Health insurance, whether it’s through an employer-sponsored plan or purchased through the private market, is considered a necessity today. And yet, you can only sign up for it during a specific window of time called “open enrollment”. This might seem counterintuitive and there are exceptions to the open enrollment rule. But restricting sign ups for health insurance to once a year helps to ensure health insurance companies stay in business and the rest of us are able to access health insurance in our geographic area and at more reasonable prices. Here’s why.
What is adverse selection and how does it work?
Adverse selection is what health insurance companies call the tendency for people to buy health insurance when they’re sick and forgo it when they’re healthy. When this happens, health insurance companies take on too much risk and often too-high of expenses without the premiums of healthy people to cover them.
Here’s an example. Let’s say a health insurance company called Horizon has annual premiums of $4,200. Let’s say Daniel is a plan participant of Horizon and he gets sick and needs medical care that costs $10,000 that year. Just his premiums alone aren’t enough to cover the cost, so Horizon needs to use premiums paid by healthy people, who didn’t need to use the medical system that year, to help cover Daniel's cost. If Horizon doesn’t have enough healthy people paying premiums, they won’t have enough money to pay for sick people’s medical care.
This could lead to the health insurance company choosing between going out of business or charging higher premiums. Both of which are bad for everyone.
Why waiting to get insurance until you’re sick impacts everyone
Health insurance companies are a business at the end of the day and adverse selection would impact how they run that business. They have to pay for the general cost of doing business which includes payroll, rent, utilities, taxes, etc. in addition to paying out participants’ claims. We have a privatized health insurance system in the U.S. so these health insurance companies must also turn a profit. If they don’t have healthy people paying premiums without using the medical system, they can’t meet these obligations.
Here’s why it’s bad for both healthy and sick people if health insurance companies go out of business. First, there will be a lack of competition. When companies have a monopoly on a market they’re not as incentivized to produce good products or to make existing products better because no one is there to challenge them. They can also charge higher prices because no one is there to undercut them. This means health plan participants could end up paying higher prices for lower quality health plans and have very little choice in the natter.
Second, you might not be able to get health insurance at all. Health insurance companies tend to focus on specific markets so if the health insurance companies in your geographic area go out of business, you might not have access to the health plan you want or need. You might also need to seek medical care far away from you because that’s where the in-network doctors are located.
Third, waiting to buy health insurance until you’re sick could mean your illness-related costs aren’t covered at all. The word “insurance” means to safeguard something or protect it in case something bad happens. The purpose of health insurance is that it gives you a safeguard against high medical costs in case you have an emergency, fall ill or otherwise need medical care.
The thing about your health is, you never know when you’re going to get sick or have an accident. So if you were going to try to time buying health insurance only when you really needed it, you’d probably fail almost every time. Because here’s the thing about health insurance, once you sign up for a plan, coverage isn’t immediate. It usually begins at the very earliest the following month and at the latest at the beginning of the next calendar year. And any costs incurred prior to your health plan start date aren’t covered by the health insurance company.
Open enrollment is the solution to adverse selection
By requiring health plan participants to sign up for their insurance plans during a small window of time, health insurance companies force people to take on some of the risk. If individuals choose not to sign up for health insurance during open enrollment, they risk not having coverage should they get sick or suffer an emergency during the next plan year.
Conversely, individuals could buy a plan and not need medical care at all during the proceeding 12 months. Since it’s almost impossible to predict what is going to happen in your life over the course of an entire year, people usually choose to buy insurance coverage as a safeguard.
As with almost any rule, there are exceptions to the open enrollment requirement. If you experience one of these major life events, which are also called “qualifying events,” you’re eligible to make changes to your health insurance plan that include adding dependents, changing plans entirely, canceling coverage and buying new health insurance:
- Change in or loss of job
- Birth or death of a child or other dependent
- Moving out of your health plan’s geographic coverage area
- Becoming eligible for Medicaid, Medicare or CHIP
- If you are a member of a Native American tribe
The ACA allows enrolled members of Native American tribes to enroll in health insurance at any time and have their coverage start on the 1st of the following month.
Learn more with Lively
One of the most cost-effective ways to pay for health insurance and medical care is by signing up for a High Deductible Health Plan (HDHP) and Health Savings Account (HSA) combination. HDHPs typically have lower premiums so it allows you to divert money you would have spent just to maintain your health plan into your HSA. The money you put in your HSA is tax-free, you can invest your HSA contributions in the market so that they grow faster, and you can use them to pay for a large number of qualified medical expenses.
To learn how an HDHP and HSA combination could benefit you, reach out to us today.
Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.