who pays for obesity?

Who Pays for Obesity?

Jay Bhattacharya

Stanford University(with Kate Bundorf

and Neeraj Sood)

February 2008

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?

Rates of Obesity in the U.S.

Proportion Obese (BMI>=30) - Adults 20-55

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

1971-74 1976-80 1988-94 1999-2000

Women

Men

Source: Anderson, Butcher, and Levine, 2003. Authors’ calculations from the NHANES

The Incremental Annual Medical Spending Attributable to Obesity

247

143

732

423

0

100200

300400

500600

700800

All Privately Insured

$

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

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?

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)

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.

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

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

Two Regimes

Health insurance premium underwriting depends on body weight.

Pooled health insurance.

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.

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

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.

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.

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

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).

** * *.DWL EU EU U P W 0

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.

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.

The Welfare Loss from Pooled Insurance: A Simulation Exercise

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

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.

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:

0,50,100,1000,10000,50000

Pr Pr k k k kk m

1 1

2 2

Medical Expenditures:Female, Age 25-39

0

.1

.2

.3

.4

.5

.6

Pro

babi

lity

0 50 100 1000 10000 50000Medical Expenditure Category

normal overweight obese

Medical Expenditures:Male, Age 25-39

0

.1

.2

.3

.4

.5

.6

Pro

babi

lity



Medical Expenditures:Female, Age 40+

0

.1

.2

.3

.4

.5

.6

Pro

babi

lity



Medical Expenditures:Male, Age 40+

0

.1

.2

.3

.4

.5

.6

Pro

babi

lity



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+

Males 0% -19% 19% $80

Females -7% -14% 21% $304

All Groups -3% -15% 19% $149

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

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.

Change in BMI per year(1) (2) (3)

Outpatient Copay 0.000 0.000 0.001

(0.23) (0.60) (0.85)

Inpatient Copay 0.001 0.000 -0.000

(0.66) (0.07) (0.14)

Deductible 0.022 -0.019 -0.042

(0.34) (0.29) (0.59)

Maximum OOP -0.000 -0.000 0.000

(1.11) (0.38) (0.32)

Constant 0.148 0.294 0.341

(6.34)** (3.00)** (3.30)**

Observations 2628 2540 2540

Demographics No Yes Yes

Site & Part.Incentive No No Yes

R-squared 0.00 0.00 0.01Absolute value of t statistics in parentheses* significant at 5%; ** significant at 1%

Probability of Turning Obese(1) (2) (3)

Outpatient Copay 0.000 0.000 0.000

(0.80) (0.90) (1.04)

Inpatient Copay -0.000 -0.000 -0.000

(0.25) (0.53) (0.73)

Deductible -0.011 -0.014 -0.019

(0.68) (0.81) (1.03)

Maximum OOP -0.000 -0.000 0.000

(0.90) (0.34) (0.28)

Constant 0.010 0.086 0.112

(0.94) (3.09)** (3.68)**

Observations 3480 2969 2969

Demographics No Yes Yes

Site & Part. Incentive No No Yes

R-squared 0.00 0.01 0.02Absolute value of t statistics in parentheses* significant at 5%; ** significant at 1%

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)

An Empirical Examination of Pooling in Employer-Provided Health Insurance

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.

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.

Data—NLSY

Nationally representative sample of people 14-22 in 1979.

Survey years 1989-1998. 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)

NLSY Study Sample

1989 1990 1992 1993 1994 1996 1998

Overweight 31% 33% 34% 35% 37% 39% 39%

Obese 11% 12% 16% 16% 18% 21% 23%

Uninsured 23% 21% 24% 23% 21% 21% 19%

Age 29 30 32 33 34 36 38

Unadjusted Estimate of the Wage Offset for Obesity

0

2

4

68

10

12

14

16

Insured Uninsured

Hourly Wage $

Obese Non-obese

-$1.70

-$0.40

Difference-in-difference estimate: $-1.30 (p<=0.05)

Wages of Workers with Employer Provided Health Insurance

5

7

9

11

13

15

17

19

1989 1990 1992 1993 1994 1996 1998

Wag

es

($/h

our)

Obese Non-Obese

Wages of Workers without Employer Provided Health Insurance

5

7

9

11

13

15

17

19

1989 1990 1992 1993 1994 1996 1998

Wag

es

($/h

our)

Obese Non-Obese

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

-5

-4

-3

-2

-1

0

1

2

All 89 90 92 93 94 96 98

$

Unadjusted Adjusted

***

***

**

***

****

Effects of Other Fringe Benefits on Wages

Table 4: Difference in difference estimates of the effect of incidence of other benefits on wages

Fringe Benefit n Coefficient SEs n Coefficient SEs

Life Insurance 32643 -0.079 0.465 22914 0.111 0.499

Dental Insurance 32915 -0.518 0.492 23122 -0.838 0.543

Maternity Benefits 30801 -0.305 0.599 21405 -0.862 0.733

Retirement 32518 -0.121 0.532 22809 -0.414 0.618

Profit Sharing 32637 -0.602 0.596 22911 -0.382 0.682

Training/Education 32506 -0.300 0.487 22841 -0.183 0.556

Childcare 32292 0.888 1.520 22657 1.577 1.987

Flexible Working Hours 32985 -0.638 0.497 23187 -0.125 0.580

*** 1%, ** 5%, * 10% stat sig

Unadjusted Adjusted

Note: Standard errors adjusted for clustering within individual. We estimate these models on the sample of workers employed full-time in each year either with employer sponsored coverage or uninsured and present both unadjusted and adjusted estimates. The table entries show the coefficients and standard errors from the interaction terms between obesity and fringe benefits offered from employers. Each table entry represents a different regression. Full regression results are available in Appendix A4.

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

Table 5: The Effect of Obesity on Wages

Sample: Full-time workers either with current employer-sponsored coverage in their own name or uninsured

(1) (2) (3) (1) (2) (3) (1) (2) (3)Obese -0.87 -0.89 0.04 -0.68 -0.70 -0.64 -1.38 -1.38 0.85

(0.30)*** (0.30)*** (0.64) (0.40)* (0.39)* (0.50) (0.47)*** (0.47)*** (1.41)Employer Coverage 1.81 2.01 2.10 2.12 1.27 1.78

(0.29)*** (0.29)*** (0.38)*** (0.42)*** (0.50)** (0.37)***Obese*Employer Coverage -1.20 -0.08 -2.89

(0.70)* (0.69) (1.40)**Constant 7.37 7.63 7.43 5.61 6.11 6.10 9.79 9.68 9.16

(2.09)*** (1.99)*** (1.98)*** (2.49)** (2.39)** (2.39)** (3.31)*** (3.21)*** (3.17)***Observations 24085 24085 24085 14203 14203 14203 9882 9882 9882R-squared 0.10 0.11 0.11 0.11 0.11 0.11 0.09 0.09 0.09* significant at 10%; ** significant at 5%; *** significant at 1%

Pooled Sample Men Women

Note: Standard errors in parentheses. Standard errors are adjusted for repeated observations of individuals. Estimates include controls for marital status, urban residence, age, firm size, job tenure, education, sex, race, year, AFQT score,

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

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

Table 6: Average Health Expenditures by Sex and Weight

SampleNormal Weight Obese

Normal Weight Obese

Aged 18-64 $1,721 $2,271 $551 * $2,294 $3,277 $983 ***Aged 20-50 $1,106 $1,061 -$45 $1,536 $2,284 $748 ***Privately Insured and Aged 20-50 $1,086 $1,011 -$76 $1,521 $2,190 $669 **Data Source: 1998 Medical Expenditure Panel Survey* significant at 10%; ** significant at 5%; *** significant at 1%

Male Female

Difference Difference

Sources of Expenditure Differences Between Obese and Non-obese

Sample: Privately Insured Individuals age 20-50

Total expenditure -$76 $669 **

By Type of ExpenditureInpatient -$31 $234 *Outpatient -$45 $435 **Emergency -$1 $24Prescription Drugs $74 * $103 **

By Source of PaymentSelf-pay -$16 -$17Insured -$60 $686 ***

Data Source: 1998 Medical Expenditure Panel Survey* significant at 10%; ** significant at 5%; *** significant at 1%

Male Female

Table 7: Incremental Medical Expenditures Associated with Obesity by Type of Service and Source of Payment

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?

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.

MEPS Expenditure Difference by Disease and Sex

Table 8: Expenditure and Prevalence Differences by Condition

WomenDisease Prevalence Differences Expenditures Conditional on Disease Differences

Thin Obese Difference se t Thin Obese Difference se tDiabetes 1.15% 4.64% 3.49% 0.49% 7.19 *** $4,246 $5,769 $1,522 $1,261 1.21Asthma 9.29% 14.58% 5.30% 1.07% 4.97 *** $3,805 $4,147 $342 $635 0.54Hypertension 6.18% 22.14% 15.96% 1.02% 15.62 *** $3,834 $4,278 $444 $596 0.75Coronary Artery Disease 0.13% 0.68% 0.56% 0.18% 3.11 *** $19,274 $6,641 -$12,633 $12,367 -1.02Angina 0.18% 0.46% 0.29% 0.17% 1.65 * $2,637 $8,574 $5,937 $5,635 1.05Myocardial Infarction 0.22% 0.69% 0.48% 0.20% 2.38 ** $6,709 $8,240 $1,531 $5,301 0.29Other Heart Disease 3.26% 4.46% 1.21% 0.64% 1.88 * $4,333 $3,900 -$433 $1,592 -0.27Stroke 0.44% 0.62% 0.17% 0.24% 0.72 $10,728 $7,969 -$2,760 $3,285 -0.84Emphysema 0.10% 0.24% 0.14% 0.13% 1.10 $13,712 $8,851 -$4,861 $7,415 -0.66Joint Pain 22.53% 35.57% 13.04% 1.51% 8.66 *** $3,740 $4,726 $987 $818 1.21Arthritis 8.07% 17.96% 9.89% 1.06% 9.36 *** $4,141 $6,097 $1,956 $764 2.56 **

MenThin Obese Difference se Thin Obese Difference se

Diabetes 1.23% 6.60% 5.38% 0.58% 9.30 *** $5,425 $4,623 -$802 $1,350 -0.59Asthma 7.99% 6.66% -1.33% 0.98% -1.35 $2,043 $2,533 $490 $705 0.70Hypertension 9.76% 26.84% 17.08% 1.25% 13.62 *** $3,276 $2,996 -$280 $565 -0.50Coronary Artery Disease 0.50% 1.15% 0.64% 0.30% 2.15 ** $12,618 $6,959 -$5,658 $5,229 -1.08Angina 0.28% 0.74% 0.46% 0.23% 1.98 ** $7,766 $9,610 $1,844 $4,383 0.42Myocardial Infarction 0.54% 1.06% 0.52% 0.30% 1.72 * $11,812 $6,123 -$5,690 $5,324 -1.07Other Heart Disease 2.03% 2.75% 0.72% 0.54% 1.32 $2,440 $4,014 $1,574 $1,292 1.22Stroke 0.15% 0.56% 0.41% 0.18% 2.21 ** $5,635 $12,730 $7,095 $6,693 1.06Emphysema 0.11% 0.20% 0.09% 0.13% 0.65 $1,781 $106 -$1,675 $1,007 -1.66Joint Pain 24.93% 31.53% 6.59% 1.63% 4.04 *** $4,514 $3,215 -$1,298 $2,718 -0.48Arthritis 6.54% 12.60% 6.06% 1.00% 6.05 *** $2,926 $4,150 $1,224 $691 1.77 *

who pays for obesity?

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