What is the concept of "adverse selection" in health insurance?

The concept of "adverse selection" in health insurance refers to the situation where individuals who are at a higher risk of needing medical care are more likely to purchase health insurance compared to healthier individuals. This is closely associated with the choice of healthier individuals choosing to avoid purchasing insurance. When many healthy individuals decide not to buy insurance, it leaves the insurance pool weighted with those who are more likely to require medical care, leading to increased costs for the insurer. The imbalance in the risk pool can weaken the insurance system, as it creates financial strain on insurers who have to cover the higher expenses associated with a riskier, less healthy applicant pool.

This understanding of adverse selection highlights the importance of having a balanced mix of healthy and unhealthy individuals within an insurance system to distribute risk effectively, which ultimately supports financial stability for insurers and their ability to provide coverage.