A large company is trying to decide which of two health insurance plans to offer its employees. Plan A has a high monthly premium and a low deductible, and Plan B has a low monthly premium and a high deductible

Question

Adverse selection is likely to be a bigger problem with A) Plan B because it is likely to attract employees who expect high medical costs, and therefore prefer low deductibles.
B) Plan A because it is likely to attract employees who expect high medical costs. Healthier employees who do not expect to have many medical bills will not be willing to pay the high premiums.
C) Plan B because it is likely to attract healthy employees who do not expect to have many medical bills. Because the monthly premiums are low, the insurance company will have a larger financial burden to bear in the event of claims due to serious illness.
D) Plan A because it is likely to attract employees who tend to overuse health care services due to the low deductible. Insurance companies are likely to pay out more in claims than they collect in premiums.

Answer 1

B