Health Insurance Dilemmas

Assume for a moment that you are slim, love broccoli and run 4 miles each day. Should your health insurance premium be lower than the amount paid by someone with an unhealthy lifestyle? Wal-Mart, PepsiCo and Safeway say, “Yes.”

One Wal-Mart employee pays a $40 monthly smoking surcharge. PepsiCo charges $600 annually unless a smoker completes a smoking cessation program.

But here are the dilemmas:

• A regressive fee, the smoker’s surcharge represents a larger proportion of lower earners’ incomes.
• Low earners have less access to health clubs.
• An asthmatic might not be able to participate in a mandatory exercise program.
• Health checks invade privacy.
• Nicotine addiction is tough to overcome.
• Obesity could be genetic.
• Unaffordable surcharges might lead to less insurance coverage for certain people.

And finally, our health is shaped by countless lifestyle decisions. Is it fair to focus on smoking and weight?

Reuters and the NY Times discuss the health-care issues here and here.

The Economic Lesson

An externality is the impact of a behavior or contract that is experienced by a third uninvolved party. When the impact on third parties is undesirable, we call the result a negative externality.

Smoking and obesity create a negative externality because higher health costs smokers raise everyone’s insurance premiums.

A benevolent impact on an uninvolved third party is called a positive externality. A community experiences the positive externality of flu vaccinations.

An Economic Question: Explain how charging higher health insurance premiums for people with unhealthy lifestyles could create unintended consequences.