European Internal Market Commissioner Charlie McCreevy has rejected the Government's defence of Vhi Healthcare over whether or not it has an unfair advantage in the Irish health insurance market.
Mr McCreevy said the Government's explanation of Vhi's exemption from solvency requirements was not convincing and simply restated an earlier position.
The European Commission took legal action against Ireland following a complaint from VIVAS Health.
The Vhi's competitors in the health insurance market claim it gives the company an unfair advantage.
The rejection increases the possibility of Ireland being taken to the European Court of Justice over the issue.
Other health insurance companies must prove they have capital reserves of 40% before they can enter the Irish market, however Vhi has an exemption which dates back to Ireland's admission to the then EEC.
That exemption was conditional on the company sticking to its core business.
Last year, VIVAS Health, the new entrant to the market, complained to the European Commission that this was anti-competitive, a point which Mr McCreevy appeared to agree with when he wrote to the Minister for Health, Mary Harney, last December.
The core of the complaint is that Vhi has moved into other activities like travel insurance and online retail business, thereby breaching the conditions which govern the exemption.
When no action was taken, the commission started formal infringement proceedings in February against the Government, giving it a month to explain the solvency questions.
The Government will be given one more chance to address the issue, and if the response is not satisfactory, Ireland will be taken to the European Court of Justice.
