Why health plan enrollment is limited to the open enrollment period
Have you tried to sign up for health insurance only to be told you’re not allowed to buy health insurance until open enrollment? If you go to a car dealership to buy a car, the dealership doesn’t refuse to sell you a car until next November. But health insurance companies won’t let you sign up for health insurance whenever you want, whether you’re trying to buy a health plan on Affordable Care Act health insurance exchanges (or directly through the insurer, outside the exchange), enroll in the plan your employer offers, or even sign up for Medicare.
Health plans limit enrollment to the open enrollment period in order to discourage adverse selection. Adverse selection happens when sick people sign up for health insurance, but healthy people don’t. It skews the amount of risk a health plan takes on when insuring someone, so the entire health insurance industry tries to prevent it.
How Adverse Selection Works
A health insurance company can only exist if it takes in more money in premiums each year than it pays out in claims. For this to happen, it needs more healthy members than sick members.
Here’s a simplified example. Let’s say each health plan member pays $6,000 per year for health insurance. For each member who needs a $400,000 bone marrow transplant that year, there must be 67 members who pay their premiums all year long without having a single claim. (67 X $6,000 = $402,000.) The health insurance company uses the premiums from the 67 members who didn’t need any care to pay the medical bills for the one member that needed a lot of care.
Why Adverse Selection Is Bad for Everyone
The whole system would fall apart if all of the healthy people thought to themselves, “Why should I pay $6,000 per year for health insurance? I’m healthy. I’ll just save that $6,000 and wait until I’m sick to buy health insurance.” Then, only the sick people, the people whose claims total more than their premiums, would enroll in health insurance. The health plan wouldn’t take in enough money in premiums to pay all of the claims. If this happened, the health plan would have two options: go out of business or raise premiums.
If it goes out of business, that’s bad for everyone. We’d all have fewer available options when shopping for health insurance, and there would be less competition. Fewer health insurance companies competing for business means there’s less incentive for health plans to provide good customer service and less incentive for them to keep premiums low to attract customers.
If it raises premiums, that’s also bad for everyone. We’d all have to pay more for health insurance. As premiums increased, healthy people would be even more likely to think to themselves, “Why pay that much for health insurance? I’ll just wait until I’m sick and then enroll in a health plan.” This would cause premium rates to spiral upwards until nobody could afford health insurance.
How Health Insurers Prevent Adverse Selection
Health insurers can’t totally prevent adverse selection, but they can make it less likely by limiting when you can sign up for health insurance to just once per year. An open enrollment period allows everyone who wants to enroll in a Health Plan to do so, but also prevents healthy people from thinking, “I’ll just wait until I’m sick to buy health insurance.” Unless they just happen to get sick during the annual open enrollment period, they’ll be out of luck and not able to sign up for health insurance when they’re sick.
Another technique that discourages adverse selection is the short waiting period between open enrollment and the date health insurance coverage begins. For example, if you sign up for health insurance during Autumn open enrollment, your coverage usually begins on January 1st. This prevents people from enrolling in health insurance on the way to the hospital, hoping that their new health plan will foot the bill for their hospitalization.
In addition, the Affordable Care Act aimed to decrease Adverse Selection by mandating that everyone have health insurance or pay a fine. This feature is being eliminated after the end of 2018, however, when the penalty will be reset to $0.
Exceptions to Open Enrollment
There are a few exceptions allowing people to enroll in health insurance outside of open enrollment.
- The initial eligibility period.
- A special enrollment period.
- Medicaid and CHIP.
- Native Americans.
Initial Eligibility Period: Employer-sponsored Plans & Medicare
An initial eligibility period happens when you first become eligible for health insurance at work, usually a month or two after you’re hired. This initial eligibility period probably doesn’t coincide with open enrollment because people are hired throughout the year. However, the initial eligibility period is limited; if you don’t sign up during a specific window of opportunity when you first become eligible for coverage, you’ll have to wait until the next open enrollment period.
You’ll also have a seven-month period of initial eligibility for Medicare when you turn 65. If you don’t sign up during your initial eligibility period, not only will you have to wait until the next annual general enrollment period, you may also be penalized with higher premiums (or, in the case of Medigap coverage, with medical underwriting when you apply, meaning that your medical history could be used to determine your eligibility for coverage).
Special Enrollment Period
A special enrollment period is triggered by certain life events such as getting married or divorced, having a baby, losing your job-based health insurance, or moving out of your health plan’s service area. When a special enrollment is triggered, you have a window of opportunity, usually 30-60 days, to change your current health plan or sign up for a new plan. If you miss that window of opportunity, you’ll have to wait until the next open enrollment period.
Note that the individual market didn’t have special enrollment periods before 2014, but now it has special enrollment periods that are generally similar to those that apply to employer-sponsored health insurance. The individual market didn’t use special enrollment periods (or open enrollment periods) prior to 2014 because people could enroll anytime they wanted… but the trade-off was that in all but a few states, eligibility for coverage in the individual market depended on your medical history. Insurers would decline applications altogether (or exclude pre-existing conditions) if people tried to enroll or switch plans after experiencing a medical condition.
Now that coverage is guaranteed-issue in the individual market (just the way it is for employees who are eligible for their employer’s health plan), the individual market uses open enrollment and special enrollment periods just like employer-sponsored health insurance.
Medicaid and CHIP: Year-round Enrollment
Medicaid, the state-based social welfare program that provides health coverage to low-income residents, is different from other types of health insurance in that it doesn’t limit enrollment to particular times of the year. Instead, it limits enrollment to just the people who meet its strict income and other eligibility criteria. If you qualify for Medicaid, you may sign up any time of the year. The same is true of CHIP (Children’s Health Insurance Program).
Medicaid doesn’t get its money from charging Medicaid recipients monthly premiums. Instead, it’s funded by state and federal taxes. Since most Medicaid recipients don’t pay premiums, there’s little risk of adverse selection due to healthy people trying to save on premiums.
Native Americans: Year-round Enrollment in the ACA Exchanges
The ACA provided some special protections for Native Americans. Among them is the opportunity for Native Americans to enroll year-round in private plans offered through the health insurance exchange in each state.
So Native Americans don’t have to wait for open enrollment. They can enroll in a plan, or switch from one plan to another, at any point in the year. If they enroll by the 15th of the month, their new coverage will take effect the first of the following month. If they enroll after the 15th of the month, their new coverage will take effect the first of the second following month.