Talent Management Column

Healthcare Costs and Obesity

Healthcare Costs and Obesity | Human Resource Executive Online It's conventional wisdom that employers can save money through instituting wellness initiatives that persuade employees to stop smoking or lose weight. But what if that conventional wisdom is wrong?

Monday, December 8, 2008
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My guess is that I'm not the only one who is tired of hearing about the recession rolling at us like a Tsunami. So here's a different story with a healthcare focus.

Before the recession came, the issue of healthcare, and particularly healthcare costs, was one of the biggest stories, and nothing has made the issues that drove it go away.

There are lots of efforts underway to reduce those costs, the most unfortunate of which are just efforts to restrict access to healthcare by making it more expensive for employees to use it. The more interesting approaches are programs to improve the health of employees, reducing healthcare costs in the process.

Programs to help employees quit smoking have long been popular as have arrangements to make it easier for employees to exercise. The new efforts are targeting obesity.

There is little doubt that obesity is a rising problem, especially in the United States, where as many as one-quarter of adults meet the body-mass-index definition. (The highest rates are in the South and lowest in New England.)

Overweight individuals have higher rates of Type II diabetes, cardiovascular disease and cancer, along with a range of other illnesses. The cost of these diseases is high, and for those who have insurance, such costs fall on the providers of that insurance. That's the employer in most cases.

So it seems like common sense that having an employee base that is overweight would cost employers more money.

Further, virtually all employer healthcare plans essentially treat employees equally, which is another way of saying that they pool the risk of healthcare expenditures. That means a healthy employee gets charged the same amount for their contribution to healthcare as does an employee with illnesses.

One might wonder -- or if you were an economist, one might actually worry -- about whether this pooling issue means that there are fewer costs to being overweight. In other words, because employees don't bear the costs of being overweight, does this pooling approach end up making it easier to be obese?

To address these concerns, employers have begun introducing programs to help employees lose weight. These began with attempts to help make it easier for employees to exercise, then began offering advice on diet and exercise and, now, are offering carrots -- bonuses and rewards -- for achieving weight-loss targets.

In addition, many employers are thinking about the next logical step, and that is to start wielding sticks as well -- at employees who smoke or who are overweight -- to compel them to take steps to improve their health. The need to cut costs in the recession will only increase the pressure to move in this direction.

There are people who are willing to question the apparently common-sense assumptions behind these arguments. In "See Who Pays for Obesity?," which appears in NBER Reporter: Research Summary 2008 No. 3, economist Jay Bhattacharya and colleagues reveal some surprising results.

One of his findings -- at least for men near the prime working ages (28 to 41) -- is that medical costs are no different for those who are obese and those who are thin. It could well be that illnesses and the associated costs will show up later, although it is also possible that by the time they do, they are borne by Medicare or Medicaid.

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The findings were different for women, though, as obese women were shown to have significantly higher healthcare costs.

In addition, the research found that wages, in general, are different for obese workers, other things being equal. They earn less for doing the same jobs and having the same credential. It is easy to chalk this one up to discrimination. We know that all kinds of physical attributes that seem to have nothing to do with job performance affect wages -- studies have shown that better-looking people earn more as do taller people, for example.

The surprising part is that the wage differences track the healthcare-cost differences. That is, wages are lower only where employers provide health insurance. And where they do, the wage differences for obese women are much greater than for obese men -- thus, reflecting the actual healthcare-cost differences.

What's the conclusion here? Workers who are overweight at a level that affects their health and healthcare costs already appear to be paying for those costs through lower wages. How exactly this happens is the tricky question. Surely, employers don't consciously assign lower wages to workers based on their estimated healthcare costs. The process no doubt plays out in subtle ways associated with performance reviews, merit pay increases, etc.

There may be lots of good reasons for helping employees become healthier and to lose weight in particular. But the idea that employers can save a lot of money on healthcare costs by getting their obese employees to lose weight may not be true because overweight employees are already paying for their higher healthcare costs through lower wages.

Peter Cappelli is the George W. Taylor Professor of Management and director of the Center for Human Resources at the Wharton School of Business.

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