[elated to Solved Problem 7.3 on page 264] An article in the Economist magazine contains the following description of the “classic adverse selection spiral”: “because

[health insurance] premiums go higher, healthy people become even less likely to buy insurance, which drives premiums higher yet, and so on until the whole thing winks out. . . .” Why does an adverse selection spiral develop?

What steps can insurance companies take to avoid it?

Source: “Romney on Health Care: To Boldly Go Where He Had Already Been Before,” Economist, May 13, 2011.