Open enrollment is the period of time from November to December when the public marketplace is open for Americans to enroll in health insurance plans. Some might find it strange that a necessity like health care is treated like a seasonal limited edition latte (only available at a certain time of year.) However, the system is set up this way in order to prevent the occurrence of adverse selection within the health care system.
What is adverse selection?
Adverse selection results in disproportionate amounts of individuals with illnesses and individuals without illnesses signing up for insurance. Why does this matter? Well, health insurance companies can only afford to be maintained if they have more money coming in than going out. So – when you have large amounts of people with conditions that need treatment signing up for insurance, but very little healthy individuals signing up, this can impact the amount of risk the insurance company takes on.
How adverse selection works?
It may sound unethical for healthcare companies to want to prevent an overflow of sick people signing up for insurance versus healthy people – but in reality, this concern is about benign able to provide quality care and treatment for those very same sick individuals. Health insurance companies can only pay for treatment or medical expenses if they have the funding – and as their funding by the government is not unlimited, they rely heavily on monthly premiums. The only way that the companies can ensure that they are taking more money in premiums than they are paying out in claims is by making sure there is a proportionate amount of healthy individuals enrolling in health care to sick individuals.
Disadvantages of adverse selection
If everyone, regardless of health paid 5,000 dollars a year for health insurance, and a person who has a health condition needed 10,000 dollars for treatment – the insurance would be able to use the 5,000 from the healthy individual who did not need any treatment that year. But – if the healthier person decided not to get health insurance until they were sick – the health care company would then be short on funds to be able to cover the medical services for the sick person.
If the majority of healthy people in America decided not to sign up for health insurance; health insurance companies would only have one option to avoid going out of business. They would need to raise premiums. With monthly health care costs already being quite costly (if you’re not qualifying for a subsidy) raising premiums would be bad for everyone. The cost of insurance would be too high for many Americans – and less accessible.
Additionally, if adverse selection were to be a continuous problem, more funding would be focused on covering medical services – and less would go towards things such as customer service and staffing. This means that the quality of the system operations within health care companies would decrease.
How health insurance providers prevent adverse selection
Health insurance companies cannot completely prevent the occurrence of adverse selection, but they can do their best. This is why the open enrollment period from November to December exists. If people are aware that they may not be able to secure health coverage when they “feel like it” then this creates a sense of urgency, encouraging them to sign up at the end of the year. This way, health care companies can somewhat regulate the proportion of health and unhealthy individuals signing up – thus lowering their financial risk.
While these restrictions on enrollment can be daunting, our health care system does in fact have special enrollment – for those who uncontrollably miss the open enrollment deadline and cannot afford to wait. They must have lost coverage after the open enrollment deadline to qualify, whether that be due to a change in jobs, homes, or even a death/birth in the family.
The 2 months open enrollment period prevents healthier individuals from signing up for health care only when they need it. It ensures that everyone is paying into their health care throughout the year – so that there is consistent funding available for companies to be able to pay out claims. This also allows health care companies to keep the cost of monthly premiums lower for everyone.
