Subsidizing Addiction: Do State Health Insurance Mandates Increase Alcohol Consumption?

Abstract

We include insurance for addiction treatment in the standard rational addiction model and show that an increase in the level of insurance for addiction treatment induces a forward-looking individual to consume more of a harmfully addictive good currently. We test this implication using cross-state variation in the adoption of mental health parity mandates. We examine the effects of these mandates on the consumption of alcohol and find that parity legislation leads to a statistically significant increase in alcohol consumption. To account for the possible endogeneity of the adoption of mental health parity mandates, we perform an instrumental variables analysis, and find that the Ordinary Least Squares significantly underestimates the insurance effect on alcohol consumption.

Keywords: Rational Addiction, Alcohol, Mental Health, Insurance, Parity

JEL Classification: I12, I18, K32, J32