Question

Answer the following short answer questions (each can be answered in half a page):

1. What does the term "risk pooling" mean in the context of health insurance?
2. How does risk pooling reduce the problem of health care costs varying widely between people?
3. How does Adverse Selection interfere with risk pooling?

Answer 1

In health insurance, risk pooling is the term used to denote a group of people who pool up the amount for a member of the society to provide that member with the healthcare service. Since most of the countries in the world do not have free healthcare service in it, risk-pooling saves people from going into the bottleneck debt.

Usually people have medical insurances for themselves. Yet, it is the poor who are hit badly because of the increasing medical expenses. Risk-pooling reduce the problem of health care costs by making the unpredictable health issues more predictable and by making funds available to the people in case of a need arise. It protects people from sudden shocks of health issues and also, make money more liquid in case of an emergency.

Finally, there is a problem of adverse selection associated with risk pooling. In the group, there are different type of people with different health needs. Sometimes, a person who is more prone to getting sick is in the same group with the person who is more healthy. Due to such adverse selections, the premium amount might increase. Due to the increased premium, healthy people might start opting out of the policy, thus increasing the premium more. This leads to the premium spiral which arises mainly when adverse selection interferes with the risk pooling.