CELEX: 62003TJ0289
State aid
Risk equalisation scheme introduced by Ireland on the private medical insurance market
Aid system
Services of general economic interest
Article 86(2) EC
Commission decision not to raise objections
Action for annulment
Admissibility
Principles of necessity and proportionality

Legal background
I –
Treaty provisions
Article 16 EC provides:
‘Without prejudice to Articles 73, 86 and 87, and given the place occupied by services of general economic interest in the
shared values of the Union as well as their role in promoting social and territorial cohesion, the Community and the Member
States, each within their respective powers and within the scope of application of this Treaty, shall take care that such
services operate on the basis of principles and conditions which enable them to fulfil their missions.’
Under the first paragraph of Article 43 EC: ‘[R]estrictions on the freedom of establishment of nationals of a Member States
in the territory of another Member State shall be prohibited. Such prohibition shall also apply to restrictions on the setting-up
of agencies, branches or subsidiaries by nationals of any Member State established in the territory of any Member State.’
Pursuant to the first paragraph of Article 49 EC, ‘restrictions on freedom to provide services within the Community shall
be prohibited in respect of nationals of Member States who are established in a State of the Community other than that of
the person for whom the services are intended’.
Article 86 EC provides:
‘1. In the case of public undertakings and undertakings to which Member States grant special or exclusive rights, Member States
shall neither enact nor maintain in force any measure contrary to the rules contained in this Treaty, in particular to those
rules provided for in Article 12 and Articles 81 to 89.
2. Undertakings entrusted with the operation of services of general economic interest … shall be subject to the rules contained
in the Treaty, in particular to the rules on competition, in so far as the application of such rules does not obstruct the
performance, in law or in fact, of the particular tasks assigned to them. The development of trade must not be affected to
such an extent as would be contrary to the interests of the Community.
3. The Commission shall ensure the application of the provisions of this Article and shall, where necessary, address appropriate
directives or decisions to Member States.’
Article 87(1) EC provides:
‘Save as otherwise provided in this Treaty, any aid granted by a Member State or through State resources in any form whatsoever
which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall,
in so far as it affects trade between Member States, be incompatible with the common market.’
Article 88(2) and (3) EC provides:
‘2. If, after giving notice to the parties concerned to submit their comments, the Commission finds that aid granted by a
State or through State resources is not compatible with the common market having regard to Article 87, or that such aid is
being misused, it shall decide that the State concerned shall abolish or alter such aid within a period of time to be determined
by the Commission.
…
3. The Commission shall be informed, in sufficient time to enable it to submit its comments, of any plans to grant or alter
aid. If it considers that any such plan is not compatible with the common market having regard to Article 87, it shall without
delay initiate the proceedings provided for in paragraph 2. The Member State concerned shall not put its proposed measures
into effect until this procedure has resulted in a final decision.’
Article 152(1) and (5) EC provides:
‘1. A high level of human health protection shall be ensured in the definition and implementation of all Community policies
and activities.
Community action, which shall complement national policies, shall be directed towards improving public health, preventing
human illness and diseases, and obviating sources of danger to human health. …
…
5. Community action in the field of public health shall fully respect the responsibilities of the Member States for the organisation
and delivery of health services and medical care. …’
II –
Regulation (EC) No 659/1999
Article 4(3) and (4) of Council Regulation (EC) No 659/1999 laying down detailed rules for the application of Article [88 EC]
(OJ 1999 L 83, p. 1) provides:
‘3. Where the Commission, after a preliminary examination, finds that no doubts are raised as to the compatibility with the
common market of a notified measure, in so far as it falls within the scope of Article [87](1) [EC], it shall decide that
the measure is compatible with the common market (hereinafter referred to as a “decision not to raise objections”). The decision
shall specify which exception under the Treaty has been applied.
4. Where the Commission, after a preliminary examination, finds that doubts are raised as to the compatibility with the common
market of a notified measure, it shall decide to initiate proceedings pursuant to Article [88](2) [EC] (hereinafter referred
to as a “decision to initiate the formal investigation procedure”).’
III –
Directive 92/49/EEC
Article 54(1) of Council Directive 92/49/EEC of 18 June 1992 on the coordination of laws, regulations and administrative provisions
relating to direct insurance other than life assurance and amending Directives 73/239/EEC and 88/357/EEC (OJ 1992 L 228, p.
1; ‘the third non-life insurance directive’) provides:
‘Notwithstanding any provision to the contrary, a Member State in which contracts covering the risks in class 2 of point A
of the Annex to Directive 73/239/EEC may serve as a partial or complete alternative to health cover provided by the statutory
social security system may require that those contracts comply with the specific legal provisions adopted by that Member State
to protect the general good in that class of insurance, and that the general and special conditions of that insurance be communicated
to the competent authorities of that Member State before use.’
IV –
Communication from the Commission on services of general interest in Europe
According to point 14 of the communication from the Commission on services of general interest in Europe (OJ 2001 C 17, p. 4,
‘the communication on services of general interest’):
‘Services of general economic interest are different from ordinary services in that public authorities consider that they
need to be provided even where the market may not have sufficient incentives to do so. … [I]f the public authorities consider
that certain services are in the general interest and market forces may not result in a satisfactory provision, they can lay
down a number of specific service provisions to meet these needs in the form of service of general interest obligations. …
The classical case is the universal service obligation … [that is to say] the obligation to provide a certain service throughout
the territory at affordable tariffs and on similar quality conditions, irrespective of the profitability of individual operations.’
Point 15 of the communication on services of general interest states:
‘Public authorities may decide to apply general interest obligations on all operators in a market or, in some cases, to designate
one or a limited number of operators with specific obligations, without granting special or exclusive rights. In this way,
the greatest competition is allowed and users retain maximum freedom with regard to choice of service provider. …’
Point 22 of the communication on services of general interest is worded as follows:
‘Member States’ freedom to define [services of general economic interest] means that Member States are primarily responsible
for defining what they regard as [such] services … on the basis of the specific features of the activities. This definition
can only be subject to control for manifest error. They may grant special or exclusive rights that are necessary to the undertakings
entrusted with their operation, regulate their activities and, where appropriate, fund them. In areas that are not specifically
covered by Community regulation Member States enjoy a wide margin for shaping their policies, which can only be subject to
control for manifest error. Whether a service is to be regarded as a service of general interest and how it should be operated
are issues that are first and foremost decided locally. The role of the Commission is to ensure that the means employed are
compatible with Community law. However, in every case, for the exception provided for by Article 86(2) [EC] to apply, the
public service mission needs to be clearly defined and must be explicitly entrusted through an act of public authority (including
contracts). … This obligation is necessary to ensure legal certainty as well as transparency vis-à-vis the citizens and is
indispensable for the Commission to carry out its proportionality assessment.’
Point 23 of the communication on services of general interest states:
‘Proportionality under Article 86(2) [EC] implies that the means used to fulfil the general interest mission shall not create
unnecessary distortions of trade. Specifically, it has to be ensured that any restrictions to the rules of the EC Treaty,
and in particular, restrictions of competition and limitations of the freedoms of the internal market do not exceed what is
necessary to guarantee effective fulfilment of the mission. The performance of the service of general economic interest must
be ensured and the entrusted undertakings must be able to carry the specific burden and the net extra costs of the particular
task assigned to them. The Commission exercises this control of proportionality, subject to the judicial review of the Court
…, in a way that is reasonable and realistic, as illustrated by the use it actually makes of the decision-making powers conferred
to it by Article 86(3) [EC].’

Facts
I –
Creation of a risk equalisation scheme in the Irish private medical insurance market
Private medical insurance (‘PMI’) was formally introduced in Ireland in 1957 with the establishment of the Voluntary Health
Insurance Board (‘the VHI’), which had the essential purpose of enabling persons not eligible under the public sickness insurance
scheme to obtain cover for the costs of hospitalisation. At the time the VHI was the only operator licensed by the Minister
for Health to provide private medical insurance services (‘PMI services’). Since 1987 the VHI, at the request of the Minister
for Health, has offered an insurance policy called ‘Plan P’, which provides cover for hospital charges incurred in public
hospitals and to which approximately 1% of the Irish population subscribe.
Since 1991 the public health insurance system, which is essentially financed through general taxation, has provided cover
for the entire Irish population irrespective of the income of the persons concerned. Thus, the principal role of insurers
active on the Irish PMI market (‘PMI insurers’) now consists in providing alternative cover to that provided by the public
health insurance system.
The Irish PMI market was liberalised following the enactment in 1994 of the Health Insurance Act, 1994 and in 1996 of the
Voluntary Health Insurance (Amendment) Act, 1996 and also the adoption of the implementing provisions contained in the 1996
Health Insurance Regulations. Those regulations can be subdivided into a number of regulations, namely the Health Insurance
Act 1994 (Open Enrolment) Regulations 1996, the Health Insurance Act 1994 (Lifetime Cover) Regulations 1996 and the Health
Insurance Act, 1994 (Minimum Benefit) Regulations, 1996.
BUPA Ireland, which was set up in conformity with that legislation, has been operating on the Irish PMI insurance market since
1 January 1997. Since then, with a market share of approximately 15% by members and 11% by receipts at the time when the application
in the present case was lodged, it has been the VHI’s main competitor on the Irish PMI market, while the VHI has retained
approximately 85% by receipts and approximately 80% by members. At the present time some 50% of the Irish population has PMI
cover.
The Health Insurance Act, 1994 and the Health Insurance Regulations 1996 also authorised the Minister for Health to order
and regulate, inter alia, the establishment of a ‘Risk Equalisation Scheme’ (‘RES’). In 1997 the Minister for Health set up
an Advisory Group with the mandate to make recommendations on the establishment of a RES. In its report of 1998 the Advisory
Group concluded that it was necessary to set up a RES. In 1999 the Minister for Health published first a technical paper for
consultation and then a White Paper proposing a RES.
On 2 March 1999, BUPA Ireland lodged a complaint with the Commission against the implementation of the proposed RES on the
ground that it infringed, in particular, Article 87(1) EC. Between March 1999 and April 2003 BUPA Ireland supplemented that
complaint by submitting a number of memoranda, reports and documents to the Commission.
In 2001, the Health Insurance Act, 1994 was amended by the Health Insurance (Amendment) Act, 2001, which authorised the Minister
for Health to implement the RES and established the Health Insurance Authority (‘the HIA’). The HIA was given the task of
advising the Minister on the commencement of payments under the RES (‘the RES payments’ or ‘the equalisation payments’) and
of administering those payments through a fund specially set up for that purpose.
The statutory instrument authorising the establishment of the RES entered into force on 1 July 2003.
In October 2004, a new PMI insurer, Vivas Healthcare, entered the Irish PMI market and under Section 12B of the Health Insurance
Act, 1994, as amended, was exempt from RES payments for three years.
On 29 April 2005, the HIA recommended, on the basis of its report of April 2005 establishing a ‘risk differential’ of 4.7%,
that the Minister for Health should commence the RES payments.
BUPA Insurance Ltd and BUPA Ireland lodged an application before the High Court (Ireland) against the Irish legislation governing
the RES and the HIA’s recommendation of 29 April 2005. By judgment of 24 May 2005, varied on 30 May and 29 December 2005,
the High Court dismissed the application for an injunction against the Minister for Health prohibiting him from ordering commencement
of the RES payments, but none the less suspended implementation of the RES payments by the applicants pending judgment on
the substance in the main proceedings.
On 27 June 2005, the Minister for Health decided not to follow the HIA’s recommendation of 29 April 2005. Following a new
recommendation by the HIA, the Minister for Health decided on 23 December 2005 to set the date for commencement of the RES
payments at 1 January 2006, subject to suspension of implementation of those payments by the applicants, as ordered by the
High Court.
By judgment of 23 November 2006, the High Court disposed of the substance of the case and dismissed the applicants’ application.
II –
The functioning of the RES
A –
The objective of the RES
The RES is essentially a mechanism which provides for payment of a charge to the HIA by PMI insurers whose risk profile is
healthier than the average market risk profile and for a corresponding payment by the HIA to PMI insurers whose risk profile
is less healthy than the average market risk profile. Those payments are made through a fund specially established for that
purpose and administered by the HIA (Article 12 of the RES).
B –
Activation of the RES payments
Under the relevant statutory instrument, the RES payments become payable following the stages outlined below.
PMI insurers subject to the RES are required to submit to the HIA returns covering six-month periods, the first return covering
the half year commencing 1 July 2003 (Article 9 of the RES). On the basis of those returns, the HIA examines and evaluates
the distribution of risks among PMI insurers and submits a report and, if necessary, makes a recommendation to the Minister
for Health (Article 10 of the RES).
On the basis of that report and, where appropriate, a recommendation from the HIA, the Minister for Health decides whether
it is appropriate to commence RES payments. His decision is subject to the following conditions (Article 10 of the RES):
–        where the risk differential between operators is under 2% RES payments are not commenced;
–        where the risk differential is between 2 and 10% the Minister for Health decides, on the recommendation of the HIA, whether
or not to commence RES payments;
–        where the risk differential between operators is more than 10%, the Minister for Health will, in principle, commence RES payments,
unless there are good reasons for not doing so.
C –
Method of calculation of RES payments
The method of calculating RES payments payable following a decision to commence those payments is set out in the Second Schedule
to the RES and explained in greater detail in the Guide to the Risk Equalisation Scheme, 2003 as prescribed in Statutory Instrument
No 261 of 2003, July 2003 (‘the RES guide’).
Determination of RES payments is directly linked to the differential between the risk profiles of the PMI insurers, the assessment
of which involves consideration of a number of risk factors. Those factors include, first, the age and sex of the persons
covered and, if appropriate, a weighting (between 0 and 50%) known as the ‘health status weight’, which is based on hospital
bed utilisation. The HIA has not thus far applied that weighting, which is currently zero, and has based its assessment of
risk differentials between PMI insurers solely on the factors of the age and sex of the persons covered.
According to the RES guide (page 14 et seq.), the principle governing the calculation of RES payments is that each PMI insurer
must bear the costs which it would have had to bear if its own risk profile had been equivalent to the average market risk
profile. The costs relating to the insurer’s real risk profile and to the average market risk profile are calculated according
to the age and sex of the persons covered. For that purpose, those persons are first divided into different age and sex cells
in order to identify the sum of the costs generated by those cells respectively and to determine the actual average cost per
person covered within each cell. According to Article 3 of the RES, the costs to be taken into account in that context are
exclusively those generated by claims (claims costs) submitted to PMI insurers during the reference period for payment of
the fees due for medical services received during a hospital stay. Subsequently, the HIA determines the average market risk
profile for each age and sex cell, in comparison to the total population insured in the market, on the basis of data provide
by the PMI insurers. That average market risk profile is then substituted for the real risk profile of the PMI insurers by
age and sex cell in order to identify the hypothetical costs that those insurers would have incurred if they had actually
had such an average market risk profile. The cost differential determined on the basis of the comparison between the actual
costs (on the basis of the insurer’s real risk profile) and the hypothetical costs (on the basis of the insurer’s average
market risk profile) ultimately provides the basis for calculating the equalisation payments, as referred to in paragraph
27 above. Those payments must correspond precisely to that cost differential and may be adjusted, by application of the ‘zero
sum adjustment factor’, to ensure that the system is self-financing.
Although in theory the RES is intended to apply to every PMI insurer active on the Irish market, the parties are agreed that
as matters currently stand its application would essentially lead to a transfer of funds from BUPA Ireland for the benefit
of the VHI.
III –
Contested decision
On 23 January 2003, the Irish authorities formally notified the RES to the Commission pursuant to Article 88(3) EC.
By Decision C(2003) 1322 final of 13 May 2003 (State aid N 46/2003-Ireland; ‘the contested decision’), the Commission decided
not to raise objections, under Article 4(2) and (3) of Regulation No 659/1999, concerning the establishment of the RES in
Ireland.
Article 1 of the operative part of the contested decision states:
‘The [RES] involves payments which are limited to the minimum necessary to compensate [PMI] insurers for [SGEI] obligations
and therefore does not involve State aids in the sense of Article 87(1) EC.’
In the presentation of the facts relating to the RES at recitals 17 to 30 to the contested decision, the Commission described
in detail the scope and the functioning of the RES. Recitals 20 to 30 to that decision describe the conditions for the commencement
of the RES (recitals 20 to 24) and the criteria and method of calculation of the RES payments (recitals 25 to 30).
In its legal assessment, the Commission concluded that the notified measure ‘[did] not constitute State aid within the meaning
of Article 87(1) EC or [could] be declared compatible with the common market pursuant to Article 86(2) [EC]’ (recitals 37
and 61 to the contested decision).
In support of that appraisal, the Commission essentially considered, initially, that the RES fulfilled in principle the conditions
set out in Article 87(1) EC. It observed in that regard that the RES payments came from public resources, originating in a
fund established by national legislation, financed by compulsory contributions and controlled by the public authorities, which
in practice benefited the VHI, an undertaking in a dominant position with an 85% market share, to compensate it for the costs
which it would normally have had to bear. The Commission considered that those payments were capable of affecting competition
and intra-Community trade and that the RES could therefore be qualified as State aid (recital 39 to the contested decision).
However, the Commission concluded that the compensation provided by the RES none the less did not constitute State aid within
the meaning of Article 87(1) EC, since according to the case-law of the Court of Justice (Case C‑53/00
Ferring
[2001] ECR I‑9067, paragraph 27), it was intended as compensation for the obligations of services in the general economic
interest (‘SGEI obligations’) imposed on all insurers active on the Irish PMI market, namely obligations designed to ensure
that all persons living in Ireland would receive a minimum level of PMI services at an affordable price and on similar quality
conditions. The Commission observed (at recitals 40 and 41 to the contested decision) that that objective would be achieved
by establishing solidarity between policy-holders and that, in particular:
–        the open enrolment requirement, that is to say, the obligation for the PMI insurer to offer a PMI contract to any person requesting
such a contract, independently of his age, sex or health status, ensured that old or chronically ill persons were not excluded
from PMI;
–        the lifetime cover requirement ensured that insurers would not reject the policy-holders when they became sick or old;
–        community rating imposed upon the insurers the obligation to apply the same premium to all policy-holders for the same type
of product irrespective of their health status, age or sex; premiums would therefore be fixed at a higher rate than young
persons would have to pay for PMI services priced on the basis of risk assessment and premiums paid by old or sick persons
would be much more affordable than if they were fixed by reference to the risk covered; thus, community rating constituted
the very basis of inter-generational solidarity and provided all insured persons with the certainty that the advent of a chronic
illness or serious injury would not render the cost of cover unaffordable;
–        last, the regulations on minimum benefits ensured that the products proposed would respect certain minimum quality standards,
although PMI insurers were free to design their insurance products.
As regards the applicants’ denial, in their complaint, that the obligations referred to in paragraph 41 above constitute SGEI
obligations, the Commission considered, in essence, that the national authorities were entitled to take the view that certain
services were in the general interest and must be provided by means of SGEI obligations when market forces were not sufficient
to ensure that they would be provided. The Commission further observed that in the absence of harmonisation at Community level
in the medical insurance sector, the national authorities were competent to impose SGEI obligations on all operators on the
relevant market. In that regard, the Commission observed that the freedom left to operators in Ireland to fix prices and define
their insurance products did not call into question the fact that the obligations laid down by the relevant legislation constituted
SGEI obligations in so far as the obligations served to achieve the objectives of a mission of general economic interest (‘SGEI
mission’), such as access by anyone living in Ireland to a certain level of PMI services at affordable prices and on similar
conditions of quality. In that regard, the Commission considered that the Irish authorities had not made a manifest error
by qualifying as SGEIs certain services going beyond those offered by the public social security scheme and accepted, in consequence,
that the obligations at issue in the present case might be qualified as SGEI obligations within the meaning of Community law
(recitals 42 to 49 to the contested decision).
The Commission then found, in substance, that the application of the RES was strictly necessary in order to maintain stability
on the relevant market, to neutralise the differential in risk profiles between PMI insurers and to compensate for the discharge
of the SGEI obligations in question. It thus concluded that the RES was proportionate (recitals 50 to 59 to the contested
decision).
As regards the necessity of the RES, the Commission observed that economic studies had highlighted the fact that in a community
rated system, and notwithstanding the open enrolment obligation, PMI insurers would, in the absence of the RES, have a strong
incentive to target, using selective marketing strategies, for example, low-risk, healthy consumers in order to be able to
charge a lower community rate then their competitors. The Commission also observed that, in those circumstances, even in the
absence of active risk selection, consumers would be likely to change insurers, which could give rise to spiralling costs
for PMI insurers whose risk profile is made up of a greater proportion of insured persons in poor health.
As regards the Irish PMI market, the Commission considered, in light of the Report of the Society of Actuaries in Ireland
of April 2002 and the available data, that the situation could change and lead to a ‘spiralling down’ since some PMI insurers
had attempted to attract young and presumably healthier consumers, by means of a strategy based on risk selection rather than
one of quality or efficiency (footnote 9 to the contested decision). Consequently, the Commission concluded that although
such market instability had not yet been observed, the danger of risk selection on the Irish PMI market based on community
rating could not be excluded, so that it was necessary to maintain stability on that market by introducing the RES, which
ensured an appropriate distribution of risks on that market. In fact, in a PMI market with a risk-based rating, the RES would
not be necessary (recitals 50 to 52 to the contested decision).
As regards the proportionality of the RES, the Commission observed, in substance, that an unequal distribution of risks among
PMI insurers did not lead automatically to the activation of the RES, but that the RES would be activated when certain conditions
were met and, in particular, when certain percentages of risk differential were reached. It further observed that the RES
limited transfers of payments between PMI insurers to the level strictly necessary to neutralise the differential between
their risk profiles. It considered that a system which compensates PMI insurers for expenditure incurred in covering ‘bad’
risks in excess of the market average was strictly necessary to compensate for the SGEI obligations with which they are entrusted,
which prohibit them from setting premiums by reference to the risk insured and from rejecting ‘bad’ risks.
The Commission also observed that not all payments by PMI insurers to insured persons were equalised, as the RES provided
for a specific ceiling corresponding to the level of benefits received by most insured persons on the Irish PMI market, to
the exclusion of ‘luxury’ services. It also observed that the RES took account of the average costs of the insurer generated
by claims for reimbursement in such a way as to avoid an equalisation of the average cost per cell of insured persons and
to allow the PMI insurers to keep the benefit of their own efficiencies. Last, the Commission considered that the RES limited
the application of the health status weight, for the purpose of determining the risk profile, to 50% of the observed use of
hospital facilities (also called ‘market experience’), which was an additional guarantee to encourage insurers to promote
shorter hospital stays, early detection and best practice generally. The Commission noted that, in consequence, the RES never
equalised the entire market risk differential (recitals 27, 28 and 53 to 57 to the contested decision).
The Commission concluded that, even if the compensation for SGEI obligations must be regarded as State aid within the meaning
of Article 87(1) EC, the aid element was compatible with the common market under Article 86(2) EC, without prejudice to its
compatibility with other rules of Community law, in particular with the third non-life insurance directive, examination of
which must take place in the appropriate procedures (recitals 60 and 61 to the contested decision).
By letter of 2 June 2003, in response to the applicants’ letter of 7 May 2003, the Commission informed the applicants that
it had concluded that the RES did not constitute State aid within the meaning of Article 87(1) EC or could be declared compatible
with the common market pursuant to Article 86(2) EC.
By letter of 6 June 2003, the Commission, at the applicants’ request, sent the applicants a copy of the contested decision,
which they received on 11 June 2003.
By letter of 23 July 2003, the Commission confirmed to the applicants that the contested decision involved rejection of their
complaint and, in response to a further request, sent them a list of seven economic studies submitted in support of the notification
by the Irish authorities, which, according to the Commission, were ‘publicly available’.

Procedure and forms of order sought by the parties
By application lodged at the Registry of the Court of First Instance on 20 August 2003, the applicants brought the present
action. Pursuant to Article 14(1) of the Rules of Procedure of the Court of First Instance, the Court decided to allocate
the case to a chamber of extended composition.
By separate document lodged at the Court Registry on the same date, the applicants requested the Court, in accordance with
Article 76a of the Rules of Procedure, to adjudicate under an expedited procedure. By letter of 5 September 2003, the defendant
submitted its observations on that request. By letter of 23 September 2003, the Court informed the applicants that it had
decided to reject the request for an expedited procedure.
By documents lodged at the Court Registry on 27 November and 12 and 17 December 2003 respectively, Ireland, the Kingdom of
the Netherlands and the VHI requested leave to intervene in the proceedings in support of the defendant. By orders of 3 February
and 2 April 2004, the President of the Third Chamber (Extended Composition) of the Court granted, first, Ireland and the Kingdom
of the Netherlands, and then the VHI, leave to intervene in support of the form of order sought by the defendant.
By letter of 28 April 2004, Ireland objected to a request for confidential treatment submitted by the applicants and requested
the Court to communicate to it a complete set of all the procedural documents. By order of 4 March 2005, the President of
the Third Chamber (Extended Composition) of the Court rejected the applicants’ request for confidential treatment vis-à-vis
Ireland and ordered that a complete version of the procedural documents be sent to that Member State.
The interveners lodged their statements in intervention and the applicants lodged their observations on those statements within
the prescribed periods.
By separate document registered at the Court Registry on 22 June 2005, the applicants submitted an application for interim
measures pursuant to Articles 242 EC and 243 EC, which was registered as Case T‑289/03 R, seeking suspension of the implementation
of Article 1 of the contested decision. By letter of 1 July 2005, the applicants withdrew their request for interim measures.
By order of 12 September 2005, the President of the Court ordered that Case T‑289/03 R be removed from the register and reserved
the decision on costs.
On 19 January 2006, the applicants lodged a request for priority treatment under Article 55(2) of the Rules of Procedure.
The defendant, Ireland and the VHI submitted their observations on that request.
Upon hearing the report of the Judge Rapporteur, the Court (Third Chamber, Extended Composition) decided to open the oral
procedure and to give the case priority treatment pursuant to Article 55(2) of the Rules of Procedure and, in the context
of the measures of organisation of procedure provided for in Article 64 of the Rules of Procedure, invited the parties to
answer a number of written questions before the hearing. The parties answered those questions within the periods prescribed.
The parties submitted oral argument and their answers to the oral questions put by the Court at the hearing on 7 March 2007.
The applicants claim that the Court should:
–        annul the contested decision;
–        order the defendant to pay the costs;
–        declare the arguments which Ireland and the VHI derive from Article 87(1) EC inadmissible;
–        order the interveners to pay the costs.
The defendant and the supporting interveners contend that the Court should:
–        dismiss the action;
–        order the applicants to pay the costs.

Law
I –
Admissibility
A –
Arguments of the parties
In the rejoinder, the defendant challenges the admissibility of the action on the ground that the applicants are not individually
or directly concerned by the contested decision for the purposes of the fourth paragraph of Article 230 EC.
The defendant claims, first, that the RES applies to all PMI insurers active on the Irish market and therefore applies to
objectively determined situations and produces legal effects only with respect to categories of persons envisaged in the abstract.
As may be seen from the HIA’s report of 28 April 2004 to the Minister for Health, which was communicated to the Commission
on 14 May 2004, and contrary to the assertion in the application that only the applicants and the VHI are subject to the RES,
a third PMI insurer, the Electricity Supply Board’s Staff Medical Provident Fund (‘the SMPF’) is also subject to the RES.
Accordingly, the applicants are not individually concerned by virtue of attributes peculiar to them or by reason of a factual
situation which differentiates them from all other persons (Case C‑50/00 P
Unión de Pequeños Agricultores
v
Council
[2002] ECR I‑6677, paragraph 36), nor are they in a position comparable to that giving rise to the judgment of 16 May 1991
in Case C‑358/89
Extramet Industrie
v
Council
[1991] ECR I‑2501. The fact that it is possible to determine, at a given moment, the likely identity of the beneficiaries
of the RES does not alter the general character of the scheme in question.
The defendant further maintains that the adoption of the contested decision did not necessarily result in the application
of the RES, which still required a recommendation from the HIA and ministerial approval of that recommendation (Case T‑9/98
Mitteldeutsche Erdöl-Raffinerie
v
Commission
[2001] ECR II‑3367, paragraph 51). The defendant explained at the hearing that the applicants were not directly concerned
by the contested decision since the application of the RES depended on intermediate measures to be taken by the Irish authorities
and amenable to appeal before the national courts.
In its observations on the plea alleging failure to initiate the formal investigation procedure provided for in Article 88(2) EC,
the defendant further submits that the essential aim of the action is to challenge the substance of the contested decision.
The action cannot therefore be declared admissible on the ground that the applicants are seeking to protect their procedural
rights in accordance with Article 88(2) EC, as recognised in Case C‑198/91
Cook
v
Commission
[1993] ECR I‑2487.
The applicants maintain that the plea of inadmissibility raised by the defendant is contrary to Article 48(2) of the Rules
of Procedure in that it was raised out of time in the rejoinder. Furthermore, the commencement of the RES had the inevitable
consequence that payments were made by BUPA Ireland for the benefit of the VHI and the contested decision was adopted at the
end of the preliminary examination procedure under Article 88(3) EC. However, the applicants do not dispute the fact that
the SMPF is also subject to the RES and that it may even benefit from a transfer of funds in the context of the application
of the RES.
The applicants conclude that, in accordance with the case-law, they are individually and directly concerned by the contested
decision. Furthermore, their action is also based on the plea alleging failure to initiate the formal investigation procedure
under Article 88(2) EC and seeks to ensure respect for their procedural rights. They rely on the judgment in Case T‑157/01
Danske Busvognmænd
v
Commission
[2004] ECR II‑917, paragraph 41), where the Court held that an applicant is entitled to plead any of the grounds of illegality
set out in the second paragraph of Article 230 EC, provided that they concern the total or partial annulment of the contested
decision.
B –
Findings of the Court
1.     Admissibility of the plea of inadmissibility
In response to the applicants’ argument that the plea of inadmissibility was raised out of time, by reference to Article 48(2)
of the Rules of Procedure, the Court observes that in any event a plea of inadmissibility alleging that the applicant lacks
locus standi
is a plea of inadmissibility that is a matter of public policy, for the purposes of Article 113 of the Rules of Procedure,
which the Court may examine of its own motion at any stage of the proceedings and independently of the pleas and arguments
put forward by the parties (see, to that effect, Case T‑141/03
Sniace
v
Commission
[2005] ECR II‑1197, paragraphs 20 to 22, and Case T‑210/02
British Aggregates
v
Commission
[2006] ECR II‑2789, paragraph 57). It is also claimed that the defendant raised in the rejoinder a new fact of which it was
informed by Ireland only on 14 May 2004, namely that a third PMI insurer, the SMPF, was also subject to the RES payments obligation.
The Court must therefore examine the merits of the plea of inadmissibility raised by the defendant.
2.     The merits of the plea of inadmissibility
a)     Whether the applicants were individually concerned
The defendant does not accept, primarily, that the applicants were individually concerned, for the purposes of the fourth
paragraph of Article 230 EC, by the contested decision.
In that regard, according to a consistent body of case-law, persons other than those to whom a decision is addressed may claim
to be individually concerned only if that decision affects them by reason of certain attributes which are peculiar to them
or by reason of circumstances in which they are differentiated from all other persons and by virtue of these factors distinguishes
them individually just as in the case of the person addressed by such a decision (Case 25/62
Plaumann
v
Commission
[1963] ECR 95, at 107;
Cook
v
Commission
, paragraph 66 above, paragraph 20; and Case C‑298/00 P
Italy
v
Commission
[2004] ECR I‑4087, paragraph 36). With more specific regard to a Commission decision on State aid, it must be borne in mind
that in the procedure for reviewing State aid provided for in Article 88 EC, a distinction must be drawn between the preliminary
procedure for reviewing the aid established in Article 88(3) EC, which is intended merely to allow the Commission to form
a prima facie opinion on the partial or complete conformity of the aid in question, and the investigation stage referred to
in Article 88(2) EC. It is only in connection with the latter investigation, which is designed to enable the Commission to
be fully informed of all the facts of the case, that the EC Treaty imposes an obligation on the Commission to give the parties
concerned notice to submit their comments (
Cook
v
Commission
, paragraph 66 above, paragraph 22; Case C‑225/91
Matra
v
Commission
[1993] ECR I‑3203, paragraph 16; Case C‑367/95 P
Commission
v
Sytraval and Brink’s France
[1998] ECR I‑1719, paragraph 38; and Case C‑78/03 P
Commission
v
Aktionsgemeinschaft Recht und Eigentum
[2005] ECR I‑10737, paragraphs 33 and 34).
Where, without initiating the formal investigation procedure provided for in Article 88(2) EC, the Commission finds, by decision
adopted on the basis of Article 88(3) EC, that an aid is compatible with the common market, the persons intended to benefit
from those procedural guarantees may secure compliance with them only if they are able to challenge that decision before the
Community Courts (
Cook
v
Commission
, paragraph 66 above, paragraph 23;
Matra
v
Commission
, paragraph 72 above, paragraph 17; and
Commission
v
Sytraval and Brink’s France
, paragraph 72 above, paragraph 40). For those reasons, the Courts will declare admissible an application for annulment of
such a decision brought by a ‘party concerned’ within the meaning of Article 88(2) EC where the applicant intends, by bringing
the action, to ensure that the procedural rights which he derives from that provision are protected (
Cook
v
Commission
, paragraph 66 above, paragraphs 23 to 26, and
Matra
v
Commission
, paragraph 72 above, paragraphs 17 to 20). The ‘parties concerned’ for the purposes of Article 88(2) EC who are entitled
under the fourth paragraph of Article 230 EC to institute proceedings for annulment are any persons, undertakings or associations
whose interests may be affected by the grant of aid, in particular undertakings competing with the recipients of the aid and
trade associations (
Commission
v
Sytraval and Brink’s France
, paragraph 72 above, paragraph 41, and
Commission
v
Aktionsgemeinschaft Recht und Eigentum
, paragraph 72 above, paragraphs 35 and 36).
On the other hand, if the applicant challenges the substance of the decision appraising the aid as such, the mere fact that
it may be regarded as concerned within the meaning of Article 88(2) EC cannot suffice to render the action admissible. The
applicant must then demonstrate that it has a particular status within the meaning of the case-law established in
Plaumann
v
Commission
, paragraph 71 above. That applies in particular where the applicant’s market position is substantially affected by the aid
to which the decision at issue relates (see
Commission
v
Aktionsgemeinschaft Recht und Eigentum
, paragraph 72 above, paragraph 37 and the case-law there cited).
In the present case, the applicants contest, in particular by their first and second pleas, the substantive legality of the
contested decision, while only their sixth plea goes to the failure to open the formal investigation procedure and thus failure
to respect the procedural guarantees provided for in Article 88(2) EC from which the applicants might have benefited as concerned
parties. In that last plea, the applicants claim, moreover, that the Commission ought to have initiated the formal investigation
procedure owing to the doubts as to whether the RES was compatible with the common market on account of the factual and economic
complexity of the case.
As regards, first, the applicants’ capacity to secure respect for their procedural rights, it is not disputed by the defendant
that the applicants, and in particular BUPA Ireland, as the VHI’s main competitor on the Irish PMI market, are ‘parties concerned’
within the meaning of the case-law cited at paragraph 69 above. The fact that in this case the applicants were able, after
lodging their complaint against the RES in 1999, that is to say, before the Commission initiated its examination of the RES
notified by Ireland in 2003, to put forward their arguments even during the preliminary examination procedure under Article
88(3) EC cannot deprive them of the right to respect for the procedural guarantee expressly conferred on them by Article 88(2) EC
(see, to that effect, Case T‑34/02
Le Levant 001 and Others
v
Commission
[2006] ECR II‑267, paragraphs 94 to 98). It follows that the applicants have
locus standi
in so far as they seek to secure respect for their procedural rights under Article 88(2) EC.
As regards, next, the applicants’
locus standi
to challenge the substance of the contested decision, the defendant is wrong to claim that the applicants are not individually
distinguished, within the meaning of the
Plaumann
case-law cited at paragraph 69 above, by the contested decision.
So far as, first of all, BUPA Ireland is concerned, it is common ground that even though the RES is in theory intended to
apply to all insurers active on the Irish PMI market, BUPA Ireland is the VHI’s main competitor on the Irish PMI market, on
which the VHI occupies a dominant position, and, moreover, that the application of the RES would necessarily give rise, initially,
to RES payments being made by BUPA Ireland for the sole benefit of the VHI, through the fund administered by the HIA. In those
circumstances, the contested decision not only substantially affects BUPA Ireland in its competitive position on the Irish
PMI market but is also aimed at BUPA Ireland, at the time of its adoption, as the only net contributor to the fund set up
for the RES. In that regard, the defendant’s argument that the circle of persons concerned by the RES and, accordingly, the
scope of the contested decision also extends to the SMPF, cannot be upheld,
a fortiori
because there is no suggestion that that fact is capable of altering the burden imposed on BUPA Ireland as the only net contributor.
It should be added that it is on account of the fear of such a substantial effect on its competitive situation, even to the
point of having to leave the Irish PMI market, that BUPA Ireland lodged a complaint with the Commission and that it was the
only interested third party to have played an active part, following a dispute lasting approximately three years, in the procedure
leading to the adoption of the contested decision, the content of which it determined, at least in part (see, in particular,
paragraphs 33 to 35 and 42 to 49 of the contested decision).
The Court concludes from the foregoing that BUPA Ireland has thus established the existence of a set of facts constituting
a special situation which distinguishes it, from the viewpoint of the contested decision, from any other economic operator
(see, to that effect, judgment of 16 May 1991 in
Extramet Industrie
v
Council
, paragraph 64 above, paragraph 17). It follows that the contested decision distinguishes BUPA Ireland as an addressee.
As regards, next, whether the first and second applicants are individually affected, it is sufficient to note that the considerations
set out at paragraphs 78 and 79 above apply
mutatis mutandis
, since, at the time of lodging the present application and until the present, those applicants, together with BUPA Ireland,
formed a group of undertakings in which the first applicant, British United Provident Association Ltd, wholly controls its
subsidiaries BUPA Insurance Ltd (the second applicant) and BUPA Ireland (the third applicant) (see, by analogy, Case T‑112/97
Monsanto
v
Commission
[1999] ECR II‑1277, paragraphs 57 and 58, a point not taken in the appeal in Case C‑248/99 P
France
v
Monsanto and Commission
[2002] ECR I‑1).
b)     Whether the applicants were directly concerned
As to the issue of direct concern raised by the defendant, it has consistently been held that the contested measure must directly
produce effects on the legal situation of the person concerned and its implementation must be purely automatic and follow
solely from the Community rules, without the application of other intermediate measures. In the case of a decision authorising
aid, the same applies where the possibility that the national authorities will decide not to grant the aid authorised by the
contested Commission decision is purely theoretical and there is no doubt that those authorities intend to act in that way
(see, to that effect,
Mitteldeutsche Erdöl-Raffinerie
v
Commission
, paragraph 65 above, paragraphs 47 and 48; Case T‑435/93
ASPEC and Others
v
Commission
[1995] ECR II‑1281, paragraphs 60 and 61; and Case T‑442/93
AAC and Others
v
Commission
[1995] ECR II‑1329, paragraphs 45 and 46; see also Case C‑386/96 P
Dreyfus
v
Commission
[1998] ECR I‑2309, paragraphs 43 and 44).
In the present case, it follows from the events preceding the adoption of the contested decision, and in particular from the
steps taken following the liberalisation of the Irish PMI market, including the setting-up of the HIA (see paragraph 18 et
seq. above), that the Irish authorities firmly intended to implement the RES, the mechanism of which was rediscussed and revised
on a number of occasions, the only questions that remain open being the precise date on which the RES would become applicable
and the RES payments commence together with the determination of the amounts of those payments. Therefore, at the time of
adoption of the contested decision, the possibility that the Irish authorities would decide not to implement the RES was purely
theoretical, as the delay in implementing it was attributable solely to the actions brought by the applicants before the High
Court against the implementing measures provided for in the relevant national legislation.
Consequently, it is appropriate to reject the defendant’s argument that the adoption of the contested decision did not necessarily
have as a consequence the application of the RES, on the ground that the Irish authorities had to take certain intermediate
measures that were amenable to appeal.
It follows that the applicants are directly and individually concerned, within the meaning of the fourth paragraph of Article
230 EC, by the contested decision and that the application must be declared admissible in its entirety.
The plea of inadmissibility raised by the defendant must therefore be rejected.
II –
Substance
A –
Preliminary observation
The applicants raise seven pleas in law in support of their application, namely, first, misapplication of Article 87(1) EC;
second, misapplication of Article 86(2) EC; third, an error of law in failing to examine the legality of the RES under Article
86(1) EC in conjunction with Article 82 EC; fourth, an error of law in failing to examine the legality of the RES under Articles
43 EC and 49 EC; fifth, an error of law and a failure to state reasons regarding the failure to carry out a proper examination
of the legality of the RES in the light of the third non-life insurance directive; sixth, unlawful failure to open a formal
investigation procedure under Article 88(2) EC; and, seventh, breach of the obligation to state reasons under Article 253 EC.
The Court notes, by way of preliminary observation, that the arguments which the parties put forward in connection with the
first and second pleas overlap to a significant extent. They raise, in particular, the question of the existence of an SGEI
mission and also the question whether the RES is necessary for the purpose of discharging that mission and whether it is proportionate.
It is therefore appropriate to begin by setting out the substance of all of those arguments so that they can properly be taken
into account in the examination of those two pleas.
B –
First and second pleas
1.     Arguments of the parties
a)     The plea alleging misapplication of Article 87(1) EC
i) Arguments of the applicants
1) General observations
The applicants submit, by way of preliminary observation, that by their first plea they take exception to Article 1 of the
contested decision, which states that the RES ‘does not involve State aids in the sense of Article 87(1) EC’. They observe
that the defendant puts forward no defence to that plea, so that the decision ought to be annulled on that ground alone.
The applicants further observe that the Commission correctly stated, at recital 39 to the contested decision, that in principle
the RES satisfies the criteria set out in Article 87(1) EC and could therefore be qualified as State aid. At recitals 61 and
62 to the contested decision, however, the Commission wrongly considered that the RES nevertheless did not constitute State
aid within the meaning of that provision because it compensated for SGEI obligations. However, in this case the conditions
for financial compensation for SGEI obligations, as recognised by the Court of Justice (
Ferring
, paragraph 41 above, paragraph 27, and Case C‑280/00
Altmark Trans und Regierungspräsidium Magdeburg
[2003] ECR I‑7747, ‘
Altmark
’, paragraphs 87 to 93), are not satisfied. In particular, in
Altmark
the Court of Justice held that where a State measure must be regarded as compensation for the services provided by the recipient
undertakings in order to discharge public service obligations, so that those undertakings do not enjoy a real financial advantage
and the measure thus does not have the effect of putting them in a more favourable competitive position than the undertakings
competing with them, such a measure is not caught by Article 87(1) EC (
Altmark
, paragraph 87). Furthermore, according to the Court of Justice, in that connection four cumulative conditions must be satisfied
(
Altmark
, paragraphs 88 to 93; ‘the
Altmark
conditions’), and they are not satisfied in this case.
In that regard, the defendant’s attempt to avoid annulment of the contested decision by relying solely on Article 86(2) EC
cannot succeed since the operative part of that decision makes no reference to Article 86(2) EC and the reason stated in that
regard, at recital 61 to that decision, is not sufficient. Even to the extent to which the conditions for the application
of Article 86(2) EC are equivalent to those applicable to Article 87(1) EC, which the defendant does not dispute, the defendant’s
argument cannot succeed since it does not in any event demonstrate the existence of an SGEI obligation which would justify
the RES or that the RES is proportionate within the meaning of
Altmark
and Article 86(2) EC.
In that context, the applicants further claim that, unlike the defendant and the Kingdom of the Netherlands, Ireland and the
VHI seek to defend the legality of the contested decision by asserting that the
Altmark
conditions are satisfied. Under Article 116(3) of the Rules of Procedure, however, interveners must accept the case as they
find it at the time of their intervention and thus cannot alter the framework of the dispute (Case T‑243/94
British Steel
v
Commission
[1997] ECR II‑1887, paragraph 70) as defined by the applicants and the defendant in their pleadings. However, since the defendant
has failed to submit argument based on Article 87(1) EC, the framework of the dispute at the time of the intervention related
only to Article 86(2) EC. In the applicants’ submission, it follows that the arguments of Ireland and the VHI concerning Article
87(1) EC must be declared inadmissible.
In any event, the defects in the reasoning in the contested decision cannot be cured retroactively in the course of the proceedings
by new legal and factual arguments put forward by the interveners (Case T‑5/02
Tetra Laval
v
Commission
[2002] ECR II‑4381, paragraphs 255, 271 and 282; Opinion of Advocate General Fennelly in Joined Cases C‑15/98 and C‑105/99
Italy and Sardegna Lines
v
Commission
[2000] ECR I‑8855, at I‑8894, point 70). On that ground, the arguments put forward by Ireland and the VHI must in any event
be rejected as unfounded.
Last, with respect to Ireland’s statement in intervention, the applicants maintain that, under Article 116(4)(b) of the Rules
of Procedure and the case-law (Case T‑84/96
Cipeke
v
Commission
[1997] ECR II‑2081, paragraphs 31 and 34), the substantive arguments in Annexes 4, 7, 9 and 10 to that statement in intervention
are admissible only in so far as they are set out in the statement in intervention itself.
The applicants maintain that in the present case the four cumulative
Altmark
conditions are not satisfied so far as the RES is concerned. They contend, moreover, that the Commission completely failed
to examine the second, third and fourth conditions, after having accepted, without making a proper evaluation, the Irish authorities’
position on the first condition.
2) The first condition: there must be actual and clearly-defined SGEI obligations
The applicants refer to the first condition laid down by the Court of Justice in
Altmark
(paragraph 89), namely that the recipient undertaking must actually have public service obligations to discharge, and those
obligations must be clearly defined.
The applicants maintain that, owing in particular to the close connection between Article 87(1) EC and Article 86(2) EC, the
concept of public service obligation used by the Court of Justice is equivalent to that of an SGEI obligation (Opinion of
Advocate General Tizzano in
Ferring
, paragraph 41 above, ECR I‑9069, points 51 and 60, and Opinion of Advocate General Jacobs in Case C‑126/01
GEMO
[2003] ECR I‑13769, at I‑13772). The Commission itself recognised in the contested decision that those two concepts are equivalent.
Moreover, the Commission has explained publicly that those two concepts refer to services with special characteristics which
the public needs (Commission report on the state of play in the work on the guidelines for State aid and [SGEIs], section
2) which do not benefit specific categories of service users (Commission non-papers on services of general economic interest
and State aid, 12 November 2002, p. 21) and which, therefore, have the following common elements: universal service, continuity,
quality of service, affordability, as well as user and consumer protection (Commission Green Paper on services of general
interest, 21 May 2003, COM(2003) 270 final, paragraph 49).
In the applicants’ submission, in light of the case-law on SGEI obligations, the conditions mentioned above imply a further
essential characteristic, namely that since the service in question is a universal service the provision of the service must
be obligatory (Case 172/80
Züchner
[1981] ECR 2021, paragraph 7; Case C‑170/90
Merci Convenzionali Porto di Genova
[1991] ECR I‑5889, paragraph 27; Case C‑393/92
Almelo
[1994] ECR I‑1477, paragraph 48; Case C‑242/95
GT-Link
[1997] ECR I‑4449; and Case C‑266/96
Corsica Ferries France
[1998] ECR I‑3949, paragraph 45).
The applicants further maintain that, in light of the specific and limited definition of the concept of an SGEI obligation,
while any State regulation which imposes obligations on an undertaking may be regarded as being in the general or public interest,
it does not follow that all such obligations are SGEI obligations in the strict sense, for which the State may legitimately
compensate the undertakings concerned. In accordance with the case-law and the Commission’s practice when taking decisions,
a distinction must be drawn between the creation of SGEI obligations and the control and regulation of the activities of undertakings
(Case 7/82
GVL
v
Commission
[1983] ECR 483, paragraphs 31 and 32, and Case C‑18/88
GB-Inno-BM
[1991] ECR I‑5941, paragraph 22; Commission Decision 97/606/EC of 26 June 1997 pursuant to Article [86(3) EC] on the exclusive
right to broadcast television advertising in Flanders (OJ 1997 L 244, p. 18); and Case T‑266/97
Vlaamse Televisie Maatschappij
v
Commission
[1999] ECR II‑2329). In the applicants’ submission, if that were not the case and if Member States were not required to respect
that precise and limited definition of the concept of an SGEI obligation, they would be able to evade the application of Article
87(1) EC and compensate for all kinds of obligations imposed on undertakings in the public interest.
The applicants submit that the concept of an SGEI obligation is a concept of Community law which must be interpreted objectively
in the same way as the concept of State aid within the meaning of Article 87(1) EC, of which it forms an integral part (Case
173/73
Italy
v
Commission
[1974] ECR 709, paragraph 13, and Case C‑83/98 P
France
v
Ladbroke Racing and Commission
[2000] ECR I‑3271, paragraph 25; and Opinion of Advocate General Jacobs in
GEMO
, paragraph 96 above, point 73). That is confirmed by the case-law according to which the concept of an SGEI within the meaning
of Article 86(2) EC is to be interpreted strictly (
GT‑Link
, paragraph 97 above, paragraph 50, and Case C‑157/94
Commission
v
Netherlands
[1997] ECR I‑5699, paragraph 37), in order to ensure that the Member States cannot easily escape the application of the rules
on State aid.
Although a Member State is free to determine, in the exercise of its discretion, the way in which it proposes to provide and
regulate the provision of an SGEI (Report from the Commission on the state of play in the work on the guidelines for State
aid and SGEIs, section 4.1; Commission Decision SG (99) D/10201 of 14 December 1999 on State aid No NN 88/98 – United Kingdom),
the qualification of an SGEI obligation is subject to strict control by the Community institutions (Case 41/83
Italy
v
Commission
[1985] ECR 873, paragraph 30).
In that regard, the applicants dispute the assertions of the defendant and the interveners that, first, the concept and application
of an SGEI obligation are subject to control only for manifest error and, second, the definition of the scope of that concept
is essentially a matter within the discretion of the Member States. Moreover, the case-law on which the interveners rely (Case
C‑67/96
Albany
[1999] ECR I‑5751, paragraph 104, and Case T‑106/95
FFSA and Others
v
Commission
[1997] ECR II‑229, paragraph 137) confirms, on the contrary, the applicants’ argument. Last, the applicants maintain that
the interveners put forward no argument capable of calling in question the Community definition of the concept of an SGEI
obligation.
The applicants contend that in the present case the first
Altmark
condition is not satisfied because there are no SGEI obligations connected with the RES. The Commission’s finding to the
contrary at recital 49 to the contested decision is incorrect in two respects.
The applicants first of all maintain that the Commission did not undertake an assessment of whether the SGEI obligations invoked
by the Irish authorities, namely the requirements of open enrolment, community rating, lifetime cover and minimum benefits
(‘the PMI obligations’) actually and objectively constituted SGEI obligations. In reality, the Commission avoided that question
by incorrectly taking the view that the matter came within the competence of the Irish authorities and that its control was
limited to a control of manifest errors on the part of those authorities in the exercise of their competence. By adopting
that approach, the Commission ignored the need for a strict and objective Community definition of SGEI obligations and unlawfully
delegated to the Irish authorities the power to define what constituted such obligations. The Commission thus failed to exercise
the degree of control required by Article 87(1) EC.
The applicants further maintain that the PMI obligations are not in the nature of an SGEI obligation, for the reasons set
out below.
First, in accordance with the case-law and the Commission’s practice in taking decisions, the PMI obligations are simply normal
regulatory obligations attached to the authorisation to provide a service and to the control by the public authorities of
the activity of the operators concerned. The regulations in issue do not impose on the operators concerned the obligation
to provide PMI services, still less a minimum level of those services or a universal service. It is merely a matter of an
authorisation to provide such services according to market demand subject to the condition that the operator concerned observes
the principles of open enrolment, community rating, lifetime cover and minimum benefits. That is also true for the VHI, which,
with the exception of Plan P, is not subject to any regulatory obligation to provide specific PMI services.
Second, the Commission’s assertion that the PMI obligations seek to ensure a certain level of PMI services for all persons
living in Ireland, at an affordable price and on similar quality conditions, is manifestly incorrect, as elderly persons and
those suffering from pre-existing diseases may be excluded from PMI services. In that regard, the Commission is incorrect
to state that the ‘open enrolment’ rule avoids the exclusion of those persons. On the contrary, PMI insurers are entitled
to exclude persons over the age of 65, or approximately 8% of the Irish population, who are seeking cover for the first time
(recital 34, third indent, to the contested decision) and in practice the VHI and BUPA Ireland do not offer insurance policies
to such persons. As regards persons suffering from pre-existing diseases, moreover, PMI insurers are entitled to limit cover
by imposing ‘waiting periods’ of 5 to 10 years, depending on the age of the persons concerned, before they are covered, a
possibility of which both VHI – except for Plan P – and BUPA Ireland make use in practice. Last, according to current figures,
approximately 49% of the Irish population do not benefit from PMI services. Furthermore, the regulations on minimum benefits
provide for such a low level of cover that, in practice, they are immaterial, since the level specified is significantly exceeded
even by the most basic plans on the market, such as the VHI’s ‘Plan A’.
Third, the applicants deny that the PMI obligations ensure uniformly affordable rates. Even for those persons for whom those
services are available and who can thus benefit from community rating, rates, with the exception of those for Plan P, are
exclusively fixed by market forces. Thus, waivers or significant premium reductions are available, in particular for persons
under the age of 18 or aged between 18 and 23. Accordingly, community rating allows only rates freely determined by insurers
on the basis of market conditions to be made uniform.
Fourth, the PMI obligations do not in any event display the characteristics of an SGEI obligation. Far from corresponding
to a universal service created in the general interest, such as a service that replaces the public social security system,
the PMI services in issue are merely optional financial services designed to provide cover that is complementary or supplementary
to the universal service. In that regard, the present case must be distinguished from that in Joined Cases C‑264/01, C‑306/01,
C‑354/01 and C‑355/01
AOK-Bundesverband and Others
[2004] ECR I‑2493, concerning the German health insurance system, which is compulsory for the great majority of German employees
and which takes the place of the universal (public) healthcare provision (Opinion of Advocate General Jacobs in
AOK-Bundesverband and Others
, at [2004] ECR I‑2495, and judgment in
Albany
, paragraph 101 above). The applicants further submit that the present case bears more resemblance to the situation in
Danske Busvognmænd
v
Commission
, paragraph 68 above (paragraphs 90 to 92), where the Court of First Instance held that the transport service in question
could not be characterised as an SGEI because the transport activities were open to competition between the various transport
undertakings which were active in the market and were all in the same situation.
In that regard, the applicants dispute the defendant’s argument, raised essentially in the defence (paragraphs 13 and 35 to
43) and not in the contested decision, that it is the provision of PMI services – rather than PMI obligations – that constitutes
the veritable SGEI mission and, without the RES, the Irish PMI market could not operate in economically acceptable conditions.
That, in the applicant’s contention, is not the case, because of the lack of any obligations on BUPA Ireland or the VHI, with
the exception of ‘Plan P’, to supply PMI services. In reality, the contested decision seeks only to implement the PMI obligations
which it incorrectly qualifies as SGEI obligations. Furthermore, although the PMI services, as optional financial services,
provide cover that ensures faster and better access to healthcare, they do not respond to a need and, as the Comité européen
des assurances states, are voluntary and not in substitution of the State system. If the Commission had none the less wished
to establish that the rules governing the PMI services were themselves SGEI obligations, a question which has no relevance
to the present case, it ought to have demonstrated that the rules in question were in the nature of an SGEI obligation, which
it failed to do.
In that context, the defendant’s attempt in the rejoinder to remedy its contradictory approach by stating that it is in fact
the provision of PMI services as such or a combination of the provision of those services and the PMI obligations that constitutes
the relevant SGEI cannot succeed. The only obligations defined by the contested decision which are deemed to be SGEI obligations
applicable to PMI insurers and the costs of which are capable of being compensated within the meaning of
Altmark
are the PMI obligations and not the PMI services themselves, which no insurer is obliged to provide. That position is also
supported by the VHI and by Ireland.
Last, at the hearing the applicants further submitted that, as confirmed by the judgment of the High Court, the Commission
based its reasoning in the contested decision on a misunderstanding of the principle of community rating and, accordingly,
on irrelevant facts, as it referred only to the community rating obligation for individual PMI contracts within the meaning
of section 7 of the Health Insurance Act, 1994, as amended, whereas the justification put forward by Ireland with respect
to the need for the compensation provided for by the RES was to be found in the principle of community rating applicable to
the whole of the Irish PMI market within the meaning of section 12 of that Act.
3) The second condition, relating to objective and transparent parameters for the calculation of the compensation
The applicants recall the second
Altmark
condition (paragraph 90), namely that the parameters on the basis of which the compensation is calculated must be established
in advance in an objective and transparent manner, to avoid it conferring an economic advantage which may favour the recipient
undertaking over competing undertakings. In the applicants’ submission, the determination of the compensation on the basis
of strict, transparent, objective and pre-determined criteria is an essential guarantee for competitors and potential competitors
of the undertaking in receipt of the subsidy and enables them better to plan their commercial decisions with knowledge of
the extent of the compensation which their rivals will receive (
Altmark
, paragraph 59).
The applicants maintain that this second condition is not satisfied either, owing to the absence of any objective parameters
for calculating the compensation for the alleged SGEI obligations. According to the applicants, the parameters used when the
RES payments are determined are neither objective nor transparent and depend on the exercise of a broad discretion by the
HIA and the Minister for Health.
First, the HIA has considerable latitude in determining the risk differential between PMI insurers on the basis of the so-called
‘market equalisation percentage’ formula, which is liable to influence the amount of the RES payments. That percentage has
first to be determined according to the age and sex profile of the persons covered by each PMI insurer, and is liable to be
adjusted by the HIA to reflect the extent to which those persons actually make use of the health services (Article 10 of the
RES; RES guide, page 14). That adjustment factor, know as the ‘health status weight’, is defined in the RES as a percentage
which the HIA ‘may from time to time determine’ (paragraph 1 of the Second Schedule to the RES) and which may be between 0
and 50%. Moreover, the Commission explicitly recognises that the HIA ‘has the power to determine the extent to which this
factor is taken into account, within prescribed parameters, subject to the HIA having established that this is warranted by
circumstances relating to the differences in risk profiles between [PMI] insurers and is in the best overall interests of
health insurance companies’.
Second, the HIA is required to report the deemed risk differential to the Minister for Health but has a discretion as to whether
or not to recommend the commencement of risk equalisation if the differential is between 2 and 10% (Article 10(4) of the RES),
a discretion which is also expressly recognised by the Commission. Third, the Minister for Health has a discretion as to whether
to accept the HIA’s recommendation where the deemed risk differential is between 2 and 10%. Even if the deemed risk differential
exceeds 10%, giving rise to the presumption that risk equalisation should be commenced, the Minister for Health could still
exercise his discretion by considering whether there are good reasons for not commencing risk equalisation (Article 10(6)
and (7) of the RES). Fourth, in the event of a decision activating the RES, the risk equalisation commencement day is also
determined at the discretion of the Minister for Health (Article 13 of the RES). Fifth, the calculation of RES payments is
carried out by the HIA, on a discretionary basis, on the basis of the further submission of returns by the insurers, taking
into account the deemed risk differential or the ‘market equalisation percentage’ determined, where appropriate, after application
of the ‘health status weight’ adjustment factor.
The applicants conclude from the foregoing that the decision to activate the RES and determination of the amount of the RES
payments to be made are not based on objective and transparent factors within the meaning of the second
Altmark
condition but depend largely on the discretion of the Irish authorities. That is confirmed by the three reports adopted by
the HIA since 2003 in which it found risk differentials of between 3 and 10% and concluded that there was no evidence of past
or imminent instability on the market. For reasons unknown to the applicants, the third report none the less recommended commencement
of RES payments. Contrary to the view expressed by Ireland and the VHI, that lack of objectivity and transparency cannot be
remedied by the fact that the parameters for the operation of the RES were ‘clearly set out’ and published in advance, since
the parameters themselves include a number of inbuilt elements of discretion. In the absence of objective criteria relating
to market disequilibrium the HIA and the Minister for Health are in reality in a position to base their assessments on other
matters, a situation which the second
Altmark
condition specifically seeks to avoid.
4) The third condition: the compensation must be strictly necessary
The applicants refer to the third
Altmark
condition (paragraph 92), namely that the compensation cannot exceed what is necessary to cover all or part of the costs
incurred in the discharge of public service obligations, taking into account the relevant receipts and a reasonable profit
for discharging those obligations. In the applicants’ submission, that condition requires that the compensation be a strict
quid pro quo
for the discharge of the SGEI obligations in question (Opinion of Advocate General Jacobs in
GEMO
, paragraph 96 above, point 119). That implies, at the very least, identification of the relevant SGEIs, identification of
the costs inherent in those obligations and of the fixed and variable costs, including an appropriate allocation of the general
overheads to the SGEI obligations, quantification of the revenues received by the beneficiary undertaking for the performance
of the SGEI obligations, determination of a reasonable profit for the performance of the SGEI obligations and, last, a guarantee
that the financial benefit provided by the aid does not exceed the additional costs attributable to the SGEI obligation, taking
into account the relevant receipts and a reasonable profit.
The applicants contend that in the present case that condition, which is equivalent to the criterion of proportionality within
the meaning of Article 86(2) EC, is not satisfied either. On the one hand, the Commission did not examine the relevant elements
referred to at paragraph 117 above and its failure to do so constitutes an error of law and an error affecting the reasoning
of the contested decision concerning the application of the proportionality test. On the other hand, since the Commission
has no discretion in applying Article 87 EC, it cannot reasonably rely on the judgment in Joined Cases T‑125/96 and T‑152/96
Boehringer
v
Council and Commission
[1999] ECR II‑3427, which concerns the restricted review of the discretion of the Community legislature in the sphere of
the common agricultural policy.
In any event, even if the Commission had carried out such an examination, the RES would not satisfy the strict
quid pro quo
condition, essentially for three reasons.
First, even on the assumption that the PMI obligations could, at least in part, be classified as SGEI obligations, they would
not create a financial burden for PMI insurers, including the VHI. The applicants submit that, as is apparent from section
3 of the report prepared by the consultants NERA, as annexed to the application (‘the NERA report’), PMI obligations do not
prevent insurers from safeguarding their profitability, in particular by adopting commercial measures. Thus, they can protect
themselves against bad risks by refusing new members over the age of 65 or imposing long waiting periods for people who are
ill. Similarly, PMI insurers are able to adjust their contractual terms and to differentiate premiums to take account of the
varied risks they must bear by virtue of their PMI obligations. They can therefore segment the market according to the risk
insured and offset the higher expenses associated with bad risks by charging higher premiums.
Second, even on the assumption that the PMI obligations entail costs, the RES would not be capable of compensating for them.
The RES payments are not in any way related to the PMI obligations and any costs which those obligations might generate, but
are calculated on the basis of the difference in deemed risk profiles between PMI insurers, as measured by the ‘market equalisation
percentage’. However, the calculation of that risk differential likewise bears no relation to the calculation of the costs
attributable to the PMI obligations for which the RES is intended to compensate. Such an exercise would involve in particular
separating those costs from the costs of other activities and quantifying them, measuring the relevant revenues and determining
reasonable profits. The applicants contend that the defendant’s argument in the defence confirms that the RES is in reality
intended to compensate for the cost of providing the PMI services as such. However, in the light of the contested decision,
those services do not in any event constitute SGEIs. An abstract relationship between the PMI obligations and the costs of
each PMI insurer is not sufficient and does not meet the requirement that the RES be strictly limited to any (clearly quantified)
costs arising from the PMI obligations. Last, Ireland’s argument that the specific financial burden associated with PMI obligations
might consist in ‘the difference between the market community rate and the cost of the insurer’s own claims’ cannot succeed,
in particular because there is no link with the actual costs occasioned by the settlement of claims.
Third, the RES is not even capable of compensating for the ‘bad risks’ of PMI insurers. On the contrary, as stated in section
4.2 of the NERA report, the RES does not take account of the premiums and receipts of the PMI insurer. Because of that, the
RES ignores the fact that extra claims costs of higher-risk members are in fact offset by higher premiums. If those revenues
are not taken into account, it is not possible to assess whether ‘bad risks’ result in a net financial burden for the PMI
insurer which merits compensation.
5) The fourth condition: comparison with an efficient undertaking
Last, the applicants refer to the fourth
Altmark
condition (paragraph 93), namely that where the undertaking which is to discharge public service obligations, in a specific
case, is not chosen pursuant to a public procurement procedure which would allow for the selection of the tenderer capable
of providing those services at the least cost to the community, the level of compensation needed must be determined on the
basis of an analysis of the costs which a typical undertaking, well run and adequately provided with means so as to be able
to meet the necessary public service requirements, would have incurred in discharging those obligations, taking into account
the relevant receipts and a reasonable profit for discharging the obligations. The applicants observe that that condition
essentially means that, in the absence of a public procurement procedure, the level of compensation must be determined, according
to the criteria set out at paragraph 117 above, by reference to what would have been required by a (hypothetical) efficient
undertaking rather than by reference to the subjective costs of a particular undertaking. Furthermore, that quantification
exercise concerning the beneficiary undertaking must be accompanied by a comparison with the costs and profits of other undertakings
in the sector or with what would reasonably be expected in that regard in conditions of competition. As the Commission correctly
asserted in its decision of 3 May 2005 not to raise objections to the risk equalisation scheme and retention of reserves set
up by the Netherlands authorities in the health insurance sector, the compensation must be limited to the extraordinary costs
of an efficient operator, taking the premiums into account (Commission decision of 3 May 2005 relating to State aid N 541/04
and N 542/04 – Netherlands – Risk equalisation scheme and retention of reserves, OJ 2005 C 324, p. 28; ‘the Netherlands RES
decision’).
The applicants maintain that the fourth
Altmark
condition is not satisfied in this case, as there was no comparison with an efficient undertaking. They contend that the
Commission did not even consider whether the costs incurred by the VHI in complying with the PMI obligations were comparable
to those which would have been incurred by an efficient operator. For the purpose of estimating the risk differential, the
RES provides neither a reference point for assessing efficiency nor a mechanism for comparing the pricing, contract design
and risk management practices of the PMI insurers by reference to those of an efficient operator. The applicants further submit
that in the decision on the Netherlands RES, the Commission specifically stated that the compensation paid in that case did
not satisfy the fourth
Altmark
condition.
ii) Arguments of the defendant
The defendant makes the preliminary observation that the contested decision relies first on the case-law that was current
at the date of its adoption, notably the judgment in
Ferring
, paragraph 41 above, to support the conclusion that the RES is not State aid. Since the adoption of that decision, however,
the Court of Justice, in
Altmark
, has refined the conditions laid down in
Ferring
. However, according to the defendant, the implications of
Altmark
are not determinative of the present proceedings, since the contested decision also relies on Article 86(2) EC when it concludes
that even if the RES does constitute State aid it is none the less compatible with the common market. The defendant states
that, for that reason, it will concentrate its submissions on Article 86(2) EC and will submit no argument in respect of the
plea alleging infringement of Article 87(1) EC.
iii) Arguments of Ireland and of the VHI
Ireland maintains that the reasoning of the Court of Justice in
Altmark
is essentially that followed in Case 240/83
ADBHU
[1985] ECR 531, paragraphs 3 and 18), and
Ferring
, paragraph 41 above (paragraph 27). Ireland and the VHI are also of the opinion that, contrary to the applicants’ contention,
the RES and the Commission’s findings in that regard in the contested decision satisfy all the conditions laid down in
Altmark
.
iv) Arguments of the Kingdom of the Netherlands
Like the defendant, the Kingdom of the Netherlands observes that the present dispute turns essentially on the interpretation
of Article 86(2) EC and that, accordingly, it intends to confine its intervention to the interpretation of that provision
and in particular of the concept of SGEI and the conditions of its application to an undertaking.
b)     The plea alleging misapplication of Article 86(2) EC
i) Arguments of the applicants
1) Preliminary observation
The applicants maintain that the Commission’s finding that in any event any aid element in the RES can be regarded as compatible
with the common market pursuant to Article 86(2) EC is not reflected in the operative part of the contested decision and is
not supported by a sufficient statement of reasons in that decision. Furthermore, that finding is manifestly wrong in law.
In the applicants’ submission, the RES and the associated PMI obligations do not meet the requirements of that provision.
2) The absence of SGEI obligations
In the first place, the applicants submit, as they did in connection with the first plea (see paragraphs 95 to 100 above),
that the PMI obligations do not fulfil the strict and objective conditions which SGEI obligations must satisfy under Article
86(2) EC, and examination of which was unlawfully delegated by the Commission to the Irish authorities.
3) The lack of an act of entrustment of an SGEI mission
In the second place, according to the applicants, Article 86(2) EC requires that undertakings be ‘entrusted’ with the operation
of SGEIs, which implies that an obligation to provide the services in question is imposed by the public authorities. However,
as the Commission recognises in its own practice in taking decisions, a mere granting of authorisation to provide such services
is not sufficient (Commission Decision 81/1030/EEC of 29 October 1981 relating to a proceeding under Article [82 CE] (IV/29.839
– GVL), OJ 1981 L 370, p. 49, paragraph 66; Decision 97/606, paragraph 14; and decision on the Netherlands RES). That condition
takes account, in particular, of the universal nature of the SGEI in question, the provision of which must be sheltered only
from market forces. However, in this case, with the exception of the requirement imposed on the VHI to offer Plan P, there
is no real binding universal service task, within the meaning of Article 86(2) EC, associated with the PMI obligations, but
only an authorisation to the operators concerned to provide certain services in compliance with certain regulatory conditions.
In that regard, the Kingdom of the Netherlands’ attempt to remedy, in the course of the proceedings, the failure in the contested
decision to examine the entrustment of an SGEI mission is bound to fail. In particular, there is no legal basis for the Kingdom
of the Netherlands’ view that an explicit obligation to perform an SGEI mission is not necessary where several undertakings
are entrusted with that mission and that it is sufficient if there is a system of authorisation or control. In the applicants’
opinion, on the contrary, compliance with Article 86(2) EC necessarily presupposes the entrustment of an SGEI mission by an
official act, which is missing in this case. They refer in that regard to the draft Commission decision on the application
of Article 86(2) [EC] to State aid in the form of public service compensation granted to certain undertakings entrusted with
the operation of [SGEIs], to the draft Community framework for State aid in the form of public service compensation and to
the Netherlands RES decision (section 4.2.1).
4) The lack of necessity and of proportionality of the RES
Preliminary observations
In the third place, according to the applicants, in the light of Article 86(2) EC, the application of the EC Treaty competition
rules must obstruct the performance of SGEI missions which have been entrusted to the undertaking. Where there is a grant
of special rights or financial assistance to an undertaking, the case-law requires that such measures enable the undertaking
in question to operate under economically acceptable conditions (Case C‑320/91
Corbeau
[1993] ECR I‑2533, paragraphs 14 to 16; Joined Cases C‑115/97 to C‑117/97
Brentjens’
[1999] ECR I‑6025, paragraph 107; Joined Cases C‑147/97 and C‑148/97
Deutsche Post
[2000] ECR I‑825, paragraph 49; and Opinion of Advocate General Stix-Hackl in Joined Cases C‑34/01 to C‑38/01
Enirisorse
[2003] ECR I‑14243, at I‑14247, point 102 and footnote 76). That implies a requirement of both necessity and proportionality
regarding the economic viability of providing the SGEI in question without thereby seeking to protect the entrusted undertakings
as such (Commission Decision 97/310/EC of 12 February 1997 concerning the grant to Portugal of further time for the implementation
of Directives 90/388/EEC and 96/2/EC as regards full competition in the telecommunications markets, OJ 1997 L 133, p. 19,
paragraph 10; Case 258/78
Nungesser
v
Commission
[1982] ECR 2015, paragraphs 8 and 9). That requirement of proportionality is, moreover, very similar, or indeed identical,
to the criterion of the strict
quid pro quo
within the meaning of the third
Altmark
condition for compensation for SGEI obligations, in that it limits the subsidy to the amount necessary to offset any losses
which might be incurred in rendering the universal service in question (Case C‑340/99
TNT Traco
[2001] ECR I‑4109, paragraphs 57 and 58).
The lack of necessity for the RES
The applicants maintain that the Commission has not demonstrated the necessity for the RES. In that regard, they claim that
the Commission made errors affecting the reasoning on which the contested decision is based and errors of fact.
As regards the errors affecting the reasoning on which the contested decision is based, the applicants submit that the Commission
wrongly concluded that the RES was necessary to ensure the application of the principles of community rating, lifetime cover
and open enrolment. That conclusion is contradicted by the facts set out in the contested decision itself, which explains
that the relevant market, since its liberation and the entry of BUPA Ireland, has not encountered instability problems. In
that regard, the mere possibility of a danger of risk selection – a danger that is theoretical, speculative, remote and not
quantified by reference to economic facts – is not in any event sufficient to demonstrate such instability.
So far as the errors of fact are concerned, the applicants contend that the Commission’s findings regarding the possibility
and consequences of such risk selection are manifestly erroneous. Contrary to the arguments of the Irish authorities set out
at recital 31 to the contested decision, there is no incentive for PMI insurers to ‘cherry pick’ the good risks and reject
the bad risks. On the contrary, since those insurers offer a range of services at different premiums and are able to adapt
their contractual terms according to the risk covered, they are able, independently of their risk profile, to offset the highest
risks by raising premiums and by tailored plans. Accordingly, there is no financial benefit to be drawn from a low risk portfolio
of members compared with a high risk portfolio. Similarly, contrary to the Commission’s assertion at recital 50 to the contested
decision, there is no passive risk selection resulting in an alleged greater tendency for individuals to switch PMI insurer.
In that regard, the reference to the seven economic studies, not mentioned in the contested decision and of which the applicants
were informed only belatedly, is not sufficient to corroborate the Commission’s conclusions and the Commission has not been
able to provide further support for them in its defence. Only one of those studies, which is irrelevant because it relates
to the Swiss market, mentions consumers’ willingness to switch PMI insurers and the Commission failed to take into consideration
a relevant study relating to the Irish market (The Private Health Insurance Market in Ireland, March 2003, prepared by Amárach
Consulting for the HIA; ‘the Amárach report’), relied on by the applicants in the course of the administrative procedure,
according to which members in the 18 to 34 age category were less likely to consider switching PMI insurers than members in
the 35 to 64 age category.
In that context, the applicants reject the Commission’s view that the asymmetry of the risk profiles, like that between BUPA
Ireland and the VHI concerning the age of members, is accounted for by risk selection. Those differences are the result of
two other factors, namely, first, customer inertia and unwillingness to switch between PMI insurers and, second, the VHI’s
own pricing strategy. As regards the first factor, the applicants claim to have shown, in the administrative procedure, that,
in view of the need to offer PMI services at a very wide price differential in order to encourage members to switch PMI insurer,
a new entrant to the market would necessarily have to target ‘new’ customers who are, by definition, younger customers. As
regards the second factor, the applicants claim that the premium levels offered by the VHI to high risk individuals do not
cover average claim costs. In that connection, the VHI is selling at a loss and BUPA Ireland is thus unable to compete for
generally older customers.
Furthermore, the Commission erroneously concluded, solely on the basis of asymmetry of risk profiles and without relevant
factual and economic evidence, that there might be market instability. However, both the VHI and BUPA Ireland are perfectly
capable of attracting low risk younger subscribers, and in fact do so. The applicants maintain that the average age of members
joining the VHI is lower than the average age of those joining BUPA Ireland. Moreover, the high costs involved when a customer
switches from one PMI insurer to the other have a stabilising effect, which contradicts the ‘spiralling down’ theory defended
by the Commission. On the contrary, the RES, for its part, is apt to have a significant effect on the stability of the Irish
PMI market because it results in higher premiums for young customers, the elimination of BUPA Ireland from that market and
increased barriers to entry. Furthermore, the argument put forward by the defendant in the defence, but not in the contested
decision, that the VHI’s solvency ratios were far from satisfactory and that further deterioration of its finances was not
acceptable is purely speculative and not supported by evidence, and is even contradicted by the contested decision since that
decision concludes that there had been no market instability in the past. The applicants add that the absence of any imminent
and future market instability is expressly confirmed by the three reports submitted by the HIA since 2003 (see paragraph 116
above), each of which concluded that there was no relevant evidence in that regard. The arguments to the contrary put forward
by Ireland in that regard are merely speculative or irrelevant because they relate to healthcare schemes in other countries.
In any event, those new arguments are not sufficient to justify the RES, since the aim of Article 86(2) EC is to preserve
SGEIs as such and not specific undertakings (
Commission
v
Netherlands
, paragraph 99 above, paragraph 43).
The lack of proportionality of the RES
The applicants also maintain that the Commission erroneously concluded that the RES was proportionate for the purposes of
Article 86(2) EC. In fact, the Commission has not shown that the RES payments would not exceed the amount necessary to compensate
the VHI for the costs incurred pursuant to its PMI obligations.
In that regard, the five arguments put forward by the Commission are irrelevant. First, the 2% risk differential required
in order to activate the RES has no practical effect because the risk profile is calculated on the basis of age and sex and
BUPA Ireland inevitably has a younger age profile than that of the VHI, so that that threshold is inevitably exceeded. Second,
the Commission’s assertion that all payments in favour of the policy holders, in particular those in the ‘luxury markets’,
are not equalised is manifestly incorrect. On the contrary, the ‘maximum equalised payments’ provisions in principle cover
all PMI policies, the only exclusion relating to the very highest levels of claims. Third, contrary to the Commission’s assertion
that the RES takes into account the PMI insurers’ average claim cost so as to enable those insurers to keep the benefit of
their own efficiencies, the taking into account of insurers’ actual costs gives rise to larger payments to the PMI insurers
with the highest costs and, therefore, provides incentives for inefficiency. Thus, contrary to the VHI’s assertions, the RES
permits compensation to be paid for costs which would not be incurred by an efficient PMI insurer. Fourth, the Commission
relies, wrongly, on the limitation of the ‘health status weight’ to 50%, whereas that aspect is linked neither to the PMI
obligations nor to justification of the RES. Moreover, that weighting also gives rise to inefficiencies because it is actual
costs rather than the costs incurred by an efficient operator that are taken into account. Fifth, with regard to the alleged
exclusion from the RES of new entrants to the market for the first three years of their activity on the Irish PMI market,
the applicants contend that this cannot mitigate the highly deterrent effect of the RES for those operators. Sixth, in contrast
to the Netherlands RES, the RES at issue in this case does not provide for any corrective mechanism to avoid overcompensation.
Last, at the hearing the applicants further submitted that, contrary to the defendant’s and Ireland’s assertion, the criterion
of the efficiency of the operator in receipt of aid should be applied, in the framework of the examination of proportionality
under Article 86(2) EC, in the same way as in the framework of the analysis of the fourth
Altmark
condition relating to the existence of aid within the meaning of Article 87(1) EC. On the one hand, that assessment of efficiency
is inherent in the assessment of the criterion of proportionality also provided for by Article 86(2) EC, which requires that
the compensation be limited to what is necessary from the point of view of an efficient operator. On the other hand, that
requirement follows from the case-law to the effect that Article 86(2) is not intended to protect specific operators. Furthermore,
the failure to take the criterion of efficiency into account in that context runs counter to the principle of an internal
market with undistorted competition and, accordingly to the Community interest. As regards any lack of efficiency being passed
on to all PMI insurers as a result of the ‘zero sum adjustment’ factor being taken into account in the calculation of the
RES payments, the applicants submitted however that their complaint did not relate to that aspect and acknowledged that the
amounts potentially concerned in the RES payments are negligible. Last, the applicants also stated at the hearing that any
inefficiencies linked with overconsumption, or the fact that a PMI insurer may provide its members with an incentive to undergo
treatment that is not medically necessary and to claim the related costs, were not addressed either during the procedure leading
to the adoption of the contested decision or during the judicial proceedings and that their complaint focused on the need
for a comparison between the PMI insurer in receipt of RES payments and an efficient operator.
5) The effect on the development of trade
Last, in the applicants’ submission, Article 86(2) requires that derogation from the Treaty competition rules must not affect
the development of trade to such an extent as would be contrary to the interests of the Community. However, contrary to the
requirements established in the case-law (
Danske Busvognmænd
v
Commission
, paragraph 68 above, paragraph 96), in the contested decision the Commission neither examined nor demonstrated the absence
of adverse effects on the development of trade.
ii) Arguments of the defendant
1) Preliminary observation
The defendant contends at the outset that the complaint alleging failure to mention Article 86(2) EC in the operative part
of the decision, which is raised in the reply, is inadmissible under Article 48(2) of the Rules of Procedure and in any event
is unfounded and must therefore be rejected.
2) Competence to define SGEI obligations
As for the question of the characterisation of the PMI obligations as SGEI obligations, the defendant first of all rejects
the applicants’ argument that that characterisation falls primarily within the competence of the Community institutions and
entails the interpretation of an objective and specific concept of Community law. On the contrary, it is apparent from the
Commission’s practice in taking decisions that it is essentially for the Member States to define what they consider to be
SGEIs and that the Commission’s control in that respect is limited to a control of manifest errors.
The defendant contends that recitals 44, 48 and 49 to the contested decision are wholly compatible with that premiss and display
no error.
3) The characterisation of the PMI obligations as SGEI obligations
As regards the characterisation of the PMI obligations as SGEI obligations, within the meaning of Article 86(2) EC, the defendant
observes that the contested decision sets out, at recitals 44 to 46, a number of considerations militating in favour of that
characterisation, such as those relating to recognition of the margin of appreciation granted to Member States to designate
SGEIs, the limited harmonisation of laws on health insurance and the competence of the Member States for health matters under
Article 152 EC. In that regard, the defendant disputes the correctness of the applicants’ objections based, first, on the
fact that the PMI obligations are in reality simple legal conditions governing the commercial activities of PMI insurers and
imposed in the public interest, second, on the fact that there is no guarantee of a minimum PMI level for all at an affordable
price, and, third, on the fact that the PMI services do not replace the social security system.
4) The imposition of SGEI obligations on PMI insurers
According to the defendant, the applicants are wrong to claim that there must be legislation requiring the VHI and BUPA Ireland
to provide PMI services, whereas, according to the case-law, it is sufficient for an operator to be required to observe certain
terms stipulated in a concession granted to it (Case C‑159/94
Commission
v
France
[1997] ECR I‑5815). In this case, the Health Insurance Act 1994 requires PMI insurers to be registered and to observe the
PMI obligations, failing which they may be removed from the register. That situation is similar to the one giving rise to
the
Ferring
judgment, paragraph 41 above.
5) The necessity of the RES
With regard to the necessity of the RES, the applicant observes that Member States may have regard to objectives pertaining
to their national policy when assigning SGEIs. Under the case-law (
Albany
, paragraph 101 above, paragraphs 107 to 111), the relevant question is not whether the RES responds to some absolute standard
of necessity, but rather whether the contested decision is manifestly in error in finding that the RES is necessary in the
sense that the absence of the RES might make it impossible for the Irish PMI market to operate under economically acceptable
conditions. Therefore, the necessity of the RES must be assessed by reference to what is economically acceptable and not to
what is indispensable.
As for the danger of active risk selection, the defendant asserts, in essence, that compliance with PMI obligations, such
as open enrolment and community rating, necessarily encourages PMI insurers to engage in active risk selection and to reduce
the number of high-risk policy-holders. Furthermore, the defendant contends that the contested decision does not claim that
the applicants’ entry on to the Irish PMI market will inevitably lead to instability on that market, but is based on the observation
that there may be risk selection, leading to instability. That is sufficient in the light of the
Albany
judgment, paragraph 101 above, and of the restricted degree of review which the Court is required to exercise over the necessity
criterion.
6) The proportionality of the RES
As regards the proportionality of the amount of the RES payments by reference to the costs incurred, the defendant observes
that it is for the applicants to demonstrate, which they have failed to do, that the Commission made a manifest error of assessment
in accepting the proportionality of the RES system (
Boehringer
v
Council and Commission
, paragraph 118 above, paragraph 74 et seq.). In light of the discretion left to the Member States both in defining an SGEI
and in determining the method of calculating the compensation for the SGEI obligations, within the meaning of Article 86(2) EC,
the applicants ought to have shown that the RES was manifestly disproportionate as a means of ensuring the functioning of
the Irish PMI market under economically acceptable conditions (Opinion of Advocate General Jacobs in
AOK-Bundesverband and Others
, paragraph 108 above, points 95 to 101). It follows from the case-law that, while the Member State, when it invokes Article
86(2) EC, must ‘demonstrate that the conditions which are laid down by that provision are met, that burden of proof cannot
be so extensive as to require the Member State, when setting out in detail the reasons for which, in the event of elimination
of the contested measures, the performance, under economically acceptable conditions, of the tasks of general economic interest
which it has entrusted to an undertaking would, in its view, be jeopardised, to go even further and prove, positively, that
no other conceivable measure, which by definition would be hypothetical, could enable those tasks to be performed under the
same conditions’ (
Commission
v
Netherlands
, paragraph 99 above, paragraph 58). The applicants have failed to demonstrate that that is the case.
The defendant therefore submits that the present plea must be rejected.
iii) Arguments of Ireland and of the Kingdom of the Netherlands
Ireland adopts the argument developed by the Commission in support of the present plea.
The Kingdom of the Netherlands submits that in the present case the PMI obligations fulfil the conditions which must be satisfied
by the SGEI obligations for the purposes of Article 86(2) EC.
2.     Findings of the Court
a)     The admissibility of the arguments put forward by Ireland and the VHI with respect to the first plea
It is appropriate to examine first of all the applicants’ argument that the arguments put forward by Ireland and by the VHI
against the first plea alleging infringement of Article 87(1) EC are inadmissible.
In that regard, it must be borne in mind that, under the fourth paragraph of Article 40 of the Statute of the Court of Justice,
which applies to the Court of First Instance by virtue of Article 53 of that Statute, an application to intervene must be
limited to supporting the form of order sought by one of the parties. In addition, under Article 116(3) of the Rules of Procedure,
the intervener must accept the case as it finds it at the time of its intervention. Although those provisions do not preclude
an intervener from using arguments different from those used by the party it is supporting, that is nevertheless on the condition
that they do not alter the framework of the dispute and that the intervention is still intended to support the form of order
sought by that party (see Case T‑2/03
Verein für Konsumenteninformation
v
Commission
[2005] ECR II‑1121, paragraph 52 and the case-law there cited, and Case T‑237/02
Technische Glaswerke Ilmenau
v
Commission
[2006] ECR II‑5131, paragraph 40).
In that regard, the Court notes that the defendant explicitly declined in its defence to submit arguments against the first
plea. The fact none the less remains that the first plea, as raised by the applicants, continues to form an integral part
of the framework of the present dispute. Second, the mere fact that the defendant declines to comment on that plea cannot
restrict the scope of the dispute. Furthermore, far from implying an admission that the plea is well founded, that waiver
of the right to reply is based on the argument that the plea is of no relevance to the outcome of the dispute. In addition,
in its defence to the second plea, the defendant in essence disputes the arguments put forward by the applicants in support
of their first plea in so far as that argument refers to the criteria for the application of both Article 86(2) EC and Article
87(1) EC, as laid down in
Altmark
. In those circumstances, there is no limitation in this case of the framework of the dispute as regards the first plea that
would preclude the interveners from raising arguments in addition to those raised by the defendant. In effect, Ireland and
the VHI fully comply with the scope of the first plea by putting forward arguments which entail the satisfaction of the four
cumulative criteria resulting from the
Altmark
judgment. Likewise, those arguments do not affect the form of order sought by the defendant, namely that the present application
should be dismissed in its entirety, a form of order which Ireland and the VHI continue to support.
However, in so far as Ireland seeks to establish, in the context of the first plea, that the RES does not involve State aid
within the meaning of Article 87(1) EC because there is no transfer of public resources (Case C‑379/98
PreussenElektra
[2001] ECR I‑2099, paragraphs 59 to 61), that argument cannot be upheld, as it is inadmissible under the fourth paragraph
of Article 40 of the Statute of the Court of Justice, read in conjunction with Article 116(3) of the Rules of Procedure. Although
the defendant does not comment on that point in its written pleadings, that argument contradicts the finding made at recital
39 to the contested decision that the RES does in fact involve the transfer of public resources. Furthermore, that finding
was not discussed by the applicants in the application. In effect, the application, taken in conjunction with the defence,
determines the framework of the dispute which the applicants must accept in the state in which they find it at the time of
their intervention. Consequently, Ireland’s argument on that point is inadmissible in that it alters the scope of the subject-matter
of the dispute within the meaning of the case-law cited at paragraph 153 above. It must therefore be accepted that, in accordance
with the concordant assessment made by the applicants and the defendant, the RES constitutes a system that involves the transfer
of public resources within the meaning of Article 87(1) EC.
It follows from all of the foregoing considerations that, apart from the argument that there was no transfer of public resources,
the arguments put forward by Ireland and the VHI with respect to the first plea are admissible.
b)     The applicability of the Altmark conditions
It must be borne in mind that the first plea is based, particularly, on the conditions laid down by the Court of Justice in
Altmark
, paragraph 89 above, a judgment delivered after the contested decision was adopted and the contents of which the Commission
could not therefore have been aware of when it adopted its decision. In the contested decision, in order to justify the finding
that there was no State aid in this case, the Commission relied primarily on the judgment in
Ferring
, paragraph 41 above (recital 40 to the contested decision).
However, it must be stated that the Court of Justice did not place any temporal limitation on the scope of its findings in
Altmark
. In the absence of such a limitation
ratione temporis
, those findings resulting from an interpretation of Article 87(1) EC are therefore fully applicable to the factual and legal
situation of the present case as it presented itself to the Commission when it adopted the contested decision.
In that connection, it must be borne in mind that the interpretation which the Court of Justice gives of a provision of Community
law is limited to clarifying and defining the meaning and scope of that provision as it ought to have been understood and
applied from the time of its entry into force. It follows that the provision as thus interpreted may, and must, be applied
even to legal relationships which arose and were established before the judgment in question and it is only exceptionally
that, in application of a general principle of legal certainty which is inherent in the Community legal order, the Court may
decide to restrict the right to rely upon a provision, which it has interpreted, with a view to calling in question legal
relationships established in good faith. However, such a restriction may be allowed only in the actual judgment ruling upon
the interpretation sought (see, to that effect and by analogy, Case C‑209/03
Bidar
[2005] ECR I‑2119, paragraphs 66 and 67, and Case C‑292/04
Meilicke and Others
[2007] ECR I‑1835, paragraphs 34 to 36 and the case-law there cited). The Court considers that those considerations, which
derive from case-law dealing, in particular, with the national courts’ duty to apply Community law, apply
mutatis mutandis
to the Community institutions when they, in turn, are required to implement the provisions of Community law which are subsequently
interpreted by the Court of Justice.
The Court must therefore examine whether and to what extent the contested decision is compatible with the criteria laid down
in
Altmark
, the scope of which, as the applicants too acknowledge, to a large extent overlaps that of the criteria of Article 86(2) EC.
However, in light of the particular nature of the SGEI mission relied on in this case, which consists in the obligation for
all operators active on the Irish PMI market to comply with a number of obligations characterised by the contested decision
as SGEI obligations, and which the Community judicature has thus far never had to consider, it is appropriate to apply the
criteria formulated in
Altmark
, in accordance with the spirit and the purpose which prevailed when they were laid down, in a manner adapted to the particular
facts of the present case.
c)     The existence of an SGEI mission within the meaning of the first Altmark condition and Article 86(2) EC
i) Preliminary observation
According to the first
Altmark
condition (paragraph 89), the recipient undertaking must actually have public service obligations to discharge, and the obligations
must be clearly defined.
It is common ground between the parties that the concept of public service obligation referred to in that judgment corresponds
to that of the SGEI as designated by the contested decision and that it does not differ from that referred to in Article 86(2) EC.
In the context of the first and second pleas, the applicants essentially claimed that the concept of SGEI is a concept of
Community law which is strict and objective in nature and compliance with which is subject to unlimited control by the Community
institutions and not capable of being delegated to the national authorities. Although the Member States have a certain latitude
as to the manner in which they propose to ensure and regulate the provision of an SGEI, the determination of the SGEI depends
on a set of objective criteria, such as the universality of the service and its compulsory nature, the presence of which must
be verified by the institutions. In the present case, on the other hand, there is no obligation, or indeed mission, of general
interest imposed on insurers to provide certain PMI services and those services are not available to the entire Irish population.
PMI services are merely optional, indeed ‘luxury’, financial services and are not intended to replace the public social security
system. Furthermore, the contested decision designates only PMI obligations, and not PMI services as such, as SGEIs. However,
PMI obligations, although they are adopted in the general interest, are merely ordinary regulatory obligations applying to
the exercise and control of the activity of PMI insurers, which, according to the case-law and to the Commission’s practice
in taking decisions, does not suffice for them to be characterised as SGEIs.
The defendant, supported by Ireland, the Kingdom of the Netherlands and the VHI, contends that the definition of SGEIs falls
primarily within the competence and discretion of the Member States and that the control which the Community institutions
are authorised to carry out in that respect is limited to control of a manifest error of assessment, which is not present
in this case. The defendant and Ireland submit that PMI is an important instrument of the social and health policy pursued
by Ireland, a matter which, under Article 152 EC, is essentially reserved for the competence of the Member States, and an
important supplement to the public health insurance system, although it does not replace that system. In this case, contrary
to the applicants’ allegations, the PMI services as such, in conjunction with the PMI obligations, constitute the relevant
SGEIs to which the contested decision refers. In particular, the PMI obligations, including open enrolment and community rating,
ensure that the PMI services are available to all. In that regard, contrary to the applicants’ opinion, it is not necessary
that the PMI services be universal and compulsory in the strict sense, that they be free of charge or economically accessible
to the whole of the Irish population and that they constitute a substitute for the public social security system. Furthermore,
in the opinion of the Kingdom of the Netherlands, in light of the dynamic concept of SGEIs, it is sufficient that the State
imposes certain requirements, such as PMI obligations, on all insurers, compliance with those requirements being subject to
a system of authorisation and control, in order for them to be able to be characterised as SGEIs. Accordingly, the grant of
a special or exclusive right to an undertaking is not necessary.
ii) The concept of an SGEI mission and the powers to define and control SGEIs
It must be made clear that in Community law and for the purposes of applying the EC Treaty competition rules, there is no
clear and precise regulatory definition of the concept of an SGEI mission and no established legal concept definitively fixing
the conditions that must be satisfied before a Member State can properly invoke the existence and protection of an SGEI mission,
either within the meaning of the first
Altmark
condition or within the meaning of Article 86(2) EC.
As regards competence to determine the nature and scope of an SGEI mission within the meaning of the Treaty, and also the
degree of control that the Community institutions must exercise in that context, it follows from paragraph 22 of the Communication
on SGEIs (see paragraph 12 above) and from the case-law of the Court of First Instance that Member States have a wide discretion
to define what they regard as SGEIs and that the definition of such services by a Member State can be questioned by the Commission
only in the event of manifest error (see Case T‑17/02
Fred Olsen
v
Commission
[2005] ECR II‑2031, paragraph 216 and the case-law there cited).
That prerogative of the Member State concerning the definition of SGEIs is confirmed by the absence of any competence specially
attributed to the Commission and by the absence of a precise and complete definition of the concept of SGEI in Community law.
The determination of the nature and scope of an SGEI mission in specific spheres of action which either do not fall within
the powers of the Community, within the meaning of the first paragraph of Article 5 EC, or are based on only limited or shared
Community competence, within the meaning of the second paragraph of that article, remains, in principle, within the competence
of the Member States. As the defendant and Ireland maintain, the health sector falls almost exclusively within the competence
of the Member States. In that sector, the Community can engage, under Article 152(1) and (5) EC, only in action which is not
legally binding, while fully respecting the responsibilities of the Member States for the organisation and provision of health
services and medical care. It follows that the determination of SGEI obligations in this context also falls primarily within
the competence of the Member States. That division of powers is also reflected, generally, in Article 16 EC, which provides
that, given the place occupied by SGEIs in the shared values of the Union as well as their role in promoting social and territorial
cohesion, the Community and the Member States, each within their respective powers and within the scope of application of
the Treaty, are to take care that such services operate on the basis of principles and conditions which enable them to fulfil
their missions.
In that regard, the applicants cannot validly rely on Case 41/83
Italy
v
Commission
, paragraph 100 above (paragraph 30), to demonstrate the need for full and unrestricted control by the Community institutions
of the existence of an SGEI mission in the health sector. In effect, that judgment shows that the Member State’s power to
take action under Article 86(2) EC and, accordingly, its power to define SGEIs is not unlimited and cannot be exercised arbitrarily
for the sole purpose of removing a particular sector, such as telecommunications, from the application of the competition
rules.
Consequently, the control which the Community institutions are authorised to exercise over the use of the discretion of the
Member State in determining SGEIs is limited to ascertaining whether there is a manifest error of assessment. In the contested
decision (recital 44), the Commission did in fact exercise that control by considering whether Ireland’s assessment of the
presence of an SGEI mission and of the characterisation of the PMI obligations as SGEI obligations was vitiated by a manifest
error.
Accordingly, the complaint that the Commission unlawfully delegated to the Irish authorities the definition of the SGEIs in
question and that it failed to exercise full and unrestricted control of the assessment made by those authorities with respect
to a strict and objective definition of the SGEIs in Community law cannot be upheld.
iii) The existence of an SGEI mission in the present case
1) Allocation of the burden of proof
It is appropriate to consider whether the Commission was entitled to take the view in the contested decision that the measures
notified by Ireland related to an SGEI mission within the meaning of the first
Altmark
condition and Article 86(2) EC.
In that regard, the Court notes at the outset that even though the Member State has a wide discretion when determining what
it regards as an SGEI, that does not mean that it is not required, when it relies on the existence of and the need to protect
an SGEI mission, to ensure that that mission satisfies certain minimum criteria common to every SGEI mission within the meaning
of the EC Treaty, as explained in the case-law, and to demonstrate that those criteria are indeed satisfied in the particular
case. These are, notably, the presence of an act of the public authority entrusting the operators in question with an SGEI
mission and the universal and compulsory nature of that mission. Conversely, the lack of proof by the Member State that those
criteria are satisfied, or failure on its part to observe them, may constitute a manifest error of assessment, in which case
the Commission is required to make a finding to that effect, failing which the Commission itself makes a manifest error. Furthermore,
it follows from the case-law on Article 86(2) EC that the Member State must indicate the reasons why it considers that the
service in question, because of its specific nature, deserves to be characterised as an SGEI and to be distinguished from
other economic activities (see, to that effect,
Merci Convenzionali Porto di Genova
, paragraph 97 above, paragraph 27, and
Enirisorse
, paragraph 131 above, paragraphs 33 and 34). In the absence of such reasons, even a marginal review by the Community institutions
on the basis of both the first
Altmark
condition and Article 86(2) EC with respect to the existence of a manifest error by the Member State in the context of its
discretion would not be possible.
It is in the light of those considerations that the Court will examine the complaints whereby the applicants seek to demonstrate
that in this case the Commission was wrong to accept the existence of an SGEI mission.
2) The identity and the nature of the SGEI mission in question
In the present case, the applicants do not agree as to the identity and the nature of the SGEIs forming the subject-matter
of the contested decision and, accordingly, of the notified measure. The applicants submit, in essence, that the contested
decision refers only to the PMI obligations, the characterisation of which as SGEI obligations is accepted by the Commission.
On the other hand, the contested decision does not examine the question whether the PMI services as such constitute SGEIs,
which in the applicants’ submission is not the case (see paragraph 110 above). The defendant and Ireland counter that assertion
by claiming that, in view of the indissoluble link between the PMI services and the PMI obligations which govern the supply
of those services, the contested decision, by characterising the PMI obligations as SGEI obligations, necessarily also recognises
that the PMI services as such are SGEIs.
It is true that the contested decision primarily examines, in particular at recitals 41 to 49, headed ‘Public service obligations’,
the PMI obligations, namely community rating, open enrolment, lifetime cover and minimum benefits, explaining the reasons
why these must be characterised as SGEI obligations. However, although the contested decision does not explicitly settle the
question whether the PMI services as such or the Irish PMI system in general also represent SGEIs, it does state, at recitals
41 and 47, that the ‘[PMI] obligations aim to ensure the achievement of a general interest mission, [that is to say,] a certain
level of PMI to all persons living in Ireland, at [an] affordable price and on similar quality conditions’. Furthermore, at
recital 48 to the contested decision, the Commission states that the Irish authorities did not make a manifest error ‘in including
in their notion of SGEI[s] services which go beyond those offered by the basic [social] security scheme’. Those findings confirm
that in the contested decision the Commission also accepted, at least by implication, that the PMI services have as such an
SGEI character. In any event, in light of the indissoluble link between the PMI obligations and the PMI services, it was impossible
for the Commission to limit its assessment solely to the PMI obligations without also taking into account the PMI services
forming the subject-matter of those obligations and the provision of which is dependent on compliance with those obligations.
Therefore, contrary to the applicants’ opinion, the contested decision recognises that the PMI obligations constitute SGEI
obligations and at the same time that the PMI services form part of an SGEI mission.
3) The distinction between the regulation of the operators’ activities and the existence of an SGEI mission entrusted by an
act of the public authority
The applicants dispute the existence of an SGEI mission; they contend that the legislation in question merely subjects the
activity of all PMI insurers to ‘normal’ regulatory obligations and that there is no entrustment of a particular mission defined
by an act of the public authority.
In the first place, as the case-law shows, the provision of the service in question must, by definition, assume a general
or public interest. Thus, SGEIs are distinguished in particular from services in the private interest, even though that interest
may be more or less collective or be recognised by the State as legitimate or beneficial (see, to that effect,
Züchner
, paragraph 97 above, paragraph 7, and
GVL
v
Commission
, paragraph 98 above, paragraphs 31 and 32). In addition, as the applicants claim, the general or public interest on which
the Member State relies must not be reduced to the need to subject the market concerned to certain rules or the commercial
activity of the operators concerned to authorisation by the State. The mere fact that the national legislature, acting in
the general interest in the broad sense, imposes certain rules of authorisation, of functioning or of control on all the operators
in a particular sector does not in principle mean that there is an SGEI mission (see, to that effect,
GVL
v
Commission
, paragraph 98 above, paragraph 32, and
GB-Inno-BM
, paragraph 98 above, paragraph 22).
On the other hand, the recognition of an SGEI mission does not necessarily presume that the operator entrusted with that mission
will be given an exclusive or special right to carry it out. It follows from a reading of paragraph 1 together with paragraph
2 of Article 86 EC that a distinction must be drawn between a special or exclusive right conferred on an operator and the
SGEI mission which, where appropriate, is attached to that right (see, in that regard,
Merci Convenzionali Porto di Genova
, paragraph 97 above, paragraphs 9 and 27;
Almelo
, paragraph 97 above, paragraphs 46 to 50; and
Albany
, paragraph 101 above, paragraphs 98 and 104 to 111). The grant of a special or exclusive right to an operator is merely the
instrument, possibly justified, which allows that operator to perform an SGEI mission. Therefore, as the Kingdom of the Netherlands
asserts, the Commission’s finding at recital 47 to the contested decision, which refers to paragraphs 14 and 15 of the communication
on services of general interest, that the attribution of an SGEI mission may also consist in an obligation imposed on a large
number of, or indeed on all, the operators active on the same market, is not vitiated by an error (see, with respect to an
SGEI mission entrusted in the context of a non-exclusive concession governed by public law,
Almelo
, paragraph 97 above, paragraph 47).
Consequently, the applicants’ argument that the existence of an SGEI mission is precluded because all PMI insurers are subject
to certain obligations cannot succeed.
In the second place, it must be borne in mind that, in essence, both the first condition laid down by the Court of Justice
in
Altmark
and the wording of Article 86(2) EC, as such, require that the operator in question be entrusted with an SGEI mission by
an act of a public authority and that the act clearly define the SGEI obligations in question (see, to that effect,
Züchner
, paragraph 97 above, paragraph 7; Case 66/86
Ahmed Saeed Flugreisen
[1989] ECR 803, paragraph 55;
GT‑Link
, paragraph 97 above, paragraph 51;
Altmark
, paragraph 89; and
Olsen
v
Commission
, paragraph 166 above, paragraph 186).
In the present case, contrary to the theory put forward by the applicants, the relevant Irish legislation does not involve
any regulation or authorisation whatsoever relating to the activity of PMI insurers, but must be characterised as an act of
a public authority creating and defining a specific mission consisting in the provision of PMI services in compliance with
the PMI obligations. Sections 7 to 10 of the Health Insurance Act, 1994, as most recently amended by the Health Insurance
(Amendment) Act, 2001, and also the 1996 Health Insurance Regulations (see paragraph 16 above), define in detail the PMI obligations,
such as community rating, open enrolment, lifetime cover and minimum benefits, to which all PMI insurers within the meaning
of that legislation are subject. Furthermore, with the stated object of serving the general interest by allowing what is at
present approximately half of the Irish population to benefit from alternative cover for certain health care, in particular
hospital care, the abovementioned PMI obligations restrict the commercial freedom of the PMI insurers to an extent going considerably
beyond ordinary conditions of authorisation to exercise an activity in a specific sector (see paragraph 191 et seq. below).
Similarly, the Court considers that that legislation satisfies the condition of a clear and precise definition of the SGEI
obligations in question within the meaning of the first
Altmark
condition (paragraph 89), which the applicants do not dispute. Furthermore, since the system chosen by Ireland does not provide
for the grant of exclusive or special rights, but for the achievement of the mission by all operators active on the Irish
PMI market, which is a choice open to the Member State (see paragraph 179 above), it follows that, contrary to what the applicants
appear to claim, there can be no requirement that each of the operators subject to the PMI obligations be separately entrusted
with that mission by an individual act or mandate.
Accordingly, the complaint that the activity of the PMI insurers is governed by ‘normal’ regulatory obligations and that there
is no act of a public authority creating and entrusting an SGEI mission must be rejected.
4) The universal and compulsory nature of the services coming within the SGEI mission
The applicants submit that the fact that the PMI services are not universal and compulsory by nature supports their conclusion
that there is no SGEI mission in this case.
General observations
As regards the universal nature of the PMI services, it must be noted at the outset that, contrary to the theory put forward
by the applicants, it does not follow from Community law that, in order to be capable of being characterised as an SGEI, the
service in question must constitute a universal service in the strict sense, such as the public social security scheme. In
effect, the concept of universal service, within the meaning of Community law, does not mean that the service in question
must respond to a need common to the whole population or be supplied throughout a territory (see, in that regard,
Ahmed Saeed Flugreisen
, paragraph 181 above, paragraph 55;
Corsica Ferries France
, paragraph 97 above, paragraph 45; and
Olsen
v
Commission
, paragraph 166 above, paragraph 186 et seq.). As stated at recital 47 to the contested decision, with reference to paragraph
14 of the communication on SGEIs, although those characteristics correspond to the classical type of SGEI, and the one most
widely encountered in Member States, that does not preclude the existence of other, equally lawful, types of SGEIs which the
Member States may validly choose to create in the exercise of their discretion.
Accordingly, the fact that the SGEI obligations in question have only a limited territorial or material application or that
the services concerned are enjoyed by only a relatively limited group of users does not necessarily call in question the universal
nature of an SGEI mission within the meaning of Community law. It follows that the applicants’ restrictive understanding of
the universal nature of an SGEI, based on certain Commission reports or documents, the content of which, moreover, is not
legally binding, is not compatible with the scope of the discretion which Member States have when defining an SGEI mission.
Consequently, that argument must be rejected as unfounded.
As regards the argument that the PMI services represent only optional, indeed ‘luxury’, financial services, intended to provide
complementary or supplementary cover by reference to the compulsory universal services provided for by the public health insurance
system, the Court observes that the compulsory nature of the service in question is an essential condition of the existence
of an SGEI mission within the meaning of Community law. That compulsory nature must be understood as meaning that the operators
entrusted with the SGEI mission by an act of a public authority are, in principle, required to offer the service in question
on the market in compliance with the SGEI obligations which govern the supply of that service. From the point of view of the
operator entrusted with an SGEI mission, that compulsory nature – which in itself is contrary to business freedom and the
principle of free competition – may consist, inter alia, particularly in the case of the grant of an exclusive or special
right, in an obligation to exercise a certain commercial activity independently of the costs associated with that activity
(see also, to that effect, paragraph 14 of the communication on SGEIs). In such a case, that obligation constitutes the counterpart
of the protection of the SGEI mission and of the associated market position by the act which entrusted the mission. In the
absence of an exclusive or special right, the compulsory nature of an SGEI mission may lie in the obligation borne by the
operator in question, and provided for by an act of a public authority, to offer certain services to every citizen requesting
them (see also, to that effect, paragraph 15 of the communication on SGEIs).
Contrary to the applicants’ opinion, however, the binding nature of the SGEI mission does not presuppose that the public authorities
impose on the operator concerned an obligation to provide a service having a clearly predetermined content, as is the case
of Plan P offered by the VHI (see paragraph 14 above). In effect, the compulsory nature of the SGEI mission does not preclude
a certain latitude being left to the operator on the market, including in relation to the content and pricing of the services
which it proposes to provide. In those circumstances, a minimum of freedom of action on the part of operators and, accordingly,
of competition on the quality and content of the services in question is ensured, which is apt to limit, in the community
interest, the scope of the restriction of competition which generally results from the attribution of an SGEI mission, without
any effect on the objectives of that mission.
It follows that, in the absence of an exclusive or special right, it is sufficient, in order to conclude that a service is
compulsory, that the operator entrusted with a particular mission is under an obligation to provide that service to any user
requesting it. In other words, the compulsory nature of the service and, accordingly, the existence of an SGEI mission are
established if the service-provider is obliged to contract, on consistent conditions, without being able to reject the other
contracting party. That element makes it possible to distinguish a service forming part of an SGEI mission from any other
service provided on the market and, accordingly, from any other activity carried out in complete freedom (see, to that effect,
GT‑Link
, paragraph 97 above, paragraph 53, and
Merci Convenzionali Porto di Genova
, paragraph 97 above, paragraph 27).
Application to the present case
In this case, the Court considers that it follows from the combination of the various PMI obligations imposed on all Irish
PMI insurers, that is to say, from the open enrolment, community rating, lifetime cover and minimum benefit obligations, that
the PMI services must be regarded as compulsory.
In fact, the open enrolment obligation (section 8 of the Health Insurance Act, 1994, as amended), that is to say, the obligation
for every PMI insurer to offer a PMI contract to every person who requests it, independently of age, sex or health, is sufficient
for the compulsory nature of the PMI services in question to be recognised. That compulsory nature is reinforced by the fact
that the obligation to contract is associated with other constraints that restrict the commercial freedom of PMI insurers
to determine the terms of PMI contracts, namely the community rating, lifetime cover and minimum benefit obligations.
Under the community rating obligation, when a PMI insurer offers PMI cover on the market, it is required to provide the PMI
services concerned at a uniform rate whatever the personal situation of the insured, the health history and the frequency
of claims submitted by that person (section 7 of the Health Insurance Act, 1994, as amended). Because of the lifetime cover
obligation, moreover, following a subscription by the insured for such cover, the PMI insurer cannot unilaterally cancel the
PMI contract, nor can it refuse to renew the contract when the insured person seeks to renew it (section 9 of the Health Insurance
Act, 1994, as amended). Last, the rules on minimum benefits provide that reimbursement for care covered by PMI contracts must
be made by reference to the amounts and minimum percentages of the costs incurred (section 10 of the Health Insurance Act,
1994, as amended, read in conjunction with the rules on minimum benefits).
In that regard, the applicants have claimed that the minimum benefits obligation is not sufficient for the existence of an
SGEI mission to be recognised, because the level of cover thus determined is so low that, in practice, it is considerably
exceeded even by the most basic insurance policies available on the market, such as the VHI’s Plan A. However, that argument
does not affect the compulsory nature of the requirements to which PMI insurers are subject under the PMI obligations. First,
it ignores the fact that the compulsory nature of an SGEI mission does not require that the law demand and predetermine the
provision of a specific service by depriving the operator concerned of all commercial freedom (see paragraph 188 above). Second,
even if the established commercial practice on the market generally reveals a level of service higher than the minimum prescribed
benefits, it cannot affect the fact that the minimum benefits that every PMI insurer is required to observe in all circumstances
constitute a legal obligation.
Nor is the characterisation of the PMI services as universal and compulsory services affected by the argument that the services
are optional in the sense that their supply is left to the free choice of both insurers and insured persons and that, accordingly,
those services do not replace the universal or basic social security services. First, recognition of the compulsory nature
of the SGEI mission is not precluded by the fact that consumers can choose not to request the supply of the services in question,
since the State considers that, for general social policy and health considerations, the service in question satisfies a real
need of a large part of the population – in this case currently approximately 50% of the Irish population – and thus makes
it accessible by an obligation to contract imposed on the supplier of the service. In effect, the universal and compulsory
nature of the SGEI is not dependent on a reciprocal obligation to contract, that is to say, in this case, by compulsory PMI
membership. As the applicants themselves acknowledge, at paragraph 29 of the reply, the
Albany
judgment, paragraph 101 above (paragraph 98 et seq.) permits of no other interpretation, since compulsory membership of the
complementary pension scheme forming the subject-matter of that case was not in any event decisive for the Court’s recognition
of that system as forming part of an SGEI mission.
Second, in light of the nature of the SGEI mission in question, based on PMI obligations imposed on all PMI insurers and not
linked with a special or exclusive right, the possibility that an insurer may voluntarily withdraw from the Irish PMI market
does not affect the continuity of the supply of the PMI service concerned and, accordingly, the universality and accessibility
of that service. Therefore, since the PMI insurers that have decided to offer cover on the market must comply in full with
the PMI obligations in question, the fact that the PMI insurer has the option to cease completely to provide PMI services
or to leave the market is in itself also incapable of affecting the universal and compulsory nature of those services.
The applicants further submit that the universal and compulsory nature of the PMI services is contradicted by the various
statutory exceptions to the open enrolment obligation (section 8 of the Health Insurance Act, 1994, as amended, read together
with the Health Insurance Act, 1994 (Open Enrolment) Regulations 1996). In effect, persons over the age of 65 seeking new
PMI cover for the first time may be refused (Regulation 6 of the Health Insurance Act, 1994 (Open Enrolment) Regulations 1996).
Below the age of 65, where a person takes PMI cover the PMI insurers may impose initial waiting periods which are, in principle,
26 weeks for persons under the age of 55 and 52 weeks for persons aged between 55 and 65 (Regulation 7 of the Health Insurance
Act, 1994 (Open Enrolment) Regulations 1996). While persons suffering from pre-existing diseases are eligible for cover, they
may, depending on their age, be subject to waiting periods of 5 to 10 years before they are eligible for payments for certain
care (Regulation 8 of the Health Insurance Act, 1994 (Open Enrolment) Regulations 1996). In that regard, the defendant and
Ireland responded, in substance, that, first, those exceptions did not appreciably reduce the real scope of the open enrolment
obligation and, second, they constituted, in any event, lawful and objectively justified measures to protect the Irish PMI
market subject to PMI obligations against malfunction and abuse.
In that regard, the Court considers that, even on the assumption that the exclusion of persons over the age of 65 who have
never had PMI cover – as provided for in the Irish legislation at the time of adoption of the contested decision – may in
theory, as the applicants claim, affect 8% of the Irish population, the significance of that exception seems to be limited
in practice. First, as the defendant states, the exception does not apply to persons who already have or have had PMI cover
and wish to renew it. Second, the applicants have not disputed the defendant’s and Ireland’s assertion that, taking into account
the fact that PMI has existed in Ireland since 1957, there is a normal tendency to subscribe to a PMI policy for the first
time at a much younger age than previously, particularly since the initial waiting periods, which increase with age, provide
an additional incentive to do so. In those circumstances, it may be expected that the number of persons thus excluded from
PMI is decreasing. It is therefore not plausible that, in practice, a significant number of persons will be affected in future
by the possibility that they will be refused cover from the age of 65. In any event, the Court considers that that limited
restriction does not affect the fact that open enrolment guarantees free access to PMI to the entire population of Ireland.
As regards the initial waiting periods, the defendant and Ireland have submitted, without being really contradicted by the
applicants, that although those periods temporarily restrict access to PMI cover, they are essential and lawful measures designed
to prevent abuse consisting in obtaining purely temporary cover in order to obtain treatment rapidly without having contributed
beforehand, by paying premiums, to the PMI community rating system. In that regard, it must be borne in mind that, as the
defendant and Ireland claim, community rating is intended to guarantee, by means of uniform premiums for the same cover (see
paragraph 192 above), an equal allocation of the burdens occasioned by the health care of all insured persons of all generations.
Thus, community rating, like open enrolment, has the ultimate objective of ensuring the sharing of risks and solidarity between
generations; and, having regard to Articles 16 EC and 152 EC, the Member State’s choice of those objectives cannot be called
in question by the Community institutions (see paragraph 167 above).
The Court acknowledges that it is plausible that a practice such as that described above might jeopardise that objective.
Furthermore, as the defendant claims, the absence of waiting periods would have the consequence that the PMI insurers, faced
with an increase in requests for payment, would have to increase premiums to the detriment of all insured persons in order
to cover the additional costs that would arise. Such a consequence would run counter to the objective of accessibility of
PMI cover guaranteed to all insured persons, an objective which also underlies community rating. In those circumstances, the
Court accepts that the initial waiting periods are inherent in a PMI market subject to open enrolment and community rating
and that they constitute an appropriate means of reconciling the accessibility and universality of the PMI service, in that
they make it possible to ensure that solidarity between generations is not abused by persons who delay subscribing to PMI
until the time when they have significant care needs.
It follows from the foregoing considerations that the combination of the obligations of open enrolment, community rating,
lifetime cover and minimum benefits is apt to guarantee that the Irish population has wide and simple access to PMI services,
which entitles those services to be characterised as universal within the meaning of Community law. The applicants’ argument
that, notwithstanding the mutualisation of premiums resulting from the community rating, the PMI services are not universal
because they are not available to all strata of the Irish population, cannot be accepted. First, as stated at paragraph 186
above, the criterion of universality does not require that the entire population should have or be capable of having recourse
to it in practice. Second, the fact that approximately 50% of the Irish population has subscribed to PMI cover indicates that,
in any event, the PMI services respond to a very significant demand on the Irish PMI market and that they make a substantial
contribution to the proper functioning of the social security system, in the broad sense, in Ireland. Third, that argument
does not take account of the fact that, as the applicants themselves acknowledge, the PMI services available on the Irish
PMI market may be subdivided into different groups of cover, including in particular basic cover, average cover and ‘luxury’
cover, which are offered at different prices and which meet separate demand from insured persons.
In that context, the fact that the prices of PMI services are neither regulated nor subject to a ceiling does not affect their
universal nature either. While it is true that, in the absence of regulations on premiums for PMI cover, the level of rates
for such cover is in principle determined by market forces, the fact none the less remains that, owing to the community rating
obligation, the rate fixed is made uniform and applicable to all PMI contracts offering the same cover, independently of the
age, sex and state of health of the persons insured. Owing to that uniformity of rates and to competition on rates between
the different PMI insurers subject to PMI obligations, to the advantage of all insured persons, the risk of an excessive rate,
which would be economically unaffordable for certain groups of persons, in particular as regards basic PMI cover, seems to
be very limited in practice. On the contrary, as Ireland submits, community rating permits a cross-subsidy of premiums to
the advantage of the most vulnerable insured persons, in particular the elderly and the sick, and ensures that they have easier
access to PMI services, whereas such access would potentially be impeded, or indeed excluded, in a market in which rates were
risk-based.
Furthermore, the universality criterion does not require that the service in question be free of charge or that it be offered
without consideration of economic profitability. The fact that certain potential users do not have the necessary financial
resources to take advantage of all the PMI cover available on the market, in particular ‘luxury’ cover, does not undermine
its universal nature provided that the service in question is offered at uniform and non-discriminatory rates and on similar
quality conditions for all customers (see, to that effect,
Corbeau
, paragraph 131 above, paragraph 15;
Almelo
, paragraph 97 above, paragraph 48; and Case C‑475/99
Ambulanz Glöckner
[2001] ECR I‑8089, paragraph 55).
In the light of the foregoing, the applicants’ very general argument concerning the optional, complementary and ‘luxury’ nature
of the PMI services cannot succeed. Apart from the fact that the applicants disregard, in this context, the various levels
of PMI cover available, they have not submitted a detailed challenge to the argument put forward by the defendant and by Ireland
that Irish PMI constitutes, alongside the public health insurance system, the second pillar of the Irish health system, the
existence of which fulfils a mandatory objective of social cohesion and solidarity between the generations pursued by Ireland’s
health policy. According to the explanations provided by Ireland, PMI helps to ensure the effectiveness and profitability
of the public health insurance scheme by reducing pressure on the costs which it would otherwise bear, particularly as regards
care provided in public hospitals. Within the framework of the restricted control that the Community institutions are authorised
to exercise in that regard, those considerations cannot be called in question either by the Commission or by the Court. Accordingly,
it must be accepted that the PMI services are used by Ireland, in the general interest, as an instrument indispensable to
the smooth administration of the national health system and they must be recognised, owing to the PMI obligations, as being
in the nature of an SGEI.
Consequently, the applicants’ arguments concerning the absence of universal and compulsory nature of the PMI services must
be rejected as unfounded in their entirety.
In those circumstances, the Commission’s assertion at recital 47 to the contested decision that the PMI obligations aim to
ensure a certain level of PMI services to all persons living in Ireland, at an affordable price and on similar quality conditions,
is not vitiated by an error. Nor does the Commission err in finding that the PMI insurers’ freedom to define the prices and
to design the terms of PMI cover does not put in question the qualification of the PMI obligations as SGEI obligations. That
is all the more true because that freedom preserves a certain level of competition without affecting the implementation of
the SGEI mission in question (see paragraph 188 above).
The Commission was therefore entitled to consider, at recitals 48 and 49 to the contested decision, that the conditions for
recognition of the PMI services and PMI obligations as relating to an SGEI mission were satisfied and that Ireland had made
no manifest error in that regard.
Consequently, the complaint alleging that there was no SGEI mission within the meaning of the first
Altmark
condition and Article 86(2) EC must be rejected.
d)     The existence of clearly defined parameters for the calculation of compensation for the RES within the meaning of the second
Altmark condition
i) Preliminary observations
The Court observes at the outset in limine that under the second
Altmark
condition (paragraph 90), the parameters on the basis of which the compensation for carrying out the SGEI mission is calculated
must be established in advance in an objective and transparent manner.
In that regard, it must be borne in mind that, for the reasons set out at paragraphs 157 to 160 above, the Commission refers,
at recital 40 to the contested decision, in its analysis of the compensation for the costs incurred in discharging the SGEI
obligations in question, only to the
Ferring
judgment, paragraph 41 above (paragraph 27). According to that judgment, the compensation must correspond to the additional
costs actually incurred by the operator entrusted with an SGEI mission. The Court considers that that requirement necessarily
presupposes a certain transparency and a certain objectivity in the criteria for the compensation, in the absence of which
even marginal review by the Community institutions would not be possible.
The Court must therefore examine whether the Commission could validly consider, at least impliedly, that in this case the
criteria for the compensation provided for by the RES were sufficiently transparent and objective to satisfy the second
Altmark
condition.
ii) The objective and transparent nature of the criteria governing the calculation of the compensation under the RES
The applicants essentially claim (see paragraph 113 et seq. above) that the calculation of the compensation under the RES
is not carried out according to objective and transparent parameters, but depends largely on the discretion of the HIA and
the Minister for Health on several levels. Thus, the assessment of the risk differentials and in particular that based on
the health status weight are largely left to the discretion of the HIA. That is confirmed by the three divergent reports published
by the HIA since 2003, which found clearly different risk differentials and drew contradictory conclusions as to the reality
of market instability. Furthermore, the HIA and the Minister for Health have a wide discretion as to the decision to activate
RES payments by reference to the percentage of risk differential achieved.
In that regard, it must first of all be noted that, contrary to the applicants’ contention, the discretion of the HIA and,
where appropriate, the Minister for Health as to the decision to commence the RES payments, a decision which implies in particular
the finding of a risk differential in excess of a certain percentage and market instability, is not linked to the question
whether the compensation is calculated according to objective and transparent parameters. That calculation is carried out,
on the basis of the data provided by the PMI insurers subject to the RES and, accordingly, of their respective risk profiles,
only after the decision to commence the RES payments has been taken. In that context, the applicants are confusing the determination
of the risk differentials, which constitutes a step preparatory to the decision to commence the RES payments, with the calculation
of the compensation paid in the form of RES payments, which depends on a detailed comparison between the actual risk profile
and the average market risk profile for each of the PMI insurers (see paragraph 33 above).
Furthermore, even on the assumption that the Irish authorities have a discretion in calculating the RES payments – which Ireland,
in particular, denies –, that discretion is not in itself incompatible with the existence of objective and transparent parameters
within the meaning of the second
Altmark
condition. As Ireland asserts, that condition does not prevent the national legislature from leaving to the national authorities
a certain discretion to determine the compensation for the costs incurred in discharging an SGEI mission. On the contrary,
as established in the case-law of the Court of First Instance, the Member State has a wide discretion not only when defining
an SGEI mission but also when determining the compensation for the costs, which calls for an assessment of complex economic
facts (see, to that effect,
FFSA and Others
v
Commission
, paragraph 101 above, paragraphs 99 and 100). It is precisely because the determination of the compensation is subject to
only restricted control by the Community institutions, moreover, that the second
Altmark
condition requires that those institutions must be in a position to verify the existence of objective and transparent parameters,
which must be defined in such a way as to preclude any abusive recourse to the concept of an SGEI on the part of the Member
State.
Consequently, the applicants’ arguments concerning the absence of objective and transparent parameters for the calculation
of the compensation, owing to the existence of a discretion of the Irish authorities, are inoperative and cannot be upheld.
It should be noted, next, that at recitals 25 to 30 to the contested decision (see paragraph 38 above) the Commission sets
out in detail the criteria, the method and the procedure governing the determination of the RES payments. It follows from
the description of the method of calculating the RES payments set out at paragraphs 31 to 33 above, moreover, that the different
calculation parameters used are clearly established by the applicable legislation, in particular the Second Schedule to the
RES. Thus, the legislation provides, in a detailed, non-discriminatory and transparent manner, that the PMI insurers subject
to the RES must regularly provide information about their risk profile and the corresponding costs by groups of age and sex
of the persons insured (parts II and III of the RES). In the light of that information, the HIA makes a comparative assessment
in order to determine the risk differential between PMI insurers (part IV read in conjunction with the Second Schedule to
the RES), which in turn determines the calculation of the RES payments (part V of the RES). Last, part V read in conjunction
with the Second Schedule to the RES also provides for the parameters and the detailed economic and mathematical formulae for
that calculation, including the method of adjustment with application of health status weight.
In that regard, the Court considers that the complexity of the economic and mathematical formulae which govern the calculations
to be carried out does not  by itself affect the precise and clearly-determined nature of the relevant parameters. In any
event, the applicants have not disputed the precise, transparent and objective nature of those parameters, but essentially
confined themselves to asserting that the Irish authorities have a wide discretion with respect to the decision, which precedes
the calculation of the compensation, to activate the RES payments (see paragraphs 210 and 211 above). That consideration also
applies to the criteria governing the application of the health status weight – which is not currently applicable –, mentioned
in the Second Schedule to the RES, with which the HIA must comply when it decides to take that factor into account and also
to the maximum limit of 50% fixed for the taking into account of the observed use of hospital capacity in the determination
of the PMI insurers’ risk profiles (recitals 28 and 57 to the contested decision).
In the light of the foregoing, the Commission cannot be criticised for not having taken into account, in its assessment of
the RES by reference to Article 87(1) EC, the various parameters governing the calculation of the RES payments. The Court
further considers that, regard being had to the considerations set out at paragraph 160 above, recitals 25 to 30 to the contested
decision, although they are found only in the factual presentation of the RES (see paragraph 38 above), constitute a sufficient
statement of reasons in that regard, the content of which was properly taken into account by the Commission in its assessment
of the compatibility of the compensation mechanism in question with Article 87(1) EC.
Consequently, the complaint based on the second
Altmark
condition must be rejected as unfounded.
e)     The necessity and proportionality of the compensation provided for by the RES within the meaning of the third Altmark condition
i) The scope of judicial review
As regards the scope of control of the necessity and the proportionality of the compensation under the RES by both the Commission
and the Court, it must be observed that that control is necessarily restricted on account of the fact that Ireland justified
the RES by the existence of an SGEI mission (see paragraph 166 above). Given the discretion enjoyed by a Member State in defining
an SGEI mission and the conditions of its implementation, including the assessment of the additional costs incurred in discharging
the mission, which depends on complex economic facts, the scope of the control which the Commission is entitled to exercise
in that regard is limited to one of manifest error (see, to that effect,
FFSA and Others
v
Commission
, paragraph 101 above, paragraph 100, and
Olsen
v
Commission
, paragraph 166 above, paragraph 216). Furthermore, it follows that the Court’s review of the Commission’s assessment in that
regard must also observe the same limit and that, accordingly, its review must be confined to ascertaining whether the Commission
properly found or rejected the existence of a manifest error by the Member State.
Furthermore, that review implies that the Community judicature determines whether the evidence adduced by the applicants is
sufficient to render implausible the assessments of the complex economic facts made in the contested decision (see, by analogy,
Case T‑380/94
AIUFFASS and AKT
v
Commission
[1996] ECR II‑2169, paragraph 59). Subject to that review of plausibility, it is not the Court’s role to substitute its assessment
of the relevant complex economic facts for that made by the institution which adopted the decision. In such a context, review
by the Court consists in ascertaining that the Commission complied with the rules of procedure and the rules relating to the
duty to give reasons and also that the facts relied on were accurate and that there has been no error of law, manifest error
of assessment or misuse of powers (see, to that effect,
FFSA and Others
v
Commission
, paragraph 101 above, paragraph 101; Joined Cases T‑111/01 and T‑133/01
Saxonia Edelmetalle
v
Commission
[2005] ECR II‑1579, paragraph 91;
Olsen
v
Commission
, paragraph 166 above, paragraph 266; and Case T‑349/03
Corsica Ferries France
v
Commission
[2005] ECR II‑2197, paragraph 138 and the case-law there cited).
As regards, more particularly, review of the proportionality of the compensation for discharging an SGEI mission, as established
by an act of general application, it has further been specified in the case-law that that review is limited to ascertaining
whether the compensation provided for is necessary in order for the SGEI in question to be capable of being performed in economically
acceptable conditions (see, to that effect,
Commission
v
Netherlands
, paragraph 99 above, paragraph 53, and
Albany
, paragraph 101 above, paragraphs 107 and 111 and the case-law there cited), or whether, on the other hand, the measure in
question is manifestly inappropriate by reference to the objective pursued (see, to that effect and by analogy,
Boehringer
v
Council and Commission
, paragraph 118 above, paragraphs 73 and 74).
The applicants’ assertion that a global review must be carried out in that context must therefore be rejected as unfounded
(see paragraph 118 above).
ii) The necessity and proportionality of the compensation made by means of the RES payments
1) Preliminary observations
As regards the necessity and proportionality of the compensation provided for by the RES, it must be borne in mind at the
outset that the parties are agreed that the third
Altmark
condition broadly coincides with the criterion of proportionality as established by the case-law in the context of the application
of Article 86(2) EC. It follows that their analysis applies
mutatis mutandis
to the second plea alleging infringement of that provision. On the other hand, as regards the assessment of the proportionality
of the compensation provided for by the RES, in so far as the parties disagree on the need to take account of the efficiency
of the operator concerned and the impact of that inefficiency on the determination of that compensation, the Court will examine
the arguments put forward on that point together with the complaint alleging absence of the fourth
Altmark
condition.
It must also be borne in mind that, in the applicants’ submission, the third
Altmark
condition, namely that the compensation must be strictly necessary, is not fulfilled. First, they claim that the Commission
did not examine all the relevant factors in that regard, which constitutes an error of law and an error affecting the reasoning
in the contested decision concerning the application of the criterion of proportionality. Second, compliance with the PMI
obligations does not create a financial burden for the PMI insurers because they are in a position to protect their profitability
by commercial measures. On the one hand, the PMI insurers can protect themselves against ‘bad’ risks, for example by refusing
new members over the age of 65 or by imposing long waiting periods on the sick. On the other hand, they are able to adjust
the contractual terms and of differentiating premiums according to the risks and thus, by charging higher premiums, of compensating
for the higher costs associated with the ‘bad’ risks which they are required to assume under the PMI obligations. Third, in
any event, in the absence of any link between the costs occasioned by the PMI obligations and the RES, the RES is not capable
of compensating for those costs. The RES payments are calculated on the basis of the risk differential of the PMI insurers
and do not depend on the calculation of the actual costs incurred in complying with the PMI obligations. Furthermore, the
RES is aimed in reality at compensating for the cost of supplying the PMI services as such which, however – in the light of
the contested decision –, are not SGEIs. Such an abstract relationship between the PMI obligations and the costs incurred
by the PMI insurer is not sufficient and does not satisfy the requirement that the RES be strictly limited to clearly quantified
costs. Fourth, the RES is not even capable of compensating for the ‘bad’ risks. It does not take account of the premiums and
receipts of the PMI insurers capable of compensating for those risks and, accordingly, it is not possible to assess whether
the ‘bad’ risks create a net financial burden for the PMI insurer. Moreover, as regards the Commission’s argument that the
RES takes account of the average costs of requests for payment and thus allows the PMI insurers to benefit from their own
efficiency (recital 56 to the contested decision), the applicants object that where the insurer’s actual costs are taken into
account that gives rise to larger RES payments to PMI insurers with the highest costs and thus provides them with an incentive
not to be efficient. Last, in any event, in the absence of a reference point for the assessment of efficiency and a mechanism
for comparing prices, the fourth
Altmark
condition relating to the need to determine the level of compensation by reference to the needs of an efficient undertaking,
by including receipts and profits, is not fulfilled.
The defendant replies that the applicants have neither demonstrated that the Commission had made a manifest error in assessing
the proportionality of the RES nor established that the RES was manifestly disproportionate by reference to the objective
of ensuring the functioning of the Irish PMI market in economically acceptable conditions (see paragraph 148 above). Furthermore,
the defendant, supported by Ireland and by the VHI, challenges the argument that compensation under the RES is not linked
with the costs generated by compliance with the PMI obligations. The RES payments are linked to the costs generated by the
differentials in risk profile – determined by age group and sex – between PMI insurers and do not exceed what is necessary
to cover the costs incurred in discharging the PMI obligations. In that regard, the legislation governing the RES makes no
reference to fixed and variable costs, receipts or profit margins. In effect, there is no precise correlation between receipts
and risks, which would be contrary to the principle of community rating, which means that the premium should reflect the risk
represented by the community and not by what may be an unrepresentative group of insured persons. Likewise, it is a requirement
of the open enrolment and community rating obligations that PMI insurers are unable to take advantage of a risk portfolio
that is more beneficial than that of other PMI insurers. The RES is thus necessary for the smooth operation of the community
rating and to stimulate competition between PMI insurers, for all age classes, by means of commercial efforts, such as those
devoted to marketing, quality of services, links with care providers or management efficiency. For those reasons, the relevant
legislation requires that the costs associated with discharging the PMI obligations be quantified and apportioned between
the PMI insurers on an equitable basis by means of the RES. On the other hand, as the PMI insurers are free to determine their
premiums and their profitability according to market conditions, the RES is not intended to equalise costs which depend on
their efficiency and the PMI insurers retain the benefit of their good management. Last, since the RES grants compensation
to PMI insurers only in respect of the difference between their own risk profile and the average risk profile on the market,
a PMI insurer cannot consider the RES to be an incentive not to be efficient. In effect, the method used to calculate the
compensation precludes, in practice, the application of the RES from depending on the costs generated by the poor management
of a PMI insurer. Under Article 3 of the RES, the mechanism for calculating RES payments takes account only of the costs generated
by requests for payment addressed to PMI insurers, to the exclusion of other costs, such as administrative and marketing costs,
which means that this method of calculation cannot have the consequence that any inefficiencies are borne by all PMI insurers.
In addition, the RES aims only to equalise, by means of that method, the burdens resulting from the variations between the
risk profiles of those insurers and not of the burdens incurred in providing PMI services as such, or the corresponding receipts
or profits.
The defendant and Ireland also contest the applicants’ argument that PMI insurers are able to reject ‘bad’ risks by taking
commercial measures. In practice, it is not possible to segment the market according to risk by means of a flexible determination
of premiums and to impose more expensive cover on high-risk consumers to cover the costs occasioned by additional requests
for payment. On the one hand, high-risk consumers do not withdraw from a lower level of cover because that would entail losing
the benefit of community rating. On the other hand, in view of the competitive pressure on the market, a portfolio of high-risk
insured persons would not readily be offset by means of higher premiums. Last, the applicants’ argument to the contrary is
contradicted by their own strategy of aligning the prices for their PMI services with those of the VHI. The defendant, supported
by the VHI, further submits that the RES payments are calculated not by reference to all claims settled by the PMI insurers,
but only by reference to claims covered by the most widely-sold and the least expensive PMI covers. Furthermore, the corrective
constituted by the health status weight, which is limited to 50%, is not currently taken into consideration by the RES. The
need for such a corrective factor, however, results from the fact that age and sex cannot explain all the differences between
the risk profiles of the PMI insurers and, accordingly, cannot fully reflect the resulting disequilibrium.
2) The relationship between the RES and the costs generated by discharging the PMI obligations
Before examining the parties’ arguments concerning the nature of the compensation made by the RES payments, in the first place,
the Court will examine the merits of the applicants’ theory that such compensation is not necessary because the PMI insurers
could avoid any burden linked with compliance with, inter alia, the community rating obligation by segmenting the PMI market
according to the risk insured by adopting commercial measures, in particular by differentiating the PMI covers and the corresponding
premiums.
While it is true that in the absence of national provisions to the contrary the PMI insurers are in principle free to determine
the extent, the quality and the price of PMI cover according to the needs of the various groups of insured persons and according
to their own commercial strategy, that freedom is severely restricted by the PMI obligations once the PMI makes its choice
as to the precise terms of a PMI policy and decides to offer it on the market (see paragraph 192 above). In effect, the community
rating obligation laid down in section 7 of the Health Insurance Act, 1994, as amended, which provides that any insured person,
independently of his age, sex and state of health, must benefit from the same premiums for the same PMI cover, prohibits discrimination
to the detriment of higher-risk insured persons in the form of higher premiums for the same cover or any reduction in the
extent or the quality of cover under the PMI contract at the same level of premium. However, the applicants have not really
contended that compliance with that obligation entails additional burdens for the PMI insurer in that it prevents the insurer
from adjusting the premium according to the risk covered and from thus offsetting, by charging higher premiums, the higher
payments corresponding to ‘bad’ risks.
In addition, in spite of the fact that their theory was disputed by the defendant and by Ireland, the applicants have not
sufficiently explained the reasons why those additional burdens might be offset by any practice of differentiating cover and
premiums that would be lawful by reference to the community rating obligation. In that regard, the mere fact that PMI insurers
active on the Irish market offer PMI policies providing distinct cover and adjusted to the needs of the different groups of
insured persons is not sufficient to render the applicants’ theory plausible, since even the most basic cover, which is generally
preferred by young persons in good health, remains and must remain accessible to persons at risk, thus satisfying the essential
objective of the open enrolment and community rating obligations. As Ireland asserts, the applicants have put forward no evidence
to show that those ‘at risk’ persons will no longer request, or will give up, that basic cover, the price of which they find
particularly attractive on account of the community rating, in response to any changes in the PMI contracts. Likewise, the
applicants have not disputed the detailed information supplied by the applicant in support of its argument that the PMI cover
offered by BUPA Ireland and that offered by the VHI are very similar and that the insured persons, notably those with VHI,
remained rather indifferent to the differentiation of the benefits and premiums (see paragraph 147 above).
In that regard, the Court rejects the argument that the PMI insurers could protect themselves against excessive burdens caused
by claims by persons at risk by refusing to cover persons who have reached the age of 65 or by imposing long waiting periods.
On the one hand, it follows from the considerations set out at paragraph 198 above that the possibility of refusing to cover
persons aged 65 or over seems very limited in practice, owing in particular to the fact that this applies only to persons
who have never subscribed to PMI cover. On the other hand, the initial waiting periods, which constitute a legitimate means
of protecting the PMI market subject to open enrolment and community rating (see paragraph 199 above), allow only temporary
avoidance of the burdens attributable to ‘bad’ risks, since, once that period has elapsed, the PMI insurer is fully exposed
to the claims of the high-risk persons whom it is required to accept under the open enrolment obligation. Accordingly, contrary
to the applicants’ contention, those restrictions do not suffice to offset the additional costs resulting from the assumption
of the ‘bad’ risks which PMI insurers are unable to avoid because of the PMI obligations.
It follows that the argument that there is no need for compensation because the PMI insurers remain free to determine the
terms of PMI cover and to segment the market according to the risk insured cannot be upheld.
In the second place, the Court will examine the argument that, in the light of the third
Altmark
condition, the compensation system provided for by the RES should be directly linked with the costs occasioned by compliance
with the PMI obligations.
In that context, it must be borne in mind that the SGEI mission in question consists in the supply of PMI services in compliance
with the PMI obligations (see paragraph 175 above). Therefore the applicants’ argument that the compensation awarded by means
of the RES payments could not be justified by the costs of supplying the PMI services as such, because those services do not
constitute SGEIs, is unfounded. It is common ground, moreover, that the costs taken into account for the purposes of calculating
the RES payments are merely those incurred by the PMI insurers when settling members’ claims (see paragraph 33 above) and
that, accordingly, those costs are closely linked with the supply of the PMI services in question. The applicants are therefore
wrong to deny the existence of a link between the costs associated with the supply of the PMI services and the compensation
provided for by the RES.
The Court none the less observes that, in the functioning of the compensation system constituted by the RES, there is no direct
relationship between the amounts actually paid by the PMI insurer following a claim and the compensation awarded by means
of the RES payments. It must be emphasised that the RES payments do not aim to compensate any costs or additional costs associated
with a specific supply of certain PMI services, but only to equalise the additional burdens which are supposed to result where
a PMI insurer has a negative risk profile differential by comparison with the average market risk profile (see paragraph 33
above). In that regard, the amounts actually paid by the PMI insurers during a given period serve only as a basis for calculating
the average market risk profile and the differential between that risk profile and the individual and actual risk profile
of each of the PMI insurers subject to the RES. Thus, a PMI insurer’s individual and actual risk profile represents the average
payment costs borne by that insurer during that period, the amount of which rises in proportion to the large number of high-risk
members submitting frequent claims for high amounts. That individual and actual risk profile of each of the PMI insurers is
then compared with the average market risk profile, which represents the average burdens borne by all PMI insurers when meeting
claims, with the aim of reproducing, as faithfully as possible, the average of the burdens generated by all insured persons
on the PMI market.
In fact, as the defendant and Ireland claim, the essential purpose of the open enrolment and community rating obligations
is to spread those burdens fairly over the entire Irish PMI market, so that any PMI insurer bears only the burdens linked
with the average market risk profile. If those burdens were not equalised, the functioning of the community rating aimed at
an equal allocation of risks between PMI insurers to enable the cross-subsidy of premiums between the generations would be
impeded. Consequently, the additional burdens which a PMI insurer must bear on account of its negative risk profile by comparison
with the average market risk profile represent the additional costs which a PMI insurer must assume on a PMI market subject
to open enrolment and community rating as a consequence of its obligation to cover high-risk persons without fixing the amount
of the premiums according to the risk insured. It is only those additional costs that the RES is designed to offset. In those
circumstances, the applicants’ argument that the RES payments are not linked with the costs occasioned by compliance with
the PMI obligations and are not capable of compensating for the unequal allocation of the ‘bad’ risks on the PMI market cannot
succeed.
In the context of the restricted control that applies in the present case (see paragraphs 220 to 222 above), the validity
of the objectives pursued by the compensation system constituted by the RES as described at paragraph 235 above and the legality
of the rules governing its operation cannot be called in question. In that regard, it is indeed appropriate to observe that
the operation of that system is radically different from that of the compensation systems forming the subject-matter of the
judgments in
Ferring
, paragraph 41 above, and
Altmark
, paragraph 89 above. Accordingly, it cannot strictly fulfil the third
Altmark
condition, which requires that it be possible to determine the costs occasioned by the performance of an SGEI obligation.
The Court considers, however, that the quantification of the additional costs by means of a comparison between the actual
risk profile of a PMI insurer and an average market risk profile in light of the amounts paid by all PMI insurers subject
to the RES is consistent with the purpose and the spirit of the third
Altmark
condition in so far as the compensation is calculated on the basis of elements which are specific, clearly identifiable and
capable of being controlled (see paragraph 216 above). Furthermore, although they assert failure to comply with the third
Altmark
condition, the applicants have not denied that the calculation of the RES payments satisfies those criteria. Nor have they
succeeded in calling in question the existence of a link, as described at paragraph 235 above, between compliance with the
PMI obligations, in particular the open enrolment and community rating obligations, and the compensation granted by means
of the RES payments.
It follows that the applicants have not demonstrated that the RES was a manifestly inappropriate means of compensating for
the additional costs resulting from compliance with the PMI obligations. In those circumstances, there is no manifest error
in the Commission’s finding at recital 53 to the contested decision that, essentially, the RES limits payments between PMI
insurers to the level strictly necessary to neutralise the differential between their risk profiles and to compensate for
the costs incurred in covering the ‘bad’ risks in excess of the market average, in order to compensate those insurers for
the financial consequences of the PMI obligations which prohibit them from setting premiums according to the risk insured
and from rejecting the ‘bad’ risks.
In the third place, the Court must reject the applicants’ argument that the Commission ought to have taken account in the
present case, in the light of the third
Altmark
condition, of the receipts and a reasonable profit that the PMI insurers might make by discharging the PMI obligations.
It follows from the considerations set out at paragraph 235 above that the compensation system constituted by the RES is wholly
independent of the receipts and profits achieved by the PMI insurers in that it is based exclusively on the costs occasioned
by the claims honoured by the PMI insurers during a certain period and in that its sole objective is to equalise the burdens
that result from the differential between the individual and actual risk profile of a PMI insurer and the average market risk
profile. As the defendant claims, notably in answer to a written question put by the Court, in such a system there is by definition
no correlation between risk profile and receipts that would allow those receipts to be taken into account for the purpose
of determining the compensation for any additional costs. In effect, in such circumstances, there can be no overcompensation
for costs by reference to receipts, since the costs taken into account in the calculation of compensation are not directly
linked with the supply of an SGEI or with the resulting receipts.
Consequently, since the RES does not aim to compensate for the costs directly linked to the supply of the PMI services (see
paragraph 235 above), which would correspond to the situation specifically envisaged by the third
Altmark
condition, there is no need to take into consideration the receipts obtained for those services in order to establish any
actual additional costs incurred in making that supply. Such an approach would even run counter to the principle of community
rating, which requires that the premium payable for PMI cover reflect the risk represented by all insured persons and not
by a specific group of insured persons. In those circumstances, a strict application of the third
Altmark
condition, which is aimed at a different form of compensation for an SGEI obligation, would not take account of the particular
nature of the functioning of the compensation system provided for by the RES. On the contrary, such an approach would amount
to calling in question as such Ireland’s choice to establish such a system, which is completely independent of the receipts
and profits of the PMI insurers and which is designed to ensure the proper functioning of a PMI market subject to the PMI
obligations. However, the Court considers that neither the purpose nor the spirit of the third
Altmark
condition requires that receipts be taken into account in a system of compensation which operates independently of receipts.
For those reasons, the Commission cannot be criticised for not having taken account of the receipts and profits achieved by
the PMI insurers in discharging the PMI obligations. Furthermore, it follows from the foregoing considerations that the complaint
that the Commission did not examine that question or state the reasons in the contested decision on that point cannot be upheld
either. In that regard, the Commission expressly relied in its analysis of the existence of aid under Article 87(1) EC on
the judgment in
Ferring
, paragraph 41 above, which requires that the additional costs actually borne by the operators entrusted with discharging
an SGEI obligation be determined (recital 40 to the contested decision). The Court considers that, as subsequently confirmed
and explained by the Court of Justice in
Altmark
, the additional costs criterion implies in principle, in the case of a compensation system such as the ones referred to in
those cases, a determination of the costs actually borne by the operator concerned when discharging an SGEI mission and the
corresponding receipts. In this case, however, the Commission properly observed, at recital 53 to the contested decision,
that the additional costs were merely those resulting from a negative risk profile, which means that the Commission correctly
recognised that the calculation method provided for by the RES did not allow any receipts obtained by the PMI insurers to
be taken into account (see paragraph 240 above).
Consequently, the applicants have not shown that the Commission had failed to have regard to the third
Altmark
condition by considering that the compensation system provided for by the RES was necessary and proportionate by reference
to the costs incurred in discharging the PMI obligations.
The complaint alleging failure to have regard to the third
Altmark
condition must therefore be rejected as unfounded.
f)     Comparison with an efficient operator within the meaning of the fourth Altmark condition
According to the fourth
Altmark
condition (paragraph 93), where an SGEI mission is not entrusted to an undertaking pursuant to a public procurement procedure,
the level of compensation needed must be determined on the basis of an analysis of the costs which a typical undertaking,
well run and adequately provided with means to meet the necessary public service requirements, would have incurred in discharging
those obligations, taking into account the relevant receipts and a reasonable profit for discharging the obligations. The
applicants maintain, in substance, that that condition is not satisfied in the absence of a reference point in the RES against
which to measure efficiency and to draw a comparison with an efficient operator. In particular, the Commission ought to have
examined whether the costs that might be incurred by the PMI insurers, notably the VHI, in complying with the PMI obligations
were comparable with those which would have been borne by an efficient operator.
In that regard, it must be noted first of all that it follows both from the considerations set out at paragraphs 239 to 242
above and from the close link between the fourth and third
Altmark
conditions, each of which requires a determination of the costs and the receipts and profits relating to the discharge of
an SGEI obligation, that the premisses of the present complaint are incorrect. Regard being had to the neutrality of the compensation
system constituted by the RES by reference to the receipts and profits of the PMI insurers, and to the particular nature of
the additional costs linked with a negative risk profile on the part of those insurers, the fourth
Altmark
condition, in that it requires a comparison of the costs and receipts directly linked to the supply of the SGEI, cannot be
strictly applied to the present case. That is already confirmed, moreover, by the purpose of the third
Altmark
condition, which is to ensure that the SGEI in question is supplied at the least costs to the community (
Altmark
, paragraph 92). It is common ground that the RES is not intended to compensate for an identified cost occasioned by the supply
of a PMI service.
It should be borne in mind, next, that the RES payments are not determined solely by reference to the payments made by the
PMI insurer in receipt of the compensation – which would be a situation corresponding to that addressed by the third and fourth
Altmark
conditions –, but also by reference to the payments made by the contributing PMI insurer, which reflect the risk profile
differentials of those two insurers by comparison with the average market risk profile.
Accordingly, the Commission was entitled in this case to consider case that in the context of the analysis of the existence
of State aid within the meaning of Article 87(1) EC, there was no need to draw a comparison between the potential recipients
of the RES payments and an efficient operator. Furthermore, even though it was likely, at the time of adoption of the contested
decision, that the VHI would initially be the main beneficiary of RES payments, it was not until later that the RES was activated
by the Irish authorities, owing to the changes in the risk profiles on the Irish PMI market. Accordingly, without knowing
the future situation of the different PMI insurers active on the Irish PMI market, the Commission was unable to identify precisely
the potential beneficiaries of RES payments and to make a specific comparison of their situation with an efficient operator.
Moreover, in light of the purpose of the fourth
Altmark
condition, the Commission was none the less required to satisfy itself that the compensation provided for by the RES did
not entail the possibility of offsetting any costs that might result from inefficiency on the part of the PMI insurers subject
to the RES. In that regard, the Court notes that the Commission expressly found, at recitals 27 and 56 to the contested decision,
that the RES took into account the PMI insurers’ own average claim cost, thus avoiding an equalisation of their average costs
per cell of insured population and allowing the insurers to keep the benefit of their own efficiencies.
In that regard, the applicants have claimed that if the actual claim costs of PMI insurers were taken into account in the
calculation of the RES payments, that would entail higher payments being made to the advantage of the least efficient PMI
insurers, which have the highest costs. However, as may be seen from recital 56 to the contested decision and from the considerations
set out at paragraph 235 above, those costs represent only the burdens associated with the claims settled by the PMI insurers
during a particular period, to the exclusion of any other management costs, such as the administrative or marketing costs
for which the PMI insurers are responsible. The applicants have neither disputed that point nor explained to what extent that
method of calculation was capable of resulting in the costs attributable to any lack of efficiency being reflected in the
settlement of claims. Contrary to the applicants’ opinion, as the calculation of compensation under the RES depends solely
on costs not linked with the efficiency of the operators in question, that compensation is not capable of leading to the sharing
of any costs that might result from their lack of efficiency and affect the possibility for those operators to keep the entire
benefit of their good management.
That assessment is not invalidated solely by the finding of the HIA, in its report of April 2005 (page 30) that BUPA Ireland’s
average daily treatment cost is around 17% lower than market average, as that lower cost could result specifically from BUPA
Ireland’s more favourable risk profile by comparison with that of other PMI insurers. In fact, in that regard, the HIA observes
that the difference between costs per day of treatment might be explained by differences concerning efficiency, the PMI products
and the state of health of those covered, and that cost can vary according to the age of the patient. It is clear that a PMI
insurer whose affiliates are in poorer health than the average of affiliates is exposed to proportionally higher treatment
costs. Nor do the applicants indicate whether the expression ‘differences in efficiency’ used by the HIA refer to the management
of the PMI insurers as such or to the management of the hospitals, which are at the origin of treatment costs, or to what
extent those differences might be relevant to the taking into account of the payment costs and be reflected in the equalisation
payments.
Nor is the applicants’ argument that the impact of high claims on the level of RES payments encourages the recipient PMI insurer
not to be efficient well founded. As the applicants themselves acknowledged at the hearing, they did not specify the nature
of any lack of efficiency to which such a situation might give rise, but essentially confined themselves to invoking the absence
of any comparison with an efficient operator within the meaning of the fourth
Altmark
condition. Last, in that regard, the defendant submitted, without being contradicted by the applicants, that, by virtue of
the First Schedule to the RES, in the context of the calculation of the RES payments, the costs of meeting claims are taken
into account only up to EUR 550 per day of hospitalisation irrespective of the level of cover involved, whereas the average
hospitalisation costs of the VHI, for example, come to EUR 640 per day of hospitalisation, which in itself constitutes a measure
of protection against over-consumption and against poor cost management by the PMI insurer. Furthermore, that ceiling on eligible
costs under the RES is explained in detail at recital 55 to the contested decision.
However, the defendant and Ireland have acknowledged that the method of calculating the RES payments is none the less capable,
to a very limited extent, of permitting the profits associated with efficiency or the costs associated with inefficiency of
the various PMI insurers to be shared, in that it includes the application of certain adjustment factors, namely, first, the
‘zero sum adjustment factor’ which serves to ensure that the system is self-financing and, second, the health status weight,
which is based on the observed use of hospital capacity (recitals 28 and 57 to the contested decision).
As regards the ‘zero sum adjustment factor’, the applicants however acknowledged at the hearing that their complaint did not
relate to that aspect of the RES and that the variations in the level of RES payments that might result were negligible and
incapable of giving rise to an appreciable equalisation of the costs associated with lack of efficiency. As regards the health
status weight, the applicants none the less contend that its application would result in lack of efficiency being taken into
account, since it is based on the actual costs of the PMI insurers rather than on the costs of an efficient operator. In that
regard, it must be pointed out that the application of that adjustment factor, which is currently zero, is subject to certain
conditions, as set out in the Second Schedule to the RES, and in particular that it is limited to 50% of the observed use
of hospital capacity. In the light of that limited importance of that factor, and as the applicants have put forward no specific
evidence to show that the actual use of hospital capacity was capable of reflecting inefficiencies, such as overconsumption
of medical services, the Commission was entitled to conclude that the compensation system constituted by the RES, and in particular
the application of the health status weighting fact, did not entail the possibility of the costs associated with inefficiency
being passed on to all PMI insurers.
In that context, the Commission clearly explained, at recitals 28 and 57 to the contested decision, that the strict conditions
governing the application of that factor made it possible to avoid the full equalisation of the effects of risk differentials
and an incentive to hospitalise patients and that, on the contrary, the 50% ceiling was an additional guarantee that would
encourage PMI insurers to promote shorter hospital stays, early detection and best practice generally. The applicants have
not challenged that finding, in detail, during the proceedings. It should be added, for the sake of completeness, that, as
the defendant and Ireland maintain, the Irish authorities have not thus far made use of that factor and have based their assessment
of the risk differentials between PMI insurers solely on the criteria of the age and sex of the persons insured.
Last, the Court considers that the Commission took into account, to the requisite legal standard, at recitals 26 to 28, 56
and 57 to the contested decision, the evidence which allowed it to conclude that the compensation provided for by the RES
was neutral by reference to any costs associated with inefficiency incurred by certain PMI insurers.
Consequently, the Court considers that the Commission did not fail to have regard to the fourth
Altmark
condition and that the present complaint must be rejected in its entirety.
In the light of all of the foregoing considerations, it must therefore be concluded that the Commission was correct to state,
in Article 1 of the contested decision, that the RES did not involve State aid in the sense of Article 87(1) EC. Accordingly,
the first plea must be rejected as unfounded. The Court none the less considers it necessary also to examine the second plea,
alleging infringement of Article 86(2) EC.
g)     The necessity and proportionality of the RES for the purposes of Article 86(2) EC
i) Preliminary observation
By their second plea, the applicants essentially dispute the necessity and proportionality of the actual introduction of the
RES. The Court will examine the applicants’ arguments relating to this second plea only in so far as they raise issues that
were not examined in connection with the first plea.
The applicants’ complaint relating to the absence of any express reference to Article 86(2) EC in the operative part of the
contested decision (see paragraphs 90 and 128) must be rejected at the outset. As the defendant observes, it does not follow
either from the relevant legislation or from the case-law that the formulation of the operative part of decisions adopted
pursuant to Article 87 EC in conjunction with Article 86(2) EC must of necessity meet specific requirements. It is also necessary,
in order to assess the actual legal scope of an act, the operative part of which is indissolubly linked to the statement of
reasons for it, that, when it has to be interpreted, account must be taken of the reasons which led to its adoption (see Joined
Cases T‑346/02 and T‑347/02
Cableuropa and Others
v
Commission
[2003] ECR II‑4251, paragraph 211 and the case-law there cited). Accordingly, although it might appear desirable, in the
interest of clarity and legal certainty, that the Commission should expressly mention in the operative part of the act the
Treaty provisions which it is applying, the failure to do so does not constitute an error of law provided that it is quite
clear upon reading the statement of reasons in conjunction with the operative part of the act precisely what those provisions
are. In this case, although the Commission did not refer in Article 1 of the contested decision to the application of Article
86(2) EC, it none the less clearly mentioned that provision at recital 61 to the contested decision, which summarises its
findings. Consequently, an averagely attentive reader of the contested decision could not be mistaken as to its actual legal
scope.
ii) The necessity for the introduction as such of the RES
1) General observations
The applicants maintain, in essence, that the Commission made errors of assessment in finding, at recitals 50 and 52 to the
contested decision, that the RES was necessary to preserve stability in a market subject to PMI obligations and also the practical
effect of those obligations. They submit that the contested decision itself acknowledges, at recital 51, that the Irish PMI
market had not thus far experienced stability problems. Furthermore, the alleged danger of risk selection is purely speculative
and unsupported by the facts. In reality, that danger does not exist because there is no incentive actively to select good
risks and there is no passive risk selection (see paragraph 134 above). The PMI insurers are capable of offsetting bad risks
by adjusting their contractual terms, and in particular by increasing premiums and differentiating cover. In any event, since
insured persons have as a general rule, as shown by the Amárach report, very little inclination to change insurers, a new
entrant into the Irish PMI market would necessarily target new customers, who, by definition, are young. Furthermore, as regards
the older insured persons, the VHI sells at a loss, thus making it impossible for BUPA Ireland to compete effectively. Last,
the economic studies on which the defendant relies, which relate to markets other than the Irish market, are neither relevant
nor capable of corroborating the risk selection theory. On the other hand, the three reports submit by the HIA since 2003
confirm that there is no imminent or future instability in the Irish PMI market (see paragraphs 131 to 138 above).
The defendant replies, in essence, that the applicants have not succeeded in calling in question the indication of the existence
of a risk of active risk selection in a system of community rating and open enrolment, a risk the principle of which was even
recognised in the NERA report. Ireland further submits that the community rating and open enrolment requirements must necessarily
be counterbalanced by the RES in order to avoid preferential risk selection by new insurers on the PMI market. In the absence
of any corrective, those new entrants, because of their favourable risk profile, would be able to achieve significant ‘technical’
benefits by keeping the amounts of premiums at virtual levels that were too high, to the detriment of all insured persons,
which would be capable of affecting the stability of the PMI market. Market stability is also threatened where an insurer
with a favourable risk profile appreciably reduces its premiums, thus triggering a ‘downward spiral’ consisting in the movement
of the most mobile affiliates towards that insurer and weakening the financial situation of competing insurers, which, because
of the community rating, are no longer capable of offering their products at competitive prices and attracting new customers.
That is the current situation of the VHI, whose solvency ratios have fallen markedly by comparison with BUPA Ireland’s.
In the opinion of the defendant and of Ireland, the applicants’ argument that it is possible for insurers to offset ‘bad’
risks by adjusting the terms of their contracts is irrelevant and is contradicted by reality. First, such an approach is contrary
to the principle of community rating and, in any event, is impracticable and incapable of maintaining the equilibrium of the
Irish PMI market. Second, the PMI services offered by the VHI and by BUPA Ireland are very similar and, in practice, insured
persons are in any event indifferent to any differentiation in the advantages offered by a PMI policy. Furthermore, the data
on the age profile of the persons insured by the VHI clearly show that such risk selection exists. As regards the risk of
passive selection, the defendant, supported by Ireland, disputes the applicants’ interpretation of the Amárach report, which
supports the existence of consumer migration from one insurer to another. Nor is the argument that the VHI fixes prices for
high-risk customers at a loss supported or admissible. The defendant submits, last, that the contested decision proceeds solely
from the finding that there was a possibility of risk selection, which is a factor of instability; and, according to the
Albany
judgment, paragraph 101 above, and to the limited degree of review which the Court is called upon to carry out concerning
the criterion of necessity, that is sufficient.
2) The subject-matter of the contested decision and of the Court’s review
Before examining the merits of the various arguments raised by the parties, the Court considers it necessary to define the
subject-matter of the examination carried out by the Commission in this case, it being understood that it is the examination
carried out by the Commission which forms the subject-matter of the review by the Court.
It must be made clear that the RES, as notified, constitutes a general system, that is to say, a system based on a number
of provisions of general application, the implementation of which is indeed predetermined, to a certain extent, by objective
and transparent criteria (see paragraphs 213 to 217 above), but not predictable in every detail. In particular, as that system
is supposed to adjust and react to rapid developments on the market concerned, its functioning is subject to certain general
provisions implying a wide discretion on the part of the authorities entrusted with its application. That is true, in particular,
for part IV of the RES, on the assessment and recommendation of the HIA concerning the existence of a risk differential capable
of activating the RES payments.
It follows that, in accordance with the definition of the scope of administrative and judicial review set out at paragraphs
220 and 221 above, the Commission’s review in that regard, which has the joint basis of Article 87 EC and Article 86(2) and
(3) EC, in particular as regards the necessity of the notified system, is necessarily limited to ascertaining whether, first,
the system is founded on economic and factual premisses which are manifestly erroneous and whether, second, the system is
manifestly inappropriate for achieving the objectives pursued. It is in that context that the Court, for its part, must examine
whether the Commission’s assessment in that regard is sufficiently plausible to support the necessity for the system in question.
Within the framework of that review, it is appropriate first of all to examine whether the market dysfunctions on which the
Member State relies in order to justify the establishment and protection of the SGEI mission in question were sufficiently
plausible and also to assess whether the Commission could reasonably consider that a system such as the RES was by nature
necessary and appropriate in order to resolve the problems referred to. It is then for the Court to ascertain whether, in
this case, the Commission’s assessment on those points is well founded by reference to current conditions and probable developments
in the Irish PMI market as they appeared at the time of adoption of the contested decision in the light of all the information
which the Commission had, or ought reasonably to have had, at its disposal.
As regards, in particular, the extent of the Commission’s review, in accordance with what is set out at paragraphs 220 to
222 above, the Commission cannot take the place of the Member State in the exercise of the wide discretion which the latter
enjoys. Thus, contrary to what the applicants appear to suggest, in assessing whether the measure in question is necessary,
the Commission has no power to ascertain, on the basis of the available data, whether the market might actually develop in
a certain way and whether the application of the regulatory instruments envisaged by the notified system will thereby become
indispensable, at a given moment, to ensure the achievement of the SGEI mission in question. In effect, the review of necessity
does not require that the Commission be convinced that the Member State, in the light of present or future market conditions,
cannot abandon the notified measures, but is limited to ascertaining whether there has been a manifest error in the exercise
of the wide discretion of the Member State as regards the way of ensuring that the SGEI mission may be achieved under economically
acceptable conditions (see, to that effect,
Commission
v
Netherlands
, paragraph 99 above, paragraph 58, and
Albany
, paragraph 101 above, paragraphs 107 and 111).
Last, if that review on the part of the Commission is restricted, that circumstance must also be taken into account in the
context of the review of the legality of the Commission’s assessment carried out by the Community judicature. That review
by the Court must be even more restricted because the Commission’s assessment relates to complex economic facts (see paragraphs
220 and 221 above). That applies especially to the review based on the principle of proportionality, in particular where the
contested act concerns State measures of general scope. In effect, such review by the Court must be limited to determining
whether those measures are manifestly inappropriate by reference to the objective pursued (see, by analogy,
Boehringer
v
Council and Commission
, paragraph 118 above, paragraphs 73 and 74).
It follows from the foregoing that the Commission did not make a manifest error of assessment by not requiring that Ireland
demonstrate that the RES was indispensable in order to ensure compliance with the PMI obligations. The Court must therefore
reject the applicants’ argument that the RES must be indispensable and that the Commission misunderstood the scope of the
review which it must carry out in that regard.
3) The presence of risk selection on the Irish PMI market
Preliminary observation
In the light of the foregoing, the Court must examine – first of all from a general viewpoint and then by reference to the
particular conditions on the Irish PMI market – whether the Commission was entitled to consider that the RES constituted a
necessary corrective in a PMI market subject to obligations of open enrolment, community rating, lifetime cover and minimum
benefits. In that regard, it is appropriate to ascertain in particular whether the Commission relied on evidence which enabled
it to demonstrate to the requisite standard that a PMI market with community rating was in danger of risk selection and whether
it could reasonably consider that that situation might upset the balance of that market.
Active risk selection
–       General economic premisses
As regards the existence of a danger of active risk selection, the parties are agreed that a new entrant on to the PMI market,
such as BUPA Ireland in 1997, has an interest in seeking a low-risk customer base in order to minimise its economic risks
and to reinforce what is still a fragile position on the market. That is particularly so in the case of a market whose competitive
structure still shows significant traces of the situation preceding its liberalisation and of a certain inertia on the part
of consumers, the majority of whom are affiliated to the former monopoly operator, such as the VHI in this case. As the applicants
themselves observe, young, healthy customers, in particular, constitute a significant group of new customers that is particularly
likely to be targeted by a new entrant to the PMI market offering them lower rates than those offered by the other PMI insurers.
In that regard, the applicants have not disputed, with sufficient accuracy and in sufficient detail, the theory that that
tendency to seek lower risks is reinforced by the community rating obligation. It is common ground that, because of that obligation,
a PMI insurer is not entirely free to balance, by charging of higher premiums, the greater economic risk in providing PMI
cover to an elderly or sick person whom the insurer cannot refuse owing to the open enrolment obligation. First, as the PMI
insurer is unable to set its premiums on the basis of the risk insured, it is required to offer the same PMI cover, on the
same conditions as regards rates, to all insured persons, independently of their age, sex and state of health (section 7 of
the Health Insurance Act, 1994, as amended) and thus to cross-subsidise premiums between the different risks insured. Second,
the PMI insurer is also unable to offer PMI cover at premiums fixed according to the highest risk that it is required to cover,
as otherwise it will no longer be capable of attracting young, healthy customers, when they are essential for its economic
equilibrium in a system of cross-subsidised premiums.
The applicants have not relied on any specific evidence capable of invalidating that description of the phenomenon of active
risk selection in a PMI market with community rating. In that regard, the applicants essentially confined themselves to invoking
the possibility for PMI insurers to segment the market according to risk by defining the terms of PMI insurance and fixing
the amount of the premiums in order to be able to offset the ‘bad’ risks by higher premiums. However, it must be borne in
mind that, for the reasons set out at paragraphs 229 and 231 above, the argument relating to the contractual freedom of PMI
insurers cannot be upheld.
Furthermore, the Court considers that, on the contrary, that argument tends rather to confirm the existence of an increased
risk of the selection of ‘good’ risks in a PMI market with community rating, in that it implies that, in practice, PMI insurers
will seek to offset, by lawful means, the effects of the prohibition on risk-based rating by offering a specially-defined
definition of PMI cover and fixing the corresponding premiums according to the needs of distinct groups of insured persons.
In effect, the applicants claim that a PMI insurer may attract young ‘good risk’ customers by providing cover specially adapted
to their needs, at attractive premiums, with the corollary that other groups of insured persons, the ‘bad risk’ customers,
have no incentive to subscribe to such unsuitable cover, and are even deterred from doing so. Irrespective of whether such
a strategy of indirect discrimination between insured persons – a point not addressed by community rating, which prohibits
only direct price discrimination – is practicable, which Ireland, in particular, denies, that strategy seems to be all the
more plausible when competition between PMI insurers is particularly strong for the new, youngest, customers, as is the case
here, as the parties are agreed in their submissions, between BUPA Ireland and the VHI. However, in those circumstances, contrary
to the applicants’ opinion, that strategy does not contradict the existence of the phenomenon of active risk selection, but
tends rather to confirm it, indeed to exacerbate it. Accordingly, the applicants’ argument based on the contractual freedom
of PMI insurers is not capable of demonstrating the absence of active risk selection. Consequently, there is no manifest error
of assessment in the Commission’s finding, at recital 50 to the contested decision, concerning the danger of active risk selection,
that PMI insurers could seek to achieve a better risk profile by, for example, selective marketing techniques, benefit design
or selective quality of service.
In that regard, the Court considers that the theory that a danger of active risk selection and, accordingly, a risk of market
instability is real and strong when the PMI insurer with a favourable risk profile embarks upon a strategy of price ‘predation’,
as described at paragraph 6 of the RES guide, is plausible. On the other hand, that danger appears to be less strong, but
still sufficiently significant, when that insurer adopts – as the defendant, Ireland and the VHI claim with respect to BUPA
Ireland’s conduct – a ‘price follower’ strategy, consisting in fixing the rates for its own PMI services at just below the
rates charged by its main competitors for the same services. In those circumstances, the customer would appear to have less
financial incentive to change PMI insurers than in the case of ‘price predation’. However, in that regard, the defendant and
Ireland assert, without being contradicted by the applicants, that such a strategy none the less allows an insurer to select
the ‘good’ risks and that, especially, it affects the proper functioning of the PMI market and runs counter to the objective
of community rating by maintaining premiums that are too high, to the detriment of customers, by comparison with the costs
of claims which a PMI insurer with a favourable risk profile must actually bear.
It also seems plausible that the ‘price follower’ strategy will have the effect that, notwithstanding its lower costs, the
PMI insurer will decline to reduce its premiums, which would none the less be in the interest of consumers and consistent
with the objective of community rating, with the sole aim of increasing its profits. Likewise, it does not appear to be precluded
that a PMI insurer with an advantageous risk profile will pursue active risk selection by adopting the ‘price follower’ strategy
so long as the price differential is sufficiently large to attract ‘good risk’ consumers.
The Court considers that both Ireland and the Commission, at recital 50 to the contested decision, submitted plausibly that
such a commercial practice was likely to create a downward spiral and thus to destabilise the equilibrium and the functioning
of the community rating PMI market in so far as PMI insurers with a favourable risk profile would be increasingly able to
attract young, healthy customers and thus further improve their risk profile, whereas PMI insurers with an unfavourable risk
profile would come under growing financial pressure owing to the increasing disequilibrium between premiums and the costs
occasioned by the claims submitted by a large number of elderly insured persons in poor health.
In those circumstances, the Court considers that there is no manifest error affecting the consideration, in recital 50 to
the contested decision, that in a PMI market subject to community rating, open enrolment and lifetime cover, there is, in
the absence of a mechanism to equalise risk, an incentive for insurers to select the favourable risks so as to be able to
offer PMI services at more advantageous prices to all insured persons or to be able to make higher profits than competing
PMI insurers.
–       The situation on the Irish PMI market
The Court observes that the Commission found, at recital 51 to the contested decision, that on the Irish PMI market a danger
of risk selection could not be ruled out even though no instability had yet been observed on that market.
In that regard, it must be emphasised that, at the time of the adoption of the contested decision, BUPA Ireland had a distinctly
more favourable risk profile than that of the VHI, its main competitor. Without there being any need to rule on the disputed
issue of whether or not the VHI’s solvency ratios are satisfactory, it must be observed that the applicants have not really
disputed the accuracy and the relevance of the data supplied by the defendant, by Ireland and by the VHI concerning the economic
situation, the VHI’s risk profile and its higher average payment costs per insured person. They accepted that the VHI had
a less healthy risk profile than BUPA Ireland (see paragraphs 135 and 138 above).
Furthermore, in support of its assessment relating to the existence of a danger of active risk selection, the Commission relied
on evidence showing that BUPA Ireland had in fact adopted a strategy of active risk selection combined with a ‘price follower’
strategy by offering rates that were in part significantly below those offered by the VHI to groups of consumers aged under
19 (with a price differential of 10%) and between the ages of 19 and 54 (with a price differential of 4%), whereas it required
higher premiums (20% higher) from persons over the age of 54 (recital 51 and footnote 9 to the contested decision). It should
be emphasised that the applicants declined during the proceedings, including at the hearing, to comment on that evidence,
notwithstanding the fact that both Ireland and the VHI relied expressly in their written submissions on BUPA Ireland’s alleged
‘price follower’ practice.
In that regard, the applicants merely asserted, in the first place, that, as a new entrant on the Irish PMI market and because
of the inertia of insured persons already tied to an insurer, BUPA Ireland necessarily had to target young consumers seeking
cover for the first time. Although that allegation is plausible and supported by the findings of the Amárach report on the
low rate of migration in Irish consumers, it cannot in itself, however, invalidate the finding relating to the presence of
active risk selection, but tends rather to confirm it (see paragraph 274 above).
The applicants claimed, in the second place, that the VHI was selling PMI cover at a loss to elderly and, therefore, high-risk
insured persons, which made it impossible for BUPA Ireland to compete with the VHI for that group of customers. That argument,
which is short on detail and is disputed by the defendant and by Ireland, was not supported by the applicants during the proceedings
and is in any event unfounded. On the assumption that such loss-making sales did exist, they would be difficult to reconcile
with economic logic because they would mean that the VHI was seeking to ensure that its high-risk customers remained loyal
and to prevent them from moving to other PMI insurers by offering them particularly advantageous premiums which did not cover
the costs of meeting claims. Such conduct would be economically irrational, since those insured persons are the cause of the
VHI’s unfavourable risk profile, of the increase in its burdens and, accordingly, of the weakening of its competitive position
on the PMI market.
In the light of the foregoing considerations, the Court considers that the Commission had sufficient relevant evidence to
conclude, without manifest error, at recital 51 to the contested decision that a danger of active risk selection on the Irish
PMI market could not be ruled out. Furthermore, regard being had to the restricted review applicable in this case (see paragraphs
220 to 222 and 265 to 270 above), the Commission could reasonably infer from the existence of such a danger of active risk
selection that there was a risk of instability on the Irish PMI market (recitals 50 and 51 to the contested decision).
In that regard, the fact that the contested decision also finds that no market instability had yet been observed in the past
cannot affect the legality of that conclusion. In view of its restricted power of review vis-à-vis the Member State (see paragraphs
220 to 222 and 269 above), the Commission was not entitled to substitute its own assessment of the evolution of the Irish
PMI market for Ireland’s. The Commission none the less satisfied itself, to the requisite legal standard, that at the time
of the adoption of the contested decision the conditions that could justify the introduction of a risk equalisation mechanism
in order to avoid future instability on that market that could result from active risk selection were fulfilled. The Court
must therefore reject the applicants’ argument that the Commission wrongly accepted the market instability argument. Last,
in light of the plausible nature of the presence of a risk of instability based on active risk selection, there is no further
need to ascertain whether the Commission could also validly conclude, at recital 50 to the contested decision, that there
was a danger of passive risk selection.
4) As to whether the RES was an appropriate means of resolving disequilibrium or instability on the PMI market
It is appropriate to examine, last, whether the Commission could reasonably consider that the RES constituted an appropriate
instrument for resolving the disequilibrium that might result from active risk selection.
To that end, it is necessary to bear in mind at the outset the essential elements governing the functioning of the RES (see
paragraphs 31 to 33 above).
Under the RES, the individual and actual risk profile of the PMI insurers is first of all determined on the basis of the periodic
information which they supply concerning the costs of meeting claims by the person whom they insure, who, for that purpose,
are divided into different groups by age (corresponding to age brackets) and sex. That individual and actual risk profile
is based on the actual average cost per insured person in those groups and corresponds, in total, to the average of the costs
of meeting claims generated by all of those groups. On the basis of the information supplied by the insurers subject to the
RES, the HIA then determines the average market risk profile by reference to each of those groups.
In the following stage, that average market risk profile is substituted for the individual and actual risk profile in order
to identify the hypothetical costs that the insurers would have incurred (per group) if they had had such a risk profile.
The cost differential – whether positive or negative – between the individual and real risk profile on the one hand and the
average and hypothetical market risk profile on the other is therefore of a size which depends on the data of all the PMI
insurers subject to the RES. Last, that cost differential must correspond, possibly following the application of the ‘zero
sum adjustment factor’, precisely to the amount to be equalised between the PMI insurers. By applying that method, the RES
establishes a direct link between, on the one hand, the risk profile of PMI insurers, which is compared with an average and
hypothetical market risk profile and, on the other, the differential in burdens resulting from the costs of meeting claims
as thus determined. It follows that, the greater the positive risk profile by comparison with the hypothetical average profile,
the more likely it is that the costs will be higher than the average market costs, and vice versa.
Furthermore, it follows from the considerations set out at paragraph 235 above that there is a real link between the additional
costs associated with a negative risk profile and, in particular, the open enrolment and community rating obligations, and
that the objectives pursued by those PMI obligations could not be achieved in the absence of a corrective such as that provided
for by the RES.
First, the community rating objective could not be achieved in full, since community rating assumes an equitable apportionment
of the costs associated with insured persons and, accordingly, of the risks between PMI insurers and that each of those insurers
has a balanced risk profile. In effect, the purpose of community rating, namely that the young, healthy insured persons subsidise
the premiums that would normally have to be paid by the elderly and sick insured persons, and, accordingly, solidarity between
the generations, would be jeopardised if one PMI insurer, in an extreme situation, covered only young persons or elderly,
sick persons. In other words, a PMI insurer can bear the burden of open enrolment and of community rating only if it is able
to offset the costs of meeting claims submitted by its elderly, sick members, which are disproportionate by reference to the
premiums, by the premiums paid by its young, healthy customers.
Second, in those circumstances, it seems plausible that, in the absence of a mechanism to restore equilibrium in the allocation
of risks and to deter active risk selection, the Irish PMI market as thus regulated might experience disequilibrium that would
jeopardise its functioning and, accordingly, the very achievement of those objectives. As the community rating obligation
provides an incentive to adopt commercial practices, such as active risk selection, that might well threaten that equilibrium
(see paragraph 273 above), the RES, as Ireland, in particular, submits, constitutes a mechanism for restoring equilibrium
that is necessary and inherent in a regulated market subject to such obligations. In the absence of an open enrolment or a
community rating obligation, the equilibrium of the market would be maintained or restored solely by market forces and, in
particular, by means of risk-based rating. While such rating appears to be capable of significantly reducing the incentive
to employ active risk selection (recital 52
in fine
to the contested decision) and, accordingly, of maintaining a certain equilibrium, it does not permit the other objective
pursued by the open enrolment and community rating obligations to be achieved, namely solidarity between the generations,
which ensures easier access to PMI – owing, in particular, to the cross-subsidy of premiums – by the elderly and the sick.
In those circumstances, the Court cannot accept the applicants’ argument – raised for the first time at the hearing and disputed
by the defendant, by Ireland and by the VHI –, that the Commission relied in the contested decision on a misconception of
community rating to justify the need for the RES. There is no indication in the contested decision that the Commission relied
on considerations other than those set out at paragraphs 291 to 293 above. Furthermore, as Ireland, in particular, asserted
at the hearing, the grounds of the contested decision, in particular those set out at recitals 24, 41 and 60, refer to the
principle of community rating as provided for in both section 7 and section 12(10)(iii) of the Health Insurance Act, 1994,
as amended. Last, contrary to the applicants’ view, the Commission did not confine itself to examining the community rating
obligation solely from the viewpoint of individual PMI contracts, but concluded, at recital 60 to the contested decision,
that the RES was necessary to maintain ‘the stability of a community rated [PMI] market’ in its entirety.
In the light of the foregoing, and taking account of the fact that the Commission could reasonably consider that, owing to
a danger of active risk selection, there was a risk of disequilibrium on the Irish PMI market, the Court finds that the Commission
did not disregard its obligation to review the need for the RES and that it was entitled to conclude that the RES was necessary
in order for the PMI obligations to be discharged in economically acceptable conditions. The applicants, for their part, have
neither adduced any evidence capable of invalidating the merits of the assessment set out at paragraphs 290 to 293 above concerning
the link between the different relevant aspects of the PMI obligations and the RES nor demonstrated to the requisite legal
standard that the RES was a manifestly inappropriate means of resolving the disequilibrium identified.
Consequently, the Court finds that the Commission did not make a manifest error in recognising the necessity of the introduction
of the RES in the Irish PMI market and the applicants’ complaints in that respect must be rejected in their entirety.
iii) The proportionality of the RES
As regards the proportionality of the RES, it follows from the considerations set out at paragraphs 228 to 243 above that
the applicants have not demonstrated that the compensation implemented by means of the RES payments was disproportionate to
the additional costs linked with compliance with the PMI obligations. Accordingly, the applicants’ arguments raised in the
context of the second plea, whereby they seek to challenge the appropriateness and proportionality of the relevant criteria
governing the calculation of the RES payments in so far, in particular, as they give rise, in the applicants’ submission,
to an allocation of the costs linked with inefficiency to the advantage of the PMI in receipt of those payments (see paragraph
138 above), must be rejected as unfounded. As the arguments alleging an allocation of a sharing of the inefficiency have been
declared unfounded, there is no need to adjudicate in this case on the question whether, generally, the inefficiency of the
operator entrusted with an SGEI mission should also be taken into account in the examination of proportionality under Article
86(2) EC (see paragraph 139 above).
Furthermore, the applicants have disputed the proportionality of the RES on the ground, first, that in view of the risk differential
between BUPA Ireland and the VHI, the minimum level, namely 2%, of that differential required to activate the RES (recital
54 to the contested decision) had no practical effect; second, that the health status weight, even though it was limited to
50% of the observed use of hospital capacity (recital 57 to the contested decision), had no connection either with the PMI
obligations or with the stated justification for the RES; third, that the exclusion of new entrants from the application of
the RES for three years (recital 58 to the contested decision) did not offset the deterrent effect of the RES constituting
an obstacle to entry; and, fourth, that the RES, unlike the Netherlands RES, did not provide for a mechanism to correct overcompensation.
In view of the restricted nature of the administrative and judicial review applicable in this case (see paragraphs 220 to
222 and 269 above), the Court considers, first, that the applicants have not shown to the requisite legal standard that the
2% level of risk differential constituted a manifestly inappropriate or disproportionate criterion, particularly since that
percentage does not necessarily lead to the activation of the RES, given the wide discretion which the Irish authorities have
in that regard (recitals 22 to 24 and 54 to the contested decision and paragraph 265 above).
Likewise, the theory that the health status weight is not linked to the PMI obligations and the justification for the RES
cannot be upheld. In that regard, the defendant and Ireland have explained, without being contradicted by the applicants,
that the fact that the costs of the claims of the various groups by age and sex are taken into account did not necessarily
fully reflect the individual and actual risk profile of a PMI insurer, owing in particular to the differences that could exist
within those groups, which necessitated the application, limited to 50%, of an adjustment based on observed use of hospital
capacity (recitals 28 and 57 to the contested decision). In so far as the application of that adjustment factor, which is
not currently proposed, is intended to determine, as reliably as possible, the actual risk differentials between PMI insurers
and, accordingly, the associated additional costs, that factor is wholly consistent with the logic of the compensation provided
for by the RES for the burdens resulting from compliance with the PMI obligations (see paragraph 234 et seq. above).
As regards the alleged deterrent effect of the RES vis-à-vis potential new entrants, the applicants themselves acknowledge
that the temporary exemption from the application of the RES during a PMI insurer’s first three years of activity on the Irish
PMI market, which had the specific aim of avoiding any possible foreclosure effect on that market and of not deterring operators
from entering it, is apt to lower the alleged barrier to entry. In any event, even on the assumption that the RES does reinforce
barriers to entry, that finding does not in itself permit the conclusion that the RES is a manifestly inappropriate or disproportionate
instrument. To accept that it was would amount to calling in question the very existence of the risk equalisation system introduced
by the RES and the achievement of the various objectives pursued by the PMI obligations (see paragraphs 291 to 293 above)
and, accordingly, the discretionary power of the Irish legislature with respect to the organisation of the health sector in
Ireland.
Furthermore, if the raising of the barriers to entry to the Irish PMI market to the detriment of potential new entrants is
a necessary consequence of the introduction of the RES, it is clear upon weighing up the objectives of the RES and the interests
involved that those objectives must take priority over the need to facilitate access to the market. For the sake of completeness,
it should be noted that the applicants’ argument is also contradicted by the entry to the PMI market, in October 2004, of
the PMI insurer Vivas Healthcare (see paragraph 22 above), when the project to activate the RES had already materialised,
and that insurer’s entry to the market shows at the same time that, contrary to the applicants’ opinion, the temporary three-year
exemption from the application of the RES which the new arrival enjoys reduces the significance of the alleged barrier to
entry.
Last, with respect to the considerations set out at paragraph 235 above concerning the method of calculating the RES payments,
which are intended solely to offset the burdens linked with compliance with the PMI obligations, the applicants’ argument
that the RES should make provision for a special mechanism to avoid overcompensation in addition to the mechanisms already
included for that purpose, such as the ceiling on reimbursable costs, cannot be upheld. The comparison which the applicants
make in that context with the Netherlands RES is invalid, since, as they themselves acknowledge, there are fundamental differences
between that system and the RES, as the former is a hybrid system in which the State covers 50% of the costs of providing
PMI services in the form of direct aid.
In the light of the foregoing, the applicants have not demonstrated that the RES is manifestly inappropriate and disproportionate.
Accordingly, the Commission was entitled to conclude, without making any manifest error in that regard, that the RES was proportionate
within the meaning of Article 86(2) EC. That is all the more so because, as stated at recital 59 to the contested decision,
all the decisions taken by the Irish authorities in connection with the activation of the RES are amenable to judicial review,
as is confirmed, moreover, by the proceedings that led to the judgment of the High Court of 23 November 2006 (see paragraphs
24 to 26 above).
Consequently, the complaint alleging that the RES is disproportionate for the purposes of Article 86(2) EC must be rejected
as unfounded.
iv) An effect on trade to such an extent as would be contrary to the interest of the Community
Last, the applicants criticise the Commission for not having examined the criterion of an effect on trade to such an extent
as would be contrary to the interest of the Community, within the meaning of Article 86(2) EC in fine, and submit that the
contested decision contains no reasoning on that point. In that regard, the applicants seek to demonstrate, notably in the
third, fourth, fifth and seventh pleas, that the RES runs counter to the interest of the Community in so far as it infringes
other provisions of Community law. In particular, in support of their fourth and fifth pleas, they maintain that, in its assessment
of a possible effect on intra-Community trade and the interest of the Community, under Article 86(2) EC, the Commission was
required to examine the compatibility of the RES with Article 82 EC, with freedom to provide services and freedom of establishment
and also with the third non-life insurance directive.
In that regard, it must be borne in mind that the Commission considered, at recital 61 to the contested decision, that even
if it were assumed that the compensation for the SGEIs constituted State aid within the meaning of Article 87(1) EC, the aid
elements would be compatible with the common market pursuant to Article 86(2) EC, without prejudice to the analysis of the
compatibility of the scheme with other rules of Community law, in particular with the third non-life insurance directive,
which would fall to be examined within the framework of the appropriate procedures.
The Court considers that the expression ‘compatible with the common market pursuant to Article 86(2) EC’ necessarily refers
to the criterion of an effect on trade to such an extent as would be contrary to the interests of the Community. Furthermore,
the reference to the third non-life insurance directive and to other rules of the Treaty implies that the Commission took
account, in the context of the application of Article 86(2) EC, of the impact of the RES on, inter alia, freedom to provide
services and freedom of establishment. In those circumstances, even though the reasoning in that regard may appear to be concise,
it none the less suffices to show that the Commission was of the view that the RES did not affect trade to such an extent
as would be contrary to the interests of the Community. Last, in so far as the applicants criticise the Commission for not
having examined diligently and fully whether the RES was compatible with the other provisions of Community law and for not
having stated the reasons on which the contested decision was based in that regard, their complaint must be examined in the
context of the third, fourth, fifth and seventh pleas.
Therefore the complaint alleging failure to examine the criterion of an effect on trade to such an extent as would be contrary
to the interests of the Community, within the meaning of Article 86(2) EC in fine, and to state reasons in that regard, cannot
be upheld.
Consequently, the second plea must be rejected as unfounded in its entirety.
C –
The admissibility of the third, fourth and fifth pleas
1.     Arguments of the parties
The defendant contends that the applicants lack
locus standi
with respect to the alleged infringement of the other provisions of Community law invoked in the third, fourth, fifth and
seventh pleas. In the context of an assessment under the rules on State aid, those provisions are relevant only where they
are closely linked to the grant of the State aid itself (Case C‑156/98
Germany
v
Commission
[2000] ECR I‑6857, paragraph 85), which is not the case here.
The applicants, in their third plea, maintain that, according to consistent case-law, it is clear from the general scheme
of the Treaty that the procedure under Article 88 EC must never produce a result which is contrary to the specific provisions
of the Treaty and that, accordingly, where certain aspects of a State aid contravene other provisions of the Treaty, that
aid cannot be declared by the Commission to be compatible with the common market (Case C‑204/97
Portugal
v
Commission
[2001] ECR I‑3175, paragraph 41, and
Germany
v
Commission
, paragraph 311 above, paragraph 78).
2.     Findings of the Court
It must be observed, first of all, that, as the defendant contends, if the Commission were required to adopt a definitive
position in a procedure relating to State aid under Regulation No 659/1999 on the existence or absence of an infringement
of provisions of Community law distinct from those coming under Articles 87 EC and 88 EC, read together, where appropriate,
with Article 86 EC, that would run counter to, first, the procedural rules and guarantees – which in part differ significantly
and imply distinct legal consequences – specific to the procedures specially established for control of the application of
those provisions and, second, the principle of autonomy of administrative procedures and remedies. In that regard, it should
further be borne in mind that, even in the guise of an action for annulment of a decision on State aid, an individual lacks
standing to act, in view of the discretionary power of the Commission in that context, against the Commission’s failure to
initiate infringement proceedings under Article 226 EC or to adopt a position in respect of a possible infringement by a Member
State of the provisions of the Treaty (see, to that effect, Case T‑148/00
Panhellenic Union of Cotton Ginners and Exporters
v
Commission
[2003] ECR II‑4415, paragraph 62 and the case-law there cited).
The applicants cannot properly rely on the case-law to the effect that it follows from the general scheme of the Treaty that
the procedure under Article 88 EC must never produce a result which is contrary to the specific provisions of the Treaty.
According to that case-law, while the Commission has a wide discretion when it determines the compatibility of a system of
aid with the common market, it is none the less required to ensure, in the context of that assessment, that the procedure
does not produce a result which is contrary to specific provisions of the Treaty other than those of Articles 87 EC and 88 EC,
in particular where those aspects of aid which contravene those provisions are so indissolubly linked to the object of the
aid that it is impossible to evaluate them separately (see, to that effect,
Matra
v
Commission
, paragraph 72 above, paragraph 41 and the case-law there cited). However, while that obligation is the expression of a general
principle that every application of Community law must be made in conformity with the higher rules of law, it does not mean
that the Commission is required, in a procedure relating to aid, to apply the rules specially laid down for review of the
application of other provisions of the Treaty or to adopt one or more decisions producing combined legal effects. Under that
obligation, the Commission is required to make an assessment by reference to the relevant provisions which are not, strictly
speaking, covered by the law on aid only where certain aspects of the aid in issue are so closely linked to its object that
any failure on their part to comply with those provisions would necessarily affect the compatibility of the aid with the common
market. In the present case, the applicants have neither explained nor shown to the requisite standard that the particular
aspects of the implementation of the RES that are alleged to infringe other provisions of Community law were indissolubly
linked to the object of the aid in issue, namely the equalisation payments. Furthermore, it must be borne in mind that the
Commission correctly concluded, in Article 1 of the contested decision, that the RES did not involve State aid in the sense
of Article 87(1) EC and that therefore that article did not in any event amount to a declaration of compatibility with the
common market within the meaning of the case-law cited above. Consequently, if only for those reasons, the third, fourth and
fifth pleas must be rejected as inoperative.
Furthermore, it is clear from settled case-law that the discretion which Article 88 EC confers on the Commission in relation
to aid does not permit it to authorise Member States to derogate from provisions of Community law other than those relating
to the application of Article 87(1) EC (Joined Cases C‑134/91 and C‑135/91
Kerafina – Keramische und Finanz-Holding and Vioktimatiki
[1992] ECR I‑5699, paragraph 20, and Case T‑184/97
BP Chemicals
v
Commission
[2000] ECR II‑3145, paragraph 55). It follows, first, that the Commission cannot adopt a definitive position in a procedure
relating to aid as to compliance with other provisions of Community law where such compliance must be controlled under a different
procedural regime. It also follows that, as the adoption of a definitive and legally binding Commission decision must be limited
to the aid aspects, only those aspects, and not the aspects relating to other provisions of Community law which do not constitute
the necessary support for the operative part of its decision, are capable of having adverse effects (see, to that effect and
by analogy,
Panhellenic Union of Cotton Ginners and Exporters
v
Commission
, paragraph 313 above, paragraphs 57 and 58).
In that regard, it must be borne in mind that, according to consistent case-law, regardless of the grounds on which a decision
is based, only the operative part of the decision is capable of producing legal effects and, consequently, of having adverse
effects. On the other hand, the assessments made in the grounds of a decision are not in themselves capable of forming the
subject-matter of an action for annulment. Their legality can be reviewed by the Community judicature only to the extent that,
as the grounds of an act adversely affecting the person concerned, they constitute the essential basis for the operative part
of that act (order of the Court of Justice in Case C‑164/02
Netherlands
v
Commission
[2004] ECR I‑1177, paragraph 21; judgment in Case T‑213/00
CMA CGM and Others
v
Commission
[2003] ECR II‑913, paragraph 186; see also paragraph 260 above), or if, at least, those grounds are capable of altering the
substance of what was decided in the operative part of the act in question (see, to that effect, Case T‑251/00
Lagardère and Canal+
v
Commission
[2002] ECR II‑4825, paragraphs 67 and 68). It follows,
a fortiori
, that the complete failure to mention provisions other than those relating to State aid both in the operative part and in
the grounds of a decision adopted pursuant to Articles 87 EC and 88 EC and, where appropriate, Article 86(2) EC, is not capable
of adversely affecting an individual and of conferring on him an interest in bringing an action.
In this case, it must be emphasised that the contested decision is a decision not to raise objections in respect of notified
aid measures, within the meaning of Article 4 of Regulation No 659/1999, which is addressed only to Ireland and which does
not constitute, either in form or in substance, an explicit response to the applicants’ complaint (see, to that effect,
Commission
v
Sytraval and Brink’s France
, paragraph 72 above, paragraph 45). Consequently, the decision cannot be interpreted as responding, even by implication,
to all the complaints raised by the applicants, including those alleging infringement of Articles 82 EC, 43 EC and 49 EC or
the provisions of the third non-life insurance directive. In those circumstances, the failure to assess those complaints in
either the operative part or the grounds of the contested decision produces no legally binding effects vis-à-vis the applicants
and is not capable of adversely affecting them, so that they do not have capacity to act in the context of the action for
annulment of the contested decision. The Commission was therefore correct to state, at recital 61 to the contested decision,
that the assessment made under Article 87 EC and Article 86(2) EC was without prejudice to the analysis, in the appropriate
procedures, of the compatibility of the RES with other relevant rules of Community law and, in particular, with those of the
third non-life insurance directive.
Last, contrary to the applicants’ theory, the wording of Article 86(2) EC in fine does not invalidate that assessment. First,
the criterion of an effect on trade to such an extent as would be contrary to the interests of the Community does not mean
that the Commission is under an obligation to ascertain, definitively and comprehensively, whether the notified State measures
infringe other provisions of Community law. Second, as the defendant claims, the applicants’ theory is contradictory in that
its application would deprive Article 86(2) EC of any practical effect as a derogation from the rules of the Treaty. Such
a derogation could never be effective if its application were at the same required time to ensure full compliance with the
rules from which it is supposed to derogate.
The Court concludes from all of the foregoing considerations that the applicants have no standing to rely, within the framework
of their action against the contested decision, on the third, fourth, fifth and seventh pleas in so far as they are based
on infringement of Articles 82 EC, 43 EC and 49 EC and the third non-life insurance directive.
Consequently, the third, fourth and fifth pleas must be rejected as inadmissible and, at the very least, as inoperative, without
there being any need to adjudicate on their merits. The seventh plea must also be rejected as inadmissible in so far as it
refers to the provisions of Community law specifically covered by the third, fourth and fifth pleas.
D –
The sixth plea, based on the failure to initiate the formal investigation procedure under Article 88(2) EC
1.     Arguments of the parties
The applicants submit that, in the light of all of the foregoing, the Commission acted unlawfully in failing to initiate the
formal investigation procedure, under Article 88(2) EC, in order to be able to adjudicate in full knowledge of the relevant
facts of the present case. The contested decision was adopted following the preliminary examination, under Article 88(3) EC,
which is intended merely to enable the Commission to form a prima facie opinion on the compatibility of the aid with the common
market. The Commission is entitled to limit itself to that preliminary examination only if that is sufficient for it to satisfy
itself that the aid is compatible (
Matra
v
Commission
, paragraph 72 above, paragraphs 16 and 33;
Cook
v
Commission
, paragraph 66 above, paragraphs 22 and 29;
Commission
v
Sytraval and Brink’s France
, paragraph 72 above, paragraphs 38 and 39; and
Portugal
v
Commission
, paragraph 312 above, paragraphs 32 and 33), which is not the case here.
In that regard, the Commission is required to examine all the facts and all the legal arguments brought to its notice by undertakings
whose interests may be affected by the grant of the aid (
Commission
v
Sytraval and Brink’s France
, paragraph 72 above, paragraph 51, and
Portugal
v
Commission
, paragraph 312 above, paragraph 35). In that context, the applicants refer back to their arguments concerning, first, the
absence of SGEI obligations and of the conditions permitting compensation for such obligations and, moreover, infringement
of the right to freedom of establishment, freedom to provide services and the third non-life insurance directive and also
Article 86(1) EC in conjunction with Article 82 EC. In the applicants’ submission, those arguments raise complex issues which
require detailed factual and economic evidence which cannot be evaluated other than in the formal investigation procedure
under Article 88(2) EC. That, they maintain, is borne out by the fact that the Commission did not examine those arguments
properly, or indeed did not examine them at all.
The applicants dispute the assertion that the opening of the formal examination procedure would not have placed them in a
better position to formulate their objections to the RES. The rules governing that procedure impose special obligations on
the Commission, which were not complied with in this case, such as publication of the decision to open the procedure in the
Official Journal of the European Union
, pursuant to Article 26(1) of Regulation No 659/1999, and the requirement, under Article 6 of that regulation, to request
comments from the interested parties, to examine those comments and to communicate them to the Member State.
As for the argument that they did not explain why the Commission ought to have expressed serious doubts as to the compatibility
of the RES with Article 87 EC, the applicants observe that they explained in detail the evidence showing that their case raised
serious problems from the aspect of State aid. Even on the assumption that the applicants are unsuccessful in their substantive
pleas, the complexity of the present case, as described, in particular, in the first and second pleas, would in itself have
required the initiation of the formal investigation procedure under Article 88(2) EC. The applicants further observe that
the Commission examined the RES for four years before adopting the contested decision. In an investigation lasting so long,
it is unusual for the formal investigation procedure not to have been initiated.
Accordingly, the contested decision must be annulled for unlawful failure to initiate the formal investigation procedure under
Article 88(2) EC.
The defendant, supported by Ireland, claims that the applicants, who bear the burden of proof, have failed to explain why
the Commission ought to have expressed serious doubts as to the compatibility of the RES with Article 87 EC and, conversely,
why the Commission could not assess what are alleged to be the complex economic issues in the present case without initiating
the formal investigation examination procedure under Article 88(2) EC. Furthermore, in view of the fact that the applicants
submitted numerous pleadings and met the Commission’s representatives in the course of the investigation of their complaint,
they ought to have explained why they would have been in a better position to challenge the RES if the Commission had initiated
the formal investigation procedure. In any event, the applicants add nothing to the other pleas relating to the substantive
legality of the contested decision and merely reiterate them under the head of the present plea.
2.     Findings of the Court
The Court observes at the outset that, under Article 4(3) of Regulation No 659/1999, the Commission is authorised to adopt,
at the close of the preliminary examination procedure, a decision not to raise objections if the notified measure raises no
doubts as to its compatibility with the common market. Conversely, under Article 4(4) of that regulation, where the Commission
has such doubts, it is required to initiate the formal investigation procedure under Article 88(2) EC and Article 6 of that
regulation.
In that regard, it must further be observed that the Commission is required to initiate the formal investigation procedure
if, in the light of the information obtained during the preliminary examination procedure, it still faces serious difficulties
in assessing the measure under consideration. That obligation follows directly from Article 88(3) EC, as interpreted by the
case-law, and is confirmed by the provisions of Article 4(4) in conjunction with Article 13(1) of Regulation No 659/1999,
when the Commission finds, after a preliminary examination, that the unlawful measure raises doubts as to its compatibility
with the common market (see, to that effect,
British Aggregates
v
Commission
, paragraph 69 above, paragraph 165).
In effect, as established in a consistent line of cases, the procedure under Article 88(2) EC is obligatory where the Commission
experiences serious difficulties in establishing whether or not aid is compatible with the common market. The Commission cannot
therefore limit itself to the preliminary procedure under Article 88(3) EC and take a favourable decision on a State measure
unless it is in a position to reach the firm view, following an initial examination, that the measure cannot be classified
as aid within the meaning of Article 87(1) EC or that the measure, while constituting aid, is compatible with the common market.
On the other hand, if the initial examination results in the Commission taking the contrary view to the aid’s compatibility
with the common market, or if it does not put the Commission in a position to overcome all the problems raised by its assessment
of the compatibility of the measure in question with the common market, the Commission has a duty to obtain all the necessary
views and, to that end, to initiate the procedure under Article 88(2) EC (
Matra
v
Commission
, paragraph 72 above, paragraph 33;
Commission
v
Sytraval and Brink’s France
, paragraph 72 above, paragraph 39; and
British Aggregates
v
Commission
, paragraph 69 above, paragraph 166).
That duty to initiate the formal investigation procedure applies in particular when the Commission, having analysed to the
appropriate standard, on the basis of the information provided by the Member State concerned, the State measure in issue,
entertains doubts as to the existence of aid elements for the purposes of Article 87(1) EC and as to their compatibility with
the common market (see, to that effect, Case C‑400/99
Italy
v
Commission
[2005] ECR I‑3657, paragraphs 47 and 48, and
British Aggregates
v
Commission
, paragraph 69 above, paragraph 167).
The Court considers that, in the light of those requirements, the Commission, in adopting the contested decision, did not
fail to have regard to the scope of Article 88(3) EC or to that of Article 4(2) and (4) of Regulation No 659/1999.
Without there being any need to rule on the question whether the applicants would have been in a better position, in the context
of the formal investigation procedure and on the basis of the procedural guarantees expressly conferred on them by Article
88(2) EC, to rely effectively on their objections to the RES, the Court finds that the applicants were fully able to defend
their point of view, by means of their complaint and other pleadings and studies lodged with the Commission, before the adoption
of the contested decision.
Furthermore, the Court infers from the findings which led it to reject the first, second, third, fourth and fifth pleas that,
on the basis of the relevant information provided by Ireland and by the applicants, the Commission was entitled to consider
that, even if the RES required an analysis of economically complex facts, it did not raise serious problems or doubts as to
the appraisal of the existence of State aid and of its compatibility with the common market. The Court considers that, in
the light of the considerations set out at paragraph 157 et seq. above, there is no indication, even after the applicants
have abundantly developed their arguments in that regard during the proceedings, to support the assertion that the result
of the Commission’s assessment of the RES, following a formal investigation procedure, might have been different from that
reached in the contested decision, which concludes that the RES does not involve State aid in the sense of Article 87(1) EC
and that the conditions for the application of the derogation provided for in Article 86(2) EC are satisfied.
In those circumstances, the present plea must be rejected as unfounded.
E –
Seventh plea, alleging failure to state reasons within the meaning of Article 253 EC
1.     Arguments of the parties
The applicants claim that the contested decision breaches the obligation to state the reasons on which it is based as consistently
interpreted in the case-law (Case C‑122/94
Commission
v
Council
[1996] ECR I‑881, paragraph 29). They maintain that the decision is characterised by the making of repeated conclusory statements,
without any proper examination of the supporting evidence, of both fact and law on the part of the Irish authorities. That
failure to state reasons is particularly serious because the applicants disputed the relevant factual, economic and legal
analysis put forward by those authorities.
Thus, at recitals 40, 53 and 60 to the contested decision, which deal with the RES as a means of compensating for the PMI
obligations, the Commission does not identify either the costs of those obligations or the RES payments that are foreseen.
Nor does it explain why those payments are strictly necessary to compensate for those costs. At recital 50 to the contested
decision, the Commission merely mentions ‘[e]conomic studies’ which support the Irish authorities’ claims. The Commission
subsequently admitted having taken account of seven studies, only two of which are mentioned in the grounds of the contested
decision. Furthermore, although the Commission concludes at recital 61 to the contested decision that any State aid is compatible
with the common market under Article 86(2) EC, it does not explain in the grounds of the decision whether the alleged SGEI
obligations were entrusted to the VHI or to BUPA Ireland or its reasons for considering that the RES payments are strictly
proportionate to the relevant costs and receipts and that the RES does not affect the development of trade to such an extent
as would be contrary to the interests of the Community. Last, the Commission merely asserts, in a single sentence at recital
61 to the contested decision, that the RES does not infringe the third non-life insurance directive, and makes no reference
whatsoever to the question, raised by the applicants, of the infringement of Article 86(1) EC in conjunction with Article
82 EC or of the infringement of Articles 43 EC and 49 EC.
The defendant contends that this plea should be rejected.
2.     Findings of the Court
First of all, the Court observes that, in the light of the considerations set out at paragraphs 313 to 320 above, the present
plea is inadmissible and, at the very least, inoperative, in so far as it refers to the alleged illegalities invoked in connection
with the third, fourth and fifth pleas.
Next, it must be borne in mind that according to consistent case-law, the scope of the obligation to state reasons depends
on the nature of the act in question and the context in which it was adopted. The statement of reasons must disclose in a
clear and unequivocal fashion the reasoning followed by the institution in such a way as to enable the persons concerned to
ascertain the reasons for the measure so that they can defend their rights and ascertain whether or not the decision is well
founded and to enable the Court to carry out its review (
Commission
v
Sytraval and Brink’s France
, paragraph 72 above, paragraph 63; Joined Cases T‑228/99 and T‑233/99
Westdeutsche Landesbank Girozentrale and Land Nordrhein-Westfalen
v
Commission
[2003] ECR II‑435, paragraph 278; Case T‑109/01
Fleuren Compost
v
Commission
[2004] ECR II‑127, paragraph 119; and
Corsica Ferries France
v
Commission
, paragraph 221 above, paragraph 62).
As regards the defects in reasoning alleged in the context of the application of Article 87(1) EC and Article 86(2) EC, it
must be observed, first of all, that, as follows from the considerations set out at paragraph 171 et seq. above, the grounds
of the contested decision taken as a whole enabled the applicants to challenge in detail the merits of the contested decision
before the Community judicature and enabled the latter to exercise its review in full. As regards, more particularly, the
alleged failures to state reasons in recitals 40, 50, 53, 60 and 61 to the contested decision, concerning inter alia the necessity
and proportionality of the compensation provided for by the RES by reference to the additional costs associated with the negative
risk profile of a PMI insurer, it is sufficient to refer to paragraph 228 et seq. above to conclude that no such failures
to state reasons are present in the contested decision.
As regards the failure in the contested decision to mention five studies used by the Commission, it must be borne in mind
that, according to a consistent body of case-law, it is not necessary for the reasoning to go into all the relevant facts
and points of law, since the question whether the statement of reasons for a measure meets the requirements of Article 253 EC
must be assessed with regard not only to its wording but also to its context and to all the legal rules governing the matter
in question (Case C‑56/93
Belgium
v
Commission
[1996] ECR I‑723, paragraph 86; Case C‑278/95 P
Siemens
v
Commission
[1997] ECR I‑2507, paragraph 17;
Corsica Ferries France
v
Commission
, paragraph 221 above, paragraph 63; and
British Aggregates
v
Commission
, paragraph 69 above, paragraph 141). In particular, the Commission is not obliged to adopt a position on all the arguments
relied on by the parties concerned, but it is sufficient if it sets out the facts and the legal considerations having decisive
importance in the context of the decision (
Westdeutsche Landesbank Girozentrale and Land Nordrhein-Westfalen
v
Commission
, paragraph 339 above, paragraph 280, and
Corsica Ferries France
v
Commission
, paragraph 221 above, paragraph 64).
In light of the considerations set out, in particular, at paragraph 228 et seq. and paragraph 273 et seq. above, the Court
finds that the Commission set out the essential economic arguments and facts supporting its analysis, while citing, in footnotes
9 and 10 to the contested decision, at least, two relevant studies in support of that analysis. In those circumstances, the
applicants’ complaint alleging failure to state reasons on the ground that the Commission did not expressly discuss the results
of the other studies in the contested decision cannot be upheld.
Last, as regards the reasons why trade between Member States was not affected to an extent contrary to the Community interest,
it is sufficient to refer to the considerations set out at paragraphs 308 and 309 above to reject that complaint.
Consequently, the plea alleging infringement of Article 253 EC must be rejected as unfounded.
F –
The application for measures of inquiry
1.     Arguments of the applicants
The applicants request the Court to order the defendant, pursuant to Article 65 of the Rules of Procedure, to produce certain
documents relating to the inter-service consultations between the Directorate-General for Competition and the Directorate-General
for the Internal Market concerning the compatibility of the RES with the third non-life insurance directive, in the event
that the defendant should fail to disclose those documents on its own initiative.
2.     Findings of the Court
As the third, fourth and fifth pleas are inadmissible and, at the very least, inoperative (see paragraphs 313 to 320 above),
the Court considers that it has sufficient information about all the essential and relevant elements of the case to be able
to adjudicate. Accordingly, it is appropriate to reject the applications for measures of inquiry submitted by the applicants.

Costs
Under Article 87(2) of the Rules of Procedure, the unsuccessful party is to be ordered to pay the costs if they have been
applied for in the successful party’s pleadings. As the applicants have been unsuccessful, they must be ordered to pay the
defendant’s and the VHI’s costs, in accordance with the forms of order sought by those parties.
Under the first subparagraph of Article 87(4) of the Rules of Procedure, the Member States which intervened in the proceedings
are to bear their own costs. Accordingly, Ireland and the Kingdom of the Netherlands, as interveners, shall bear their own
costs.
On those grounds,
THE COURT OF FIRST INSTANCE (Third Chamber, Extended Composition)
hereby:
1.
Dismisses the application;
2.
Orders British United Provident Association Ltd (BUPA), BUPA Insurance Ltd and BUPA Ireland Ltd to bear their own costs and
to pay the costs incurred by the Commission and the Voluntary Health Insurance Board;
3.
Orders Ireland and the Kingdom of the Netherlands to bear their own costs.
Jaeger
Tiili
Azizi
Cremona

Czúcz
Delivered in open court in Luxembourg on 12 February 2008.
E. Coulon

M. Jaeger
Registrar

President
Table of contents
Legal background
I –  Treaty provisions
II –  Regulation (EC) No 659/1999
III –  Directive 92/49/EEC
IV –  Communication from the Commission on services of general interest in Europe
Facts
I –  Creation of a risk equalisation scheme in the Irish private medical insurance market
II –  The functioning of the RES
A –  The objective of the RES
B –  Activation of the RES payments
C –  Method of calculation of RES payments
III –  Contested decision
Procedure and forms of order sought by the parties
Law
I –  Admissibility
A –  Arguments of the parties
B –  Findings of the Court
1.  Admissibility of the plea of inadmissibility
2.  The merits of the plea of inadmissibility
a)  Whether the applicants were individually concerned
b)  Whether the applicants were directly concerned
II –  Substance
A –  Preliminary observation
B –  First and second pleas
1.  Arguments of the parties
a)  The plea alleging misapplication of Article 87(1) EC
i) Arguments of the applicants
1) General observations
2) The first condition: there must be actual and clearly-defined SGEI obligations
3) The second condition, relating to objective and transparent parameters for the calculation of the compensation
4) The third condition: the compensation must be strictly necessary
5) The fourth condition: comparison with an efficient undertaking
ii) Arguments of the defendant
iii) Arguments of Ireland and of the VHI
iv) Arguments of the Kingdom of the Netherlands
b)  The plea alleging misapplication of Article 86(2) EC
i) Arguments of the applicants
1) Preliminary observation
2) The absence of SGEI obligations
3) The lack of an act of entrustment of an SGEI mission
4) The lack of necessity and of proportionality of the RES
Preliminary observations
The lack of necessity for the RES
The lack of proportionality of the RES
5) The effect on the development of trade
ii) Arguments of the defendant
1) Preliminary observation
2) Competence to define SGEI obligations
3) The characterisation of the PMI obligations as SGEI obligations
4) The imposition of SGEI obligations on PMI insurers
5) The necessity of the RES
6) The proportionality of the RES
iii) Arguments of Ireland and of the Kingdom of the Netherlands
2.  Findings of the Court
a)  The admissibility of the arguments put forward by Ireland and the VHI with respect to the first plea
b)  The applicability of the Altmark conditions
c)  The existence of an SGEI mission within the meaning of the first Altmark condition and Article 86(2) EC
i) Preliminary observation
ii) The concept of an SGEI mission and the powers to define and control SGEIs
iii) The existence of an SGEI mission in the present case
1) Allocation of the burden of proof
2) The identity and the nature of the SGEI mission in question
3) The distinction between the regulation of the operators’ activities and the existence of an SGEI mission entrusted by an
act of the public authority
4) The universal and compulsory nature of the services coming within the SGEI mission
General observations
Application to the present case
d)  The existence of clearly defined parameters for the calculation of compensation for the RES within the meaning of the
second Altmark condition
i) Preliminary observations
ii) The objective and transparent nature of the criteria governing the calculation of the compensation under the RES
e)  The necessity and proportionality of the compensation provided for by the RES within the meaning of the third Altmark
condition
i) The scope of judicial review
ii) The necessity and proportionality of the compensation made by means of the RES payments
1) Preliminary observations
2) The relationship between the RES and the costs generated by discharging the PMI obligations
f)  Comparison with an efficient operator within the meaning of the fourth Altmark condition
g)  The necessity and proportionality of the RES for the purposes of Article 86(2) EC
i) Preliminary observation
ii) The necessity for the introduction as such of the RES
1) General observations
2) The subject-matter of the contested decision and of the Court’s review
3) The presence of risk selection on the Irish PMI market
Preliminary observation
Active risk selection
–  General economic premisses
–  The situation on the Irish PMI market
4) As to whether the RES was an appropriate means of resolving disequilibrium or instability on the PMI market
iii) The proportionality of the RES
iv) An effect on trade to such an extent as would be contrary to the interest of the Community
C –  The admissibility of the third, fourth, fifth and seventh pleas
1.  Arguments of the parties
2.  Findings of the Court
D –  The sixth plea, based on the failure to initiate the formal investigation procedure under Article 88(2) EC
1.  Arguments of the parties
2.  Findings of the Court
E –  Seventh plea, alleging failure to state reasons within the meaning of Article 253 EC
1.  Arguments of the parties
2.  Findings of the Court
F –  The application for measures of inquiry
1.  Arguments of the applicants
2.  Findings of the Court
Costs
*
Language of the case: English.