Final answer:
Flexible benefit packages often result in higher administrative costs due to the intricate nature of managing customized plans, which may lead to higher premiums and affect an insurer's risk pool stability.
Step-by-step explanation:
One downside of flexible benefit packages is that they come with higher administrative costs. These costs arise from the complex nature of managing personalized benefit options, which often requires more administrative work, such as hiring workers, administering accounts, and processing insurance claims.
When individuals with health insurance utilize their coverage, they may encounter various forms of cost-sharing such as deductibles, co-insurance, and co-payments. This structure is intended to discourage moral hazard by ensuring that insured individuals bear some of the costs out of pocket.
However, from the perspective of insurance companies, increased flexibility in benefit packages can amplify the complexity and expense of administering these plans. As insurance companies strive to cater to the unique needs of each policyholder, they must allocate more resources toward the administrative aspect of their business. This in turn can lead to higher premiums, particularly if the insurance company needs to offset losses from high-risk individuals—an outcome that might deter low or medium-risk individuals from purchasing insurance, further complicating the insurer's risk pool and financial stability.