Which statement distinguishes moral hazard from adverse selection in health insurance?

• A. Adverse selection occurs after purchase when high-risk individuals are more likely to buy; moral hazard occurs before purchase when behavior changes due to coverage.
• B. Adverse selection occurs before purchase when high-risk individuals are more likely to buy; moral hazard occurs after purchase when behavior changes due to coverage.
• C. Both occur only in health insurance
• D. Neither occurs in any insurance

Answer: (B)

The main idea is that adverse selection is about who chooses to buy insurance before signing up, while moral hazard is about how behavior changes after coverage is in place. Adverse selection happens because high-risk individuals know more about their own health than the insurer, so they’re more likely to purchase insurance, pulling the pool toward higher average costs. Moral hazard occurs after someone is insured, since the presence of coverage lowers the out-of-pocket cost of care, which can lead to more or riskier healthcare use. In health insurance, this timing difference is the key distinction: adverse selection is pre-purchase, moral hazard is post-purchase. The other descriptions mix up the timing or claim that these phenomena don’t occur, which isn’t accurate.