What does 'risk pooling' mean in health insurance?

Risk pooling in health insurance refers to the practice of bringing together individuals with a broad range of health risks and conditions into a single insurance plan. This approach helps to stabilize insurance premiums and overall costs for the group. By pooling people with varying health statuses—some who are low-risk and others who are high-risk—insurers can spread the financial risk across a larger population. This collective sharing of risk becomes particularly important in managing unexpected healthcare costs, as the premiums collected from the entire group may sufficiently cover the higher costs incurred by a smaller number of individuals with significant health issues.

Through risk pooling, insurers can maintain more predictable and lower premiums for all members compared to insuring only those with similar, higher health risks, which could lead to exorbitantly high premiums for everyone involved. This mechanism creates a safety net that helps ensure that those who need medical care the most can receive it without incurring unaffordable costs, while those who are healthier contribute to the overall funding of the risk pool.

Other options do not capture the essence of risk pooling accurately, as they either focus on unhelpful strategies such as setting higher premiums for certain individuals or suggest narrowing down the group to those with only similar risks.