High-risk pool

An equalization pool is a fund created to level out differences in financial risk, often across long periods of time, in a process known as risk equalization. Examples include mandatory health insurance and grower co-operatives.

In health insurance, equalization pools are used in countries such as Ireland, Australia, Germany and the Netherlands, to balance risks in groups of people of varying levels of health to ensure medical risks are covered for people who might otherwise be difficult to insure.

In normal insurance markets, insurers price high-risk individuals at a higher premium to discourage them from buying insurance and offer lower-risk individuals lower premiums. That can make insurance phenomenally expensive for the elderly and those in poor health at a time when they can least afford to pay for insurance because they are not earning an income. Young people, on the other hand, for whom ill health is not a major concern, often do not buy health insurance even though it is relatively cheap for them to do so.

To overcome the problem, some governments have made basic health insurance compulsory and have created a risk equalization pool to even out differences in risks carried by insurance companies in the health market. Thus, the younger and healthier people must pay into the risk equalization pool and the older and sicker persons will receive money from the equalization pool. A government agency usually assigns the risks and manages the risk pool. Governments can then subsidize health care for the unemployed or the retired through the risk pool system. The presence of a risk equalization pool and a common health benefits system makes competition more transparent between health insurers and prevents them from behaving in ways which discourage the achievement of a universal health care system for the nation.

Ireland's health insurance system was originally a state monopoly with premiums collected by Vhi Healthcare. The monopoly was later broken and the British private health insurance company BUPA entered the Irish market and began competing with VHI, and generally undercutting it by attracting mostly younger and healthier clients by offering them cheaper coverage. VHI complained bitterly because BUPA was effectively seen to be making an unacceptably high amount of profits under the arranagements, saddling VHI with the cost of insuring the more high risk end of the market. In 1999 private health insurance covered about 1.5 million people (42% of the population). To tackle the problem, on 1 July 2003 new risk equalization regulations came into force (SI No. 261 of 2003) with the aim to neutralize more equitably the differences in insurers costs from variations in the health status of their members. It introduced risk equalization transfers from insurers with low risk profiles to insurers with high risk profiles. Under the regulations, insurers covered by the scheme, both the open insurers and one restricted membership undertaking, were required to submit biannual returns to The Health Insurance Authority (the Authority), the independent statutory regulatory body for the industry, detailing the claims of their members. Under the system, if the market equalization percentage, the degree of difference between insurers’ risk profiles, is less than 2%, the regulations specify that no risk equalization payments should be commenced. If it lies between 2% and 10%, the Authority must make a recommendation to the Minister for Health and Children as to whether or not payments should be commenced. If it is above 10%, the Minister is to sanction the commencement of payments unless, having consulted with the Authority, he determines that to do so would not be in the best overall interests of health insurance consumers.

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Wikipedia