The earliest known insurance policies were written some 5,000 years ago, to protect shippers against the loss of their cargo and crews at sea. The owners pooled their resources to spread the risk of loss amongst them all. This is risk pooling and is essential to the concept of insurance which spreads financial risks evenly among a large number of contributors to the program. For risk pooling to be effective, “The risk should be unforeseen and infrequent. If a negative event can be predicted in a certain case, it’s not a risk, but certainty—and certainties are not insurable (with the possible exception of death, which is insurable because its timing is uncertain). Furthermore, if a risk is too frequent, it cannot meaningfully be transferred to an insurance company, since the insurance company would only pass on the cost of the negative occurrence to the pool of insureds, along with their expenses and profits.” 

And herein lies the conundrum of private insurance for health care. For most of us, most of the time, negative events, such as health problems, are unpredictable and infrequent, so risk pooling works. However, for the aging population or those with a chronic medical condition, the “risks” become frequent or lifelong, making insuring them a problem for insurance companies. They overcame much of this problem by heavily segmenting the population, meaning that availability and premiums were based on health care status, health history, gender, industry of employment age, etc.

Changes to our health care system under the Affordable Care Act (ACA) are based on the Democratic Party’s advocacy for a broad-based pooling of health care risks. The Republican Party generally advocates for health care to be based on more individual responsibility, and accepts greater segmentation of health care risks.

These policies promote greater pooling of the health care risk:

  1. Medicare and Medicaid

  2. Employer-based insurance

  3. Financial assistance to purchase private health insurance

These policies decrease risk pooling in health care:

  1. Rating of insurance premiums, that is, segmenting the population by health status.

  2. Health care savings accounts, offering tax advantages to those who can afford them, which pulls money out of insurance pools.

  3. Sales of insurance across state lines, which undermines state policies on pooling risk.

  4. Coverage deductions, benefit exclusions, and cost-sharing variations according to health status, all of which place a greater burden on those needing health care.

  5. Age-related tax credits that do not vary with incom.

  6. High-risk pools requiring very high public expenditure to offset costs.

  7. De-linking insurance from employment 

It can be argued that, as a nation, we all accept that we must carry car insurance and fund the fire department, even though we may rarely have a car accident or a house fire. This is risk pooling for the common good. If we, as a nation, believe that access to affordable health care is a basic human need, then the risk-pooling approach promotes broad access to medical care regardless of income, age, or health status, and we should be promoting policies that reflect this.

Lesley Frost, Advocacy Chair

Sources: finance.zacks.com, health affairs.org