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Insurance companies try to avoid pooling health care risk
http://healthaffairs.org/blog/2016/03/15/dont-let-the-talking-points-fool-you-its-all-about-the-risk-pool/
Most people are healthy most of the time, and as a consequence, health care expenditures are heavily concentrated in a small share of the population: about 50 percent of the health care spending in a given year by those below age 65 is attributable to just 5 percent of the nonelderly population. The lowest spending half of the population accounts for only about 3.5 percent of health care spending in a year.
Deciding how much of total health care expenditures should be shared across the population and how to share it is the fundamental conundrum of health care policy. There is more risk pooling the larger the share of health expenditures included in the insurance as covered expenses (i.e., the fewer benefits excluded and the lower the out-of-pocket cost requirements), the larger the number of both the healthy and the sick insured, and the lower the variation in premiums across different enrollees. Sharing the costs of the sick across the broader population (a.k.a., risk pooling) increases costs for the healthy to the benefit of those with health problems; this creates more financial losers than winners at a point in time, since there are many more healthy people than sick in a given year. Segmenting risk pools has the opposite effect, savings for the currently healthy while increasing costs for those with health problems.
The degree of risk sharing under current law varies by the insurance market. Public insurance (e.g., Medicare, Medicaid) represents the most pooling of risk. All beneficiaries are eligible for the same health insurance benefits, and the cost of providing those benefits is largely financed by broad-based revenue sources (e.g., income or payroll taxes), completely separating enrollee health status from financing of the programs’ benefits. Public programs that include deductibles, co-insurance, or co-payments or limit covered benefits reduce the sharing of risk to some extent, as these provisions increase financial burdens directly with medical care use.
Risk pooling approaches promote broad access to affordable medical care regardless of income or health status, while the risk segmenting approaches do not and would in fact reduce access relative to current law. Advocates of the latter generally employ terms such as individual responsibility, skin in the game, consumer choice, and market competition, but make no mistake about it: it is all about the risk pool.
Most people are healthy most of the time, and as a consequence, health care expenditures are heavily concentrated in a small share of the population: about 50 percent of the health care spending in a given year by those below age 65 is attributable to just 5 percent of the nonelderly population. The lowest spending half of the population accounts for only about 3.5 percent of health care spending in a year.
Deciding how much of total health care expenditures should be shared across the population and how to share it is the fundamental conundrum of health care policy. There is more risk pooling the larger the share of health expenditures included in the insurance as covered expenses (i.e., the fewer benefits excluded and the lower the out-of-pocket cost requirements), the larger the number of both the healthy and the sick insured, and the lower the variation in premiums across different enrollees. Sharing the costs of the sick across the broader population (a.k.a., risk pooling) increases costs for the healthy to the benefit of those with health problems; this creates more financial losers than winners at a point in time, since there are many more healthy people than sick in a given year. Segmenting risk pools has the opposite effect, savings for the currently healthy while increasing costs for those with health problems.
The degree of risk sharing under current law varies by the insurance market. Public insurance (e.g., Medicare, Medicaid) represents the most pooling of risk. All beneficiaries are eligible for the same health insurance benefits, and the cost of providing those benefits is largely financed by broad-based revenue sources (e.g., income or payroll taxes), completely separating enrollee health status from financing of the programs’ benefits. Public programs that include deductibles, co-insurance, or co-payments or limit covered benefits reduce the sharing of risk to some extent, as these provisions increase financial burdens directly with medical care use.
Risk pooling approaches promote broad access to affordable medical care regardless of income or health status, while the risk segmenting approaches do not and would in fact reduce access relative to current law. Advocates of the latter generally employ terms such as individual responsibility, skin in the game, consumer choice, and market competition, but make no mistake about it: it is all about the risk pool.
Comment by Don McCanne of PNHP: Risk pooling is the most fundamental concept in health care financing. Funds are paid into a common pool to cover the health care needs of those insured by the pool. Although that is a simple, basic concept, this article explains the complexities of risk pooling, with special attention to policies that promote greater risk pooling and policies that decrease pooling, separating the risks. The consequences are immense.
The politicians are discussing various concepts of health care reform ranging from incremental changes to the Affordable Care Act (ACA), to various concepts of replacing ACA, to establishing a single payer national health program. The most important differences between these models are in how they pool risk. The least effective are the ACA replacement proposals, and the most effective is a universal single payer system (an improved Medicare for all).
Even though it is easy to explain risk pooling, it is important to be able to respond to each proposal for reform with a precise explanation of how that proposal impacts risk pooling. The reason is that it’s all about the risk pool. A well designed universal risk pool ensures that health care will be affordable for each of us whenever we need it.
The full article by Linda Blumberg and John Holahan should be downloaded, studied, and saved as a reference to be used in health policy advocacy. We won’t get risk pooling right until we have everybody in, nobody out! (Thanks, Quentin.)
