Can a National Risk Pool Save Health Insurance?

by Fred Siegmund

President Obama, in a prime time address to Congress, pledged to reform health care in America. All types of insurance are supposed to let people pay premiums into a risk pool that generates a reserve fund to pay losses.

Insurance companies employ mathematicians to analyze actuarial data on mortality — accidents, sickness, disability, retirement and other risks — to construct probability tables that will determine the premiums that will generate reserves to pay future losses.

The risk pool has to be defined and probability tables calculated as random risk. Life insurance actuaries use data accumulated from many years to know the random risk that someone age 50 will die during their 51st year.

They don’t know who will die, but they know the probability, which lets them determine the premiums necessary to build an adequate reserve fund. Life insurance policies typically exclude death caused to soldiers in warfare because it is not random risk and prevents actuaries from building a reserve fund.

Random Risk in the Health Care System

Problems with random risk have plagued the health care system. Someone who already has heart disease or diabetes is not insurable in a private health plan because they are not a risk, they are a certainty, or they have a pre-existing condition.

Their probability of loss is one and their premium would have to equal the cost of treatment to avoid draining a reserve fund.

In the 1950s, insurance companies sold policies and defined a risk pool through the work place. One trouble with a health care risk pool that depends on jobs comes at retirement, when people lose their employer sponsored health insurance.

Age and the likelihood of pre-existing conditions assure it will be difficult or impossible for retirees to re-enter a risk pool and buy insurance. Pressure to cover retirees built up until the passage of Medicare health insurance for retirees in the Johnson Administration.

The second trouble with a health care risk pool that depends on jobs is that not everyone has one, or has one they can keep. Layoffs or employers without health care amount to an exclusion from a health insurance risk pool.

Before a layoff, someone is in a risk pool they may have entered long ago when they were young and healthy. In the mean time, they may have developed heart disease or some medical condition that is not a risk for private insurance, but a certainty or pre-existing condition, which cannot be covered when someone has to re-apply for health insurance.

Why Private Insurance Can’t Provider a National Risk Pool

If everyone entered a common national risk pool at birth and stayed until death, then all Americans would share in the risks of all our injury and illness. The pre-existing condition for someone age fifty would be a random risk to share by all in a national risk pool.

Private health insurance companies do not have the ability to define a national risk pool, but process applications when they receive them. Other private insurance companies do the same thing and each of them has an incentive to assemble risk pools with the healthiest people they can find, and avoid the sick and all those with pre-existing conditions.

There is nothing in free markets that will move private health insurance to a national risk pool or provide health care insurance that includes everyone. Only the Federal government has the ability to create a national risk pool.

Private health insurance cannot solve America’s health care failures alone, but will leave people without health insurance, exactly as it has been doing for more than 60 years.

About the author: Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at

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