Question

How does risk adjustment reduce the incentive for cream skimming?

a) By allowing insurers to avoid high-risk clients
b) By equalizing the financial impact of high-risk clients
c) By encouraging insurers to provide better benefits
d) By promoting price competition among insurers

Answer 1

Risk adjustment reduces the incentive for cream skimming by equalizing the financial impact of high-risk clients.

Step-by-step explanation:

Risk adjustment reduces the incentive for cream skimming by equalizing the financial impact of high-risk clients. This means that insurers are not able to avoid high-risk clients or charge them higher premiums. Instead, risk adjustment mechanisms transfer funds from insurers with healthier populations to those with sicker populations, ensuring that insurance companies are financially compensated for covering high-risk individuals.