Equalization pool

An equalization pool is a term used in many different industries or national settings to describe a fund from which to level out differences in collective enterprises due to imbalances, often across long periods of time in a process known as risk equalization.

In health insurance, equalization pools are used in countries such as Ireland, Germany and Holland to balance risks amongst insurance pools and 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 joining the pool and price lower risk individuals with lower premiums. This 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. The young 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. But in national policy terms, health insurance should be a life-long investment... you should pay in when you are well and have earnings and should receive benefits when you are ill and unable to work. To overcome this 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 policies of younger and healthier people must pay into the risk equalization pool and the older and sicker policies will receive money from the equalization pool. A government agency usually assigns the risks and manages the risk pool. Governments can then subsidize health 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.

In co-operative marketing ventures with near monopoly power, especially of perishable goods such as milk or fruit, equalization pools are sometimes used to even out price fluctuations that might otherwise happen through the seasons or from year to year.

Some governments use equalization pools to achieve social balance, so that richer regions with fewer needs for state aid pay taxes into an equalization pool from which poorer regions needing financial assistance to provide the same level of services as the richer regions can draw on.

Equalization pool in health insurance

The Netherlands

Main article: Health care in the Netherlands

Health care in the Netherlands has since 2006 used a new system of health care based on a risk equalization model. See main article for details.

Prior to 2006, The Netherlands required all private insurers to provide a comprehensive uniform benefits package. Competition is promoted by giving individuals a subsidy to help them buy compulsory health insurance from competing insurers. Insurers receive risk-adjusted per capita payments by the government and a separate flat rate premium from each insured person. The more efficient the insurer, the lower the premium paid by the insured. Insurers are also allowed to negotiate lower fees than officially approved provider fees, which was previously prohibited. As a result, this system, which was first authorised in 1990 to help improve quality, brought private health insurers to the market for the first time since 1941. Both insurers and providers became involved in quality improvement efforts, which became the focus for competition among insurers rather than competition only on price. The system in use between 1990 and 2006 improved quality overall and choices, but has made the goal of reducing health-related inequalities more difficult, as better-off individuals were able to prepay for more inclusive benefit packages..

Ireland

Ireland's health insurance system was originally a state monolopy with premiums collected by Vhi Healthcare. The monopoly was later broken and the British private ghealth 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 cover. VHI complained bitterly about this because BUPA was effectively seen to be making super profits under the arranagements and saddling VHI with the cost of insuring the more sick end of the market. In 1999 private health insurance covered about 1.5 million people (42% of the population). To tackle this problem, on 1 July 2003 new risk equalization regulations came into force (SI No. 261 of 2003) with the aims to neutralize more equitably, the differences in insurers’ costs due to 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 these 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 claims by age and gender 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%, then 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%, then 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.

In 2002, BUPA Ireland made a complaint to the European Commission, claiming that risk equalization constituted state aid, as transfers were likely to take place from BUPA Ireland to Vhi Healthcare and the latter is owned by the state. The Commission investigated this and in 2003 determined that transfers under the equalization scheme did not constitute state aid. BUPA withdrew from the Irish health insurance market on 14th December 2006.