May 08

Ice Cream Death Spiral

Ice Cream Death Spiral

Patricia Smithe

What is better than ice cream on a hot day? All-you-can-eat ice cream on a hot day. In Philadelphia, a person can eat all of the ice cream they want at the Super Scooper All-You-Can-Eat Ice Cream Festival. For two days, an individual can eat unlimited ice cream for $7.

Based on the success of Super Scooper, my friend decided to replicate their model at his ice cream store. After paying $50, a patron could eat as much ice cream as they like for the rest of the year. What could go wrong?

At first, business was booming. Cash was rolling in like the ocean at high tide, as people bet they could eat more than $50 dollars’ worth of ice cream in a year. But after the first month, my friend started to notice a problem. The people who were signing up for his program were not healthy individuals who preferred eating asparagus over ice cream. Much to his dismay, the vast majority of the signers on were of a vast size due to eating a vast amount of ice cream.

Within three months, his company was losing more and more money as his customers were gaining more and more pounds. In order to balance the scales, he had to increase the amount of money that people paid from $50 to $100. Regrettably, this resulted in even fewer healthy ice cream eaters signing up, because they knew that there was no way they would eat $100 worth of ice cream. The only people who signed up were individuals that ate a ton of ice cream, and these people were still eating more than $100 dollars’ worth of ice cream.

Finally, he raised the price to $250. At this point, hardly anyone could afford to go into his store at such a price. The only people who did were the individuals that ate way more than they paid for. In the end, he went out of business, because the average ice cream patron could not afford to pay that much for ice cream, and those who did still consumed more ice cream than they paid for.

My friend’s store failed because it had entered into a death spiral. This occurs when a company has customers that are utilizing more services than they paid for. When a company is placed in such a perilous predicament, they have three options to recoup the cash: find more customers, decrease the quality and cost of their service, or increase the price for their services. Unfortunately if you decrease the quality or increase the cost, fewer people will be willing to buy the watered-down, excessively-priced product. When fewer customers sign up, prices will have to go up, and the quality will go down. Every increase in cost will result in fewer new customers signing up; until eventually, no one can afford the company’s product, and they will go out of business.

Right now, health insurance companies are drifting downward into a death spiral because of the Affordable Care Act. The new law requires that insurance companies must accept any customer, regardless of their health. This has resulted in the very sick signing up right away for insurance, because it is a good deal for them, they receive more care than they paid for. Unfortunately, the healthy individuals that do not need or want insurance are not willing to pay for a product that they do not want; otherwise, they would have bought it already. This situation has resulted in insurance companies having an increase in expenses, since the increase in services received by the very sick new customers is not offset by the insurance premiums of healthy new customers who do not utilize health services. In order to make up for the increase in services, insurance companies will have to increase insurance premiums, which will lead to fewer people signing up. At this point, the companies will be caught in a death spiral. An ever dwindling number of people will sign up for insurance as the cost continues to increase. If the current system continues under the Affordable Care Act, care will no longer be affordable.

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