It occurs when those who anticipate needing healthcare choose to buy insurance more often than others. It is because insurance suppliers lack full information about the risk of individual insured persons. Adverse selection may result from the tendency among patients to seek or continue insurance coverage to a greater extent than healthy people.
An example of adverse selection is when only a few employees select cover for parents. This is done because the family knows that the chances of the parent falling ill are higher. Adverse selection needs to be prevented; else it affects the financial sustainability of the insurance programme.
It can be controlled to a certain degree by making the insurance mandatory and/or by enlarging the subscription unit, e.g. if the entire family is insured rather than an individual.