External Costs of Obesity

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DESCRIPTION (provided by applicant): Adult obesity is a thorny public health problem. A large literature documents rising obesity prevalence in the U.S., and measures the associated health and accounting costs. Over a decade ago, Wolf and Colditz measured the health care costs and lost workplace productivity due to obesity to be over $68 billion annually. The morbidity and accounting costs associated with obesity have led economists and public health practitioners alike to advocate vigorous public intervention. However, measures of medical costs due to obesity are not, in and of themselves, germane to the debate over whether public actions to curb obesity are justified. Rather, it is the costs of body weight decisions not borne by an adult making those decisions (hereafter, external costs) that are most relevant. An important mechanism by which obesity is (potentially) subsidized is through health insurance. There is a small empirical literature aimed at measuring the cost of public health insurance attributable to obesity. This literature focuses solely on health expenditure differences between obese and non-obese adults but ignores relevant payment differences. In the case of Medicare, for example, this literature does not consider differential contributions via taxes, differential obesity-related mortality, and the timing of health care expenditures. In the case of employer provided private insurance, the literature ignores the possibility (implied by the theory of compensating wage differentials) that, relative to thinner workers, covered obese workers are reduced because of their higher expected medical expenditures. Even a proper measurement of the subsidy is not enough to calculate the welfare loss from the obesity externality caused by health insurance. If the subsidy does not change the behavior of the people in a health insurance pool, then the subsidy is just a costless transfer from the thin to the obese that does not change social welfare. The key question is: to what extent do transfers to obese adults change incentives regarding their diet and exercise decisions? The welfare loss from the externality is proportional to both the size of the subsidy and the elasticity of body weight decisions with respect to the subsidy. We propose three tasks: (1) to measure the net subsidy from non-obese to obese individuals induced by Medicare from a lifetime point of view; (2) to measure the net subsidy induced by employer-provided health insurance; and (3) to measure the extent to which body weight decisions are distorted by health insurance induced subsidies.