Question: You are watching a television news story about the AIDS crisis with a friend Your friend says, "I think it is terrible that people infected with AIDS often can't buy health insurance. People who are ill are the ones that really need health insurance. Even worse, once someone gets health insurance, they often have to pay a deductible equal to 20 percent of the first $3,000 of their medical bills each year. Only then does the insurance company coyer the remainder of the medical bills."
What problem caused by asymmetric information are insurance companies trying to avoid when they deny coverage to someone who may already be ill? What would happen if the insurance companies did not deny coverage to people who are already ill?