What is "adverse selection" in health insurance?

Adverse selection in health insurance refers to the phenomenon where individuals who are more likely to require medical care—those with higher health risks—are more inclined to purchase health insurance compared to healthier individuals. This unequal distribution can lead to an imbalance in the insurance pool, causing higher claims costs for the insurer.

When those with greater health risks opt into the insurance system, it can drive premiums up, as insurance companies must cover the expenses of these individuals. This makes it challenging for insurers to maintain affordability while also ensuring that they can cover the costs of care for their members. In the long run, if adverse selection continues unchecked, it can lead to instability in the insurance market, where premiums may become unsustainable, leading to fewer healthy individuals in the pool, escalating the problem further.

The other options do not accurately capture the essence of adverse selection; for instance, low-risk individuals purchasing insurance or mandated coverage does not directly illustrate the concept of adverse selection. Moreover, premium increases not tied to risk profiles do not reflect the fundamental issues arising from adverse selection.