Don’t Let The Talking Points Fool You: It’s All About The Risk Pool
By Linda Blumberg and John Holahan
Health Affairs Blog, March 15, 2016
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 health policies of the two political parties and their presidential candidates differentiate themselves clearly along the lines of pooling philosophies: the Democrats generally advocate broad-based pooling of health care risk and the Republicans generally advocate more individual responsibility and are willing to accept much greater segmentation of health care risk. These positions have dramatically different implications for individuals when they experience significant health problems, and they also have very different implications for low- and middle-income populations as compared to those with high incomes. As a consequence, each health care policy proposal should be evaluated as to its ramifications for risk pooling.
Left unchecked, people who perceive themselves healthy will tend, if they are pursuing their own near-term financial self-interests, to separate themselves from sick people—either by avoiding health insurance entirely, purchasing insurance products sold predominantly to other healthy people, or purchasing insurance products offering limited benefits that likely are not attractive to those requiring significant medical care. Those supporting public policies that allow or encourage this type of separating of health care risks often argue that they are placing greater personal responsibility on each individual, who will in turn make better decisions about the use of medical services. However, the burden of that increased responsibility falls most heavily on those with health problems, since it places larger financial costs on those with medical care needs at the time those needs arise, reducing costs for individuals while they are healthy.
Depending upon the extent of the risk segmentation created, these policies can effectively deny care to those that need it. Those who are well off financially can finance a considerable amount of necessary care out-of-pocket; a low- or middle-income individual experiencing a health crisis cannot. Thus, policies that separate risks will not only harm the sick, they will decrease access to care most heavily for the non-wealthy with health problems. Therefore, the amount of risk pooling versus risk segmentation is a fundamental choice.
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.
By Don McCanne, M.D.
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.)