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Health Insurance and the Obesity Externality

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  • Jay Bhattacharya
  • Neeraj Sood

Abstract

If rational individuals pay the full costs of their decisions about food intake and exercise, economists, policy makers, and public health officials should treat the obesity epidemic as a matter of indifference. In this paper, we show that, as long as insurance premiums are not risk rated for obesity, health insurance coverage systematically shields those covered from the full costs of physical inactivity and overeating. Since the obese consume significantly more medical resources than the non-obese, but pay the same health insurance premiums, they impose a negative externality on normal weight individuals in their insurance pool. To estimate the size of this externality, we develop a model of weight loss and health insurance under two regimes%u2014%u2014(1) underwriting on weight is allowed, and (2) underwriting on weight is not allowed. We show that under regime (1), there is no obesity externality. Under regime (2), where there is an obesity externality, all plan participants face inefficient incentives to undertake unpleasant dieting and exercise. These reduced incentives lead to inefficient increases in body weight, and reduced social welfare. Using data on medical expenditures and body weight from the National Health and Interview Survey and the Medical Expenditure Panel Survey, we estimate that, in a health plan with a coinsurance rate of 17.5%, the obesity externality imposes a welfare cost of about $150 per capita. Our results also indicate that the welfare loss can be reduced by technological change that lowers the pecuniary and non-pecuniary costs of losing weight, and also by increasing the coinsurance rate.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11529.

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Date of creation: Aug 2005
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Publication status: published as Bhattacharya, Jay and Neeraj Sood. “Health Insurance and the Obesity Externality.” Advances In Health Economics And Health Services Research 17 (2007): 279-318.
Handle: RePEc:nbr:nberwo:11529

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  1. Gruber, Jonathan, 1994. "The Incidence of Mandated Maternity Benefits," American Economic Review, American Economic Association, American Economic Association, vol. 84(3), pages 622-41, June.
  2. McClellan, Mark & Skinner, Jonathan, 2006. "The incidence of Medicare," Journal of Public Economics, Elsevier, Elsevier, vol. 90(1-2), pages 257-276, January.
  3. Ehrlich, Isaac & Becker, Gary S, 1972. "Market Insurance, Self-Insurance, and Self-Protection," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 80(4), pages 623-48, July-Aug..
  4. Gruber, Jonathan, 2000. "Health insurance and the labor market," Handbook of Health Economics, Elsevier, in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 12, pages 645-706 Elsevier.
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Cited by:
  1. Giorgio Brunello & Pierre-Carl Michaud & Anna Sanz de Galdeano, 2008. "The Rise in Obesity Across the Atlantic: An Economic Perspective," Working Papers 2008-21, FEDEA.
  2. Bhattacharya, Jay & Packalen, Mikko, 2012. "The other ex ante moral hazard in health," Journal of Health Economics, Elsevier, Elsevier, vol. 31(1), pages 135-146.
  3. Smith Trenton G. & Stoddard Christiana & Barnes Michael G, 2009. "Why the Poor Get Fat: Weight Gain and Economic Insecurity," Forum for Health Economics & Policy, De Gruyter, De Gruyter, vol. 12(2), pages 1-31, June.
  4. Jay Bhattacharya & Neeraj Sood, 2011. "Who Pays for Obesity?," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 25(1), pages 139-58, Winter.
  5. Michael A. Cohen & Marina-Selini Katsaiti, 2009. "Evaluating Health Care Externality Costs Generated by Risky Consumption Goods," Working papers, University of Connecticut, Department of Economics 2009-43, University of Connecticut, Department of Economics.
  6. Boris Augurzky & Thomas K. Bauer & Arndt R. Reichert & Christoph M. Schmidt & Harald Tauchmann, 2012. "Does Money Burn Fat? – Evidence from a Randomized Experiment," Ruhr Economic Papers, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen 0368, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
  7. Eugene Choo & Michael Denny, 2006. "Prior Conditions, Age and the Impact of Insurance," Working Papers tecipa-259, University of Toronto, Department of Economics.
  8. Colin Baker & Ralph Bradley, 2013. "The Simultaneous Effects of Obesity, Insurance Choice, and Medical Visit Choice on Healthcare Costs," NBER Chapters, in: Measuring and Modeling Health Care Costs National Bureau of Economic Research, Inc.
  9. Sara Bleich & David Cutler & Christopher Murray & Alyce Adams, 2007. "Why Is The Developed World Obese?," NBER Working Papers 12954, National Bureau of Economic Research, Inc.
  10. Tomas Philipson & Richard Posner, 2008. "Is the Obesity Epidemic a Public Health Problem? A Decade of Research on the Economics of Obesity," NBER Working Papers 14010, National Bureau of Economic Research, Inc.
  11. Kuku, Oluyemisi & Gundersen, Craig & Garasky, Steven B., 2008. "Food insecurity and childhood obesity: beyond categorical and linear representations," 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) 6163, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
  12. Burke & Heiland, 2007. "Social Dynamics Of Obesity," Economic Inquiry, Western Economic Association International, vol. 45(3), pages 571-591, 07.
  13. Stanciole, Anderson, 2007. "Health Insurance and Life Style Choices: Identifying the Ex Ante Moral Hazard," IRISS Working Paper Series, IRISS at CEPS/INSTEAD 2007-10, IRISS at CEPS/INSTEAD.
  14. Inas Rashad & Sara Markowitz, 2007. "Incentives in Obesity and Health Insurance," NBER Working Papers 13113, National Bureau of Economic Research, Inc.
  15. Courtemanche, Charles & Carden, Art, 2009. "The skinny on big box retailing: Wal-Mart, warehouse clubs, and obesity," MPRA Paper 25326, University Library of Munich, Germany.

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