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EC Authorises Irish Health Insurance Tax And Levy Scheme,
by Jason Gorringe, Tax-News.com, London
Friday, June 19, 2009
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-ŕ-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.
The Commission considered that although the tax relief is directed at individuals,
it clearly has an effect on health insurers, namely that insurers with a bad
risk profile benefit from it at the expense of those with a better one. Therefore
the EU state aid rules were applicable. As in its 2003 decision on the Risk
Equalisation Scheme, the predecessor of the current measure, the Commission
recognised that due to its importance in the overall health system and in particular
to the special obligations it is subject to, private medical insurance qualifies
as a public service.
In line with the jurisprudence of the EU Courts, notably the Altmark ruling
of the European Court of Justice (case C 280/00), the Commission concluded that
the measure constitutes state aid. Such aid can be compatible with the Single
Market provided it satisfies the conditions laid down in the EU Framework on
state aid in the form of public service compensation. In particular, the public
service must be clearly defined, entrusted and the public support may not overcompensate
the service providers.
In the course of the investigation, the Commission found that the scheme was
designed in way so as not to lead in principle to overcompensation of the insurers.
Furthermore the Irish Authorities committed to introduce a mechanism to avoid
the overcompensation of the net beneficiary of the scheme, the VHI. In light
of the design of the scheme and this commitment, the Commission found that the
measure was in line with the EU Framework and as such compatible with Article
86 (2) of the EC Treaty as compensation for public services.
The decision, the Commission noted within its statement, 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.
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