Sunday, July 15, 2007

Dollars to doughnuts

Sir Henry sent me this link to a paper by Jay Bhattacharya for the Hoover Institute on the so-called ‘obesity crisis’. I saw Jay speak at the American Economic Association meetings in Chicago early this year. He is a livewire and a top theorist/empirical researcher in the area of obesity economics. He is a big fan of the Simpsons – fat Homer often plays a central role in his talks.
The question posed is whether getting fat is a public or just purely a private health problem. Jay’s argument is that the costs of obesity are internalised and borne by the fatties when they have employer-sponsored health insurance in the US because fatties are paid less wages than thin people (it is a fact!) and the difference more than covers the extra insurance costs firms must pay. Thus if one has firm-sponsored health insurance payment for being fat occurs by firms paying higher insurance charges which they recover by paying lower wages.

But if insurance is pooled there could be a pooled health insurance is pooled where premiums do not depend on your obesity status. By pooling in the same insurance plan the healthy subsidise the unhealthy by the difference between the unhealthy person’s medical bills and the average medical bills of pool members.
It’s like going out to dinner with a large group of people, knowing beforehand that you are going to split the bill. Though we are loath to admit it, even sometimes to ourselves, dinners like that create a moral dilemma: do I order the lobster or the red snapper, which costs $20 less? If there are 20 people around the table, my lobster order will raise the bill by a dollar for everyone, including me, but I get to eat a meal that is $20 more expensive.
In pooled schemes of the type prevailing in Australia enrollees’ premiums do not depend on body weight and are always much lower than expected medical bills. There is now no wage pass-through that can undo pooling between obese enrollees and taxpayers. This might change the body weight decisions of enrolees creating a public health problem after all.

Bhattacharya and Sood have an answer for the US based on the extreme assumption that all Americans are in a single health insurance pool. They finds the cost of the body weight decisions caused by this extreme pooling is roughly $150 per adult per year. This means that on average, every adult American pays $150 annually to subsidize the extra health care for obese people, roughly the price of one visit to the doctor. It is not a lot.

In practical terms then the obesity epidemic (at least in the US) is not a public health crisis. Most of the costs from poor diet and lack of exercise are paid by the obese themselves. This does not mean that the government should not warn consumers about the dangers associated with some foods, such as those with high trans-fat content. Also, government should get out of the business of subsidizing foods (such as high-fructose corn syrup) through its agricultural policies. But these are information issues not subsidies driven by pooled health insurance.
I suspect the same result is true in Australia. I don’t overeat because the rest of you are subsidising my health insurance costs. I am just a glutton.


Sir Henry said...

This is a very troubling notion. What we have here is matter, forme, and power of a commonwealth, ecclesiasticall and civill to do exactly that, pick up the bill so everyone can dine, if not on lobster but at least sufficiently. Is this a civil society? Or do we return to lives, "solitary, poor, nasty, brutish, and short" as Mr Hobbes said.

Apart from eating lobster, this is a slippery slope which has ramifications for universal health (health funds keeping out the old because their miantenance is very costly indeed as they reach their use-by date. )

Unless society as a whole subsidises the chronically ill and the old, they will be treated either by Mother Teresa style hospice charity or not at all. We have to get a sense of proportion about this, if not humanity.

I'm with Kant and the universal moral law which is entirely independent of such things as crude utilitarianism proposed by some economists.

hc said...

Jay's arguments on this issue see a pooled insuurance arrangement as working fine - the incentives to pig out on a lobster are not that great.

This is comforting because, as you point out, a privatised health scheme has incentives to exclude bad risks.

This is why I favour schemes such as Medicare with essentially 100% cover over privatised health insurance cover for basic medical cover.

Yobbo said...

Harry, it could still be done much better. Your favourite bugbear - smoking - is a huge health risk.

The government chooses to recognise this by charging ridiculous amounts of tax on cigarettes.

However, instead of then passing this money on to the health system so smokers would in fact be subsidising their own health care, it puts the smoking taxes into general revenue and continues to charge everyone high rates of medicare anyway.

Same goes for taxes on a lot of other things.

Either sin taxes should go directly to medicare or they should be removed.

They shouldn't be given to the government to create large, useless advertising campaigns and to coerce organisations into banning smoking in order to get government bribes.

That is the case now with every major sporting stadium in Australia - smoking is banned (even outdoors) because the "QUIT foundation" doles out millions to keep it that way. Millions that comes directly from smokers.

I severly doubt how many people are going to give up smoking because they can't smoke on the 2 days a year they go to the cricket, or the once a fortnight they go to the footy.

hc said...

Sam, I am working on smoking at present and will post soon. Tax receipts from smoking greatly exceed health costs that smokers incur but which they don't pay themselves - it is by a factor of more than 5.

BTW I support this and, if anything favour higher taxes. I'll explain reasons later but there is no reason for the hypothecation you suggest. The point of the taxes is to discourage smoking. The tax receipts should be spent where they do most good which need not be in the area of health.

You can see that with a simple example. Suppose smoking caused huge health costs ($10 million per smoker) but that that curing cancers cost $100 billion. Hypothecating the taxes towards health care would be silly.

As smoking in Australia is 4th lowest in the world and has fallen dramatically over recent years how do you know publicity campaigns to end smoking are wasteful?

hc said...

Sir Henry, This is a nice polemic on the case for a national health scheme in the US that I endorse:

Yobbo said...

"As smoking in Australia is 4th lowest in the world and has fallen dramatically over recent years how do you know publicity campaigns to end smoking are wasteful?"

They are largely a joke, Harry. Governments have always failed at attempting to influence free will.

What DOES reduce smoking is the increasingly large area of Australia that you can't smoke in without being hauled into the dock.

Government persuasion never works, but coercion does.

hc said...

Sam, You might be right - the evidence is inconclusive - but my view it that, in the longer term, there has been a massive chasnge in the social acceptibility of smoking.

I think people know the science and get the anti-smoking messages.

I think the US has lower cigarette taxes than us (and low by international standards) but now has an adult smoking rate less than ours.