Risk Pooling in Health Care Finance
April 26, 2012
Risk pooling is a mechanism where revenue and contributions are pooled so that the risk of having to pay for health care is not borne by each contributor individually. Risk pooling is a form of risk management practiced by the health industry especially insurance companies. While risk pooling is necessary for insurance to work, not all risks can be effectively pooled. Pooling risks together allows the costs of those higher risks to be subsidized by those with a lower risk. The risk pooling in health care is practiced based on two considerations, equity and efficiency. There are those who believe that the cost of health care expenses should not be bourn by individuals themselves alone especially those who are not well off in the society and can’t pay. Instead, they believe that some of that risk should be spread across a given pool of individuals carrying various levels of risk. The efficiency argument is that by putting people in the diversified risk pool, and utilizing that pool it can increase the health care productivity, reduce the uncertainty associated with the healthcare cost for the individuals in the risk pool. (McCarthy, Davies, Gaisford and Hoffmeyer, 1995) Risk pooling can be classified into four approaches; no risk pool, unitary risk pool, fragmented risk pool and integrated risk pools. In the No risk pooling approach, individuals are responsible to meet their own obligation for the healthcare cost. In this approach, individual will pay the premium for the insurance based on their individual risk based on their previous health history. Individual in this situation would only have a choice between multiple insurance companies, which may consider the individual at various different risk categories. It’s also possible in this scenario, that the most riskiest of individuals will be avoided by most insurance companies. (Peter and Witter, 2004) In the Unitary Risk Pool approach, similar to one practiced in Canada and Europe, through taxation, a central pool is created that would mandate all individuals to participate whether they are rich or poor. All individuals are then placed in a single central pool with a particular health care package. Even though, the unitary pool reduces the economic barrier of the price mechanism to consumption that is everyone who needs health care should do so without any economic barrier. Unitary Risk Pool has its own set off inefficiencies. They include: Inflated/unaffordable costs. Since there is no incentive for the individual or the service provider from spending on unnecessary tests and services. As for the service providers, guaranteed payment encourage careless demand for healthcare services unwarranted in addressing individual cases. One size fit all approach where people’s needs are not being met on the individual level. No incentives for the service providers like doctors, nurses to innovate. As the population ages, the pool of individual paying into the risk pool decreases thus making it difficult to keep it going. The third approach is the Fragmented Risk Pooling. By doing fragmented approach, you can avoid the inefficiency that is brought on by too large a risk pool. Pools can be decided based on risk factor, geographical factor, employment etc. Some pool may make it mandatory to participate, while others are voluntary. Most Employers often fragment their risk pools by offering multiple HMO and PPO option. In this scenario, young healthy employees who would have less risk and healthcare needs choose self-funded PPO, while the rest more risk is migrated to the HMO as older individuals end up choosing that. The fourth approach is the Integrated Risk Pooling. Integrated Risk Pooling is used to do financial transfers between different fragmented pools. Under this arrangement, the individual risk pools can remain in place, but financial transfers are arranged between pools so that...
References: Peter C. Smith and Sopie N. Witter (2004) Risk Pooling in Health Care Financing: The Implications for Health System Performance, World Bank Publications
Jean P. Hall and Janice M. Moore (2008) Does High-Risk Pool Coverage Meet the Needs of People at Risk for Disability?. Inquiry: September 2008, Vol. 45, No. 3, pp. 340-352.
World Health Organization (2000), The World Health Report 2000. Health systems:
improving performance, Geneva: World Health Organization.
McCarthy, T., Davies, K., Gaisford, J. and Hoffmeyer, U. (1995). Risk-adjustment and its implications for efficiency and equity in health care systems, Basle: Pharmaceutical Partners for Better Healthcare.. Los Angeles/London: National Economic Research Associates.
John Graves and Sharon K. Long,(2006) “Why Do People Lack Health Insurance?” The Urban Institute.
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