Health Economics Applications and Policy

Lecture 6 – Obesity and other challenges: Insights
from Behavioural Economics
Health Economics Applications and Policy
EFN423
Health Economics Applications and Policy
EFN423
Recap of Market Failure and Government Intervention:
Last week we learned a bit about Behavioural Economics in
general, and some cool Nudges to correct behavioural biases
of individuals.
This week we are focusing on Obesity (and health issues of
similar nature); and on some policy interventions based on
behavioural economics insights.
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Introduction
• Calorie deprivation (in moderation) can make you
healthier

• Cuba after the collapse of the USSR
• The starvation experiment at the University of Minnesota
  during WWII
  • Obesity is a growing problem in the US and
  worldwide
  o Why? What is causing this epidemic?
  o Is it a public health crisis?
  o What government responses are appropriate?
  3
  When is a person obese?
  • Q: Is a man who weighs 180 pounds obese?
  • That depends on whether the person is 5 feet tall or 7.
  o Clearly, some accounting must be made for height in defining
  obesity.
  o The canonical way to do this is calculate the body mass index or
  BMI:
  • A person is considered clinically obese if his or her BMI is
  30 or greater.
  4
  Average BMI by education level in the US
  (source: National Health Interview Survey
  5
  Obesity rates are rising…
  • Body weight in the U.S. has been rising in fits and starts
  for at least the past 150 years.
  • The proportion of adult Americans who are obese has
  more than doubled between 1977 and 2006.
  • Body weight has been increasing for decades in every
  developed country in the world.
  o The heaviest countries are all in the Anglosphere.
  6
  What explains increasing obesity?
   Theory 1: Genetics
  • Evidence suggests that genetics plays a key role in
  determining body weight for both children and adults.
  • While genetics may predispose some to being heavy,
  they cannot be the reason for the rise in body weight.
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   Theory 2: The food industry
  • One popular theory for explaining obesity levels is
  that fast food restaurants and agricultural
  corporations push unhealthy, fattening foods and
  large serving sizes on an unwary populace.
  o There is evidence that living close to fast food
  restaurants increases bodyweight, especially among
  children.
  o But even if the popularity of fast food restaurants has
  contributed to rising obesity since World War II,
  bodyweight has been increasing since at least the
  mid 19th-century.
  What explains increasing obesity?
  8
  Estimated average BMI of American males in various age-cohorts
  (Source: Costa and Steckel, 1997)
  9
  1890
   Theory 3: Food price trends
  • Since WWII, improvements in the technology of agriculture
  have made food production substantially cheaper and
  driven down its price.
  • The law of demand says that a decline in the price of a
  normal good will be met with an increase in the quantity
  consumed of that good—and people have responded to
  these price decreases just as expected.
  • While some have pointed to rising portion sizes at meals as
  a cause of rising body weight, those rising portions are
  themselves a consequence of falling food prices.
  What explains increasing obesity?
  10
   Theory 4: Changing lifestyles
  • Sedentary Jobs: The labor economy in the developed world, which
  previously consisted largely of agricultural jobs, has become
  dominated by service and manufacturing jobs, which require less
  physical activity.
  • Heating and AC: Bodies expend energy to cope with hot and cold
  temperatures, so air conditioning and central heating may be
  contributing to fat staying on bodies rather than being burned off.
  • Automobile use: The automobile is credited with dramatically
  reducing average daily walking exercise in developed countries.
  What explains increasing obesity?
  11
   Theory 5: Labor force participation
  • In the Western world, the increase in labor force participation by
  women, and the simultaneous decline in the average time spent
  preparing meals at home, has contributed to rising body weight.
  o This same force has contributed to the rising share of food dollars
  spent on restaurant food, which is often more calorically dense
  and fattening than food prepared at home.
  • Technological changes that make housework less onerous, such
  as the invention and dissemination of dishwashers and
  microwaves, have also decreased the relative price of labor force
  participation.
  What explains increasing obesity?
  12
  Obesity is a side effect of good things
  • Lower food prices
  • Labor-saving technological innovations
  • Modern conveniences (air conditioning, cars)
  • Economic opportunities for women
  13
  The costs of obesity
  • Higher health care costs:
  o Annual medical expenditures in the U.S. are 36% higher for
  obese people than thinner people.
  • Reduced life expectancy:
  o A 40-year-old white male with BMI 35 has a life expectancy three
  years shorter than one with BMI 24.
  • Increased risk of chronic diseases such as heart disease,
  diabetes, and hypertension.
  • Reduced physical mobility and function
  • Lower wages
  • Social stigma
  • Crucial question: are these public or private costs?
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  Is obesity a public health crisis?
  • For an economist, it is the distinction between public
  and private costs that determines whether obesity is
  a public health crisis rather than a significant but
  private problem.
  15
  • Under this welfare economics rubric, an outbreak of tuberculosis is
  a public health emergency, but a rise in the prevalence of back pain
  is not.
  o In the case of tuberculosis, drastic public action, like quarantines,
  may be justified.
  o With back pain, no government action is justified because, unlike a
  tubercular patient in a crowded room, a person with back pain
  inflicts no costs on others.
  o If painkillers or surgery are worthwhile, the person with back pain
  will pay for it.
  • How might one person’s obesity be costly to someone else?
  o Only one obvious pathway: pooled health insurance.
  Is obesity a public health crisis?
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  Pooled health insurance
  • Example: Imagine that Homer, Carl, Lenny are in a pooled workplace
  health insurance plan at the Springfield nuclear power plant.
  o Homer pays the same amount to qualify for health insurance
  coverage as his colleagues Carl and Lenny.
  o Homer is dangerously obese and likely to generate substantial
  medical costs in the coming year, whereas Carl and Lenny eat
  organic greens and exercise every day and have not needed medical
  care in decades.
  o Suppose that each additional jelly donut Homer eats raises the total
  medical bill for the entire nuclear plant by $1. Because Homer is one
  of hundreds of employees, his own health insurance premium only
  rises by a fraction of a cent with each donut he eats.
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  • Thus, by pooling together in the same insurance plan, Carl,
  Lenny and everyone else in the pool subsidises Homer’s
  costly jelly donut habit.
  • In this way, pooled insurance creates an artificial
  externality where none existed naturally.
  o While this cross-subsidisation induced by pooled insurance
  seems like a problem – from a social planner’s point of view it
  is not certain that social welfare actually declines as a result.
   If Homer gains a dollar from the insurance cross-subsidisation
  while the other employees lose exactly a dollar in total, then
  health insurance induces a transfer but does not create any social
  loss.
  Pooled health insurance
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  Moral hazard and health insurance
  • For Carl, Lenny, and Homer alike, pooled health insurance
  reduces the price of unhealthy eating.
  o Perhaps Carl responds to pooling by joining Homer for jelly
  donuts, while Lenny skips his yoga exercises.
  • This is a classic case of moral hazard: distortions in price
  induce changes in behavior that lead to a loss in social
  welfare.
  o If this assumption holds, pool members eat too poorly, exercise
  too little, and weigh too much relative to the social optimum.
  • The presence of moral hazard in pooled health insurance
  implies a true public health crisis.
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  Is obesity contagious?
  • Some researchers are concerned that obesity can “spread”
  not through physical contact like tuberculosis but through
  links in a social network.
  • If obesity spreads this way, it would qualify as a public
  health crisis after all (even though we think pooled health
  insurance does not create social loss).
  20
  • Researchers using data from a massive study of the residents of a
  Massachusetts town tested whether social networks spread
  obesity—and they found evidence for obesity contagion.
  o They found that subjects are more likely to become obese if
  the people that they are tied to socially (friends, relatives,
  coworkers) became obese in a previous period.
  o Further, obesity risk increases most dramatically when one
  person becomes obese in a mutually-perceived friendship.
  Is obesity contagious?
  21
  • As with most observational studies, questions of causality are not
  definitively answered here.
  o Example: Perhaps if a pair of siblings become sick in quick succession, it
  is a sign of changing dietary habits or economic conditions. Or perhaps
  people choose friends on the basis of mutual interests that are
  fattening.
  • One natural experiment conducted at the U.S. Air Force Academy
  provides useful insights:
  o If a cadet was assigned to a dorm with poorly- conditioned dorm-mates,
  his performance on a Physical Education Assessment test tended to
  suffer accordingly.
  o This study suggests that associating socially with less fit peers does tend
  to degrade one’s own fitness.
  Is obesity contagious?
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  Justifications for public health intervention
  • So far, we have argued that a government intervention against
  obesity is not justified unless obesity causes a social loss through
  externalities.
  • This is the welfarist point of view, because welfare economics
  assumes that individual choices should be respected by the
  government as long as they do not harm others
  • If we relax that assumption, there may be additional justification
  for government action.
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  Inadequate nutritional information
  • There is evidence that consumers are woefully unaware of the
  nutritional content of much of the food they eat.
  • This lack of knowledge has been proposed as a justification for
  public intervention, such as nutrition facts labels and calorie
  posting requirements at restaurants.
  • However, the effectiveness of such measures has been questioned,
  as many consumers do not respond to this information.
  • And even with perfect nutrition information, consumers may have
  trouble translating their food choices into health outcomes.
  Justifications for public health intervention
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  Childhood obesity
  • Obesity during childhood is associated not only with obesity during
  adulthood but also with elevated rates of heart disease later in life
  and a shorter life span.
  • Welfare economics starts from the premise that people know what
  is best for them, and that their actions reveal their true preferences.
  o But this assumption is less likely to hold when it comes to
  children, who may be uninformed about health risks, illequipped
  to think long-term about health decisions, and
  especially vulnerable to advertising for unhealthy foods.
  Justifications for public health intervention
  25
  Impatience and addiction
  • Another critique of the welfare economics argument posits that
  even adults do things that are bad for them.
  o What if people gorge on cookies but regret the decision later?
  o What if people become addicted to French fries and cannot stop even if
  they do not want to gain weight?
  o These kinds of scenarios are the focus of behavioral economics.
  • A ban on unhealthy midnight snacks would certainly reduce
  obesity—it may even be supported by the very people whose
  midnight snacks would be outlawed.
  o But this kind of muscular government intervention raises profound
  questions about liberty and the fundamental assumptions of welfare
  economics.
  Justifications for public health intervention
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  Application in Public Health
  Engagement in Child Health Program and Parental Preferences:
  Evidence from Australia
  Jay Sarkar (QUT); Dipa Sarkar (QUT); Tony Beatton (QUT);
  Juliana Goncalves (University of Sydney); Helen Vidgen (QUT); Carly Moores (Flinders University)
  Issue: Childhood obesity and overweight is a big problem in QLD and
  Australia). A large number of parents are worried about their children’s
  obesity and overweight. PEACHTM provides a child health-management
  program for free across Queensland. The program is successful for the
  ones who complete the program.
  However, retention of participants over the duration of the program
  remains a key challenge for PEACHTM. Don’t the parents really want
  their kids to become healthier?
  Question: Is low engagement among parents a result of behavioural
  biases??
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  Engagement in Child Health Program and Parental Preferences:
  Evidence from Australia (Sarkar et al., 2019)
  Key results:
  Controlling for cognitive ability, self-confidence, work-hours, etc.:

1. Early dropout parents are more likely to be present-biased
   (impatient); and high-attendees are more likely to be more patient.
2. The effects of risk-taking behaviour is domain-dependent.
3. Early drop-out parents are more likely to be risk-averse; and highattendees
   are more likely to be more risk-seeking, when the risky
   prospects are presented in ‘loss frame’ in health domain.
   Application in Public Health
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   Insights from Behavioural Economics
   • The onset and management of obesity and other chronic
   diseases are often driven by suboptimal behaviours, including
   poor diet and sedentary lifestyle.
   • These behaviours can be traced to discounting of future health
   benefits, discounting of future risks, lack of motivation, lack of
   confidence in the ability to overcome a health problem.
   • Behavioural economic has emerged as a promising tool to
   address these suboptimal behaviours.
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   Insights from Behavioural Economics
   • Strategies developed by behavioural economists include:
   o Framing and nudging towards desired behaviours;
   o Providing salient information on more immediate benefits
   of healthy behaviour and immediate risks of obesity;
   o Use of social-network to develop and promote inclusive
   and positive group-based norms
   • Such strategies hold promise for improving health behaviours
   and disease control, but most have not been studied in medical
   settings. The effectiveness of these approaches should be
   evaluated for their potential as tools for medical professionals.
   30
   Examples of Behavioural Intervention Programs
4. Regret Lottery
   • This intervention is based on loss aversion; as well as the fact that
   individuals do not like to regret (called regret aversion).
   • Lotteries can take advantage of the fact that individuals overweight
   small probability events. For example, providing a 1% chance of
   winning $100 might motivate people more substantially than offering
   them $1 directly, even though the two have the same expected value.
   Regret lotteries have successfully influenced behaviour in a variety of
   health domains.
   o For instance, subjects lost significantly more weight when provided
   with a regret lottery that paid out an expected $3 per day (in the form
   of a 20% chance of winning $10 plus a 1% chance of winning $100) if
   the subject is on track to his or her weight loss goal (Volpp et al.
   2008b).
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   Examples of Behavioural Intervention Programs
5. Commitment Devices
   • Another way to leverage loss aversion with monetary incentives is to
   provide individuals the opportunity to make commitment contracts
   (also called deposit contracts) in which they put up their own money.
   This money is then forfeited if they fail to achieve a certain goal, such
   as reaching a weight loss target or attending the gym a specified
   number of times in a week or month.
   • This strategy allows individuals to create monetary incentives for
   themselves and leverage loss aversion simultaneously. A commitment
   contract in which the committed funds were matched 1-to-1 by
   researchers was effective at achieving weight loss by study
   participants (Volpp et al. 2008a).
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   Examples of Behavioural Intervention Programs
6. Peer Mentoring
   • There is growing evidence that social forces have a powerful effect on
   individuals’ health behaviour.
   • In a randomised controlled trial on teen smoking across 59 schools
   and 10,730 students aged 12-13 in Wales (Campbell et al. 2008),
   control schools received the standard smoking education while a
   special program was implemented in treated schools that included
   peer mentors: students who were trained to have informal
   conversations with their peers to discourage smoking.
   • Treated schools showed lower likelihood that students would smoke
   one to two years later.
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   Summary: Behavioural Intervention Programs
   • Many interventions rely on other behavioural tools, such as
   Information and Salience (e.g., nutrition labelling leading to
   decreased calorie intake), Context and Framing (changing the default
   of health coverage in insurance plan, changing from opt-in to opt-out
   rules in consent for organ donation), etc.
   • Overall, while the BE approaches have often proven to be costeffective,
   so far scientific evidence mostly point to short-term
   effectiveness of BE interventions.
   • More research is needed to understand its effects on long-term
   behaviour change, which may help design public health strategies
   that reach segments of the population hitherto impervious to existing
   public health strategies.
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   Conclusion
   • The rapid rise of obesity and associated chronic diseases
   worldwide has inspired policy responses in many countries.
   o New York City voted to ban trans-fat in restaurants in 2006.
   o Japan started charging higher premiums for citizens with
   waistlines above a maximum threshold in 2008.
   o Denmark instituted a tax on all products with saturated fat in
   2011.
   • If there is no moral hazard, then these laws do not affect
   total social welfare, but they do introduce a regressive tax,
   since obese people tend to be poorer than thinner people.
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   • Thus, any government intervention should be scrutinized for
   unintended and harmful side-effects.
   o Example: taxing fast food may rein in obesity, but would
   likely hurt the poor who rely on these sources of cheap
   food for important nutrients.
   • Behavioural economics provides some useful tools to manage
   obesity. Some behavioural ‘nudges’ have proven to be successful
   in managing obesity and other chronic diseases.
   Conclusion
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   The cover of “The Economist”, Dec. 13-19, 2003.
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   References:
   Campbell R, Starkey F, Holliday J, et al. An informal school-based peer-led intervention for smoking prevention in
   adolescence (ASSIST): A cluster randomised trial. Lancet. 2008 May; 371(9624):1595-1602.
   DellaVigna S, Malmendier U. Paying not to go to the gym. Am Econ Rev. 2006 Jun; 96(3):694-719.
   Fehr E, Falk A. 2002. Psychological foundations of incentives. Eur. Econ. Rev. 46:687–724.
   Giné X, Karlan D, Zinman J. Put your money where your butt is: A commitment contract for smoking cessation. Am
   Econ J Appl Econ. 2010 Oct; 2(4):213-35.
   Goldfarb, A., Ho, TH., Amaldoss, W. et al. Behavioral models of managerial decision-making. Mark Lett (2012) 23:
7. doi:10.1007/s11002-012-9183-4
   John LK, Loewenstein G, Troxel AB, et al. Financial incentives for extended weight loss: A randomized, controlled
   trial. J Gen Intern Med. 2011 Jun; 26(6):621-6.
   Kahneman D, Tversky A. Prospect theory: An analysis of decision under risk. Econometrica. 1979 Mar; 47(2):263-92.
   Rothman, A. J., & Salovey, P. Shaping perceptions to motivate healthy behavior: the role of message framing.
   Psychological bulletin, 1997; 121(1), 3.
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