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 racticed 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 cenario, 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 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 some of all of the variation caused by pure fragmentation is eliminated. The essential feature of integrated risk pools is to smoothen the variation in per capita expected expenditure by effecting financial transfers from pools with lower per capita expected expenditure to pools with higher per capita expected expenditure. It is highly unfeasible to implement Just pure unitary risk pool and some fragmentation is nevitable.
There is a trade-off between the size of the pools and the complexity of managing the pool. The graph below shows the point S which is the optimal point, beyond which the risk pool is not viable. Figure 1 : Risk Pooling performance vs. Population Size (Peter et el, 2004) The new health care law has put a major focus on the risk pooling. Policymakers explored alternative risk pooling mechanism to make insurance affordable for everyone. Most Americans get their health insurance via the employer sponsored health plan. Others get their health insurance through government sponsored health plan like Medicaid,
Medicare or via the armed forces health program. And, many people who are self- employed purchase their own health plan directly from a health insurance company. Additionally, more than 40 million Americans do not have any health insurance because they work part time, their employer does not offer health insurance, or they cannot afford health insurance premiums but make too much money to qualify for Medicaid. There are also significant numbers of people who can afford insurance but are turned down by insurance companies because they have a serious pre-existing condition such as cancer, diabetes, or an HIV infection.
In most states, there are no laws that require a health insurance company to provide coverage to an individual (. Graves and Long, 2006) One way to do the risk pooling in the new health reform bill, is the creation of health insurance exchanges. Through the use of insurance mandate, combined with guaranteed issue of coverage, elimination of pre-existing the basis for achieving universal (near-universal) coverage in combination with use of the health insurance exchanges for people who are not covered by employer provided healthcare or government supplied health care like Medicaid and Medicare.
Each state will have a health insurance exchange that offers at least two health options with different levels of premiums and out-of -pocket expenses. The exchanges may be replacement for, or an addition to, currently implemented state’s high-risk pool. Insurance exchange is typically run by a private sector company or nonprofit. Based on the new Healthcare law, these private exchanges must meet certain criteria defined by the exchange management. These exchanges then work directly with insurance carriers to provide cost effective health insurance to individuals in high-risk pool, or to those who can’t afford to get insurance.
However, the healthcare reform missed a major issue and that is risk pooling across state line. The cross-state pooling might theoretically address number of goals. The first is the benefit of offering employer-based health care coverage in metropolitan areas that cross state line. Residents may reside in one state but work and obtain heath insurance in another state would be than covered by this rule. States with small population could benefit from increasing the size of their risk pools by Joining other states. This will hedge against year to year health care premium cast since it will over for large risk pool.
One of the most important benefits would be that insurance companies would not have to follow different rules for different states. Each state has its own set of rules, which differ from the state next door. To ensure that the exchange provides affordable and comprehensive coverage to the participants, it needs to provide minimum standards for benefit designed such that the individual subscriber gets the care they need at an affordable cost. It should limit the degree of variations in different benefit to prevent individuals with more risk to enroll in one articular exchange vs. nother. It should limit the number for different plan choices in the exchange so that it should make the selection easier and should require that the insurance company that offers through the exchange provide full range of benefits. Exchanges only provide the availability aspect of the health care, the affordability aspects is also part of the new health care law. A 2006 poll showed that more than half of the uninsured could not afford insurance. (Graves et el. , 2006) Census data reveal that more than one-third of the U. S. ninsured were employed ull time for the preceding year, and more than two-thirds of the uninsured had been employed (either full or part time) for at least part of the year. (U. S Census Bureau) As mentioned above, nearly one-third of the uninsured ” or some 13 million Americans ” earn between 100 percent and 200 percent of poverty. An additional 8. 9 million Americans earn between 200 percent and 300 percent of poverty. Figure 2: Uninsured in USA below Poverty line Those who are below poverty line will be subsidized by the government to make the health insurance affordable. All these implementations will begin in 2014 when the
Health Care law is in full effect. That is if the Health Care law survives the Supreme applicable to say inventory management, supply chain etc. Risk pooling help reduce uncertainty and mitigate the consequences of uncertainty. Implementation of risk pooling varies with each application of it, but its effectiveness varies based on how it has been executed.