Arizona Health Insurance Practice Exam

Adverse selection is a phenomenon in health insurance markets where individuals who are at a higher risk of needing medical care are more inclined to purchase insurance compared to those who are healthier and may opt out. When individuals with pre-existing conditions or higher health risks are more likely to seek out insurance, it can lead to an imbalance in the risk pool. This results in higher costs for insurers as they have to pay out more in claims than anticipated, which can then lead to increased premiums for all insured individuals.

The presence of adverse selection can distort insurance markets, making it difficult for insurance companies to maintain affordable rates for everyone. If only those who anticipate needing medical care are purchasing insurance, insurers may have a smaller base of healthier individuals to balance out those higher costs, making it challenging to set fair prices for coverage.

The other options do not accurately capture the concept of adverse selection. For example, the notion that only healthy individuals purchase insurance does not reflect the reality of the situation where it is the unhealthy individuals driving the demand. Similarly, limitations on insurance for all applicants and lower rates for unhealthy individuals do not illustrate the dynamics of adverse selection where higher-risk individuals disproportionately seek coverage.