The incidence of the healthcare costs of obesity
Introduction
Average annual medical expenditures are $732 higher for obese than normal weight individuals (Finkelstein et al., 2003).1 But who bears the costs of medical care associated with obesity? In competitive health insurance markets, equilibrium prices never ignore relevant and easily observable data about the insured (Arrow, 1963). Because obesity is easily observable by insurers,2 obese individuals who obtain health insurance in private markets are likely to pay for their higher utilization of medical care in the form of higher health insurance premiums. While the vast majority of the under 65 population in the U.S. obtains health insurance from private insurers, most coverage is employment-based. As a result, the incidence of the health care costs of obesity for the under 65 population is largely a question of the incidence of the costs of employer-sponsored coverage.
Premiums for employer-sponsored coverage could potentially reflect differences across individuals in observable risk factors through two mechanisms. First, workers often make an out-of-pocket contribution to the premium for coverage from an employer. Although these employee premium contributions could, in theory, vary by employee characteristics, they are rarely risk adjusted for obesity or any other observable risk factor (Keenan et al., 2001).3 Alternatively, variation in individual expected expenditures could be passed on to individual workers in the form of differential wage offsets for employer-sponsored coverage. In the absence of risk-adjusted premium payments by workers, if wages did not adjust, firms in a competitive industry could make positive profits by hiring only thin workers. Equilibrium wage offsets based on weight eliminate such arbitrage opportunities. The existing literature, however, does not provide evidence on whether the incidence of the costs of employer-sponsored coverage varies by individual risk factors.
The absence of risk rating for observable risk factors like obesity potentially creates two sources of inefficiency. First, it may lead to inefficient quantities of insurance coverage. In a population of heterogeneous risks, a movement of premiums away from the actuarially fair rate toward the average of the group distorts the quantity of health insurance purchased by consumers, potentially leading to adverse selection (Pauly, 1970, Rothschild and Stiglitz, 1976). In the context of employer-sponsored health insurance, the inability of employers to make wage offsets that reflect individual variation in the cost of providing coverage could create incentives for them to hire relatively low cost workers, creating inefficiencies in labor markets (Summers, 1989). Second, a lack of risk rating of premiums may even lead to higher rates of obesity by creating moral hazard in risky behaviors that affect health expenditures (Ehrlich and Becker, 1972). In other words, the failure of the obese to pay for their higher medical care expenditures through higher health insurance premiums may reduce incentives for individuals to maintain a normal weight (Bhattacharya and Sood, 2006).
In this paper, we examine whether obese individuals receiving employer-provided health insurance pay for their higher medical costs through reduced wages. Our empirical work is based upon a simple idea: all else equal, obese individuals with health insurance from an employer should receive lower wages relative to their similarly insured non-obese colleagues, while there should be no difference between the wages of obese and non-obese individuals in jobs without health insurance. We find that, while obese workers who receive health insurance through their employer earn lower wages than their non-obese colleagues, obese workers who are uninsured earn about the same as their thinner colleagues. Furthermore, we show that a substantial part of these wage penalties at firms offering insurance can be explained by the difference between obese and non-obese individuals in expected medical care costs. Finally, we show that obese individuals pay no wage costs for other employer-provided fringe benefits, where obesity is not a relevant risk factor in price setting.
By providing evidence consistent with the risk rating of premiums for obesity through differential wage offsets, our findings reduce concerns over the possibility that inefficiencies in insurance markets are (in part) responsible for rising rates of obesity. Our results suggest that the obese, at least those with employer-sponsored coverage, bear the full cost of the incremental medical care associated with obesity.
Our results also provide evidence on the validity of two controversial and important findings in economics, each of which has generated a large literature. The first is that even if employers nominally pay for health insurance premiums, it is really employees who bear the cost of employer-sponsored insurance. While there is only limited empirical evidence demonstrating the existence of any wage offset for health insurance, even less evidence is available on whether the wage offset varies across workers. Many studies, in fact, have produced estimates of either no relationship or a positive relationship between wages and the provision of health insurance (Gruber, 2000). The few studies that produce evidence consistent with the theory of compensating differentials leave open the question of whether incidence is at level of the individual or the group (Gruber, 1994, Pauly and Herring, 1999, Sheiner, 1999). Our results indicate that, in the case of obesity, these wage offsets not only exist, but also vary by individual characteristics.
The second finding is that the wages of obese workers are lower than those of their normal weight peers, and in the case of white women, the relationship appears to be causal (Cawley, 2004). While obesity could cause lower wages through either invidious workplace discrimination or a negative effect of obesity on worker productivity, the absence of an effect of obesity on wages for either men or black women casts doubt on lower productivity as the explanation. In other words, the literature leaves open the possibility that white women experience significant labor market discrimination in the form of lower wages due to obesity. Our results suggest a reinterpretation of this literature. That obese white women earn lower wages appears to be due, at least in part, to the higher cost of insuring these workers.
Section snippets
Empirical framework
Standard economic theory predicts that jobs that provide fringe benefits provide correspondingly lower cash wages, reflecting the costs to employers and the value to workers of the fringe benefit (Rosen, 1986). Although theory predicts that workers, not employers or firms, bear the incidence of the costs of fringe benefits, less is known about how these costs are allocated across workers when the cost of providing the fringe benefit varies across individuals. Individual-specific incidence
Data
The empirical work in this paper is based on two data sources, including the NLSY, collected by Bureau of Labor Statistics, for our analysis of obesity and worker wages, and the Medical Expenditure Panel Survey (MEPS) primarily for our analysis of obesity and medical expenditures. We also analyze the relationship between wages and obesity using data from the MEPS both to replicate our findings from the NLSY using an alternative data source and to conduct additional tests that are not possible
Difference in difference estimates
In Table 2, Table 3, Table 4, Table 5, we present results from our primary data source, the NLSY. Table 2 presents the difference-in-difference estimates of the effect of obesity on hourly wages using our main sample. Among workers with health insurance, obese workers earn $1.42 per hour less on average than non-obese workers. Among uninsured workers, the difference in hourly wages between those who are obese and those who are not is small ($0.25) and not statistically significant. The
Conclusions
Our results indicate that obese workers with employer-sponsored health insurance pay for their higher expected medical expenditures through lower cash wages. These wage differences are greatest among female workers, who have larger expected medical expenditure differences associated with obesity than male workers. This conclusion is strengthened by our findings that these types of wage offsets do not exist either for obese workers with coverage through alternative sources or for other types of
Acknowledgements
We thank the Stanford Center for the Demography and Economics of Health and Aging funded the National Institute on Aging (AG017253), and the Agency for Heath Care Research and Quality (KO2-HS11668) for financial support. We thank participants at various seminars for their comments. We thank John Cawley, Eric Finkelstein, Dana Goldman, Nicole Maestas, Victor Fuchs, Darius Lakdawalla, Neeraj Sood, and Anne Royalty for helpful suggestions. We thank Kavita Choudhry and Nicole Smith for excellent
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