The Department of Health is to ask the European Commission for an extra year to allow the VHI be reformed into a new private corporate structure and to end its unlimited State guarantee.
The Cabinet agreed today that the department should seek to negotiate with the Commission to extend the original deadline of the end of this month, to December 2014.
The aim is to allow the VHI to generate sufficient funds to meet minimum solvency levels and avoid the need for any cash injection from the State under its new structure.
Some of that funding is expected to be raised from the re-insurance market.
In July 2012, the European Commission requested that Ireland end the unlimited guarantee for the VHI by the end of this year, warning that otherwise a state-aid investigation might be commenced.
Because the VHI is a statutory body, it cannot be liquidated or wound up or go bankrupt, giving it a financial advantage over competitors.
The Commission requested that the VHI be progressively incorporated into one or several private limited companies and be governed by company law.
It would also have to meet minimum solvency levels under Central Bank rules.
The Department of Health has said under the changes planned the VHI will still be owned by the State.