The Nexus Between Obesity and Comprehensive Health

Insurance

The Buffet Problem

• It is difficult not to over-consume at zero or low marginal cost.– It is difficult not to overeat at a buffet or while on a

cruise (or at a conference).– This is the reason we no longer see bumper-to-

bumper warranties on anything but the powertrain of cars.

– We pay for insurance, then only pay the copay for more health care services.

Comprehensive Health Insurance is Like a Health

Care Buffet• We over-consume because, with low copays

and low or no deductibles, medicating is cheaper than watching what we eat. Copay– 50% higher rate of obesity among those on

Medicaid, compared to privately insured.– People in countries with public, universal health

care appear more likely to become obese, as they become relatively more affluent.

IOTF map

The Inverse of Engel’s Law• We over-consume because (in the converse

of Engel’s Law) we choose to spend part of our discretionary income on dining/health care rather than weight control.– We treat food prepared for us and health care as

luxury products. (Hence, spending grows faster than income).

– Nearly half of Americans’ food budget is spent outside the home.

– Obesity has spread with affluence, particularly where public health care prevails.

The Problem of Moral Hazard

• Moral hazard arises when a party does not bear the full consequences of his/her actions, leaving some other party to bear some consequences. Tends to act with less care.– Just as we are more careful about our health while

we are waiting for our health insurance to take effect after a job change…

– And may defer necessary health care…– Once we have insurance, we tend to be less

vigilant about weight gain, because our health insurer will cover most of the cost of remediating.

Moral Hazard and Obesity• We over-consume because a portion of the

cost is borne by the health insurer; which is to say, normal weight members of our insurance pool.– Those who struggle to control weight as a means

of controlling hypertension and cholesterol are often counseled by their doctors to give up in favor of drug therapy. It’s not uncommon for these people to give up attempts to control their weight, too.

– Insurance mandates for treatment of diabetes seem to lead to a 10% higher BMI among those with the disease.

Negative Consumption Externalities

• When some part of the costs of an individual’s actions falls on third parties.– Similar problem to second hand smoke.– The fact that obese individuals pay the same

insurance premiums as normal weight individuals of the same age, creates a transfer payment from thinner to heavier individuals.

– To the extent that individuals are more likely to add weight as they age, these transfers from heavier to thinner individuals are likely to involve transfers from the young to the old.

The Negative Externality of Obesity

• Percent of obese population grew as the costs of obesity to the insured individual went down due to:– falling out-of-pocket and copay expenses

during the 1970s & 80s.– And a surge in medical, prescription and

surgical remedies for the effects of obesity.

Implications: Scolding Will Have Little Effect

• E.g., Surgeon General’s warnings go on to cigarette packages 1966 & 1970.

• Rand Fact Sheet proposals may have little effect.– Reducing potion size.– Limiting access to ready-to-eat foods.– Limiting access to snack foods at work & school.– Reducing food advertising.

Implications: Economic Options

• Obesity rated insurance premiums.– Similar effect to a tax.– Eliminates transfer from normal weight & over weight to

obese, and therefore, the externality.

• Higher co-pays and deductibles.– Between 20% & 30% copays appear effective.

• Personal economic stake in weight loss.– Health savings accounts.– More Cash& Counsel programs.– Swiss model, without the price controls.– Costs already coming down, obesity will too.