Question

Which of the following is not an example or illustration of the adverse selection problem (a.k.a. the problem of hidden information) of third-party payers?

People buy health insurance to cover and protect themselves in case they might someday need it to cover big medical expenses.

All of the choices listed here

Sicker people buy more health insurance coverage or more robust health plans, while healthier people buy less coverage.

Anticipating they will require some surgical and other costly procedures soon, people who already have health insurance decide to switch to more generous health insurance plans during next week's open enrollment period.

Some people do not buy health insurance at all, until the time comes when they need it to cover costly medical procedures.

Answer 1

Answer- a) People buy health insurance to cover and protect themselves in case they might someday need it to cover big medical expenses.

Adverse selection essentially refers to a situation wherein one party has more information than the other, in which case information is exploited. This party can either be buyer or a seller.

In the above cases, sicker people know that they have a tendency to get high medical bills, hence going with robust health plans. But the insurance company doesn't know this. In this case buyer (sick people) has more knowledge than the insurance company. Same goes with healtheir people going for lower insurance coverage. Anticipation of some surgical and costly procedures is also a prior knowlege that that the buyer has but the seller doesnt which qualifies as adverse selection.And going for insurance only to cover medical procedures is also exploiting previous knowledge.

Only in the first case, neither the buyer nor the seller knows whether people taking the insurance will get sick and require medical insurance or not. Thus it is not a case of adverse selection.