1. Who Pays for Obesity? Jay Bhattacharya Stanford University
(with Kate Bundorf
and Neeraj Sood)
February 2008

2. Motivation Obese individuals have more chronic diseases
Higher rates of diabetes, heart disease, hypercholesterolemia, hypertension, and stroke.
Medical expenditures are greater on the obese
$31 billion (in year 2000 $) spent during 1996 for adult overweight/obesity-related cardiovascular disease treatments alone.
Among the overweight, per capita lifetime medical costs can be reduced by $2,200 - $5,300 following a 10 percent reduction in body weight.
Should we care?

3. Rates of Obesity in the U.S.
Source: Anderson, Butcher, and Levine, Authors’ calculations from the NHANES

4. The Incremental Annual Medical Spending Attributable to Obesity
Source: Finkelstein et. al. “National Medical Spending Attributable to Overweight and Obesity: How Much, and Who’s Paying?”, Health Affairs – Web Exclusive, 14 May 2003.

5. Should We Care?
Obesity can have severe personal medical and social consequences.
These consequences should (and often do) play an important role in private decisions about body weight.
But is obesity a “public” health crisis?
To what extent are the costs of obesity external?

6. Obesity Externalities
Private health insurance
Since medical costs are higher for the obese and premiums do not depend on weight, lighter people in the same pool pay for the food/exercise decisions of the obese.
Government social programs
The negative health effects of obesity may decrease the ability of the obese pay for and increase the use of government social programs.
Disability insurance, Medicaid, Medicare
(Calculating the direction of the transfer is complicated in the case of Medicare)

7. Aims of the Talk
Develop an economic framework for thinking about health insurance/obesity externalities.
Estimate the external costs of obesity assuming complete risk pooling.
Examine the extent of risk pooling among the obese and non-obese in employer-provided health insurance.

8. An Economic Framework for Thinking about the Health Insurance/Obesity Externality

9. Model Summary
Each consumer starts with an initial genetic endowment of weight and maximizes expected utility.
Losing weight (exercising, avoiding donuts)
Increases income (by reducing uninsurable disability).
Decreases the probability of falling sick, which in turn increases expected medical care costs.
Causes some disutility directly.
Consumers purchase insurance to insure against health shocks

10. Two Regimes
Health insurance premium underwriting depends on body weight.
Pooled health insurance.

11. Regime 1: Underwriting Allowed
Insurance premiums equal expected medical costs, given weight.
Under full insurance, consumption is the same regardless of health state.
Two marginal benefits from weight loss:
Weight loss increases income
Weight loss lowers insurance premiums
One marginal cost from weight loss:
Direct disutility of dieting, exercising.

12. Regime 1: Welfare Implications
No moral hazard problem as premiums are dependent on weight
Consumers choose to lose weight even when fully insured
They face the full costs of their weight choice through the health insurance premium.
Weight loss is at socially optimal level
Full insurance is optimal when premiums are actuarially fair
Can show first order condition for 2 state (healthy vs Sick) model

13. Regime 2: Pooled Insurance
Insurance premiums depend on the distribution of weight within the pool.
Premiums are set at the expected level of medical expenditures for the whole insurance pool.
If the pool size is large, consumers pick their weight without taking into account the effect of their choices on premiums.
External costs of weight loss decisions are imposed on other pool members.
Pk is the proportion of people choosing each weight category, k. This can be interpreted as a Cournot-Nash equilibrium.

14. Regime 2: First Order Conditions
One marginal benefit from weight loss:
Weight loss increases income
One marginal cost from weight loss:
Direct disutility of dieting, exercising.
Unlike Regime 1, there is no incentive for weight loss through decreased premiums.

15. Regime 2: Welfare Implications
Weight loss lowers premiums for everybody in insurance pool but consumers ignore this when making individual decisions
Weight loss creates a positive externality, and hence is underprovided
Full insurance is not socially optimal
Consumer heterogeneity is not a necessary condition for this result
Can show first order condition

16. Welfare Loss Due to the Externality
Dead weight loss (DWL) under pooling due to the obesity externality is proportional to:
The effect of weight loss on expected medical expenditures (P′).
The effect of insurance on body weight decisions (Δω).

17. The State of the Literature
There is a large literature documenting the difference in medical expenditures between obese and non-obese populations.
A related literature documents that public and private insurance pay for a high proportion of obesity related expenditures.
Almost no work examines the effect of pooled insurance on body weight decisions.

18. Policy Implications of the Framework
If pooled health insurance does not cause obesity (Δω = 0)
No social harm from obesity (through the health insurance mechanism) even with full insurance.
Insurance induces transfers but no welfare loss.
If pooled insurance changes body weight:
Potentially large social harm from not underwriting premiums based upon body weight.

19. The Welfare Loss from Pooled Insurance: A Simulation Exercise

20. Simulation Setup Utility function:
U(c, ) = ln c -  2
Consumers can choose from one of three weight categories – normal, overweight, obese
Parameters
Probability distribution of initial weight
Disutility from weight loss: 
Co-Insurance: 
Estimated assuming pooling

21. Calibration For a given set of parameters
Estimate weight distribution under each regime
Estimate expected medical expenditure
Estimate welfare loss from not allowing weight-based underwriting (CV)
Choose utility function parameter to match weight distribution in data.

22. Modeling Health Care Expenditures
Use standard two-part model of medical care expenditures as a function age, sex, race, and indicators of obesity and overweight.
Use parameter estimate to approximate the true distribution by discrete distribution with 6 points of support:

23. Medical Expenditures: Female, Age 25-39

24. Medical Expenditures: Male, Age 25-39

25. Medical Expenditures: Female, Age 40+

26. Medical Expenditures: Male, Age 40+

27. Estimated Welfare Loss from the Obesity Externality
Change in Distribution of Weight Due to Pooled Premiums
Welfare Loss from Obesity Externality (Y)
Group
Normal
Overweight
Obese
Age 25-39
Males
-5%
-9%
14% $7
Females 0%
-16%
16%
$78
Age 40+
-19%
19%
$80
-7%
-14%
21%
$304
All Groups
-3%
-15%
$149

28. Measuring the Elasticity of Body Weight with Respect to Insurance Coverage: Three Studies

29. RAND Health Insurance Experiment
Use data from the RAND health insurance experiment to measure the insurance elasticity of body weight
Take advantage of randomized insurance assignment
Surprisingly, this elasticity is never reported in the voluminous literature on the HIE.

30. Change in BMI per year (1) (2) (3) Outpatient Copay 0.000 0.001 (0.23)
(0.60)
(0.85)
Inpatient Copay
-0.000
(0.66)
(0.07)
(0.14)
Deductible
0.022
-0.019
-0.042
(0.34)
(0.29)
(0.59)
Maximum OOP
(1.11)
(0.38)
(0.32)
Constant
0.148
0.294
0.341
(6.34)**
(3.00)**
(3.30)**
Observations
2628
2540
Demographics No
Yes
Site & Part.Incentive
R-squared
0.00
0.01
Absolute value of t statistics in parentheses
* significant at 5%; ** significant at 1%

31. Probability of Turning Obese
(1)
(2)
(3)
Outpatient Copay
0.000
(0.80)
(0.90)
(1.04)
Inpatient Copay
-0.000
(0.25)
(0.53)
(0.73)
Deductible
-0.011
-0.014
-0.019
(0.68)
(0.81)
(1.03)
Maximum OOP
(0.34)
(0.28)
Constant
0.010
0.086
0.112
(0.94)
(3.09)**
(3.68)**
Observations
3480
2969
Demographics No
Yes
Site & Part. Incentive
R-squared
0.00
0.01
0.02
Absolute value of t statistics in parentheses
* significant at 5%; ** significant at 1%

32. Preliminary Conclusions
Consistent with zero insurance elasticity of body weight
Limitations
Does not include zero insurance branch
The data are dated (thought there’s no reason to think that the elasticity has changed)

33. An Empirical Examination of Pooling in Employer-Provided Health Insurance

34. Obesity and Wages in the Labor Market
The wages of the obese are lower than similar normal weight workers.
For men, these differences are explained by job and occupation choice.
For women, these differences are less easily explained, raising the concern that they are attributable to invidious discrimination.

35. Study Design
Compare wages of obese and non-obese workers with employer-sponsored health insurance
Use the difference between the wages of the obese and the non-obese workers without employer-sponsored health insurance as a control.

36. Data—NLSY Nationally representative sample of people 14-22 in 1979.
Survey years
Health insurance status available after 1988.
Sample:
Full-time workers (usually worked 7+ hours per day at full time job), excluding pregnant women.
Primary sample includes workers with employer-sponsored insurance and uninsured (35,750/24,805 worker-years)

37. NLSY Study Sample 1989 1990 1992 1993 1994 1996 1998 Overweight 31%
33%
34%
35%
37%
39%
Obese
11%
12%
16%
18%
21%
23%
Uninsured
24%
19%
Age 29 30 32 33 34 36 38

38. Unadjusted Estimate of the Wage Offset for Obesity
-$1.70
-$0.40
Difference-in-difference estimate: $-1.30 (p<=0.05)

39. Wages of Workers with Employer Provided Health Insurance

40. Wages of Workers without Employer Provided Health Insurance

41. Difference in Difference Estimates of the Wage Offset for Health Insurance by Year* **
***

42. Effects of Other Fringe Benefits on Wages

43. Can Lower Wages Of The Obese Be Attributed To Higher Medical Care Costs?

44. Data Sources
1998 Linked Medical Expenditures Panel Survey (MEPS) and the National Health Interview Survey (NHIS)
Medical expenditures and other control variables from MEPS
Height and body weight from NHIS

45. Incremental Medical Care Costs Of Obesity Relative To Normal Weight By Sex

46. Sources of Expenditure Differences Between Obese and Non-obese

47. Reconciling the Estimates
Incremental annual medical care costs of obesity for women are approximately $700.
The annual wage offset for health insurance for obese women is almost $6,000.
2.89 * 2,041 hours annually
Explanations for the difference
Loading of health insurance?
Residual discrimination concentrated in high end jobs that provide health insurance?
Noise in the point estimates?

48. Conclusions The welfare loss from the obesity externality requires:
Pooled health insurance that induces a transfer from non-obese to obese individuals in the pool.
Increased body weight as a result of this transfer.
Obesity related wage offsets “undoes” pooling for employer provided health insurance.
Two ways to limit the welfare loss from the obesity externality in public insurance:
This externality arises because weight based underwriting of health insurance premiums is not permitted.
Modest copayment can also limit these external effects.

49. MEPS Expenditure Difference by Disease and Sex