We've looked at the idea of a simple interaction, transaction between patients and providers, but noted the problem of risk, which makes operating a healthcare system around a simple transaction really untenable. To move forward, we need a solution to the problem of risk. How do we solve it? Well, there's basically one general type of solution more or less universally used around the world these days. The solution is to pool the risk. What do we mean by that? Well, let's use an example to illustrate. Suppose there are 1,000 people, and we think about their healthcare over the course of a year. Let's let them all be the same from the perspective of their health for this example, each of them has a one percent chance. Let's use some made up but not entirely unrealistic numbers here of getting very sick in the year. If they get very sick, they're going to need a $100,000 worth of healthcare. This is actually not out of the question in many healthcare system these days. In the US, for example, there's a small percent of the population that have healthcare costs this higher every year. Let's say our group of a 1,000 also has a 29 percent chance of getting sick enough to need $15,000 worth of medical care. Then, just to be simple, let's say that these people also have a 60 percent chance of needing a $1,000 worth of healthcare and a 10 percent chance that they'll get by the year with nothing. I think those percents all add up to a 100. This is a representation of the risk that faces each of the people. Getting that a $100,000 bill would for many people be seriously problematic and cause real trouble. Even 15,000 could be real trouble for many people if it wasn't unexpected bill. So risk is a problem. What if we make the following arrangement? What if we get the 1,000 people together, and we get everyone to agree, somehow we do this, that they'll all pitch in to cover the medical bills of the group? Everybody agrees to contribute an equal share, let's say it's an equal share to keep it simple, of the total amount needed for the group. We're going to call this a version of risk pooling. Everyone in the group now shares the risks together. Let's think about what would happen for a second at the group level and do a basic math problem. We might expect that if we have a 1,000 people and there's a one percent chance that any one of them will get really sick, that 10 out of a 1,000 will end up needing the a $100,000 of medical care. We may not know who in exactly in advance, but we can guess it will be about 10 out of the 1,000. So our group collectively is going to spend 10 times a $100,000, so a million dollars, for those 10 people whoever they turn out to be. The group can expect to spend $15,000 for 290 of the people. We don't know who in advance, but it should turn out to be about 290 of them. So that'll be 290 times 5,000 on that group. For 600 people, the group can expect to spend a 1,000. So that'll be 600 times 1,000, and 100 of the people out of the 1,000 on average will need nothing. If you add it all up, that's $5,950,000 our group is collectively going to spend. If we divide that evenly among the 1,000 people or the group, it's 5,950 each. So what happens when people go in together, and we pool risk in this way? Given the statistics, an individual who participates in this arrangement removes the risk that was facing him or her individually. They used to have a one percent chance they'd be the unfortunate one and get the $100,000 medical bill. But they no longer face this possibility. They don't face the chance of a $15,000 bill either. Instead, they can expect to pay the more predictable, hopefully more manageable amount 5,950. Now you note that they also give up their chance of being the lucky one, the fortunate one who needed zero, which they may have liked, they're going to pay the 5,950 one way or another. But risk pooling in this case has reduced their risk. It has replaced a very uncertain, possibly problematically large cost with a more certain, more manageable cost. Risk pooling for us then generally will refer to a situation where a group of people together share the costs of medical care for the group. We can define risk pooling as the spreading of financial risks across a large number of contributors to a pool, so that the level of risk facing any one person is reduced by combining risks across multiple people. Thought about in a slightly different way. What we do here is we shift the risk away from the individual, and we give the risk to the group, which is collectively better positioned to handle it. Something you can watch for as you think about healthcare systems. We do a lot in modern healthcare systems to move risk around from one place to another. Starts out with patients here, individuals, and it ends up with the group. Moving the risk around turns out to be an important and interesting feature of healthcare systems that can help us understand what's going on. Risk pooling can be very interesting to dig into more, but we don't really have a lot of time to spend on the nuances. A lot of interesting questions though that you can keep in mind. What if we didn't divide up the shares evenly? How do we deal with it, if there are events like a really bad flu season that come along in some year and make everyone sicker than planned? What if not everyone is the same, and we have some people we know are healthier and some we know are sicker in advance? This latter one turns out to be a very important challenge. Risk pooling works best when a broad range of people participate. But people who are very healthy might often prefer not to be in the same risk pool as people that have more health issues. All of these and other things too have been discussed and can be explored further if you find this interesting. What we need for this course is the basic idea. We have risk as a problem in the healthcare system. The way we deal with it is to create systems that pool that risk. So how do you actually get risk pooling to happen in a modern healthcare system? We'll deal with that later.
