Health minister Mary Harney intends to bring proposals for a new form of risk equalisation in health insurance to cabinet next month, she has confirmed.

Responding to a recent Dáil question from Fine Gael, Harney said the current interim scheme of "loss compensation" was prompted by the Supreme Court's July 2008 ruling striking down a previous risk equalisation scheme.

Risk equalisation is designed to compensate insurers that have more older people on their books. But when it was ruled out by the courts, the government provided for the interim loss compensation scheme to take effect.

"Without a risk equalisation or loss compensation system, insuring older or ill people will be loss-making. As a result, insurers that cover a higher proportion of older people will be at a significant competitive disadvantage and insurers will seek to avoid insuring older people," Harney said.

"It follows that, without risk equalisation or loss compensation, competition will not function properly and the market will operate counter to the interests of ill and older people. This is why it is the international norm for risk equalisation or loss compensation to apply in community rated markets. The Health Insurance Authority has started work on preparing a comprehensive risk equalisation scheme to replace the interim scheme of loss compensation when it expires. I intend to bring proposals in this regard to the government before the end of March."

Last month, VHI chief executive Jimmy Tolan claimed the temporary levy/age-related tax relief scheme introduced last year was only 40% effective. He said older customers were still loss-making. VHI's older customers generated losses of €170m in 2009, he added.

However, private health insurers such as Quinn Healthcare and Hibernian Aviva Health have criticised the health insurance levy as a "stealth tax" that forces customers to pay higher premiums than necessary to subsidise state-owned VHI.