The World Health Report incentives associated with it, particularly under non-risk-related contribution schemes Selection behaviour is a potential problem of competition whenever and at whatever organizational level pooling is performed(27, 28). It is particularly a problem for competi tion under non-risk-related contribution schemes Either pooling organizations will try to pick the lowest risk consumers (risk selection), who will contribute but not cause or the highest risk consumers will seek coverage more actively than the rest of the p tion(adverse selection). Pooling competition then becomes a battle for information be- ween consumers(who usually know more about their own risk of requiring health interventions)and the pooling organization(which needs to know more about consumers isks to ensure long term financial sustainability). This has significant consequences for the administrative costs of pooling organizations. If adverse selection predominates, pooling organizations end up with increasing costs, are obliged to demand increasing contribu ions, and may eventually face financial default. This applies not only to private health insurance schemes but also to community pooling arrangements. Evidence shows that managing adverse selection is a major challenge for community pooling arrangements (17), which mostly rely on voluntary affiliation. If instead risk selection predominates, as is most likely when there is weak regulation of pooling competition, the poor and the sick will be excluded. Exclusion from the pool is a problem that should be corrected through a combination of regulation and financial incentives Regulation may cover such aspects as mandatory par- cipation, non-risk-related contributions or community rating( the same price for a group of members sharing the same geographical area or the same workplace), and prohibition of nderwriting(requesting additional information regarding health risks). Financial incen tives may include risk compensation mechanisms and subsidies for the poor to join a pool These approaches reduce the problems of pooling competition but are administratively expensive because of the high transaction costs within the system, associated with moving from hierarchical organizational arrangements for non-competitive pools to a market in pooling(29, 30) Regulation and incentives should also be directed to avoiding fragmentation of the pe as a result of competition. If organizational and institutional incentives are adequate, large pools are much more efficient than pooling competition. Single national pools, as the larg est pools attainable and as non-competing organizations, might be seen as the most effi cient way to organize pooling. They avoid fragmentation and all competition problems but In most health financing arrangements, pooling and purchasing are integrated within the same organization. Allocation of funds from pooling to purchasing occurs in the or- anization through the budgetary process. There are, however, a few instances in the world where attempts have been made to separate the functions and allocate resources from a pooling organization to multiple purchasers through risk adjusted capitation. For example, in Colombia(31, 32)and the USA (33, 34), attempts have been made to take advantage of purchasing competition to minimize the pooling competition problems discussed above STRATEGIC PURCHASING Health systems need to ensure that the package of health interventions they provide and finance responds to the criteria discussed in Chapter 3. They also need to ensure that the way interventions are provided helps to improve the systems responsiveness and fi nancial faimess Strategic purchasing is the way to achieve this104 The World Health Report 2000 incentives associated with it, particularly under non-risk-related contribution schemes. Selection behaviour is a potential problem of competition whenever and at whatever organizational level pooling is performed (27, 28). It is particularly a problem for competi￾tion under non-risk-related contribution schemes. Either pooling organizations will try to pick the lowest risk consumers (risk selection), who will contribute but not cause expense, or the highest risk consumers will seek coverage more actively than the rest of the popula￾tion (adverse selection). Pooling competition then becomes a battle for information be￾tween consumers (who usually know more about their own risk of requiring health interventions) and the pooling organization (which needs to know more about consumers’ risks to ensure long term financial sustainability). This has significant consequences for the administrative costs of pooling organizations. If adverse selection predominates, pooling organizations end up with increasing costs, are obliged to demand increasing contribu￾tions, and may eventually face financial default. This applies not only to private health insurance schemes but also to community pooling arrangements. Evidence shows that managing adverse selection is a major challenge for community pooling arrangements (17), which mostly rely on voluntary affiliation. If instead risk selection predominates, as is most likely when there is weak regulation of pooling competition, the poor and the sick will be excluded. Exclusion from the pool is a problem that should be corrected through a combination of regulation and financial incentives. Regulation may cover such aspects as mandatory par￾ticipation, non-risk-related contributions or community rating (the same price for a group of members sharing the same geographical area or the same workplace), and prohibition of underwriting (requesting additional information regarding health risks). Financial incen￾tives may include risk compensation mechanisms and subsidies for the poor to join a pool. These approaches reduce the problems of pooling competition but are administratively expensive because of the high transaction costs within the system, associated with moving from hierarchical organizational arrangements for non-competitive pools to a market in pooling (29, 30). Regulation and incentives should also be directed to avoiding fragmentation of the pool as a result of competition. If organizational and institutional incentives are adequate, large pools are much more efficient than pooling competition. Single national pools, as the larg￾est pools attainable and as non-competing organizations, might be seen as the most effi￾cient way to organize pooling. They avoid fragmentation and all competition problems but also forego the advantages of competition. In most health financing arrangements, pooling and purchasing are integrated within the same organization. Allocation of funds from pooling to purchasing occurs in the or￾ganization through the budgetary process. There are, however, a few instances in the world where attempts have been made to separate the functions and allocate resources from a pooling organization to multiple purchasers through risk adjusted capitation. For example, in Colombia (31, 32) and the USA (33, 34), attempts have been made to take advantage of purchasing competition to minimize the pooling competition problems discussed above. STRATEGIC PURCHASING Health systems need to ensure that the package of health interventions they provide and finance responds to the criteria discussed in Chapter 3. They also need to ensure that the way interventions are provided helps to improve the system’s responsiveness and fi￾nancial fairness. Strategic purchasing is the way to achieve this