Health Insurance in a World of Interdependent Risks: The Case of the Affordable Care Act

Many decisions regarding prevention give rise to risk spillovers. In such a scenario, this paper evaluates the impact of health insurance regulation in the form of the Affordable Care Act. Reducing the number of uninsureds, the opt-out penalty may result in crowding out of prevention effort, increasing risk of disease for a part of the population. Depending on the market structure, even a socially optimal prevention level can result, but this comes at the discomfort of regulation. The challenge for policy makers is how to strike the trade-off between internalizing risk externalities and keeping health insurance markets competitive.