One Reason Why Adverse Selection Problems Arise in Health Insurance

question 63

Multiple Choice

One reason why adverse selection problems arise in health insurance markets is that

• A)sick people are more likely to want health insurance than healthy people.
• B)because of advances in medical technology, people are living longer. These medical advances are costly and drive up the price of insurance for everyone.
• C)the average age of citizens of the United States has increased in recent years, and will continue to increase over the next 20 to 30 years. As older citizens retire, more and more of their medical bills will have to be paid by younger workers.
• D)fewer men and women are choosing medical careers because of the increase in the cost of malpractice insurance.

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Definitions:

Break-even Points

The level of production or sales at which total revenues equal total expenses, resulting in no net profit or loss.

Common Fixed Expenses

These are fixed costs that do not vary with the volume of production or sales, such as utilities, rent, or administrative salaries, shared across different products or departments.

Variable Costing

An accounting method that considers only variable costs as product costs and treats fixed costs as period costs to be charged in full against the current period's revenue.

Direct Labor Cost

The expense associated with employees who are directly involved in the production process.