scheme – where older, less profitable customers pay the same for insurance as younger, more profitable customers – has distorted the market, says IBI.

“The failure to implement an effective risk-equalisation scheme has essentially allowed an economic transfer to private enterprise, ultimately to the cost of the State,” the report says.

VHI has a market share of about 58 per cent, but about 80 per cent of insurance claims, because it has a larger share of the less profitable, older segment of the market.