Why do we have "open enrollment" for insurance changes?

March 17, 2010 6:21 AM

What problem does "open enrollment" solve for employers or insurance companies?

Most (all? all in the US?) health insurance plans offered through employers come with an open enrollment period, during which you can make changes to your plan. Why do we have this, instead of a rolling period in which each person can make changes once a year, from their start date?

I understand why insurance companies would not want people to make changes every few months. But why not have it a rolling date, where it's once per every 365 days from the person's start date? How does this benefit either employers or health insurance companies?

posted by Houstonian to work & money (11 answers total)

I would imagine it's vastly less complicated administratively. Also, at my work the plans seem to change slightly every year so they probably negotiate it once a year and then present the employees with the options for the next year. If they did it on a rolling basis you would have people potentially grandfathered in on plans that weren't available to others, it would be a mess.
posted by ghharr at 6:28 AM on March 17, 2010

In my understanding, it's a practice used to work with legal guidelines and industry changes. By having benefit periods begin on the first of the year, it gives a clean date for legal changes, changes of benefits provider or available plans by a company, and just makes things easier in general.

For instance, if your state passed a law saying that health plans offered had to have a mandatory minimum coverage for some sort of disability, then they can give January 1 of an upcoming year as the date for compliance. Since companies already re-enroll in plans on that date, it's much easier.

If my rolling enrollment period was in July and my company switched insurance providers in January, they would have to have a phase-out plan or force me to change my benefits again. More paperwork.
posted by mikeh at 6:39 AM on March 17, 2010

For what it's worth, there are a set of legal changes (marriage, domestic partnership, divorce, birth of a child, removing a child due to them aging out of coverage or getting their own insurance) that allow you to change your policy mid-year. I think the real question here is why having each person having their own enrollment period would be easier -- is there a scenario you're thinking of, or is this question driven by the fact that it would make more sense for an individual? I'd argue that point, as many people are going to forget when their job anniversary is, but if everyone enrolls at the same time, it allows companies to publicize the enrollment period, any changes, and have large group sessions to educate people about new plans or changes.
posted by mikeh at 6:43 AM on March 17, 2010

Because it's a group insurance policy with an annual term where the contract is between the employer and the insurance company with the employee as a named, intended beneficiary, not directly between the insurer and the employee.

Like all insurance policies, health insurance policies are for a term, typically one year. At the end of every year, the health insurance carrier will evaluate its experience and adjust its rates and coverages appropriately. Employers then negotiate with carriers to get the best plan they can given their employees' loss history. The negotiated rate depends on their ability to get a certain number of people into the plan by a certain date, as the reason the insurer is dealing with them on preferable terms compared to the individual market is their ability to bring in a large volume of business. Ergo, the employer has until a specified date to get their numbers together, at which point the contract is finalized for the coming year.
posted by valkyryn at 6:44 AM on March 17, 2010

In my understanding, it's a practice used to work with legal guidelines and industry changes. By having benefit periods begin on the first of the year, it gives a clean date for legal changes, changes of benefits provider or available plans by a company, and just makes things easier in general.

It also makes the taxes tidier.
posted by devinemissk at 7:04 AM on March 17, 2010

It also makes the taxes tidier.

How do you mean?
posted by Houstonian at 7:13 AM on March 17, 2010

IANAT(ax)L (nor am I an accountant), but this is my basic understanding:

First, basic premise:

1) The amount deducted from an employee's paycheck for health insurance premiums is tax-deductible.
2) Your premiums will change each year after your employer has renegotiated with the insurance company. (Your premiums may also change if you've experienced a qualifying life event, but your question was about open enrollment.)
3) Therefore your taxable income will change when your new insurance kicks in on January 1.

Since the tax year follows the calendar year, it makes things tidier for your employer if your taxable income doesn't change in the middle of the year but instead changes at the same time the tax year changes. They don't have to fiddle with the payroll in the middle of the year to make sure they're withholding the proper amount of payroll tax on your income (or unemployment tax or social security tax, etc.).
posted by devinemissk at 7:24 AM on March 17, 2010

While not all businesses follow the tax schedule for their fiscal year, the concept as outlined on wikipedia is still relevant here. In short: lining up business changes at the same time makes life easier.
posted by mikeh at 7:50 AM on March 17, 2010

All good answers so far.

But the fundamental reason for this is that insurance rates are driven by actuarial valuations, which is the process of projecting costs based on expected future claims. Such projections are made based on past claims and what coverage has been bought for future claims.

Now, while the actuarial profession might seem like black magic to most people, it's actually a mature, well-established discipline. The calculations are pretty straightforward, process-wise. The really difficult and tedious is obtaining clean and reliable data. As they say, garbage in, garbage out.

Valuations are done based on plan years, i.e. "the cost for employer ACME Inc to provide these benefits for X employees from Jan 1, 2010 to Dec 31, 2010 will be $Y", and all your data has to line up cleanly with the plan years. If the data didn't line up, then that would be introducing more inaccuracy into the projections. This includes any changes in coverage that subscribers choose.

Yes, IAAA (I am an actuary).
posted by randomstriker at 8:57 AM on March 17, 2010

For schools and companies which use an academic calendar, the Open Enrollment period is often in the early summer.

The annual structure to OE plays a part in the purchaser group sales cycle. The vast majority of group contracts are going to be up for rebid at the same time. That makes life easier for both insurer and purchasing company.

For the purchaser group (company) it's much easier to have 1 time period for changes. It's easier to communicate to employees in groups than it is to do presentations of plans each month. Also, the purchaser is going to need to set up electronic feeds of covered employees. While there's some necessary fluctuation each month (new hires, fires, location and coverage changes), getting the file transfer largely stable is a big deal to the insurer and the purchasers. This feeds into all of the downstream systems - enrollment ID cards, assigning individuals to panels.
posted by 26.2 at 10:16 AM on March 17, 2010

Thank you! Everyone gave a little bit different perspective, which really helped me understand the big picture.
posted by Houstonian at 4:21 PM on March 17, 2010