Problems of adverse selection and moral hazard in the context of healthcare

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In health insurance, adverse selection is brought about by information asymmetry amongst the insured and the insurer. The majority of health-care economists argue that asymmetric information problem of adverse selection and moral hazard in the health service delivery significantly differentiate provision of health care from other commodities. Adverse selection is rampant in insurance industry especially health insurance. This phenomenon happens whenever people decide to purchase insurance based on how likely it is for them to make a claim on the insurance coverage. Adverse selection happens in various forms. For instance, the insurance applicant may have knowledge about a risk that the insurer may not be aware. Also, the insurance company may have access to the risk knowledge but is unable to integrate it wholly into the price of the insurance coverage because of the confines of the insurer’s rating method and antidiscrimination laws (Gruber, 2017).

Moral hazards come in different forms. They range from individual precaution, resource overutilization, and providers. Under individual precaution, insured persons are less likely to be caution with their lives or assets since they know there’s already a plan on reimbursement/ cover in case of an event happening. An example being a house owner is not likely to buy a fire extinguisher since he/she already has house insurance and therefore in the case of a fire, he will get covered by the insurer.

Resource utilization, on the other hand, is the misuse of available resources by insured persons and providers. This abuse may take place in forms of getting unnecessary scans since you have a wide medical coverage annually, taking medicine such as anti-vitamins when not necessarily needed just to mention but a few. Providers, in this case, refer to the doctors who give medical services. They may take it upon themselves to gain from insured patients by either quoting their charges highly than expected or performing unnecessary procedures just to have a higher pay from an insured patient.

Problems associated with adverse selection include many insurers taking insurance from large corporations and not small businesses as Individuals expecting high health care costs in the future will prefer expensive insurance firms(big firms) and vice versa. Adverse effects may cause people selecting on wrong health plans since prices are never about marginal costs but on a benefit-cost basis. In events of adverse selection where screening is done by the insurer or insured on the counterparty, risks likely to spread is lost while also attracting the healthy to take health policies and deterring the sick by overcharging them as 15 million USA citizens are not insured medically (Gruber, 2017).

Another good example of adverse selection is the issuance of IPO’s to the financial markets that are less priced and coming from small firms. It is anticipated that companies with poor prospects are likely to sell to the public and therefore Potential investors need to have done research on such IPO’s before making their investments. Small initial public offerings (IPOs) for instance, of less than $50 million ordinarily lose money, while large IPOs gain normal returns” (Hsieh & Sloan, 2017).

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  1. Gruber, J. (2017). Lecture 26: Healthcare Economics. [Video file]. Retrieved from
  2. Hsieh, C. and Sloan, F. A. (2017). Health Economics. Massachusetts: MIT Press.
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