One of the many factors that can cause a health insurance system to fail is “adverse selection,” a phenomenon in which those who know they will make higher-than-average claims are disproportionately likely to enroll and pay premiums. The inevitable results is a rapid increase in premiums, which encourages even more marginal consumers to forgo insurance, leaving average claims, and therefore premiums, to increase even further.
One approach to limit this problem is to limit the time frame during which enrollment is permitted. Why have limited open enrollment periods? The idea is that without them – that is, if anyone could enroll in health plans whenever they want – people could “game the system,” enrolling when they need health care, and disenrolling when they don’t.