Health risk is being calculated, priced, allocated, managed, and in many cases bought and sold through a complex and often opaque insurance and capital markets system which starts with the individual and family at the most micro level and often climbs through several stages of increased aggregation through various forms of health, life, and disability insurance to large regional and national markets at the most macro level.

The increasing use of high deductible plans is resulting in the assumption of potentially large financial risks by low income and moderate income people and their healthcare providers, who are likely to be facing increased collection risk associated with the high deductible requirement. These changes in the allocation of health-related financial risk can be particularly dramatic when the consumer’s enrollment in such a plan has made them otherwise ineligible for public subsidies such as Charity Care or, alternatively, when the consumer is shifting from any low-deductible plan (including Medicaid in the case of a low-income person making just enough more to become ineligible) to a high-deductible plan.  And high-deductible plans are likely to become more and more prevalent in the years ahead.  Perhaps the best way to reduce the financial risks to particularly vulnerable populations like this is to help them better manage their own short and long-term health risks, which are the ultimate drivers of both their health insurance premium and out-of-pocket health expenses.

Sharing the risk of health problems and their attendant expenses within relatively small and/or tightly knit groups, e.g. communities, a single employer’s workforce, affinity groups, etc. appears to many analysts to provide the best opportunities for individuals and families to see how their own health practices effect the group as a whole, for several reasons.

First, the tenor of risk sharing relationships for small or tightly knit affinity groups, whether they are formally structured as a self-insurance group by an employer, a mutual benefit society, or an affinity group, can be relatively long, e.g. multiple years or even decades. By contrast, health risk sharing through standardized commercial health insurance plans offered by large regional or national firms through employers using cafeteria plans normally only last twelve months. This tends to shorten the insurers’ time horizons to a year, and to focus on immediate rather than long term health issues of each patient. Insurance relationships of longer tenor permit insurers to invest in health interventions such as preventative measures, wellness, etc. with longer term pay-offs as measured by multi-year rather than on total costs of care. 

Secondly, the impact of an individual’s or family’s own health behavior on the group’s aggregate cost of health care can be conveyed more directly and more swiftly in small and/or more tightly knit groups, than is typical in larger and/or less tightly knit groups. These opportunities for enhanced accountability by individuals and families to the group should make preventative, wellness, disease management, and similar programs designed to optimize longer term health outcomes substantially more effective.

While smaller and/or more tightly knit affinity groups offer more obvious opportunities for increased accountability and a focus on long run as well as immediate health outcomes, they are challenged to find ways to lay off health risks which can otherwise overwhelm them financially, e.g. the risk of normally rare but catastrophic health cost events (catastrophic risk) and the risk that the group will include a higher than normal percentage of high cost patients (selection risk).  Also, in order to stay competitive, small groups need to find ways to reduce administrative costs by somehow replicating the economies of scale enjoyed by larger groups, and obtain pharmaceuticals and other medical supplies at discounts enjoyed by larger groups utilizing their buying power clout in the markets. They also may need to access working and/or long term capital on as favorable terms as large entities.

How can smaller and/or more tightly knit affinity groups meet the risk management, overhead cost, and bulk buying challenges posed by their relatively small size, while still maximizing such advantages as increased accountability and longer tenor?

Laying off catastrophic risk

Normally, self insurers protect against catastrophic risks with underwriting by the re-insurance or wholesale insurance market. The predictable healthcare costs are retained and self-insured, forming a first or "working" layer of cover, and a stop-loss or stop-gap policy is purchased from the commercial insurance market. The commercial insurance market then pays for losses above the specified self-insurance limit per loss, thereby stopping the cost of losses to the self-insured above the retained values.

Laying off selection risk

Small groups such as self-insured entities needing to lay off selection risk are unlikely to do so through exclusionary techniques such as creating a separate high risk pool and charging those members of the group more in premiums or burdening them with higher deductibles. Instead, they are likely to use “inclusionary” techniques in which some portion of the high-cost member’s claims are pooled and then proportionately redistributed through reinsurance among the carriers in the market. As with high-risk pools, public subsidies may also be used to offset some of the cost of claims. This type of mechanism is often called, somewhat inaccurately, a "reinsurance pool." A more precise term is "risk-transfer pool.”

Achieving economies of scale to reduce costs of administration, drugs and supplies, and credit

Administration: Small groups such as self insurance plans can usually contract with a third party administrator, almost always an insurance company or HMO, that manages the back office settlement of transactions with providers and gives the insured access to the reduced rates already negotiated by the insurance company with providers.

Drugs and other commodity supplies: Bulk purchasing allows consumers to lower the cost of a product by buying a large amount of it at once or contracting to buy a large amount of it over time.  Producers agree to the lower price because it guarantees them a sale, ensures that they can produce at volume, and can involve lower marketing and other administrative costs. The power of bulk purchasing is greatest when the purchaser is buying commodities or other products where multiple producers are selling similar or identical goods, such as generic drugs.  Bulk purchasing exerts far less power when negotiating for a unique good, such as a drug that is still under patent and that has unique benefits. 

Credit: Pooled credit structures are typically used by groups of smaller entities to gain the most cost efficient access to working capital or long-term capital.  A good example is the New York City Affordable Housing Acquisition Loan Fund, which provides relatively short term debt to community groups and other small scale developers of affordable housing projects for such pre-construction loan purposes as land aquisition.  In this case, the lowest possible cost of funds was achieved by using a tranched approach, with a consortium of foundations providing an inexpensive mezzanine layer as Program Related Investments.

• Are there examples where balancing micro/macro risk has been tried?  To what scale? Is it working?  On what terms is it judged?
• How does out of pocket expenses affect patient behavior would that impact patient behavior? Can we extrapolate that to how access to credit affects choices?
• Who has built a better community-based or affinity group collection model?   What are the practices being tried or under consideration? What can we learn from models that have not worked?
• What can be learned from very large, self-insured affinity groups such as the Veterans Administration and the AARP?

Many components are at least loosely associated with this leverage point because credit and health risk calculations are central to all health finance system transaction. Those components most directly associated with the leverage point include:

• Self-insurance Groups
• Wellness Plans
• Insurance Contract Tenor
• Fraternal and Mutual Societies
• Carbon Credits
• Local Aide
• Pooled credit structures