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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.

Suggested Citation

  • Jay Bhattacharya & Neeraj Sood, 2005. "Health Insurance and the Obesity Externality," NBER Working Papers 11529, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:11529
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    File URL: http://www.nber.org/papers/w11529.pdf
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    References listed on IDEAS

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    Cited by:

    1. Jay Bhattacharya & Neeraj Sood, 2011. "Who Pays for Obesity?," Journal of Economic Perspectives, American Economic Association, vol. 25(1), pages 139-158, Winter.
    2. Brunello, Giorgio & Michaud, Pierre-Carl & Sanz-de-Galdeano, Anna, 2008. "The Rise in Obesity across the Atlantic: An Economic Perspective," IZA Discussion Papers 3529, Institute for the Study of Labor (IZA).
    3. Eugene Choo & Michael Denny, 2006. "Prior Conditions, Age and the Impact of Insurance," Working Papers tecipa-259, University of Toronto, Department of Economics.
    4. Bhattacharya, Jay & Packalen, Mikko, 2012. "The other ex ante moral hazard in health," Journal of Health Economics, Elsevier, vol. 31(1), pages 135-146.
    5. Courtemanche, Charles & Carden, Art, 2011. "Supersizing supercenters? The impact of Walmart Supercenters on body mass index and obesity," Journal of Urban Economics, Elsevier, vol. 69(2), pages 165-181, March.
    6. Cawley, John & Meyerhoefer, Chad, 2012. "The medical care costs of obesity: An instrumental variables approach," Journal of Health Economics, Elsevier, vol. 31(1), pages 219-230.
    7. 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.
    8. Brunello, Giorgio & Michaud, Pierre-Carl & Sanz-de-Galdeano, Anna, 2008. "The Rise in Obesity across the Atlantic: An Economic Perspective," IZA Discussion Papers 3529, Institute for the Study of Labor (IZA).
    9. Augurzky, Boris & Bauer, Thomas K. & Reichert, Arndt R. & Schmidt, Christoph M. & Tauchmann, Harald, 2012. "Does Money Burn Fat? Evidence from a Randomized Experiment," IZA Discussion Papers 6888, Institute for the Study of Labor (IZA).
    10. Stanciole, Anderson, 2007. "Health Insurance and Life Style Choices: Identifying the Ex Ante Moral Hazard," IRISS Working Paper Series 2007-10, IRISS at CEPS/INSTEAD.
    11. 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.
    12. 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, vol. 12(2), pages 1-31, June.
    13. Kuku-Shittu, 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 6163, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    14. Ralph Bradley & Colin Baker, 2013. "The Simultaneous Effects of Obesity, Insurance Choice, and Medical Visit Choice on Health Care Costs," NBER Chapters,in: Measuring and Modeling Health Care Costs, pages 211-240 National Bureau of Economic Research, Inc.
    15. Michael A. Cohen & Marina-Selini Katsaiti, 2009. "Evaluating Health Care Externality Costs Generated by Risky Consumption Goods," Working papers 2009-43, University of Connecticut, Department of Economics.
    16. Inas Rashad & Sara Markowitz, 2007. "Incentives in Obesity and Health Insurance," NBER Working Papers 13113, National Bureau of Economic Research, Inc.
    17. Bhattacharya, Jay & Bundorf, M. Kate, 2009. "The incidence of the healthcare costs of obesity," Journal of Health Economics, Elsevier, vol. 28(3), pages 649-658, May.
    18. Veiga, Paula, 2008. "Out-of-pocket health care expenditures due to excess of body weight in Portugal," Economics & Human Biology, Elsevier, vol. 6(1), pages 127-142, March.
    19. Burke & Heiland, 2007. "Social Dynamics Of Obesity," Economic Inquiry, Western Economic Association International, vol. 45(3), pages 571-591, July.
    20. 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.

    More about this item

    JEL classification:

    • I1 - Health, Education, and Welfare - - Health
    • D6 - Microeconomics - - Welfare Economics

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