Economic Causes and Consequences of Obesity

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Presented by Eric Finkelstein, Ph.D.
3040 Cornwallis Road P.O. Box 12194
Research Triangle Park, NC 27709
Phone [phone]
Fax [phone]
e-mail finkelse_at_rti.org www.rti.org
RTI International is a trade name of Research
Triangle Institute
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Outline

• Obesity Prevalence
• Economic Causes
• Why Should (or Shouldnt) We Care About Obesity?
• Proper Role of Government

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U.S. Statistics

• 2/3rds of Americans are overweight or obese
• Over the past 25 years, the number of obese
  individuals has more than doubled
• The increase occurred for all population subsets,
  including children, the elderly, and all
  racial/ethnic groups
• Interesting aside - income disparities among
  adults are disappearing

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National Obesity Rates Among Adults (ages 20-74),
by Poverty Status
Source Health, United States, 2006. Centers
for Disease Control and Prevention
http//www.cdc.gov/nchs/data/hus/hus06.pdf073
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But Why The Rise In Obesity Rates?

• The story of Mauritanian women

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Calories In
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Calories In
Foods Equivalent to about 100 Calories

• A net caloric imbalance of about 100 calories
  per day could generate an average weight gain of
  10lbs per year (Hill et al).

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Calories In

• Caloric intake changes from NHANES I (1971-74) to
  NHANES (1999-2000)
• Men 2,450 to 2,618 kcal/day 7 increase
• Women 1,542 to 1,877 kcal/day 22 increase
• Carbohydrate changes from (1976-80 through
  1999-00)
• Men 1,039 to 1,283 kcal/day 24 increase
• Women 700 to 969 kcal/day 38 increase
• Consumption of food away from home increased from
  18 to 32 of total calories between 1977-78 and
  1994-96
• Soft drinks are the number one food consumed in
  the American diet

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• But why the increase in consumption?

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Cheap Food Gets Cheaper

• Food costs (both money and time) have been
  steadily declining
• Greatest drops are for calorie dense foods
• Since 1960, the relative price of food compared
  with other goods has decreased by 16
• Since 1978, food prices have dropped by 38
  (until very recently)
• Since 1983, prices of fresh fruits and
  vegetables, all fruits and vegetables, fish, and
  dairy products have increased by 190, 144, 100
  and 82, respectively
• Fats and oils, sugars and sweets, and carbonated
  beverages increased at much lower ratesby 70,
  66, and 32, respectively

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Changes in Relative Prices
Source Author calculations based on the Consumer
Price Index All Urban Consumers (U.S. City
Averages, 1983-2005)
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Non-Monetary Costs

• Opportunity cost of preparing foods from scratch
  continues to increase relative to purchasing
  prepared and pre-packaged foods
• Increased prevalence/convenience of fast-food and
  restaurants lowers acquisition costs
• Technology lowers the cost of preparing
  pre-packaged foods more than it does for foods
  cooked from scratch
• Consider the microwave
• 95 of homes have them today
• 8 had them in 1978

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Calories Out
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Activities and Calories Burned Per Hour
Source METs Compendium
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Changes in Caloric ExpenditureLeisure Activity

• The benefits of inactive leisure have gone up
  so we would expect leisure time physical activity
  to decrease
• Internet, computer games, cable TV,
• Between 1970 and 2000, the of homes with more
  than one TV rose from 35 to 75
• Those with cable TV rose from 7 to 76
• 55 of homes now have Internet access
• Exercise has become costlier

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Average Hours Per Day Spent in Leisure and Sports
Activities
Source Bureau of Labor Statistics, Dept. of
Labor, U.S. GovernmentAmerican Time Use Survey
(ATUS) 2003 Released September 2004
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Percentage of the 8th, 10th and 12th Graders Who
Watch 4hrs or More of Television on Weekdays, by
Race, 2004
Source Child Trends original analysis of
Monitoring the Future data, 2004.
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Non-Leisure Time Physical Activity

• The (opportunity) costs of being active on the
  job have gone up
• Due to technology, you can accomplish more by
  doing less (energy expenditure)
• More physical activity would decrease
  productivity (and wages)
• Many of us could choose more active (and lower
  paying) jobs but at a significant cost (Ill
  return to this point)
• Note a 30-minute jog followed by 8 hours at a
  desk job falls short of the 10,000 Steps
  recommendation

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One More Potential Cause of Rising Obesity Rates
Moral Hazard
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Moral Hazard

• Over the past few decades, there has been a
  tremendous increase in medical, pharmacological
  and surgical treatments for the risk factors and
  diseases that are promoted by obesity
• Statins for cholesterol
• Metformin for diabetes
• Many new BP meds
• Over 1.5 million procedures performed last year
  in the U.S. aimed at opening up clogged arteries

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Moral Hazard

• Among todays obese population, the prevalence of
  high cholesterol and high blood pressure are now
  21, and 18 percentage points lower, respectively,
  than among obese persons 30 to 40 years ago
  (Gregg et al)
• Todays obese population has better BP and
  Cholesterol values than normal weight adults had
  a few decades ago (Gregg et al)
• Maybe being obese is not so costly anymore

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Recap Its the Economy, Stupid

• Obesity is the result of technological
  advancements that have changed relative costs of
  food consumption, physical activity, and obesity
• Decreased cost of food consumption
• Increased cost of physical activity
• Decreased health costs of being obese
• Technology (or a growing economy) is responsible
  for (or at least exacerbates) rising rates of
  obesity
• Obesity is a side-effect of our own success
• These changes reflect consumer preferences

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• We may be fatter, but are we worse off?

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A Growing Waistline Can Be Bad For Your Health

• Substantial excess weight reduces life
  expectancy, but most notably for BMIs 35
• Excess weight causes 70 of diabetes cases in the
  United States
• Excess weight greatly increases the risks of
  developing hypertension and high cholesterol
• Obesity adversely affects nearly every system of
  the human body

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A Growing Waistline Can Be Bad For Your Health
SOURCE NAASO, The Obesity Society
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Utility Maximizing
A Growing Waistline Can Be Bad For Your Health
but Diet and Exercise have their own costs
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Utility Maximizing

• Economic framework Utility Maximization
• Given all the choices we could be making, we
  choose the options that make us best off (i.e.,
  the ones that give us the most utility)
• max U (physical activity, diet choices, leisure)
  
• Subject to constraints time, money, biology
• Increasing weight over time can be explained by
  changes in the constraints
• Preferences for thinness do not appear to have
  changed
• For many, including my Uncle Al, weight gain is
  the utility maximizing outcome given the changing
  environment

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So what is the role of government?
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Role of Gov. as Seen by Economists

• Government should intervene only in the case of
  market failures (or undo past government
  failures)
• Market Failure occurs when resources are not
  being allocated efficiently by the private sector
• Externalities
• Market Power
• Public Goods
• Imperfect (Asymmetric) Information
• Consumer Irrationality

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The Role of Government When It Comes to Obesity

• Where are the market (or government) failures?

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Externalities

• Second-hand smoke provides a clear motivation for
  government interventions to reduce smoking rates
• Smokers impact non-smokers
• Does obesity increase the health risks of the
  non-obese?
• Not likely
• Obesity in Pregnancy may be one exception
• Increases risk for the offspring
• During pregnancy delayed diagnosis, increased
  cesarean and instrumental delivery, preeclampsia,
  eclampsia, and gestational diabetes
• For the child neural tube defects, spina bifida,
  heart defects and delivery-related neonatal
  morbidity
• Provides a role for government to address obesity
  among women of child-bearing age

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Market Power

• More (not less) market power would be helpful
  when it comes to obesity
• Monopolists tend to raise prices
• Recent surge in food prices may slow rising rate
  of obesity but hard to argue that high prices are
  a good thing

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Public Goods

• The government already funds many public goods
  related to obesity
• 83.6 million acres of public parks and
  recreational facilities
• Food Guide Pyramid
• 200 million Steps to a HealthierUS Initiative
• CDC funded obesity prevention programs
• 440 million NIH budget for obesity research (up
  250 since 1998)
• Could gov. do more, yes, but would it be money
  well spent?

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Imperfect (Asymmetric) Information

• Lots of markets function fine with asymmetric
  information
• Should gov. force mandatory labeling for
  store-bought foods or restaurant foods?
• FDA advisory panel says no
• Key Question - Can the market solve this issue
  without gov. intervention (i.e., is there a
  market failure)?

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Irrationality

• Are consumers able to maximize utility subject to
  their constraints?
• Evidence of food addictions but can these be
  overcome?
• Can we not over-exercise to make up for
  over-consumption or control our consumption?
• Some cannot but most can

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Evidence of Rationality?

• We conducted a national telephone survey in Fall
  2004
• Tested if overweight and obese adults recognize
  their own risks
• Asked disease free individuals their risk for
  stroke, heart disease, cancer and diabetes
• Risk rated as high, moderate, low, or no
  risk
• All respondents were also asked to predict their
  life expectancy
• Regression analyses tested association between
  responses and BMI

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Evidence of Rationality?

• Results
• Overweight associated with significantly greater
  self-perceived risk of diabetes, stroke, heart
  disease and cancer
• Obesity associated with significantly greater
  self-perceived risk of all four diseases
• Perceived risk increases with increasing BMI
• Self-reported life expectancies
• Normal weight 78.2 years
• Overweight 75.8 years (p.001)
• Obese 74.3 years (p
• What are the implications?

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Financial Externality

• Is government intervention warranted to save
  money?

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Financial Externality

• Overweight and obesity increase the annual
  medical bill by 90 billion per year
• In the absence of overweight and obesity, health
  insurance expenditures would be 9 lower
• Medicare expenditures would be 11 lower
• The government finances half of the total annual
  medical costs attributable to obesity, or more
  than 45 billion per year
• The average taxpayer spends 175 per year to
  finance obesity-related medical expenditures
  among Medicare and Medicaid recipients

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Financial Externality (cont.)

• But is this a reasonable justification for
  government intervention?
• Arent Medicare and Medicaid entitlement programs
  by design?
• Hard to use these costs to justify government
  intervention
• If unhappy about these costs, solution is easy
• Experience rate or cut the programs
• Resolving the financial externality would suggest
  that only cost-saving interventions are warranted
• These dont exist to my knowledge
• Would also suggest giving away free cigarettes!

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So Is There a Role for Government?

• Government imposes laws and regulations that
  influence food consumption and physical activity
  decisions
• This ultimately influences rates of obesity
• An appropriate role of gov. may not be to solve
  existing market failures, but to revisit past
  laws/regulations to determine whether they may be
  doing more harm than good
• Farm bill, zoning, publicly provided health
  insurance,
• Provision of public goods is also a classic role
  of government, but unlikely to be cost saving
• Targeted incentives may be a more appropriate
  tool than regulation
• Menu labeling in restaurants is a great example

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So Is There a Role for Government?

• Addressing obesity in kids should be a top
  priority for government
• The utility maximization argument clearly fails
  for them
• Bad decisions as youth are especially hard to
  undue
• That is why we mandate schooling and ban alcohol
  and cigarettes for youth
• Much more public support for youth-focused
  government interventions

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Stop Here
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The Employers Dilemma
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CHAPTER TEN
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The Employers Dilemma

• Why Dont Businesses Invest More in the Health of
  their Workforce?

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Missed Work Days by BMI Category
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Annual Medical Expenditure for Normal Weight and
Obese Employees 2001-2003 Medical
Expenditure Panel Survey
Source Finkelstein, E.A. and D.S. Brown. 2006.
Why Does the Private Sector Underinvest in
Obesity Prevention and Treatment? North Carolina
Medical Journal 67(4)310-312
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Why Dont Businesses Invest More in the Health of
their Workforce?

• Unlike government, most employers are profit
  maximizers and will invest in their workforce
  only to the extent that it is profit maximizing
  to do so
• Even though the costs of obesity to employers are
  high, expensive obesity-related initiatives are
  likely to be a bad investment for many firms

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Why Dont Businesses Invest More in the Health of
their Workforce?

• Employers rarely look further than 5 years down
  the road
• Individuals switch jobs roughly every 4-5 years
• Investment return is likely to be received by
  another businesspossibly even competitor (e.g.
  gastric bypass surgery)
• Little financial incentive to invest in younger
  obese workers who are not yet costly
• Medicare further reduces incentives to invest in
  obesity treatment
• 38 of the 58,000 cost of obesity accrues after
  age 65
• Retiree health insurance benefits are
  increasingly uncommon

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Why Dont Businesses Invest More in the Health of
their Workforce?

• Adverse selection
• Dont want to attract the wrong employee
  (bariatric surgery is another great example)
• Does businesses myopic perspective suggest a role
  of government?
• Government intervention could be pareto optimal
  if cost-saving interventions are available but
  underprovided
• But evidence of ROI on worksite wellness programs
  is weak at best

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So Whats an Employer to Do?

• A successful obesity prevention program should
  make it cheaper and easier to be thinnot fat
• Interventions that change marginal costs and
  benefits are likely to be followed by changes in
  behavior
• It also needs to be profit maximizing for the
  employer
• Incentive-based programs are increasingly common
  and may be cost-saving (Finkelstein et al JOEM)

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Incentive-Based Wellness Programs
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Will the Market solve the Obesity Problem?
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Private Sector Solutions

• There is a huge demand for effective weight loss
  solutions (and even ineffective ones)
• 50 million Americans will attempt to lose weight
  this year through many different mechanisms
• Companies are hard at work looking for innovative
  strategies to reduce rates of obesity and improve
  health
• Potential profits are enormous

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Private Sector Solutions

• The commercial weight-loss industry is a 49
  billion per year industry
• Health club memberships have doubled in past 15
  years
• Sales for anti-obesity agents in the U.S. are
  expected to triple by 2010 from 723 million in
  2005 to 1.4 billion
• Between 1998 and 2004, bariatric procedures,
  including bypass and banding, have increased by
  more than 800 in the U.S.
• Active video games and other technologies are
  increasingly popular
• Public health folks may not like some of these
  solutions but they may be optimal from a utility
  maximizing perspective

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Conclusion

• Obesity is a side-effect of our own success
• Utility maximizing individuals may optimally
  choose to weigh more than public health officials
  would like
• Government efforts should focus on revisiting
  past policies that may have inadvertently
  promoted rising rates of obesity
• Optimal private sector response may be to use
  incentives or other strategies that make it
  cheaper and easier to be thin, not fat
• Technology is part of the problem but will also
  be part of the solution

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Extra Slides
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Consequences for Employers

• Prevalence among Fulltime Employees
• Obesity, not eligible for bariatric surgery
• BMI 30-35 or 35-40 w/o select comorbidites
• Obesity, eligible for bariatric surgery
• BMI 40, or 35-40 w/comorbidities

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Consequences for Employers
Annual Medical Expenditures (2003) Attributable
to Obesity

• Note - does not include costs for bariatric
  surgery
• Data from MEPS (Medical Expenditure Panel Survey)

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Consequences for Employers
Annual Absenteeism Attributable to Obesity
(days missed)
Obesity-attributable days missed due to illness
or injury Based on data from National Health
Interview Survey (NHIS)
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Consequences for Employers
Combined Value of Medical and Absenteeism
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Adverse Financial Consequences for Employers

• A 500 person firm spends roughly 140K annually
  on obesity-attributable medical expenditures and
  absenteeism
• Excludes costs for bariatric surgery
• 65 result from the surgery eligible group
• Other costs may include presenteeism, life
  insurance, retraining, and disability costs
• Suggests potential savings associated with
  successful obesity and wellness initiatives
• But
• Do firms have enough incentives to undertake the
  investment?
• What form will the interventions take?

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Graphical Analysis Total Quarterly Medical
Payments
Mean Quarterly Payments (2004 )
Quarters Before or After procedure

• Quarter 1 is the quarter in which the procedure
  occurred
• Blue banding, Purple bypass

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Just Follow the Money

• The costs of obesity alone at a firm with 1,000
  employees are roughly 285,000 per year of which
  30 results from increased absenteeism.
• Short-term disability claims attributed to
  obesity have increased tenfold during the past
  decade and cost employers an average of 8,720
  per claim.
• Obese employees are shown to be less productive
  while on the job. Presenteeism has become a
  concern for employees.
• BMI and cognitive function
• People with BMI over 30 have a 20 reduction in
  recall compared to those with a BMI less than 20.
  
• Causal link between obesity and Alzheimers
  disease. The hunger hormone leptin plays a role
  in learning and memory.
• If obesity contributes to presenteeism, through
  increased illness or cognitive decline,
  productivity and the firms bottom line will be
  adversely affected.

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The Relationship Between Obesity and Income for
Males
Analyses based on data from the Medical
Expenditure Panel Survey.
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The Relationship Between Obesity and Income for
Females
Analyses based on data from the Medical
Expenditure Panel Survey