No free lunch for the obese?


It was interesting to read in The Times this week that many American companies which offer health insurance are fining employees who do not maintain their weight below a certain threshold.

This is a twist on a predictable phenomenon. Non-pay benefits are part of the cost of employing labour just as much as wages. When the cost of these benefits rises, as health insurance costs have risen in the US, the increased cost must be met by the employees in reduced wages, if people are to maintain their jobs. It can’t come out of profit, for declining profit would mean employers would cut back on the number employed.

So long as employees value the benefit as least as highly as the wage cut they incur, there is no real problem. Indeed they might even be better off if the company can secure insurance at an average cost lower than that which employees could obtain for themselves with their own money. An increased supply of potential workers willing to work at the going wage rate, attracted by the health insurance, could perhaps even lead to more employees being taken on – a win-win situation.

The problem arises if discernible characteristics of the workforce can alter the average risk premium. If overweight people have a higher probability of using the insurance, the premium paid by the average worker will be too high to cover the risk faced by slimmer, fitter people. Workers in this category are likely to leave rather than have their wages held down to pay for the healthcare of overweight colleagues. This adverse selection would leave a workforce with higher average weight and yet higher insurance premia.

No wonder employers are trying to avoid this by in effect charging the obese more for their insurance cover. And of course this principle can be extended. In one case a pharmacy chain is imposing a $600 a year penalty for those who don’t satisfactorily monitor their weight, blood sugar and cholesterol. Unsurprisingly, smoking also attracts a penalty.

So markets can work to generate incentives to reduce obesity and other health problems without government direction. It may be seen as intrusive, but of course if the market works effectively there will be some firms which do not offer health insurance but instead offer higher wages – so nobody need necessarily be monitored in this way.

Problems may arise, however, if the American courts can be persuaded that obesity is a disability, or an age-related condition, in which case discrimination law (even more fierce in many cases in the USA than it is here) is likely to stop markets functioning in this broadly optimal manner.

In the UK, of course, we have state-funded health ‘insurance’. Thus we have no choice in the matter as people who watch their weight are forced, through taxation, to fund the healthcare needs of the obese.

It has been suggested that we could simulate the private-sector approach by offering a higher tax allowance for those who keep their weight down. It’s an idea, though I wouldn’t want to complicate our tax system even more. And in Britain we would also be likely to hear arguments about inequality brought out if, as seems possible, the poor are more likely to be seriously overweight than the rich.