In the market for health insurance, asymmetric information problems arise because
A) Privacy laws prevent the sellers of health insurance from asking buyers pertinent lifestyle questions.
B) Buyers of health insurance policies always know more about the state of their health than do the insurance companies.
C) The sellers of health insurance require medical exams that give them more information than the buyers normally have.
A health insurance policy provides coverage for a person’s healthcare costs in exchange for a premium. An individual who has health insurance can often recover costs related to medical care, surgery, prescription drugs, and even dental care. In addition to reimbursing the insured for medical expenses, health insurance can also pay health care providers. Premiums may be covered in part by employers, but employers also often deduct the costs from employees’ paychecks as a way to attract quality workers. Benefits from health insurance are tax-free for recipients, with some exceptions for S corporation employees.
When asymmetric information is present in the insurance market, it results in market failure since one party in a transaction does not have sufficient knowledge of the other. Asymmetric information is a problem common to all insurance markets. The party with less information creates a process where the party with more information is forced to reveal information about themselves through their choices. For example, an insurance company might offer different types of plans. A “full coverage” plan might be more expensive than a “limited coverage” plan.