What does "adverse selection" refer to in health insurance?

The concept of "adverse selection" in health insurance occurs when high-risk individuals are more likely to seek out insurance coverage compared to low-risk individuals. This situation arises because those who know they are at greater risk of needing medical care are motivated to obtain insurance to protect themselves from potential financial losses. As a result, insurance companies may find themselves with a higher proportion of high-risk policyholders, which can lead to increased claims costs.

This phenomenon is concerning for insurers because if the pool of insured individuals skews towards those who will incur significant expenses, it can lead to financial instability for the insurance provider. To counteract adverse selection, insurers often employ various strategies, such as medical underwriting and requiring detailed health information during the application process.

The other options presented do not accurately define adverse selection. The selection of low-risk individuals would actually reduce the risk pool's overall claims cost and is not indicative of adverse selection. The process of appealing denied claims is unrelated to the risk profile of insured individuals, while assessing policyholder satisfaction pertains to customer service and retention rather than the fundamental risk dynamics of the insurance pool.