Health Insurance and the Obesity Externality

Jay Bhattacharya and Neeraj Sood

A chapter in The Economics of Obesity, 2006, pp 279-318 from Emerald Group Publishing Limited

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 – (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 bodyweight, and reduced social welfare. Using data on medical expenditures and bodyweight 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.

Date: 2006
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Working Paper: Health Insurance and the Obesity Externality (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:eme:aheszz:s0731-2199(06)17011-9

DOI: 10.1016/S0731-2199(06)17011-9

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