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Regarding healthcare, what is meant by the term "adverse selection" and how do insurers address this problem? 

          Regarding healthcare, what is meant by the term "adverse selection" and how do insurers address this problem?

Added by Steven B.

Horngren’s Cost Accounting
Horngren’s Cost Accounting
Srikant M. Datar, Madhav V. Rajan 16th Edition
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Regarding healthcare, what is meant by the term "adverse selection" and how do insurers address this problem?
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Transcript

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00:01 Recall that adverse selection is when people who have inherently higher risk seek out insurance.
00:15 What is the effect of this? well, remember that insurance is based on averages.
00:23 In other words, they look at all of the people in a particular population and they say, okay, there are people who are very risky.
00:32 There are people who have almost no risk.
00:33 There are people in the middle.
00:34 They develop a mathematical model that can give them the average risk, and that's how they develop premiums.
00:41 But what if the vast majority of people who are inherently risky buy insurance? well, that's going to severely strain the system...
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