Why Can’t I Sign Up for Health Insurance Whenever I Want?

Why Health Plan enrollment is limited to the open enrollment period.

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"What do you mean we have to wait until November to sign up for health insurance?". Image © Don Bayley/Getty Images

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, sign up through your employer, 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 one less available option when shopping for health insurance; 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 the 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 aims to decrease adverse selection by mandating that everyone have health insurance or pay a fine.

Exceptions to Open Enrollment

There are a few exceptions allowing people to enroll in health insurance outside of open enrollment.

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, usually a week or two, 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.

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.

Medicaid, the state-based social welfare program, is different than 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. 

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. 

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