Final answer:
A Medicare Supplement policy may be cancelled mainly for non-payment of premiums or material misrepresentation. Adverse selection may indirectly lead to cancellation by affecting overall market premiums. The ACA does not directly cause cancellations but influences the insurance market.
Step-by-step explanation:
The question asks about the circumstances that would cause a Medicare Supplement policy to be cancelled. A Medicare Supplement policy, also known as Medigap, can generally only be cancelled by the policyholder for non-payment of premiums or material misrepresentation on the application form. Insurance companies can't cancel these policies as long as premiums are paid on time and there was no fraud in obtaining the policy. However, situations that involve moral hazard or adverse selection might indirectly lead to policy cancellations. For instance, if adverse selection leads to a significant number of high-risk individuals purchasing insurance, thereby causing an imbalance in the insurance pool, and if insurance companies raise premiums to cover this risk, this might cause even individuals with Medicare Supplement policies to drop their coverage due to increased costs.
It is notable that the Patient Protection and Affordable Care Act (ACA or Obamacare) does not directly cause Medicare Supplement policies to be cancelled but has provisions that affect the larger insurance market by addressing issues related to adverse selection.