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Entities that pursue profit must be classified as undertakings.

 Discuss this case and other elements of the Notice on the Notion of Aid at our EStAL Seminar: Mapping the Boundaries of the Market on 12-14 April in Rome.


 

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Introduction

On 5 February 2018, the General Court annulled Commission decision 2015/248 concerning health insurance in Slovakia [see judgment in case T‑216/15, Dôvera zdravotná poist'ovňa et al v European Commission].[1] The Commission decision was reviewed here on 10 March 2015.

(View article at http://stateaidhub.eu/blogs/stateaiduncovered/post/1707.)

The Commission had concluded that the providers of health insurance in Slovakia were not undertakings even though two of them were private companies.

All health insurers, public and private, provided coverage for compulsory health insurance to Slovak residents. All eligible residents were free to choose between the three insurers: SZP [public], DZP [the applicant] and UIC [another private company]. Slovakia also operated a risk-equalisation scheme for sharing risk and therefore medical costs across all insurers.

DZP claimed that SZP benefited from State aid. The Commission, however, considered, that public funding did not constitute State aid because the compulsory health insurance, as organised and carried out in Slovakia, was not an economic activity and, therefore, SZP could not be classified as an undertaking.

Existence of economic activity

The primary task of the General Court was to determine whether an economic activity was carried out. It recalled, first, the definition of the concept of State aid and proceeded to examine whether the health insurance system in Slovakia involved market elements so that SZP could be regarded as an undertaking.

Then, it reiterated the main principles of the case law. “(46) The prohibition laid down in Article 107(1) TFEU applies to the activities of undertakings […]. In the context of EU competition law, any entity engaging in an economic activity, regardless of its legal status and the way in which it is financed, is an undertaking”. “(47) Any activity consisting in offering goods or services on a given market is an economic activity”. “(48) The fact that the offer of goods or services is made without profit motive does not prevent the entity which carries out those operations on the market from being considered an undertaking where that offer exists in competition with that of other operators which do seek to make a profit”.

After these preliminary statements, the Court proceeded to examine the presence of market activities in the areas of social security and health insurance. “(49) It must more specifically be noted that, in the field of social security, the Court of Justice has held that certain bodies entrusted with the management of statutory health insurance and old-age insurance schemes pursued an exclusively social objective and did not engage in economic activity. The Court of Justice found that was so in the case of sickness funds which merely applied the law and could not influence the amount of the contributions, the use of assets and the fixing of the level of benefits. Their activity, based on the principle of national solidarity, was entirely non-profit-making and the benefits paid were statutory benefits bearing no relation to the amount of the contributions”.

“(50) However, the Court has held that non-profit-making organisations, contributing to the management of the social security system and subject to the solidarity principle, could be considered to be carrying out an economic activity”.

“(51) It is therefore clear from the case-law that the social aim of a health insurance scheme is not in itself sufficient to exclude classification as an economic activity. It must also be examined whether that scheme can be regarded as applying the principle of solidarity and is subject to the supervision of the State which established it. Those factors are liable to preclude a given activity from being regarded as economic”.

“(52) For the purposes of that assessment, first, it must be noted that characteristics of social security schemes applying the principle of solidarity include, inter alia, an obligation on health insurance bodies to be affiliated with the scheme, a lack of any direct link between contributions paid and benefits received, compulsory and identical benefits for all insured persons, contributions proportional to the income of insured persons and application of the pay-as-you-go principle”.

“(53) Second, characteristics of social security schemes subject to State supervision include, inter alia, an obligation for health insurance bodies to offer compulsory benefits to insured persons and an impossibility for health insurance bodies to influence the nature and level of the benefits set by law or the amount of the contributions paid by insured persons”.

A comment is in order at this point. Casual observation suggests that in practice insurance companies operate on the basis of three different models. According to the first model, on the input side they charge a premium that is linked to the individual risk of the insured person while on the output side the premium varies according to the benefits provided. According to the second model, on the input side they charge the same premium to all insured persons but on the output side they adjust the premium according to the benefits provided to each person. According to the third model, on the input side they charge the same premium while on the output side they provide the same benefits to everybody, regardless of the size of the premium and the size of benefits. The first two models can be sustained by the market. The third model cannot be sustained by the market, even if the insurer is not-for-profit. A non-profit insurer still has to charge a premium that is high enough to cover all its costs. But that implies that healthy people subsidise people in poor health. Healthy people would simply choose a cheaper insurer. Therefore, if both premia and benefits are fixed, either insurance must be compulsory or it must be paid by taxpayers. In either case there must be a solidarity mechanism based on some form of compulsion. Not surprisingly, the General Court continued its assessment of the case by asking whether there was such solidarity and compulsion mechanisms in place.

Is the service based on solidarity?

“(54) The Court must examine, in the light of those considerations, whether the Commission committed an error of assessment in concluding, in recital 95 of the contested decision, that the profit-making objective pursued by health insurance companies and the competition elements present in the Slovak compulsory health insurance sector did not call into question the predominant social, solidarity and regulatory features indicating the non-economic nature of the activities performed by health insurance companies.”

“(55) It should be noted that the Commission found, in essence, in recitals 84 to 88 of the contested decision, that the Slovak compulsory health insurance scheme had significant social, solidarity and regulatory characteristics.”

“(56) The health insurance companies have a legal obligation to register every Slovak resident who so requests. Thus, they cannot refuse to insure a person on the grounds of his age, state of health or risk of illness. Next, the health insurance scheme is based on a system of compulsory contributions, which are fixed by law in proportion to the income of the insured persons, but independently of the benefits received or of the risk resulting from, inter alia, the age or state of health of the insured person. Furthermore, all insured persons have the right to the same minimum level of benefits. Finally, there is a Risk Equalisation Scheme, whereby health insurance bodies insuring high-risk individuals receive funding from health insurance bodies with a portfolio composed of persons presenting lower risks.”

“(57) As regards, second, the strict State supervision to which health insurance bodies are subject, it is apparent […] that they are subject to special regulations. In addition to identical status, rights and obligations, each health insurance body is established with the purpose of executing public health insurance and cannot carry out activities other than those provided for by law. Moreover, the activities of health insurance bodies are subject to supervision by a regulatory office, which ensures that those companies adhere to the aforementioned legislative framework and intervenes when violations occur.”

“(58) In the light of those various factors, it is necessary to uphold the Commission’s conclusion that, in essence, the Slovak compulsory health insurance scheme had predominant social, solidarity and regulatory features. Moreover, that finding is not challenged by the applicant.”

But is there competition too?

“(59) However, it should also be noted that, as is apparent from recitals 92 and 94 of the contested decision, the law allows health insurance companies, first, to make, use and distribute profits and, second, to compete to a certain degree in terms of quality and services offered.”

“(63) It must be held that the health insurance companies’ ability to make, use and distribute part of their profits does call into question the non-economic nature of their activity, contrary to what the Commission found in recital 94 of the contested decision.”

“(64) Indeed, the Commission rightly states that the ability to use and distribute profits is regulated more strictly than in normal commercial sectors, since that power is, in the present case, subject to the fulfilment of requirements intended to ensure the continuity of the scheme and the attainment of the social and solidarity objectives underpinning it. However, that becomes irrelevant for the purposes of excluding the economic nature of the activity, once the market operators in question seek to make a profit. In any event, the fact that Slovak health insurance companies are freely able to seek and make a profit shows that, regardless of the performance of their public health insurance task and of State supervision, they are pursuing financial gains and, consequently, their activities in the sector fall within the economic sphere. Therefore, the strict conditions framing the subsequent use and distribution of profits which may result from those activities does not call into question the economic nature of such activities.”

 

“(65) It must be held that the existence of a certain amount of competition as to the quality and scope of services provided by the various bodies within the Slovak compulsory health insurance scheme also has a bearing on the economic nature of the activity, contrary to what the Commission found, in essence, in recitals 92 and 93 of the contested decision.”

“(66) While […] health insurance bodies may not freely set the amount of the contributions or formally compete via their tariffs, the legislature did nevertheless introduce an element of competition as to quality, as the companies may freely supplement the compulsory statutory services with related free services, such as better coverage for certain complementary and preventive treatments in the context of the basic compulsory services or an enhanced assistance service for insured persons. They may therefore differentiate themselves in terms of quality and scope of services in order to attract insured persons, who, by law, are free to choose their health insurance company and switch company once a year. The latitude available to health insurance bodies to compete thus enables insured persons to benefit from better social protection for an equal contribution amount, as the additional services offered are free of charge. As the applicant points out, although Slovak health insurance companies are obliged to offer the same statutory benefits, they compete through the ‘value for money’ of the cover they offer and, therefore, on the quality and efficiency of the purchasing process, as the Commission itself acknowledges in recital 93 of the contested decision.”

“(67) Thus, even if there is no competition within the Slovak compulsory health insurance system in respect of either the compulsory statutory benefits or formally on the amount of contributions, there is nevertheless intense and complex competition due to the market volatility resulting from insured persons’ power freely to choose their health insurance provider and to switch insurance company once a year, and the fact that health insurance bodies are competing in terms of the quality of service, which is assessed individually by the insured persons.”

“(68) It follows that, in view of the profit pursued by health insurance companies and the existence of intense competition as to quality and the services offered, the activity of providing compulsory health insurance in Slovakia is economic in nature.”

“(69) That conclusion cannot be undermined, even if it were to be argued that SZP … were not seeking to make a profit. Admittedly, where the bodies whose activity is examined do not have such a goal, but have a degree of freedom to compete to a certain extent in order to attract persons seeking insurance, that competition does not automatically call into question the non-economic nature of their activity, particularly where that element of competition was introduced in order to encourage the sickness funds to operate in accordance with principles of sound management […]. However, […] the fact that the offer of goods or services is made without seeking to make a profit does not prevent the entity which carries out those operations on the market from being regarded as an undertaking, provided that the offer exists in competition with that of other operators that are seeking to make a profit. It follows that it is not the mere fact of being in a position of competition on a given market which determines the economic nature of an activity, but rather the presence on that market of operators seeking to make a profit. That is the situation in the present case, since it is common ground between the parties that the other operators on the market in question are seeking to make a profit, so that SZP […], ‘by contagion’, would have to be considered to be undertakings.” [Emphasis added]

The General Court found that the Commission had committed an error of assessment when it concluded that SZP could not be considered as an undertaking on the grounds that the activity carried out by health insurers in the Slovak compulsory health insurance scheme was not economic in nature. Consequently, the Court annulled the decision of the Commission.

It is difficult to understand how in the Slovak market insurance companies could make profits by offering free services in order to attract new clients who pay the same premium regardless of their state of health and therefore the risk they posed to the companies. Probably the insurance companies enjoyed economies of scale while the risk equalisation mechanism offset extra outlays. Or perhaps the risk equalisation mechanism compensated insurance companies not just in terms of the risk profile of their clients but also according to the number of clients. The more clients they had, the more compensation they obtained.

However, the important lesson to be drawn from this judgment is that any entities that compete with each other are not necessarily undertakings. By contrast, entities that pursue profit are undertakings.

-------------------------------------------------

[1] The full text of the judgment can be accessed at:

http://curia.europa.eu/juris/document/document.jsf?text=&docid=199045&pageIndex=0&doclang=EN&mode=lst&dir=&occ=first&part=1&cid=730922.

[Photo credit: House Buy Fast from flickr.com]



Comments

by Phedon Nicolaides, Wednesday, 25 April 2018, 08:44:12

Last week, the Commission appealed against the judgment of the General Court. Let’s see what the Court of Justice will have to say on this very important issue and how it will approach the concepts of market and competition.


by gae rea, Friday, 20 April 2018, 13:40:15

The case T‑216/15, Dôvera zdravotná poist'ovňa et al v European Commission, is a very very interesting one because in my opinion it raises the underlying question of what be the legal foundations of a free (i.e. competitive) market. In order to decide whether an activity is economic or not, the profit motive does not matter - that is obvious if we distinguish the profit as purpose of operation of business, which is an ex ante choice of the entrepreneur, from the profit as actual ex post result of that operation, which depends on the choice of the consumer. As stated by CJEU, “It follows that it is not the mere fact of being in a position of competition on a given market which determines the economic nature of an activity, but rather the presence on that market of operators seeking to make a profit”. Yet, the presence on …. market of operators seeking to make a profit is a mere fact. The number and in particular the possibility to enter the market depends on the law. In the case T‑216/15, Dôvera zdravotná poist'ovňa et al v European Commission, the essential point is in my view, that the social security system be not a market at all because of the country’s legislation. It is due to that legislation, i.d. State intervention, if there are only three undertakings, or in other words, there is no competition and consequently no market, as health insurance is compulsory for each individual. This situation guarantees to realize quite easy profits, although improperly. In such situation, no company has any stimulus to compete and try to better up their services or to reduce the cost of their operation (i.e. to be innovative and efficient). The marginal company can simply rise up their prices, recording no losses to their turnover. We are facing a situation of rent granting. Paying a higher price because of the lack of real competition is quite equivalent, from an economic view, to paying taxes, which the State gives subsequently out to subsidise the activity concerned. Money does not flow from taxpayers into the State, but consumers pour it out directly in the firms' hands as higher prices. In both cases, the undertaking receive an undue advantage, unjustifiable because paid by the consumer, always involuntary and often unaware as well. The consumer is simply exploited: they cannot choose a) neither to buy and above all not to buy the health coverage of their preference; b) nor the benefit from the insurance as “…Slovak health insurance companies are obliged to offer the same statutory benefits …”. There is no market within the Slovak compulsory health insurance system, either in respect of the compulsory statutory benefits or formally on the amount of contributions. Competition requires a market clear of State interferences, any form they can assume. Market requires freedom of contract – or better the freedom to carry out any economic activity without any other limitations than civil rights and freedom of consumers - and protection of private property. On these grounds, competition can emerge as a feature of the market. So that we could say that the purpose of competition law is twofold: 1) to increase the ever changing set of choice (above all the choice not to choose) rather than to protect the consumers’ rights, and 2) to protect market from State intervention (State aid law). Consumer is the sovereign.


by Caroline Wehlander, Thursday, 1 March 2018, 11:37:08

This importan judgment seems to confirm my analysis that not only for-profit but also non-profit and municipal schools offering their services free och charge but in competition in the Swedish publicly financed system (a system where pupils may choose the school they attend), must be seen as conducting an economic activity. The same goes for elderly care in systems of free choice in Sweden, where for-profit entities, non-profit entities and public institutions in competition offer their services which are financed to a large extent by the state. See Services of General Economic Interest as a Constitutional Concept of EU Law, 2016, Springer, p. 297-339. I based my analysis of the Swedish cases (free choice systems for school and elderly care) on a very detailed analysis of the notion of economic activity in the case law of the CJEU, which is shortened in the book (chapter 2) but considerably longer and more detailed in my PhD thesis.


by Phedon Nicolaides, Wednesday, 28 February 2018, 16:59:13

I very much agree with you. We see that both the Commission and EU courts tend to extend the frontiers of the market [as in the recent judgment on Charleroi airport]. But the implications of this judgment are rather unpredictable. Probably the most “explosive” part of the judgment is in paragraph 69: ‘the fact that the offer of goods or services is made without seeking to make a profit does not prevent the entity which carries out those operations on the market from being regarded as an undertaking, provided that the offer exists in competition with that of other operators that are seeking to make a profit. It follows that it is not the mere fact of being in a position of competition on a given market which determines the economic nature of an activity, but rather the presence on that market of operators seeking to make a profit.’ We used to think that similar economic and non-economic activities could co-exist. Now the General Court is telling us that if there is a profit seeking entity, the activities of a non-undertaking become economic in nature if they are ‘in competition’ [which means that they are similar enough]. The next judgment will have to explore further what it means to be ‘in competition’. But I am sure we all can think of many economic and non-economic activities that are sufficiently similar. Are they ‘in competition’?


by Dr. Hans Arno Petzold, Tuesday, 27 February 2018, 13:49:40

This is an interesting judgment, indeed. The Slovak system does very much resemble the German social health insurance system, only that there are a lot more “competitors” offering their services to those obliged to join the system (about 90% of the population). Even with contribution regulated by law (a percentage of the income from employed work, up to a moving threshold), and little room for any additional premium, the insurers – all organised as public-law corporations – still manage to vary in amount and quality of service, be it by “economies of scale”, be it by lean management or other means of cost efficiency. Private insurance companies are not admitted to this market, but according to the GC, this is a market. It will be interesting to see how the ECJ thinks about this, and what consequences this may have also for the German system, which is under massive criticism anyway.



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