Gruber (1994) shows that the costs of employer-provided health insurance benefits are passed on to employees through lower wages. But do employees with higher expected medical expenses have their wages reduced by a higher amount to reflect the additional medical costs to employers? This may not be the case if employers can not observe the health of employees when they hire them. On the other hand, for obese individuals, the fact that they are obese is easily observable. Papers such as Finkelstein, Fiebelkorn and Wang (2003) show that annual medical expenditures for obese individuals are $732 more than those of normal weight. Is this additional cost passed on to obese employees through lower wages?
This is what an NBER working paper by Bhattacharya and Bundorf (2005) aims to investigate. The authors compare the wages of obese and non-obese individuals in companies without health insurance. Then they compare the differences in wages of obese and non-obese employees in companies with health insurance. Since no health insurance costs will be passed on employees if no insurance is offered, the difference between the two wage gaps may be able to identify if higher health insurance premiums are passed on to employees through lower wages. If there are differences in wages between obese and non-obese workers (i.e.: due to discrimination, lower productivity, etc.) these differences are likely constant across firms with and without health insurance.
The authors find that “the incidence of obesity on wages for workers insured through their employers is -$1.68.” After controlling for a variety of covariates, this estimate lowers to -$1.44. This difference is mostly due to the fact that wages of obese workers with health insurance grew slower than thinner workers with health insurance. This may be due to the increasing price of medical care, the increasing severity of obesity–the BMI of individuals at the 95th body weight percentile has increased over time–or the aging of the population in the panel.
As a falsification test, the authors use a similar difference-in-difference estimation strategy comparing the obese vs. non-obese wage gap between employers with and without other fringe benefits (e.g.: life insurance, dental insurance, retirement benefits, child care, maternity leave, etc.). If obesity does not affect the cost of these fringe benefits, than we should see no difference in the obese/non-obese wage gap between employers who do and do not offer these benefits. The authors find that this difference-in-difference estimator is not statistically different from zero.
There are a few problems with this analysis. First the authors admit that “those with relatively low productivity due to health consequences of obesity may consume more medical care and, as a result, self select into firms offering health insurance.” Also, the data the authors have only reveals whether or not the individual has health insurance, and does not give the insurance premium paid by either the employer or the employee. Thus, these estimates are likely to be very imprecise.
Nevertheless, if this study’s results are true, then it would imply the following:
“If there are no externalities in these decisions, then “twinkie” taxes will only distort already optimal decisions. But if employer-provided insurance pools the health risk of the obese and non-obese, it will create an externality that reduces incentives to maintain a normal weight. Our evidence on the incidence of the obesity wage premium suggests that pooling of the obese and non-obese does not occur in the employer-sponsored insurance market; hence the externalities caused by health insurance on decisions about body weight are small.
- Jay Bhattacharya and M. Kate Bundorf (2005) “The Incidence of Healthcare Costs of Obesity,” NBER WP #11303.
- Jay Bhattacharyaa and M. Kate Bundorf (2009) “The incidence of the healthcare costs of obesity” Journal of Health Economics, Volume 28, Issue 3, May 2009, Pages 649-658.
- Finkelstein, Fiebelkorn and Wang (2003) “National Medical Spending Attributable To Overweight And Obesity: How Much, And Who’s Paying?,” Health Affairs, Web Exclusive, May 14, 2003.