Final answer:
Health insurers spread risks to create stable risk pools with a balance of healthy and sick individuals, avoiding an insurance death spiral. They may also manage risk through employment-based groups or government exchanges and address adverse selection issues through government regulations.
Step-by-step explanation:
Health insurers try to spread risks? to ensure financial stability by balancing the cost of claims across a diverse group of policyholders. This is achieved when a health insurance pool has a good ratio of healthy to sick individuals. Insurers utilize risk pooling to avoid scenarios where an abundance of chronically ill people leads to rapidly depleted funds, known as an insurance death spiral.
Another method of managing the adverse selection problem is through employer insurance groups or government-sponsored health exchanges, which mix individuals with different risk levels. Nonetheless, the moral hazard remains an issue as insured individuals might engage in riskier behaviors, assuming their health insurance will cover any consequences.
To create a feasible insurance market, insurers may segregate buyers into risk groups and adjust premiums accordingly or mandate that everyone, including those at low risk, must purchase insurance, which can involve government regulations.