What is adverse selection in the context of health insurance?

In the context of health insurance, adverse selection refers to the phenomenon where individuals who are at higher risk of needing medical care are more likely to purchase health insurance compared to those who are at lower risk. This occurs because individuals who anticipate needing healthcare services, such as those with pre-existing conditions or poor health status, are motivated to obtain insurance to cover their potential healthcare costs.

When a larger proportion of high-risk individuals enroll in a health insurance pool, it can lead to higher overall claims costs for insurers. Consequently, this may result in higher premiums or even the withdrawal of certain insurance products from the market, as insurers try to balance their risk pools. Adverse selection can create a cycle where only the most unhealthy individuals are covered, potentially destabilizing the insurance market.

The other options focus on scenarios that do not accurately capture the essence of adverse selection. For instance, the notion of lower health risks purchasing insurance does not align with the adverse selection framework, and denying coverage based on health history goes against principles of fair access and the regulations within most insurance markets. Monitoring systems for fair pricing do not directly pertain to the concept of adverse selection either, as they are more focused on ensuring that pricing is equitable rather than addressing the risk distribution in insurance enrollment.