Abstract: We study the dynamics of participation and health care consumption in the Affordable Care Act’s health insurance marketplaces. Unlike other health insurance contexts, we find individuals commonly drop coverage midyear; roughly 30% of enrollees exit within nine months of sign-up. These dropouts spend more on health care while covered than in the months before sign-up or after exit. We model the consequences of drop-out on equilibrium premiums and consumer welfare. While dropouts generate a type of adverse selection, the welfare effect from their participation is ambiguous and depends on the relative spending per month of part-year vs. full-year enrollees. Using our empirical model, we quantify changes in premiums and welfare after the imposition of penalties targeting drop-out. We find that overall welfare declines with a ban on drop-out: young and healthy consumers---those who can more easily re-time their health spending, as well as those who value the option to exit---choose to forego coverage entirely, leading to higher average costs among the insured population and thus higher premiums.