What might be a consequence of adverse selection in health insurance?

Adverse selection occurs when there is a lack of symmetric information between buyers and sellers in the insurance market. Specifically, it happens when individuals with higher risks—such as those who are ill or have pre-existing conditions—are more likely to purchase insurance, while healthier individuals opt out. This situation can lead to insurers facing a higher proportion of claims than expected, as the risks and costs associated with the policyholders are greater than anticipated.

As a result, insurers experience increased costs due to the higher claims and medical expenses that arise from covering a population that is less healthy on average. To counteract these losses, insurance companies often respond by raising premiums for all policyholders. Higher premiums are necessary to maintain financial viability and ensure that the insurer can cover the costs associated with the higher risk pool. Therefore, the consequence of adverse selection manifests as increased costs for insurers, which inevitably leads to higher premiums for policyholders.

The other options do not accurately reflect the outcomes of adverse selection. For instance, offering more extensive coverage options for lower premiums is contrary to the financial realities caused by adverse selection. Similarly, an increase in insurance companies entering the market is less likely in a situation where adverse selection is prevalent, as increased costs and risks discourage new entrants. Lastly, decreased