Question

Moral hazard predicts that, in the presence of homogeneous information, the removal of a rule forcing healthy (low risk) individuals into risk pools will generally result in a decrease in the premiums charged by insurers to individuals who remain in these risk pools.

Answer 1

the removal of a rule forcing healthy (low risk) individuals into risk pools will generally result in a decrease in the premiums charged by insurers to individuals who remain in these risk pools.

This statement is True why? Adverse selection occurs when in a voluntary market indivuals at a greater risk of high health care spending are more likely tp desire coverage while low risk individuals and are more likely to opt out. Hence requiring individuals to have a health insurance coverage is one way to increase participation and not lead the premium rates to fall. further limited enrollment periods with penalties for delayed enrollment is another way. A high risk pool will not work by itself becaue it is prohibitively expensive to adminiter due to the problem of adverse selection. This is prohibitively expensive for consumers to purchase as there will be higher premiums and lastly it offers less optimal coverage often with annual and lifetime limites and gaps