Equalization pool
Encyclopedia
An equalization pool 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.
, equalization pools are used in countries such as Ireland
, Australia
, Germany
and the Netherlands to balance risks amongst 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. 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 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 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 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.
. 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 about this because BUPA was effectively seen to be making an unacceptably high amount of profits under the arranagements and 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 this 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 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 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%, 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 14 December 2006 by selling the Irish company to new owners. The company continued with its legal challenge on the issue of community rating and the application of the risk equalization levy. The Irish Supreme Court has since found in favour of the Irish company on the grounds that community rating is not the same as risk equalization, and the whole issue of VHI's predominantly older clientele is now back in the hands of government which has declared that it is not in a rush to move to propose new legislation.
model.
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.
Risk equalization
Risk equalization is a way of equalizing the risk profiles of insurance members in order to avoid loading premiums on the insured to some predetermined extent.- Health care :...
. Examples include mandatory health insurance and grower co-operatives.
Health insurance
In health insuranceHealth insurance
Health insurance is insurance against the risk of incurring medical expenses among individuals. By estimating the overall risk of health care expenses among a targeted group, an insurer can develop a routine finance structure, such as a monthly premium or payroll tax, to ensure that money is...
, equalization pools are used in countries such as Ireland
Ireland
Ireland is an island to the northwest of continental Europe. It is the third-largest island in Europe and the twentieth-largest island on Earth...
, Australia
Australia
Australia , officially the Commonwealth of Australia, is a country in the Southern Hemisphere comprising the mainland of the Australian continent, the island of Tasmania, and numerous smaller islands in the Indian and Pacific Oceans. It is the world's sixth-largest country by total area...
, Germany
Germany
Germany , officially the Federal Republic of Germany , is a federal parliamentary republic in Europe. The country consists of 16 states while the capital and largest city is Berlin. Germany covers an area of 357,021 km2 and has a largely temperate seasonal climate...
and the Netherlands to balance risks amongst 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. 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 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 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 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
Universal health care
Universal health care is a term referring to organized health care systems built around the principle of universal coverage for all members of society, combining mechanisms for health financing and service provision.-History:...
system for the nation.
Ireland
Ireland's health insurance system was originally a state monopoly with premiums collected by Vhi HealthcareVhi Healthcare
The Voluntary Health Insurance Board — which trades under the brand name Vhi Healthcare, and is still commonly referred to in Ireland as "The VHI" - is the largest health insurance company in the Republic of Ireland. It is a statutory corporation whose members are appointed by the Minister for...
. 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 about this because BUPA was effectively seen to be making an unacceptably high amount of profits under the arranagements and 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 this 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 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 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%, 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 14 December 2006 by selling the Irish company to new owners. The company continued with its legal challenge on the issue of community rating and the application of the risk equalization levy. The Irish Supreme Court has since found in favour of the Irish company on the grounds that community rating is not the same as risk equalization, and the whole issue of VHI's predominantly older clientele is now back in the hands of government which has declared that it is not in a rush to move to propose new legislation.
The Netherlands
Health care in the Netherlands has since 2006 used a new system of health care based on a risk equalizationRisk equalization
Risk equalization is a way of equalizing the risk profiles of insurance members in order to avoid loading premiums on the insured to some predetermined extent.- Health care :...
model.
Co-operative marketing
In co-operative marketingMarketing
Marketing is the process used to determine what products or services may be of interest to customers, and the strategy to use in sales, communications and business development. It generates the strategy that underlies sales techniques, business communication, and business developments...
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.