The European Commission has proposed changes to State aid rules, so that the protection enjoyed by the VHI ceases by the end of next year.
The Commission says that the Statute of the VHI means that it can not go bankrupt and as a result, it enjoys an undue financial advantage over its competitors.
It wants the Government to change the status of the VHI to a private limited company by December 2013.
The advantage the VHI enjoys as a statutory body over its competitors has been a matter of controversy since the Irish health insurance market was opened to competition in 1994.
Today the European Commission said the removal of the unlimited State guarantee to the VHI was essential.
The Commission says that if no agreement is reached on the proposed measures within a month, it may open a State aid investigation.
The Health Minister, Dr James Reilly said today's announcement from the Commission represents a clear pathway by which issues can be resolved.
VHI Healthcare also welcomed the decision and said it will need extra capital to meet the Central Bank's solvency requirements under the changes.
In a statement issued by the company, it said that it plans to make an application to the Central Bank for authorisation "but it must satisfy the Bank that it has a sustainable business case over the next three to five years and the introduction of a robust Risk Equalisation Scheme is a pre-requisite to that."
"Vhi Healthcare believes that it is a strategic imperative for Vhi Healthcare to be regulated and that this will be in the best interests of our 1.2 million customers.
"Authorisation will allow Vhi Healthcare more commercial freedom to diversify its product range thus affording customers more choice and will help Vhi Healthcare maximise opportunities to drive revenue from different markets," it added.
