Equalization Pool - Health Insurance

Health Insurance

In health insurance, 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.