What is "adverse selection" in health insurance?

Adverse selection occurs when individuals with higher health risks are more inclined to purchase health insurance compared to those who are healthier. This phenomenon can lead to an imbalance in the risk pool, where the insurer has to cover a greater proportion of individuals who will utilize healthcare services more frequently and at higher costs.

In a situation where those in good health choose not to purchase insurance or delay making that decision, insurers may find themselves primarily covering those who are likely to incur significant medical expenses. This can raise the overall cost of insurance for everyone involved and may lead to increased premiums.

Understanding adverse selection is crucial because it impacts how insurance companies assess risk and set premiums. If adverse selection is significant, insurers may need to implement strategies such as mandatory coverage or different premium rates based on health status to stabilize their risk pools. This concept highlights the importance of balancing risk among insured individuals to maintain a sustainable insurance market.