Health insurance and the obesity externality

Jay Bhattacharya

"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...