Chapter EMC, Problem 7MCQ

To determine

To state: The option that would increase the problem of adverse selection in the health insurance industry.

Answer to Problem 7MCQ

The correct option is a, i.e., higher insurance premium.

Explanation of Solution

Suppose that a health insurance company were to offer a standard policy to everyone with the same premium (the basic monthly fee for the policy). The premium would reflect the average risk of incurring a medical expense. But that would make the policy look very expensive to healthy people, who know that they are less likely than the average person to incur medical expenses. So healthy people would be less likely than less healthy people to buy the policy, leaving the health insurance company with just the customers it doesn’t want people with a higher-than-average risk of requiring medical care, who would find the premium to be a good deal. In order to cover its expected losses from this less healthy customer pool, the health insurance company is forced to raise premiums, driving away more of the remaining healthier customers, and so on. Because the insurance company can’t determine who is healthy and who is not, it must charge everyone the same premium, thereby discouraging healthy people from purchasing policies and encouraging unhealthy people to buy policies.

So, the correct option is a, i.e., higher insurance premium.