The cash wages for obese workers are lower than those for non-obese workers because the cost to employers of providing health insurance for these workers is higher.
Increasingly, Americans are either overweight or obese. Individuals with a body mass index (BMI) of 25 to 29.9 are considered overweight, while those with a BMI of 30 or more are considered obese. The proportion of adults classified as obese increased from 12 percent in 1991 to 20.9 percent in 2001. (The BMI for an individual is calculated as a person's weight in kilograms divided by their height in meters squared.)
Because obesity is associated with increased risk for a range of chronic conditions, health care costs are higher for obese than for normal weight individuals. Annual medical expenditures are $732 higher on average for obese individuals than for normal weight individuals. On an aggregate level, approximately half of the estimated $78.5 billion in medical care spending in 1998 attributable to excess body weight was financed through private insurance (38 percent) and patient out-of-pocket payments (14 percent).
Obese individuals tend to be sicker and to spend more on health care, so the question arises: who bears the costs? The majority of the under-65 U.S. population receives health insurance coverage through their employers. Under pooled group health insurance, the insured group pays for higher medical expenditures, such as those associated with obesity, through higher premiums. Yet, employee contributions to plan premiums are rarely risk-adjusted for obesity or any other observable risk factor, implying that all individuals within the pool pay for these premium increases equally. As a result, it is tempting to conclude that fellow workers in a firm pay for the health care costs of obesity.
In The Incidence of the Healthcare Costs of Obesity (NBER Working Paper No. 11303), authors Jay Bhattacharya and M. Kate Bundorf find that obese workers with employer-sponsored health insurance pay for their higher expected medical expenditures through lower cash wages. This conclusion is strengthened by their finding that these types of wage offsets do not exist for obese workers with insurance coverage through an alternative employer. Nor are there wage offsets for other types of fringe benefits whose cost to the employer is less likely to be affected by BMI.
Although economic models of worker compensation predict the existence of a wage offset for health insurance, this finding is noteworthy given the dearth of empirical evidence on the existence of these types of wage offsets. The authors also provide evidence on the level at which these wage offsets occur. The magnitude of the wage offset for employer-sponsored coverage varies by individual characteristics that affect expected medical expenditures, in this case obesity. Assuming that obese workers are not highly concentrated within particular firms, this suggests that the wage offset for health insurance varies across individuals within a firm based on their health risk.
The authors caution that their results do not provide direct evidence that employees bear the full incidence of the cost of employer-sponsored coverage. It is possible that employers either partially or fully subsidize the average premium. The evidence here supports a weaker version of employee incidence: that employees pay for individual characteristics that make them a high cost to insure. These results imply that having insurance provided through an employer does not guarantee the pooling of health risks across all employees.
Prior studies generally have found that obese workers have lower wages and that the wage reductions cannot be explained by variation in worker productivity. The underlying implication is that obese workers, particularly women, face significant labor market discrimination. The authors' results point to and provide empirical evidence for an alternative explanation. For workers in jobs without employer-provided health insurance, there is only a small obesity wage penalty. The obesity wage penalty is largest in jobs where health insurance is provided. Hence, the cash wages for obese workers are lower than those for non-obese workers because the cost to employers of providing health insurance for these workers is higher.
In fact, the authors' evidence suggests that for both male and female obese workers, the magnitude of the wage penalty exceeds the expected marginal cost of insuring an obese individual. The traditional explanations for the obesity wage penalty can be applied to this excess wage penalty, although it is beyond the scope of the authors' current research to sort them out. These explanations include invidious discrimination against the obese, mainly in the high end jobs that provide health insurance; job sorting of the obese into relatively low wage occupations among the high end jobs; and perhaps even productivity differences between the obese and non-obese in high-end but not low-end jobs
-- Les Picker