Health Care “Death Spiral”

Love it or loathe it, the incoming health care mandate might be necessary.

In January 2014, the political posturing over the new health care law in the United States will all be academic—states will have to offer a marketplace for buying insurance. One of the most controversial aspects of these American Health Benefit Exchanges is the mandate for a minimum level of coverage.

A National Bureau of Economic Research study, coauthored by Keith M. Marzilli Ericson, assistant professor of markets, public policy, and law, found that purchasing mandates can be essential to the functioning of the entire market. Using data from trendsetting Massachusetts, which has had a mandate since 2006, Ericson concluded that if the requirement to buy is removed, markets can unravel. If consumers are allowed to opt out, the most price-sensitive consumers—the young and healthy—will bail out. As these consumers leave, the less price-sensitive consumers—who tend to be both older and have higher health costs—are stuck in the market, which, in turn, leads to higher markups. If enough people are willing to drop out of the market altogether, the authors note, “a death spiral effect in which all price-sensitive consumers exit the market” can occur.