National Health Insurance
Risk Pool Size

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The WHO makes recommendations on the size of risk pools: “Large pools are better than small ones because they can increase resource availability for health services. The larger the pool, the bigger the share of contributions that can be allocated exclusively to health services. A large pool can take advantage of economies of scale in administration and reduce the level of the contributions required to protect against uncertain needs, while still ensuring that there are sufficient funds to pay for services. Given that needs vary unpredictably, the estimation for an individual could be unaffordably large. By reducing this uncertainty, the pool is able to reduce the amount set aside as a financial reserve to deal with variations in the health expenditure estimates for its members. It can then use the funds released for more and better services.”

“Fragmentation of the pool – in other words, the existence of too many small organizations involved in revenue collection, pooling and purchasing – damages performance of all three tasks, particularly pooling. In fragmented systems, it is not the number of existing pools and purchasers that matters, but that many of them are too small.” ... “Predominantly out-of-pocket financing represents the highest degree of fragmentation. In such a case, each individual constitutes a pool and thus has to pay for his or her own health services.” This fragmentation is also true of the use of personal medical savings accounts. The case of Argentina before 1996 is described where many of the 300 pools have “no more than 50 000 members”.

“Larger is better for pooling and purchasing. But economies of scale show diminishing returns and, beyond a critical size, marginal benefits may be negligible. The argument for large pools is therefore not an argument for single pools when multiple pools can exist without fragmentation, and when their size and financing mechanisms allow for adequate spreading of risk and subsidization of the poor.”

A comprehensive review of the choice between single and multiple payers was done by Hussey & Anderson. Their analysis compares single-payer and multi-payer models for revenue collection, risk pooling, purchasing, and social solidarity. They argue that single-payer and multi-payer systems each have advantages: single-payer systems are usually financed more progressively, and rely on existing taxation systems; they effectively distribute risks throughout one large risk pool; and they offer governments a high degree of control over the total expenditure on health. Multi-payer systems sacrifice this control for a greater ability to meet the diverse preferences of beneficiaries through competition.

On the question of social solidarity, single-payer systems can “foster citizens’ trust in the ability of the government to protect their welfare, enhancing the population’s view of the legitimacy of the government. However, in some cases multiple insurance pools might improve the political support of the government. For example, better-off individuals who feel that they are contributing more than their fair share towards insuring the health risks of others may oppose the health insurance system.”

“Allowing them to opt out of a single-payer insurance system may provide greater social solidarity ..., by securing the political support of high-income earners for the public insurance system. This is particularly important in low- and middle-income countries where the high-income individuals and large industries must be willing to pay most of the cost of the reforms.”

In a multiple pool system, how large do risk pools need to be? This can be answered from a technical actuarial perspective. The “law of large numbers” is at work in that the larger the risk pool, the greater the stability in the results from month to month. A useful study and recommendations on minimum risk pool size for different healthcare benefits was published by the actuarial and clinical consulting firm, Milliman USA, as reproduced below.

Table 1: Minimum Risk Pool Size for Healthcare Providers to Accept Risk

Millimans argue that:  “Successful provider organization acceptance of insurance risk (i.e., claim fluctuation risk) requires a minimum number of member lives in order to provide a reasonably predictable result. This minimum number varies by scope of services and population covered. For example, the low cost, high frequency of primary care physician services requires a relatively low number of member lives (500 to 1,000) for predictable claim cost. On the other hand, some specialty services (i.e., organ transplants) require a very high number (100,000 +) of covered lives before the associated risk becomes predictable.”

Although the same studies have not been published on South African data, the pool sizes seem appropriate, based on experience. The table above illustrates that primary care services, which tend to be for high frequency low cost events, need the smallest pool size. Including specialist care increases the required pool size substantially from about 500-1,000 lives to 20,000-30,000 lives because some specialists services are rare and a few patients may need substantial specialist intervention. A risk pool providing only for hospital services needs the largest pool (60,000 to 100,000 lives) to cope with the low frequency very high cost events. But the most important point is that when all services are combined (the low frequency, high cost ones and the high frequency low-cost ones), then the minimum pool size reduces to about 20,000 lives.

In South Africa, the Council for Medical Schemes uses 30,000 beneficiaries (or lives) as the definition of a large medical scheme. This reflects the same thinking as in the Milliman study, that at about that size the results will be more predictable and thus the financial results of the risk pool will be more stable.

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