Insurance theoretically spreads risk and operates on laws of large numbers -- in other words, the company is betting that if 500,000 people buy this policy, statistically it will only pay out on a relatively small number of them, thus covering operating expenses and turning a profit. But, for health insurance,* it tends to not really work that way. You don't get 500,000 completely random people buying the policy. People are more likely to buy the policy if they have reason to believe they will need/profit from it. So insurance companies try to account for that reality. I think it is a fundamentally broken system.

* Car insurance, which is basically required across the U.S., seems to work a little closer to the way it is "supposed to".