Explain the adverse selection problem that is faced by health insurance companies when offering individual health insurance policies. What method do health insurance companies employ to combat the problem?

What will be an ideal response?

The adverse selection problem that health insurance companies face is that they would like to insure as many healthy people as possible. Unfortunately healthy people will have a lower tendency to purchase health insurance. By contrast people who assess that they are more likely to use the health insurance because of their perceived or known health problems will be more inclined to seek out insurance. Health insurance companies can combat this problem by requiring potential policy holders to take a physical exam which may reveal pre-existing conditions which they may either choose not to cover or do so with a higher premium.