Pooling the Risk for Universal Healthcare Part II: No Risk Pool or Unitary Risk Pool

Posted on January 13, 2009


In the previous entry I addressed the need for risk pooling for a successful universal healthcare initiative. In this entry I want to write about the possible models for risk pooling. The two obvious models are no risk pool – individuals take care of their healthcare needs without the society sharing any risk or burden, and unitary (or mandatory) risk pool – all members of the society/ country are “forced” to be part of a single risk pool. I will address the primary features and challenges inherent to each of these models. 

No risk pool is the current situation in India. Individuals are not required to have any healthcare insurance and if they do it is voluntary. In a no risk pool situation, individuals try to eliminate the uncertainties in healthcare expenditures by signing up for private insurance. Insurers charge premium based on their assessment of an individual’s risk profile.

  • I have argued in earlier entries (1, 2) that there are good reasons of equity and efficiency that make risk pooling desirable. This is true for both the individuals and the insurers. For individuals, absence of a risk pool means their existing health record becomes the primary criterion determining their premium cost – sometimes even eligibility to be insured. It is not hard to see why individuals with chronic conditions like diabetes, cancer or congenital problems or life threatening infections like AIDS would never qualify for affordable insurance. For insurers, absence of a risk pool means they are at a disadvantage with imperfect information on individuals’ true health status. Individuals always will know their health status better than what insurers can determine. Insurers are consequently hit with the problem of adverse selection; individuals with above average risk (the sick) are more likely to purchase insurance than those below average risk (the healthy). The insurance pool becomes less healthy ultimately leading to breakdown of the insurance function and even market failure of the insurer.
  • In certain no risk pool arrangements, insurers are prohibited from discriminating on price. In such situations insurers are often seen to cream skim the market, encouraging the healthy to sign up but making it difficult for the unhealthy to do so. Alternatively insurers are seen to make the claim process extremely cumbersome or simply refusing to pay claims thus ensuring their profitability at the expense of the insured.
  • No risk pool arrangements significantly inflate the administrative overhead. Assessing individual risk, writing appropriate insurance contracts and reimbursing claims require significant resources, diverting premium revenue to paying for non productive administrative expenses.
  • No risk pool arrangements provide no incentive to undertake public health programs. It has been seen, especially in developing e economies like India, that investments in public health programs like immunization have a disproportionately high positive impact on the health of the society.

It is obvious that the no risk pool arrangement is not in interest of anybody – not the individuals, not the insurers and definitely not the society.

Unitary risk pool is the current situation in certain European countries like Britain. Pooling is mandatory and all revenues – raised through taxation or social insurance schemes – are placed in a single central pool that pays for a defined package of services for all. By its very design the unitary risk pool seeks to eliminate the inefficiencies of a no risk pool arrangement, allowing for a transfer of benefits from those that can afford to those that don’t and from those that need healthcare services to those that don’t. However the unitary risk pool is not without its own inefficiencies.

  • Moral hazard leading to inflated/unaffordable costs is the biggest challenge for a unitary risk pool. Both service providers and individuals contribute to this challenge. For individuals, guaranteed and free access eliminates the economic barrier of cost, and hence the incentive to moderate demand, leading to excessive consumption of healthcare services. For service providers, guaranteed payment encourages induced demand for healthcare services unwarranted in addressing individual cases. Over consumption leads to ballooning costs which in turn lead to progressive shrinking of the packages of services guaranteed, sometimes even bankrupting and jeopardising the entire healthcare system.
  • A particularly strong argument against unitary risk pool is that such an arrangement by providing a one size fits all package of services ignores individuals need for differing healthcare services.
  • Another argument that merits attention is that a unitary risk pool guarantees service providers payments or returns on their investment thus suppressing, perhaps eliminating, innovation that would otherwise have thrived in a competitive environment  as service providers searched for efficiency.
  • In developing economies a unitary risk pool faces a rather singular challenge of unequal access. While the healthcare services are free, there are costs associated with travel, lost income from missed work, time spent travelling and waiting. These costs are not insignificant to the poor in a developing economy. In such a scenario the poor or those in remote rural areas access healthcare services as last resort. This leads to inequity in access of the free healthcare services with the rich and urban class cornering a disproportionate share of the available services and hence the spend.

Clearly the unitary risk pool while desirable is not without its share of challenges; challenges that need to be met with caution and care if the pool is to succeed.