What does "adverse selection" mean in the context of health insurance?

Adverse selection refers to a situation in health insurance where individuals with a higher probability of requiring medical care are more likely to enroll in a health plan, while those who are healthy may opt out. This typically leads to a disproportionate number of unhealthy individuals in a risk pool. As a result, insurance companies may face financial difficulties due to the increased costs associated with a higher volume of claims.

In this context, selecting unhealthy individuals enrolling in health plans clearly captures the essence of adverse selection. It explains why insurance companies aim to attract a balanced risk pool, comprising both healthy and unhealthy individuals. By doing so, they can spread the risk and manage costs effectively.

The other options do not accurately represent the concept of adverse selection. High premiums for healthy individuals do not encapsulate the issue's core, as adverse selection primarily revolves around the imbalance in enrollment based on health status rather than premium pricing. Similarly, guaranteed coverage for all applicants implies an inclusive approach that aims to combat adverse selection, rather than perpetuate it. Finally, insurance plans that favor young individuals are unrelated because adverse selection is not about favoring a specific group but about the risk distribution within the entire pool of enrollees.