Question

of HEALTH INSURANCE AND THE OBESITY EXTERNALITY, Jay 11. Please refer to the paper Bhattacharya Neeraj Sood, 2005. es private or public health insurance that subsidizes medical expenditures for the obese lead to an obesity externality? Explain in detail (a) Do the two policies that limit (b) Define the welfare loss from the obesity externality. State the social welfare harm from the obesity externality under pooled insurance.

Answer 1

(a) The paper of Health Insurance and the Obesity Externality by Jay and Neeraj explained that as long as insurance premium(the amount which we have to pay for secure future) are same for obese and non-obese people, there is no incentive to obese people to take care of their health, because whenever they claim for insurance, they get extra benefit relative to non-obese people. The main crisp over here is life of obese people is comparatively risky to non-obese, so they should be charged more insurance premium, but as per insurance policies if you lie in same age bracket your premium is same which creates an externality. Externality happen when there are profit for some in exchange for loss of some. Here when insurance companies subsidies premium for all the people it reduces risk for obese people they get extra benefit over there. For non-obese people they are now free to eat anything they want, because in future whole cost will be bear by insurance company. For both obese and non-obese people there are some future loss related to it. So, we can conclude that private and public insurance that subsidizes medical expenditures leads to obesity externality but the welfare loss depends upon the size of subsidy given.

(b) Welfare loss from obesity externality is reducing quality life of people of our country, increasing diseases, losing lives of working class in the long run, thus creating a bad impact on overall economy. When the working class of an economy is obese, physically not very much fit, the rates of heart attacks will increase, number of sudden death will rise, thus creating loss of an economy. Pooled insurance is a practice where all insurance companies come together to keep prices low of insurance. Policies which limit the social welfare harm from obesity externality are:

(i) Medical Test for Insurers-Keeping prices high for obese people: We can conduct a medical test and get to know which disease they are suffering from and in future what are the possibilities of disease which can harm them, according to that we can fix the prices. If a person have high chances of having disease in future and have in present, we can set high insurance premium for them, for others we can set low premium. So that obese people have atleast one disincentive to not eat more.

(ii) Less claims/benefits for obese: Those who are obese are not taking care of their health should be given less claim against their loss from insurance companies. If premium amount is same for both and obese people will get less insurance claim than non-obese people, it also creates an disincentive for obese people.

Basically we needs to think about those policies which creates incentive to be fit, to eat healthy.