Risk-adjusted capitation payments from a central fund to competing health i
nsurers or health plans form an essential feature of market-oriented health
care reforms in many countries. If these premium-replacing payments do not
adequately reflect risk, it may lead to solvency problems for plans with re
latively many high-risk members and to selection against such individuals.
Mandatory Fooling across insurers may alleviate both problems by making the
market as a whole financially responsible for high-cost or high-risk indiv
iduals. To finance the pool, every insurer would be obliged to pay, for eac
h of its members, a uniform contribution that would depend on the projected
size of the pool. The statistical analysis indicates that mandatory poolin
g may substantially mitigate solvency and selection problems while retainin
g incentives for efficiency and cost containment.