Risk Equalization Schemes

Health insurance is designed to pool risk among individuals.  Profit-seeking health insurers attempt to limit their risk by selecting healthier consumers. To counter this behavior, many nations have implemented risk equalization schemes.

A recent article in the journal Health Policy aims to analyze the techniques of risk equalization employed by several countries in the setting of voluntary health insurance systems. All these systems maintain the goal of keeping health insurance affordable in the competitive marketplace by cross-subsidizing the high-risk insured.  Interestingly, this step of implementing risk equalization is often seen as a way to transition a health care system from voluntary to mandated insurance. This step, however, was not used by the United States in its pending health reform.

Specifically, the authors discusses the details of the use of risk equalization in South Africa and Ireland, as well as claim equalization in Australia.  Risk equalization is insurers’ payment to or from an unspecified fund based on the health risk of each insured individual.  This payment can be in an external system, where the fund is managed by a third party (such as a governmental body) or internal system, where funds are paid from one insurance company to the next through a solidarity fund.  Ireland currently uses an external system, whereas Australia and South Africa use internal systems.  Similar to risk equalization, claim equalization is payment to or from insurers, but is based on actual claims costs instead of individual risk profiles of the insured.

All three countries in this analysis seem to have needed to move toward a system of risk equalization as a result of attempting to control the costs of health insurance for all individuals after implementing community-rated premiums. Community-rating means that the cost of premiums is mandated to be the same for all individuals within that community regardless of individual health risk.

This community-rating, however, motivates insurance companies to attempt to insure lower risk, and therefore less expensive, individuals. This is termed risk selection.  Insurers often do this risk selection through selective advertising, designing benefit packages that cater to target individuals, or offering plans with high deductibles and low premiums.

Of note, this analysis also concludes that the policy makers of all three countries underwent significant lobbying efforts by insurers against the implementation of risk equalization, which must be anticipated in any country attempting to integrate such measures against risk selection by insurers.  Understandably, insurers staunchly oppose risk equalization because it eliminates, or at least lessens, their ability to risk select, which is more effective at producing profit than efficiently managing health care.

Commentary

While this analysis looks at risk equalization in voluntary health insurance systems, it also mentions that many countries with mandatory health insurance (Belgium, Germany, Israel, the Netherlands, and Switzerland) have implemented risk equalization to control costs of health insurance and prevent competition based on risk selection.  Looking ahead to the reformations to the American health system, it will be interesting to see if the range of health insurance premiums allowed – somewhat community rated but also based on health risk (age and tobacco use only) – will provide enough profit for the insurers, or if the limits placed on premiums will spur on more risk selection among them.

If risk selection does enter the equation among health insurers in the near future, risk equalization strategies will be needed not only for individual and small group markets, but also for the large group marketplace.

Armstrong J, Paolucci F, McLeod H, van de Ven WP. Risk equalisation in voluntary health insurance markets: A three country comparison. Health Policy. 2010 Nov;98(1):39-49. Epub 2010 Jul 24.

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Lisa Maurer, MD