THE POTENTIAL ROLE OF RISK-EQUALIZATION MECHANISMS IN HEALTH-INSURANCE - THE CASE OF SOUTH-AFRICA

International agencies such as the World Bank have widely advocated th e use of health insurance as a way of improving health sector efficien cy and equity in developing countries. However, in developing countrie s with well-established, multiple-player health insurance markets, suc h as South Africa, extension of insurance coverage is now inhibited by problems of moral hazard, and associated cost escalation and fragment ation of insurer risk-pools. Virtually no research has been done on th e problem of risk selection in health insurance outside developed coun tries. This paper provides a brief overview of the problem of risk fra gmentation as it has been studied in developed countries, and attempts to apply this to middle-income country settings, particularly that of South Africa. A number of possible remedial measures are discussed, w ith risk-equalization funds being given the most attention. An overvie w is given of the risk-equalization approach, common misconceptions re garding its working and the processes that might be required to assess its suitability in different national settings. Where there is widesp read public support for social risk pooling in health care, and govern ment is willing and able to assume a regulatory role to achieve this, risk-equalization approaches may achieve significant efficiency and eq uity gains without destroying the positive features of private health care financing, such as revenue generation, competition and free choic e of insurer.