What is the second method listed to control adverse selection?

What is the second method listed to control adverse selection?

• A. Break people into groups
• B. Control through contract
• C. Increase deductibles across the board
• D. Require full disclosure of health history

Answer: (B)

Adverse selection creeps in when those who know they’re higher risk are more likely to buy insurance, leaving the insurer with a riskier pool. Controlling this through contract design means shaping the terms of the coverage itself—how much is paid, what is covered, and how costs are shared—so that the price and benefits align with the actual risk and behavior of enrollees. By using features like risk-based pricing within the contract, deductibles, copays, exclusions, waiting periods, and coverage limits, the insurer can deter low-value or high-risk enrollments and ensure that the cost of coverage reflects risk. This approach directly addresses the information advantage held by applicants and helps preserve a balanced, sustainable risk pool. While other methods can influence enrollment patterns, contract-based design provides a precise mechanism to manage risk sharing and pricing in light of asymmetric information.

Adverse selection creeps in when those who know they’re higher risk are more likely to buy insurance, leaving the insurer with a riskier pool. Controlling this through contract design means shaping the terms of the coverage itself—how much is paid, what is covered, and how costs are shared—so that the price and benefits align with the actual risk and behavior of enrollees. By using features like risk-based pricing within the contract, deductibles, copays, exclusions, waiting periods, and coverage limits, the insurer can deter low-value or high-risk enrollments and ensure that the cost of coverage reflects risk. This approach directly addresses the information advantage held by applicants and helps preserve a balanced, sustainable risk pool. While other methods can influence enrollment patterns, contract-based design provides a precise mechanism to manage risk sharing and pricing in light of asymmetric information.