National Health Insurance
Regulations and Risk Adjustment to Improve Pooling  

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The WHO argues that: “Health system policy with regard to pooling needs to focus on creating conditions for the development of the largest possible pooling arrangements. Where a particular country for the moment lacks the organizational and institutional capacity to have a single pool or large pools for all citizens, policy-makers ... should try to create the enabling conditions for such pools. ...  Introducing regulations such as community rating (adjusting for the average risk of a group), portable employment-based pooling (insurance that a worker keeps when changing jobs) and equal minimum benefit packages (access to the same services in all pools), in addition to protecting members of the pools, may pave the way for larger pooling in the future.” ...

 “Regulation may cover such aspects as mandatory participation, non-risk-related contributions or community rating (the same price for a group of members sharing the same geographical area or the same workplace), and prohibition of underwriting (requesting additional information regarding health risks). Financial incentives may include risk compensation mechanisms and subsidies for the poor to join a pool.”

In competitive risk pool environments, the greatest danger is that funds compete on the basis of risk selection. Van der Ven & Ellis describe “cream-skimming” (also called preferred risk selection or “cherry-picking”) as the selection that occurs because health plans prefer low-risk consumers to high-risk consumers. The authors argue that “the larger the predictable profits resulting from cream skimming, the greater the chance that cream skimming will be more profitable than improving efficiency. At least in the short run, when a health plan has limited resources available to invest in cost-reducing activities, it may prefer to invest in cream skimming rather than in improving efficiency. ... Efficient health plans who do not cream skim applicants, may lose market share to inefficient health plans who do, resulting in a welfare loss to society.” One mechanism to deal with the differences in risk pools created by competitive behaviour is to create a fund for risk-adjustment so that all plans face a more similar risk profile and cream-skimming becomes unprofitable or much less profitable.

The ANC Health Plan of 1994 called for medical schemes under a future NHI to be subject to the following:

• Schemes ... should be prohibited from excluding any member (e.g. on the basis of high risk).
• The basic package of care to be covered by the NHI should be statutorily defined.
• Contributions to cover the basic package would be income related ....
• This contribution revenue (covering the basic package) should be pooled in a central equalisation fund, out of which every scheme would be paid in terms of its overall risk profile i.e. a risk adjusted capitation fee.

South African regulation of medical schemes has already moved substantially in the direction advocated by the WHO and envisaged by the ANC Health Plan. The Medical Schemes Act of 1998, effective from January 2000, re-introduced open enrolment, community-rating and minimum benefits. However while substantial work on the risk-adjustment mechanism has taken place, the proposed Risk Equalisation Fund has not yet been implemented. South Africa is unusual in having implemented these three elements without risk equalisation. As described in section 1, pooling has two functions: to allow risk cross-subsidies and income cross-subsidies. Without the central pooling mechanism of the Risk Equalisation Fund it is not possible to introduce the industry-wide income cross-subsidies envisaged in the ANC Health Plan of 1994.

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