Why Your Health Insurance Costs a Fortune (Blame the Lemons)

 

As a student I do silly things, but I am healthy for the most part. I rarely find myself needing healthcare. But-and this is a big but- the time I needed it recently, I was shocked to find how expensive it was. 

But why is private health insurance necessary in the UK I hear you ask? Many reasons: long waits, unsatisfactory care and underfunding are seen in the NHS. Private healthcare insurance can be the answer to these issues. But we need it to be affordable…

Having investigated healthcare insurance more, I discovered there are countless issues surrounding the provision of what is presumed to be a necessary good. I found that at the centre is one idea: asymmetric information, and from there two consequences arise: adverse selection and moral hazard. I appreciate this sounds very confusing, and it did to me at first too, so let me elaborate.

 

Problems behind problems

At the heart of this issue is asymmetric information: when one party has more information than the other. Simply put, adverse selection occurs due to asymmetric information. Insurers struggle to verify applicants’ health status, costing them significant amounts of money due to unexpected costs. They recover this by increasing their insurance premiums. This creates a situation where people who are healthy are unwilling to buy insurance at higher prices. This creates an endless cycle where only unhealthy people buy insurance. This is where the market starts to break down. Scary!

A fruit market?

A simple analogy is seen through Akerlof’s work on peaches and lemons (Akerlof, 1970). Peaches are representative of healthy people who bring low risks to health insurers. Whilst lemons represent unhealthy people who constantly make expensive claims. It’s difficult to truly know someone’s health…

Akerlof creates parallels in the second-hand car market between peaches being good cars and lemons being bad cars. Like buyers of second-hand cars, health insurers also cannot tell the difference between low risk and high-risk applicants.

The asymmetric information prompts premiums being set at a price higher than the peaches are willing to pay. As this continues to happen, more peaches leave the market. Consequently, insurance prices increase because insurers need to generate profit after the losses the high-risk lemons cause them. Premiums will be forced higher … Causing disastrous effects! People are driven out of the health insurance market, unable to easily access lifesaving services.

More and more and more issues?    

The adverse selection spiral is reported by the Care Quality Commission, which speaks on the pressing issues of the “unfair provision” of healthcare. There’s a lack of access, and an underprovision in the quality of care received, and this is particularly prevalent in disadvantaged groups. Due to health insurance companies having a lot less money, the quality of their care drops immensely. (Holt and Roberts, 2023).

Let me pose a question: if you knew that any mistake you made would be covered by someone else, would you behave more rashly? This introduces the concept of moral hazard. Moral hazard is not just about people taking greater risks. It also reflects a simple economic idea: once someone is insured, the out-of-pocket cost of healthcare falls, so treatments may feel cheaper. As a result, people may visit doctors more often or accept treatment they might otherwise avoid if they had to pay themselves. A study of Alcoa Inc employees found that more generous insurance led to over $1,200 extra in healthcare spending per person annually, because it felt “free.” (Einav et al., 2013).

The NHS is a clear effort in fixing the issues of failing private health insurance in the UK, but in the NHS, healthcare and overall standards of living can feel like a postcode lottery, with those living in privileged areas receiving better overall care than those in poorer areas. Propper (2024) touches on this: finding that though health supplies are distributed across the UK relatively evenly, people from higher socioeconomic backgrounds tend to receive better treatment quicker.    

 

Solutions?

One solution is making healthcare insurance compulsory. This will prevent peaches from leaving the market. Germany enforced mandatory health insurance, whilst focusing on self-governance, ensuring there is never an underprovision of healthcare or supplies. Compulsory insurance may keep people in the market, but it does not ensure good healthcare. This is seen through the number of people reporting Germany having good healthcare being below the European average. (Zeeb et al, 2025).

Another solution? Nudge people in. Governments can exploit a quirk of human psychology called framing. Which is our tendency to stick with whatever option is presented as the default (Kahneman and Tversky, 1981). The UK proved this works: when workplace pensions switched to opt-out in 2012, participation jumped from 42% to 86% (Department for Work and Pensions, 2023). Apply the same logic to health insurance and the "peaches" stay in the market, stabilising premiums without force.

Disclosure regulations are another option. Before taking out a premium, people would have to disclose their medical history, ensuring everyone gets priced accordingly and preventing people from exiting the market. However, this could worsen inequality — those facing illnesses would be charged higher premiums than healthy people, meaning the people who need health insurance the most could end up being excluded entirely.

 

Solutions in action

In the US, the Affordable Care Act (ACA) transformed the healthcare system. With Obama making “efforts to correct failures in insurance market practices” (Johnson and Johnson, 2023). This aimed to reduce adverse selection and asymmetric information, which would’ve driven healthy individuals out of the market. The ACA implemented policies such as income-based subsidies, improving access to healthcare; however, quality improvements were limited and gaps in coverage remain.

These solutions are unlikely to be effective in isolation and should be combined. Ultimately, The NHS was Britain’s answer to a market that failed, and seeing as private insurance still operates and inequalities persist, Akerlof’s theories remain as relevant as ever. The adverse selection spiral didn’t disappear; it just changed shape.

me pose a question: if you knew that any mistake you made would be covered by someone else, would you behave more rashly? This introduces the concept of moral hazard. Moral hazard is not just about people taking greater risks. It also reflects a simple economic idea: once someone is insured, the out-of-pocket cost of healthcare falls, so treatments may feel cheaper. As a result, people may visit doctors more often or accept treatment they might otherwise avoid if they had to pay themselves. A study of Alcoa Inc employees found that more generous insurance led to over $1,200 extra in healthcare spending per person annually, because it felt “free.” (Einav et al., 2013).

The NHS is a clear effort in fixing the issues of failing private health insurance in the UK, but in the NHS, healthcare and overall standards of living can feel like a postcode lottery, with those living in privileged areas receiving better overall care than those in poorer areas. Propper (2024) touches on this: finding that though health supplies are distributed across the UK relatively evenly, people from higher socioeconomic backgrounds tend to receive better treatment quicker.    

 

Solutions?

One solution is making healthcare insurance compulsory. This will prevent peaches from leaving the market. Germany enforced mandatory health insurance, whilst focusing on self-governance, ensuring there is never an underprovision of healthcare or supplies. Compulsory insurance may keep people in the market, but it does not ensure good healthcare. This is seen through the number of people reporting Germany having good healthcare being below the European average. (Zeeb et al, 2025).

Another solution? Nudge people in. Governments can exploit a quirk of human psychology called framing. Which is our tendency to stick with whatever option is presented as the default (Kahneman and Tversky, 1981). The UK proved this works: when workplace pensions switched to opt-out in 2012, participation jumped from 42% to 86% (Department for Work and Pensions, 2023). Apply the same logic to health insurance and the "peaches" stay in the market, stabilising premiums without force.

Disclosure regulations are another option. Before taking out a premium, people would have to disclose their medical history, ensuring everyone gets priced accordingly and preventing people from exiting the market. However, this could worsen inequality — those facing illnesses would be charged higher premiums than healthy people, meaning the people who need health insurance the most could end up being excluded entirely.

 

Solutions in action

In the US, the Affordable Care Act (ACA) transformed the healthcare system. With Obama making “efforts to correct failures in insurance market practices” (Johnson and Johnson, 2023). This aimed to reduce adverse selection and asymmetric information, which would’ve driven healthy individuals out of the market. The ACA implemented policies such as income-based subsidies, improving access to healthcare; however, quality improvements were limited and gaps in coverage remain.

These solutions are unlikely to be effective in isolation and should be combined. Ultimately, The NHS was Britain’s answer to a market that failed, and seeing as private insurance still operates and inequalities persist, Akerlof’s theories remain as relevant as ever. The adverse selection spiral didn’t disappear; it just changed shape.

Reference List

Akerlof, G.A. (1970). The market for 'lemons': Quality uncertainty and the market mechanism. The Quarterly Journal of Economics, 84(3), pp.488–500. doi:10.2307/1879431.

Busse, R., Blümel, M., Knieps, F. and Bärnighausen, T. (2017). Statutory health insurance in Germany: a health system shaped by 135 years of solidarity, self-governance, and competition. The Lancet, 390(10097), pp.882–897. doi:10.1016/s0140-6736(17)31280-1.

Claude (2026). Peaches vs lemons: Akerlof's market for lemons illustrated [Digital illustration]. Generated by Claude Sonnet 4.6 (Anthropic). Available at: https://claude.ai [Accessed: 27 March 2026].

Department for Work and Pensions (2023). Workplace pension participation and savings trends of eligible employees: 2009 to 2022. GOV.UK. Available at: Workplace pension participation and savings trends of eligible employees: 2009 to 2023 - GOV.UK

Einav, L., Finkelstein, A., Ryan, S.P., Schrimpf, P. and Cullen, M.R. (2013). Selection on moral hazard in health insurance. American Economic Review, 103(1), pp.178–219. doi:10.1257/aer.103.1.178.

Holt, A. and Roberts, M. (2023). Two-tier care crisis: People forced to pay or wait. BBC News, 20 October. Available at: https://www.bbc.co.uk/news/health-67100395 [Accessed: 29 March 2026].

Horn, P. (2023). The downward spiral [Digital image]. Medium, August. Available at: https://medium.com [Accessed: 29 March 2026].

Johnson, S.W. and Johnson, S.L. (2023). A review of the impact and evolution of the Affordable Care Act in America. International Journal of Scientific and Research Publications, 13(8), pp.25–29. doi:10.29322/ijsrp.13.08.2023.p14003.

Kelley. W.K. (2026), Asymmetric information is at the heart [Digital Image]

Mannemanna, C. (2025). Government intervention as a response to market failures in healthcare. International Journal of Science, Architecture, Technology and Environment, pp.540–544. doi:10.63680/ijsate1025054.056.

Propper, C. (2024). Socio-economic inequality in the distribution of health care in the UK. Oxford Open Economics, 3(Supplement_1), pp.i577–i581. doi:10.1093/ooec/odad090.

Tversky, A. and Kahneman, D. (1981). The framing of decisions and the psychology of choice. Science, 211(4481), pp.453–458. doi:10.1126/science.7455683.

 

Zeeb, H., Loss, J., Starke, D., Altgeld, T., Moebus, S., Geffert, K. and Gerhardus, A. (2025). Public health in Germany: structures, dynamics, and ways forward. The Lancet Public Health, 10(4). doi:10.1016/s2468-2667(25)00033-7.