National Health Insurance
The Function of Pooling

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The World Health Organisation using the Kutzin framework approach, describes the functions of a health system as the collection of revenue, the pooling of revenue, the purchasing and the delivery of healthcare. Pooling is well described in Chapter 5 of the World Health Report of 2000 as follows: “Pooling is the accumulation and management of revenues in such a way as to ensure that the risk of having to pay for health care is borne by all the members of the pool and not by each contributor individually. Pooling is traditionally known as the “insurance function” within the health system, whether the insurance is explicit (people knowingly subscribe to a scheme) or implicit (as with tax revenues). Its main purpose is to share the financial risk associated with health interventions for which the need is uncertain.” The insurance function is illustrated below, showing the inherent cross-subsidy from low risk to high risk people as a risk cross-subsidy in the upper half of the diagram.

Figure 1: Risk Cross-Subsidies and Income Cross-Subsidies in Pooling Arrangements

“Pooling reduces uncertainty for both citizens and providers. By increasing and stabilizing demand and the flow of funds, pooling can increase the likelihood that patients will be able to afford services and that a higher volume of services will justify new provider investments”.

 “When people pay entirely out of pocket, no pooling occurs. ...  Although prepayment and pooling are a significant improvement over purely out-of-pocket financing, they do not take questions of income into account. As a result of large pools, society takes advantage of economies of scale, the law of large numbers, and cross-subsidies from low-risk to high-risk individuals. Pooling by itself allows for equalization of contributions among members of the pool regardless of their financial risk associated with service utilization. But it also allows the low-risk poor to subsidize the high-risk rich. Societies interested in equity are not indifferent to who is subsidized by whom. Therefore, health financing, in addition to ensuring cross-subsidies from low to high risk (which will happen in any pool, unless contributions are risk-related), should also ensure that such subsidies are not regressive”.

“Health systems throughout the world attempt to spread risk and subsidize the poor through various combinations of organizational and technical arrangements.” Figure 1 illustrates both risk and income-related cross-subsidies. “In practice, in the majority of health systems, risk and income cross-subsidization occurs via a combination of two approaches: pooling and government subsidy.”

These “could occur among the members of the same pool, for example in single pool systems such as the Costa Rican social security organization and the National Health Service in the UK, or via government subsidies to a single or multiple pool arrangement. Cross-subsidization can also occur among members of different pools via explicit risk and income equalization mechanisms, such as those being used in the social security systems of Argentina, Colombia and the Netherlands.”

“Even under single pool organizations, decentralization, unless accompanied by equalization mechanisms for resource allocation, may result in significant risk and income differences among decentralized regions. Brazil has introduced compensatory mechanisms in the allocation of revenues from the central government to the states to reduce such differences.”

Thus although the pooling function has as its major role to create risk cross-subsidies from low risk to high risk people, the existence of a pool also plays a critical role in creating the mechanism for income cross-subsidies between high and low income people. This policy brief addresses issues to do with risk pooling, leaving the question of how best to arrange the income cross-subsidies for a future policy brief.

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