Pooling the Risk for Universal Healthcare Part I: Why is it necessary?

Posted on January 7, 2009


Implementation of a Universal Healthcare system can be thought of as an exercise in managing 3 interlinked challenges:

  • Funding: How to raise adequate and equitable – those with means subsidise those without – funding?
  • Pooling: How to ensure efficient and equitable risk pooling – ensure that the more risky are not left out and the less risky don’t opt out?
  • Purchasing: How to transfer the collected funds efficiently – with low leakages and low overheads – to the service providers?

In an earlier entry I wrote on the models for funding universal healthcare and in this entry I aim to highlight the importance of addressing the second of the three challenges i.e. pooling of the risk.

The World Health Organisation defines risk pooling as: the practice of bringing several risks [individuals] together for insurance purposes in order to balance the consequences of the realizations of each individual risk.

A frequent and robust debate, especially in the United States in the recent past, is whether individuals are solely responsible to arrange for their healthcare needs or does the society have a responsibility in sharing this burden. Given the unique nature of the risk healthcare, I believe that the society has an obligation to support the burden of healthcare needs and there are good reasons of both equity and efficiency to do so.

It is important to understand what makes the healthcare risk rather unique. When planning for healthcare expenses individuals face three types of risks or uncertainties:

  1. Over their lifetimes individuals consume differing amounts of healthcare services; the generally healthy consume less than the generally unhealthy.
  2. It is difficult to estimate the timeline for when an individual would need access to healthcare services; one could reasonably assume that the old need more frequent access than the young but this assumption is invalid when accounting for catastrophic expenses like those linked to accidents or congenital problems.
  3. Individuals have need for differing healthcare services; it is easy to see that men consume different healthcare services than women but even among men, depending on age, genetic disposition, geography, race, etc. the need for specific healthcare services greatly vary.

Clearly, unlike other needs like food (regular and determinate), shelter (determinate), primary education (determinate and for the young), it is difficult to predict and plan for individual healthcare needs. It is this uncertainty that society should seek to address through risk pooling. Of course the question still remains; why should the society address it? I will answer the question along two parameters of equity and efficiency.

The equity argument requires that individuals should have an equal chance to enjoy an interesting, fruitful, contended life and fulfill their potential. Just like sex, colour, race and other accidents of birth, poor health should not hinder the opportunity for a full and realised life. Specifically, individual financial capability should not be a deterrent to health status or health care utilisation. I believe such unhindered access to healthcare services is a true testimony to the usefulness of all the scientific and technological advances we as a species have made. Imagine the civilisational loss if Shakespeare or Newton or Darwin or Michelangelo were thwarted from creating their masterpieces because they were struck down by a disease that they could not afford to treat.

The efficiency argument though less philosophical is equally powerful. It does not matter what individual income is; there is always a chance of contracting that one disease or that one condition which will severely compromise the individual’s financial well being – cancer, HIV, loss of limbs – the list is long. From the larger society’s perspective this is a double whammy, as in absence of affordable healthcare services, it not only loses a productive member but also is required to care for such destitute individuals. Every rupee spent on sustaining the poor (and I am not for a minute advocating that we don’t sustain the poor) takes it away from being invested in much needed physical infrastructure or security initiatives. Surely it is more efficient for the society to share the burden of healthcare services rather than divert scarce resources from infrastructure development to sustain those rendered poor and destitute by unaffordable healthcare costs.