Pooling the Risk for Universal Healthcare Part III: To Unitary Risk Pool via Integrated Risk Pools

Posted on January 19, 2009


In the previous entry I addressed why Unitary Risk Pool is a desirable arrangement when implementing a universal healthcare initiative. I also highlighted the challenges involved in establishing a unitary risk pool. These challenges become particularly acute in a large population and less developed economy like India. Indeed for most countries a unitary risk pool may be infeasible perhaps even an undesirable arrangement.

In practice most countries devolve the responsibility of delivering universal healthcare to smaller administrative units (provinces, states); each unit managing its unitary risk pool. This leads to creation of what are termed as fragmented risk pools. Individuals are assigned to a particular pool depending on:

  • Their geographical location
  • Industry they work in
  • Their demographic characteristics such as age and current health status
  • Their choice (from competing insurance service providers)

It is obvious that different risk pools will, given their varying sizes and mix of risk, have varying per capita expected expenditure. It is equally obvious that smaller the size of individual risk pools greater will be the variation in the spending needs across different pools. In the extreme, highly fragmented pools will comprise of individual families (or individuals) and exhibit the same degree of variation in per capita expected expenditure as in a no risk pool. The key takeaway is that a country needs to manage the tradeoff between administrative ease and variation in expected expenditure when managing the size and structure of the fragmented risk pool.

The policy response to the disadvantages of fragmented risk pools is to create a balancing arrangement termed as integrated risk pools. 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. Such transfer may be arranged through a centralized adjustment pool or directly between the pools. It is important to recognize that these transfers may not be (or need not be) adequate to finance the gap in variation in expected spends and may require additional financing by an external source, usually the government.

In its simplest form, such financial adjustment would be based on capitation payment, or the average expense incurred (or likely to be incurred), across all pools, for a particular member for a particular period of time. Each pool has varying capacities to raise revenue (premium payments) and the goal is to ensure that each pool has available adequate financing to ensure an equal per capita spend.

This arrangement though simple in principal does not take into account the variation of risks across pools. For e.g. a pool of relatively young and well earning individuals (in the Indian context, say software engineers) would have a much lower expected per capita expenditure than their older peers (say government employees) and have the ability to contribute much more than their less well off (say employees in light engineering industry) peers. A more equitable and efficient arrangement accounts for varying risks across pools through the concept of risk adjusted integrated risk pools.

Risk adjusted integrated risk pools are characterized by:

  • Equal capitation rates but different premium rates – account for varying ability and propensity to pay
  • Equal premium rates but different capitation rates – account for varying healthcare services needs
  • Both premium and capitation rates are set in accordance to the ascertained risk in the pool – account for both varying ability to pay and varying healthcare services needs.

For a detailed discussion on the issues addressed in this and previous two entries (1,2), go here to download an excellent paper by Smith and Witter.

Thus a system of risk adjusted integrated pools allows a country to get past the administrative challenges of managing a single, large unitary risk pool and yet gain most of its advantages.