By now you know that the Open Enrollment is the only time where you can enroll or change your health insurance plan. But what you might not know is why the Open Enrollment Period exists. The short answer is that it prevents adverse selection. Which is when people only buy health insurance when they’re sick or need it. However, there is a lot more that went into the creation of the Open Enrollment.
History of Health Insurance
To fully understand how the open enrollment period began you need to understand how health insurance came to be. This way you can see the series of events that shaped open enrollment’s creation and the reasons it was needed. Health insurance as we know it today has been around since the 1850’s. Back then, people who worked on the railroads and steamboats did their jobs in dirty, often dangerous places where serious injuries and illnesses were common occurrences. Even though these jobs paid well, workers were essentially risking their lives every day to the point that many became unable to work at all. And in turn couldn’t provide for their families. So the concern of the general population was, if the worst happens, how would they pay for their care while maintaining a household which often held a spouse and several children.
That’s where health insurance came to be. In 1850 the Franklin Assurance Company of Massachusetts became the first company to offer workers’ accident insurance. This set the standard for other companies in the years to come. Workers could now protect themselves financially from major injuries by putting money into an accident insurance “pool”. Everyone put money into the pool and when claims arose the money for their care was taken from the pool. This meant that healthy workers were helping to pay for injured worker’s care. While knowing that if they were ever in that situation the other workers would be helping to pay for their care.
History Of Open Enrollment
Let’s hop in the Delorean and time jump to 1949 when President Harry S. Truman finally set up the national health care system. This creation would eventually lead to the idea of open enrollment. During World War II, companies started offering health insurance to their workers as a way to draw in more people in a tight job market. This practice of offering health insurance as an employee perk ran rampant, every company wanted in on the trick. So, people started signing up for health insurance in such large numbers that the program’s financial future was in serious trouble if something didn’t change.
This is because unhealthy people had more reason to sign up then immediately start making claims. Which would crash the system because more money was coming out of the insurance company than going into it. This is what led to insurance companies starting to only let people enroll during specific times of the year. Doing this gave the insurance companies the ability to:
- Manage their risks by limiting the number of enrollees at any given time.
- Handle their cost basis by understanding how many people would enroll and what their health status would be.
- Simplify the entire health insurance process by only reviewing applications or updating policies at a certain time of year.
- Track their coverage levels so they could manage their ability to fulfill their current policy offerings.
During open enrollment insurance companies were also able to improve ties with other insurance companies. They could now take the time to strengthen the insurance contracts they currently had, make new partnerships, and improve healthcare all around. Most importantly, open enrollment helped health insurance grow a sense of shared duty. Companies could now pool their resources, share the best practices and ideas, as well as figure out how to navigate all the rapid new changes to the industry and market.
What Is Adverse Selection
Okay, now that the history lesson is over everyone back to the Delorean- we’re headed home. Well actually, we’re headed back to the beginning of this article where we mentioned open enrollment discouraging adverse selection. This is what health insurance companies nicknamed the trend in people only buying health insurance when they’re sick. When only sick people buy policies the insurance companys’ risk skyrockets. This is because they end up having to pay out more money than they have because there’s more claims than premiums. Health insurance companies only stay in business if they get more money from premiums than they give out in claims. So, it needs more healthy people than sick ones to properly pay out claims as well as pay to keep the company running smoothly.
Here’s what we mean. Let’s say that a health insurance company charges an annual premium of $4,200. Brianna is a member of this plan and she gets sick and her care costs $10,000 for that year. Brianna’s premiums aren’t enough to cover those costs by themselves. So, the health insurance company has to tap into the premiums of healthy policyholders who haven’t needed any healthcare that year to cover the difference for Brianna’s care. If there isn’t enough available money from healthy premiums. Then Brianna’s care comes out of the business’ pocket and their company as a whole goes into the red. This would lead to the health insurance company having to shut down or raise their premiums to supplement their loss. Both hurt everyone across the board.
Consequences of Adverse Selection
At the end of the day, health insurance companies are businesses. And adverse selection is a surefire way to bankrupt said business. In addition to paying out claims, insurance companies also have other expenses. Things such as employee wages, building rent, utilities, taxes etc. are all a part of running a healthy business. Not to mention health insurance is private in the U.S. Meaning these companies also have to make money after paying out claims and bills. Otherwise, the business closes its doors. So, what makes it so harmful to not only the companies, but also the general public as a whole?
Lack of Competition
The more health insurance companies close the more other companies begin to hold a monopoly on the market. When an insurance company has a hold on the market it has no competition so there’s no reason for them to try to improve their policies or create new upgraded ones. They can also charge whatever they want because other companies aren’t around offering cheaper options to pull customers away from them.
If health insurance companies start going the way of dinosaurs, there’s a chance that you won’t be able to get health insurance at all. Health insurance companies tend to focus on specific areas like certain states, counties, and even cities. So, if the health insurance companies in your area go out of business, you won’t have access to a plan that you want or need. If you do manage to get a plan from another area that’s extended its coverage a little, you may end up having to travel long distances to reach their in-network providers.
You Leave Yourself Vulnerable
If you wait to get health insurance until you’re sick, your medical bills might end up not even being covered. The point of health insurance is to protect you in case of something happening. It helps pay the costs for the unexpected injuries and illnesses. The thing about health insurance is that coverage doesn’t start right away. It usually begins at the beginning of the month after you enroll or even at the beginning of the next year, whichever comes first. So if you try to get coverage because you need it right then it most likely won’t be covered because your policy will not pay for anything before it’s active.
How Open Enrollment Prevents Adverse Selection
Health insurance companies can’t entirely erase adverse selection, but they can lower the risk of it happening by only accepting applications once a year. Everyone who wants health insurance can sign up or make changes to their plans during the open enrollment. This keeps healthy people from assuming that they can just wait until they’re sick to get insurance because it’s always available. They won’t be able to sign up for health insurance when they’re sick unless they happen to get sick during the open enrollment period. As we noted above, the open enrollment period comes with a waiting period between enrolling and your coverage beginning. This keeps people from signing up for health insurance on their ride over to the hospital in the hopes that their new plan will cover the bill.
The Affordable Care Act did originally have a plan to stop adverse selection. There was an annual fine for anyone who had access to affordable health insurance and didn’t enroll. The federal fine was removed in 2018 though. However, California, Massachusetts, New Jersey, and Rhode Island all have their own health insurance laws that penalize people that don’t have health insurance. They only get fined if they don’t qualify for an exemption on their state or district tax returns. These states keep this fine in place not to be harsh, but because they believe it’s a useful tool in preventing adverse selection in the health insurance market. In turn it keeps these state’s insurance premiums lower for their population.
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