Navigating adverse selection and moral hazard in health insurance: implications for sustainable coverage

Health insurance protects households from catastrophic expenditures by pooling risks and distributing costs. Yet, insurance markets face challenges from adverse selection and moral hazard, both threatening sustainability and affordability. Both phenomena stem from the information asymmetry between insurers and insured individuals. Adverse selection arises when high-risk individuals disproportionately enrol, raising premiums and risking market failure. Moral hazard occurs when reduced marginal costs drive unnecessary utilization and resource inefficiency. This narrative paper reviews their causes, consequences, and empirical evidence across different health systems, and provides a structured assessment of mitigation strategies including standardized plans, risk adjustment, compulsory pooling, subsidies, cost-sharing, financial incentives, and awareness programs, examining how each strategy works in practice, its effectiveness, and the trade-offs it involves. It emphasizes tailored, multidisciplinary interventions to build resilient and equitable insurance systems.