We've talked before about risk pooling and the use of risk pooling to solve the problem of risk that was complicating the delivery of healthcare and threatening the ability of the healthcare system to get patients the health care that they need. Risk pooling is a nice concept, but what we need is some way to actually pull it off. If you just have 100 people or 1,000 people and you're trying to organize them to pool risk, maybe you could possibly do that if some person who's good at organizing things goes and makes that happen. But in reality, we're using much larger pools of people these days who generally don't know each other. So we're going to need some other way to do it. Perhaps not surprisingly then, we've created institutions and organizations in modern healthcare systems that do this. And they're well established parts of healthcare systems now. I'll use a generic term for these here, and we'll call them intermediaries. We'll say that intermediaries are the entities that collect funds from a group of people, pool the funds, and use them to pay for health care for the people who are covered. Now, just a moment on terminology could be useful. We'll often use the term intermediaries here, but in fact, you'll hear people, including me, use other terms as well. Some intermediaries are private insurance companies, so we'll call them that sometimes, maybe just insurers. Sometimes we'll call them payers. Sometimes we'll call them health plans, just plans. These are all essentially synonyms, each with its own little nuance of meaning. There are two principal types of intermediaries that have come to exist. One, we call insurance companies, or private insurance companies, or private intermediaries. And another, the second, is a set of government payers that act as intermediaries and pool risk. Insurance companies first. We'll think about these mainly as private companies that have been set up to sell a product that we generally call health insurance. And by selling that product and running their business, they end up pooling risk. More specifically, the product that these companies sell is something that we call an insurance policy. This is a contract really that provides for paying the medical bills of the holder, perhaps under some conditions. It will generally say that if you have this policy then you'll be able to get your health care costs paid, maybe under some condition, by the insurance company that sold you the policy. What kinds of conditions can come up? It could be a variety of things. It varies from one case to another. It could be that you have to pay part of the cost yourself and the insurer will pay the rest. It could be that costs are covered if you see providers that they have arrangements with but not other providers. Some policies have more conditions, some have less. A little more terminology could be helpful now. We often refer to people with the policy as the enrollees, or the members, or the beneficiaries of the insurance company. And when they have a policy, we say that they're covered, or they have coverage for the medical care that's included in the policy. Now a policy is a valuable thing. You don't get one of those for free, you just pick it up. You buy that for a price. In the jargon, the price of an insurance policy is called a premium. In a very basic way, which for now leaves some things out, private insurance companies are in the business of selling policies in return for money. And they do that because they think it's good business. But as they do that, they're also pooling risk. How's that happening? Well, lots of people buy the policies. Generally thousands of people, or hundreds of thousands, or millions of people, maybe, buy a policy from a company, and they all pay the premium. The insurance company collects all the premiums from all the people and then pools them together, creating a pot of money that they can use to pay medical bills. Then when they honor the contract for people who bought the policy, paying medical bills for the group, they pool the risk. What happened? It's like in the risk pooling example earlier, individuals here pay a fixed known amount for the insurance premium. And in return, they get a policy that removes the risk that they're going to face a problematic medical bill that they would have to pay by themselves. The insurance company takes on the risk, which it can do because it's getting a large group of people together and pooling the risk. There are lots of companies that do this. In the US there are a number of large ones, Blue Cross Blue Shield, Aetna, Kaiser, for example. And there are many, many other smaller ones. Insurance companies also exist in many other countries around the world. The second general kind of intermediary that does risk pooling is a government or a government program. We'll sometimes refer to them as public intermediaries. Here, the program agrees to cover health care costs for some group of people, then it collects funds from the population to finance this. The funds could be collected through the tax system, or in some cases, it could be structured more as a premium that you might pay to the government or some other payment specifically for health care or for health insurance. However that goes on, a large group of people pay a relatively well known, understandable, manageable amount that goes into a fund of one kind or another that's used to pay the health care bills of the people the government agrees to take care of. Removing the risk from the individuals who are covered and placing the risk with the intermediary, which will now cover the health care costs. Once we introduce intermediaries into the picture, we get a different map of our health care system. We can add on to the earlier simple picture with just patients and providers. With intermediaries in the picture, funds can flow through the intermediaries from the patients to the providers. So let's take a look at a modified picture. On the one side here, we have a group of people we'll call the population, some of whom might become patients, maybe not all of them. The population pays money, either through premiums for private insurance or through taxes or other fees to a government intermediary, or maybe both. In many countries, there are actually both types existing at the same time. The intermediaries pool the risk and pay healthcare providers for providing care to the patients. Normally, a lot of the payments for providers go through intermediaries these days, but not all. So you'll still see a relationship in which funds flow from patients to providers. These can have a bunch of names, out-of-pocket payments, user charges, cost sharing, or other related terms can come up. Out-of-pocket payments remain an important feature of many healthcare systems. And even with insurance coverage, many patients still have to pay something when they use care, either because the insurer covers much but not all of the costs, or because there are sometimes things that are not covered by insurance.
