Around Des Moines

While writing an article on health insurance versus health care for Leading Voices: Iowa, I devised a very simple exercise on risk pools. The Iowa General Assembly most likely will attempt to pass some type of mandatory health insurance in the next few years based on the belief that pulling in healthier individuals will reduce health care costs, or at least insurance premiums. Plus, presidential candidates are trying to claim that mandatory insurance equals universal coverage. Understanding risk pools is essential to understanding these health plans. The following exercise is very simple because I want to show the concept, not any actual risk. It is also very simple because I am not an actuary.

There are four companies. One builds boats (Group A). One constructs beach houses (Group B). One digs swimming pools (Group C). One sells galoshes (Group D). Each company has 50 employees, none of whom swim.

Statistics (as created for this exercise) show death by drowning is likely every year for 15% of boat makers, 10% of people on the beach, 5% of people filling pools, and 1% of people who only find water in rain puddles (i.e., the general public).

Marine Insure sold life insurance policies to all members in Groups A and D. Aqua Life sold policies to all members in Groups B and C. Although current law limits small businesses combining coverage, for this exercise all workers with each insurer are considered to share the same coverage. These are called the risk pools.

The red bars in the chart show the number of people in each group who are expected to die from drowning in any year. The yellow bar shows the premium each member would pay.

To calculate the premium, a base rate of $10 was set. This base covers the cost of selling the policies, mailing out required material, and maintaining an office. Additionally, $10 was determined to be the price paid out for each drowning. All other costs, such as investigators, have been excluded. Each member would start with a $10 base premium. The number of expected deaths in each group would be multiplied by $10 and then divided by the number of members. That number would then be added to the base premium. Thus, in Group A, 15 deaths would be expected for a payout of $150 shared by 50 members at a cost of $1.50 per member for a total member premium of $11.50.

All 4 groups are shown individually in the chart. Then the two risk pools (Marine Insure with Groups A & D and Aqua Life with Groups B & C) are shown. The last two groupings show what happens when the Marine Insure risk pool consists of 50 from Group A but 100 from Group D and then 100 from Group A and 50 from Group D.

Real data is much more complicated. Nevertheless, hopefully this will help readers understand how risk pools work.

M.R. Field is editor of Leading Voices: Iowa.