DEFINITION: Adverse selection refers to a situation in which the buyers and sellers of an insurance product do not have the same information available. A common example with health insurance occurs when a person waits until he knows he is sick and in need of health care before applying for a health insurance policy. This doesn’t work in the medically underwritten model of individual health insurance, because pre-existing conditions are a factor in determining eligibility and price.
But starting in 2014, individual policies will be guaranteed issue.There was a lot of concern that this would lead to adverse selection, with healthy people opting to not purchase health insurance and instead wait until they needed coverage before enrolling. This would have had the effect of raising premiums significantly.
The current solution is that individual policies will only be available during open enrollment. The initial open enrollment is October 1, 2013 to March 31, 2014. In future years, open enrollment will be limited to October 15th to December 7th, or when a person has a qualifying event that triggers open enrollment.