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Tax the Unhealthy? (Part 1)

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[The following is part 1 of a two part guest post by Adfecto from Aspire 2 Wealth. He left a great comment on this subject. Though I initially disagreed with him, he made some great points. He was kind enough to consolidate many of those thoughts into two posts. If you like this article, consider subscribing to his RSS feed.]

A great deal of buzz has been generated lately about the idea of making people who are unhealthy pay more for health insurance. Most people's knee jerk reaction when they hear about this idea is that, "of course unhealthy people should pay more." It seems only fair that those who burden the system pay their fair share, right?

I'm here to tell you that it isn't that simple. Your intuition has betrayed you, and in fact it is a terrible idea to charge different rates in this manner. Now, quickly before everyone quits reading, I want to pose a few questions that hopefully will encourage you to keep reading.

1. How do you decide who is unhealthy?

2. Who decides if someone is unhealthy?

3. How much extra should someone pay if they are unhealthy? 10%, 20%, 200%?

4. Where do we draw the line? If you are very unhealthy should you no longer qualify for any insurance?

5. Does it matter why you are unhealthy? What if a person was unlucky? What if a person was born unhealthy?

6. Why should unhealthy people pay more? Do unhealthy people really cost more to insure?

This is a lot to tackle in a single blog post, but my goal is to get everyone thinking. In the interest of full disclosure, I am overweight (but not morbidly so) and my wife has asthma. It is very likely that we may be the type of people others would want to single out for higher rates. That said, I think my arguments are not based solely on my bias against paying more for insurance.

Now to answer some of the questions: The obvious starting place is to break the population down into groups based on their health. Research has shown that certain groups of people are more susceptible to disease than others. First on the list are smokers and the obese. Smokers have been shown to be more likely to get cancer and obese people are more likely to have high blood pressure, heart attacks, or suffer a stroke. These are all expensive conditions to treat, and can be identified by simple screening.

My problem is this, even if you could define some characteristics that made a person "unhealthy," you are still missing out on a lot of people who are equally unhealthy but don't fit your metric. What about the skinny people who don't eat any fruits or veggies? What about the fat people who regularly exercise? What about the people who work with radiation or carcinogens in their occupation? Which children grew up in homes with lead paint? Which people have seven close family members who have died of heart disease? The point is that creating an objective metric that encapsulates all of the genetic, environmental, and lifestyle factors that truly determine our level of health is not possible. To boil this complexity down to five or ten multiple choice questions would punitively affect many people who are healthy and miss many people who are unhealthy.

Now playing devil's advocate for a moment, let us consider that we have indeed found our voodoo methodology to classify a person's health or 'un-health.' I am sure an actuary could create a formula to determine exactly how much people in each category of health should pay, but recognize that number would be based on an imperfect model of disease and medicine. Based on some hypothetical model, a smoker may be charged 20% more on average for health insurance. That seems fair. Maybe the person who has high blood pressure is assigned to pay 10% more on average for health insurance. Again it may be in the right ball park. However, it is naïve to think that we understand our health so well that a mathematical formula can sum it all up, down to a dollar amount.

Now, what about the person who has Type I (childhood) Diabetes. This is a lifelong condition that requires all manner of treatments and medications. If the actuary comes back and says 50% or 100% more for health insurance, is that 'fair' or reasonable. This condition does not have anything to do with behavior, but it does cost an awful lot to treat. Now, what if an adult is diagnosed with diabetes, should it matter if it is Type II (somewhat based on lifestyle) or if it is late onset Type I? What if it is misdiagnosed? Finally, what if the disease is AIDS? Would it matter how it was contracted? Should that person pay double for health insurance? I would answer that it should not matter. We should all pay the same.

Move on to read part 2.

Last updated on April 15, 2010.

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24 Responses to “Tax the Unhealthy? (Part 1)”

  1. Adfecto says:

    I’d like to thank Lazy Man for the opportunity to guest post for him. Thanks to all of you who read the post and then check out my blog, Aspire 2 Wealth. Keep your eyes open for Part 2 of this series coming very soon. I look forward to some spirited comments on this topic so feel free voice your ideas.

  2. kitty says:

    One basic assumption behind this idea is that prevention saves money. This may seem obvious from the first glance, but what seems obvious isn’t always true. Just the past week there was an article in New England Journal of Medicine disputing this: http://content.nejm.org/cgi/content/full/358/7/661
    “Sweeping statements about the cost-saving potential of prevention, however, are overreaching. Studies have concluded that preventing illness can in some cases save money but in other cases can add to health care costs.”

    There was also a study done in Holland that showed that healthier people actually cost more in the long run (because they live longer and health cost more over lifetime): http://www.boston.com/news/world/europe/articles/2008/02/05/study_good_health_costlier_in_long_run/

    These are actual studies done by medical researchers, not politician statements or wishful thinking. Here is a thought – maybe before making policies, politicians should have some proof that what their plan would actually save money?

    I also agree with the blog entry above. If we are talking about risk factors, what about runners? Knee replacements and injuries are expensive too. Bottom line is though – the longer we live the more we cost.

  3. Bill says:

    Adfecto, from my understanding, the idea is to charge more for the ppl whose health bills could likely be greatly reduced if they quit smoking, started a diet, and exercised regularly.

  4. Jesse says:

    This idea really scares me. I am completely healthy and it seems to me just another thing for the government to poke into our lives. Everyday I think more and more we just need to move to the FairTax.

  5. Bill says:

    kitty, really? really? maybe it would be better to offer “free” health care for ppl who agree to eat cyanide tablets on their 10th birthday. I sure would decrease the health spending on those ppl due to their decreased life span? don’t be dumb.

  6. Jon says:

    kitty,

    I heard an interview on NPR with one of the author’s of that study. He said they (purposely) didn’t take a lot of stuff into account like increased economic productivity of healthy people. The study only serves as a starting point that focuses only on costs of being healthy.

    Also, many costs were specific to the Netherlands. For instance, the chief cost driver in the study was the cost of state-provided nursing homes, which (iirc) the author said cost about 20,000 euros per year. In a less socialist society like the USA, many of the costs won’t apply.

    Anyway, that said, I want to pose this question: why should people employed at big companies get the benefit of group insurance rates? Why is it okay to charge individuals more if they smoke, but not if the same exact individuals are under a group plan? That doesn’t make sense.

    Personally, I think group plans need to go. They are unfair and discriminatory. We either need to have universal coverage based on taxes (i.e. 1 big group plan), or purely individual coverage (no group plans). Doctors and hospitals should not legally be allowed to charge people different prices. I think it’s really disgusting that doctors will give special breaks to insurance companies that they won’t give to individuals without insurance.

  7. Bill says:

    Jon, I agree w/ your opinion on group plans in big companies. While one could argue that it’s a perk given to businesses to promote the success of capitalism, I’ll argue that it’s not fair that I pay the same as my fat co-worker who is outside on a cigarette break.

  8. dong says:

    I think there’s a balance to be struck. I don’t think people should pay more things they do not choose. But if you choose to smoke then I believe you should have to pay the price or quit. People need to be given incentives to make healthy choices. Obviously this creates a problem when there are admittedly people who are naturally skinnier or healthier for that matter. But the incentive structures can still be place. For instance maybe can get a discount on insurance if they can document they actively excercise regardless of what weight they are?

  9. SavingDiva says:

    While I think Adfecto brings up an excellent argument, I agree with dong. I think a balance needs to be struck. I have a family history of heart disease. However, I do a lot of things to keep my risk as low as possible.

    I have a hard time watching health care costs skyrocket because Americans aren’t taking care of themselves. I do find it a little frightening that there will be health standards created. However, I’m pretty confident that if we base the standards on the American public they can’t be too strict.

    Consider health insurance like car insurance, would you want your insurance bill to go up because your next door neighbor has 3 DUIs and has totalled a vehicle. If you’re a responsible driver, you should be rewarded with lower premiums. I think health insurance should be though of in a similar light.

  10. kitty says:

    Jon, you may have a point about the study limitations. But do you have a single study that actually shows that these measures save money? How much? What about other costs, such as higher cost of injuries for people who exercise? Some measures are cost-saving; others aren’t. What seems obvious is not always true.

    As to the employer insurance – it allows to spread risk. You don’t know when you are going to need care or cost money. Certain lifestyles increase risk of some conditions, but there are plenty of healthy fat people and sick thin people. A lot of people who do everything right – don’t smoke, exercise, eat right – still get sick. Living healthy lifestyle may decrease the risk of some conditions, but it will not eliminate the risk. Bill may not want to pay for one’s fat co-worker, and if he is still young, he doesn’t want to subsidize his over-50 co-workers. But would he thinks the same when he is 50? Or if he gets sick in spite of all the right choices and his individual insurance decides not to extend his policy?

    Bill, actually I am arguing against taxing the unhealthy and explaining why, so I don’t quite understand your example. But unlike you, I am not going to resort to name-calling. The discussion here is about cost and not whether prevention is beneficial to you as an individual. Nobody wants to die young – I don’t, I assume you don’t either. Prevention has its value other than cost. But yes, from the insurance company perspective, if we die from an immediately fatal heart attack at the age of 56 – as my very unhealthy cousin-in-law did – we’ll save money. At any rate – I included a reference to a paper published in a reputable medical journal. Have you bothered to read it? Are you saying the doctors who write in a medical journal are dumb, the reviewers of their paper are dumb, but the politicians and you know better?

  11. kitty says:

    SavingDiva, is doing all you need to minimize risk includes taking drugs? Do you know how expensive this is – i.e. how many people needs to be treated with statins for 10 years, for example, to prevent one heart attack? What about extra tests you may want to take? Should you pay more if you need/want them even if these measures are proven to save lives?

    This is an example of why some preventive measures while beneficial and maybe even life-saving are actually expensive. There are these interesting concepts in epidemiology: NNT (number needed to treat) for drugs and NNS (number needed to screen) for screening. It sounds so simple – “it is cheaper to take statins than to treat heart attack”, “it is cheaper to do test X than to treat cancer” – until you calculate how many people actually need to be treated/screened to benefit one person. This is an example of how what “seems obvious” isn’t always true. Obviously, prevention has a lot of value. But cost savings isn’t always one of it. So maybe before you talk about charging someone more you have some real evidence that it’ll save money?

    As to skyrocketing health care costs, it is an oversimplification to think that the lifestyle is the only cost. Defensive medicine – doctors ordering unnecessary tests to protect themselves from lawsuits has a part in it. There has been a study that showed that over half of the doctors order unnecessary, non-recommended tests at annual physicals. Each of these tests cost money; each of these tests can result in false positives requiring more expensive tests. People demanding tests because they saw an ad on TV is a large part of it too. Prescription drugs far outpaced the inflation. There are a number of reasons for higher costs. And btw – people do live longer.

    BTW – I’ve never smoked, I hate smoking, and I am slim.

  12. paidtwice says:

    My spouse’s work has started a program similar to this. he gets up to 5 $10 deductions on his bi-weekly premium for meeting certain health criteria. Even though he gets all 5 deductions, I’m still not pleased they’ve gone to a system like this. Once it starts, where does it end?

  13. Sara says:

    @Jon: “I think it’s really disgusting that doctors will give special breaks to insurance companies that they won’t give to individuals without insurance.”

    This comment represents a misunderstanding of how insurance companies work with doctors. Doctors don’t give insurance companies “special breaks” because they choose to. Insurance companies say “hey, if you want to take our insurance at your practice, we will only pay you $X amount of dollars for this procedure/test/whatever, and you have to accept that. also, you can’t charge the patient anything to make up the difference.” For a lot of procedures and tests, the amount the insurance companies pay is less than the doctor’s cost to perform it. The doctors have to make up the loss on other procedures, or by charging patients without insurance a more standard rate. And ALL insurance companies do this, so it’s not like doctors have the choice of avoiding the ones that do.

    It’s a broken system. It results in patients without insurance paying more for procedures than patients with insurance. It results in doctors and hospitals pushing perhaps unnecessary but more profitable procedures/tests/surgeries to make up the difference on the stuff they lose money on.

    However, to suggest that doctors are in bed with the insurance companies in order to rip off uninsured patients is totally wrong.

  14. Adfecto says:

    @ Kitty

    I hope you aren’t confused about my hypothesis. Everyone should pay the same for health care and equally share risk. In part 2 I reference the same article you bring up.

    @ Bill

    The idea of paying people who take preventative measures does get discussed and some employers are implementing these types of policies. This is not what my article addresses, which is insurers or employers charging more for covering “unhealthy” people. It seems you have either missed the point of the article or simply disagree, but in that case add some just justifications to support your position beyond (I’m healthy, I deserve to pay less / he is fat and smokes thus deserves to pay more).

    @ Jon

    I think you are on to something with the Big Group plan idea, but the idea of individual health insurance is backwards. How do you share risk if your policy is priced for one person or even just a small sample size? You can’t unless the insurer is using a system of writing offsetting individual policies, such as one high risk for one low risk. But then, why even bother with the high risk? That person does not provide a profit motivation so instead only give insurance to very healthy people, still charge them high rates, and reap a huge profit. Everyone loses but big business.

    @ dong

    Who’s business is it if a person smokes? Do we legally requirement to answer a questionnaire about their personal habits? Do we require a person to submit to step on a scale and make that data available to the employer and insurer? I think all of these “decisions” constitute my person life choices that are nobody’s business but my own. If my employer ever asked my weight to assess how much I should pay for insurance I would lie (unless it was under oath or under legal order) or I would refuse. It is my business. Period.

    @ Saving Diva

    Health care costs are not skyrocketing because we aren’t taking care of ourselves. They are skyrocketing for several reasons, first because people are living longer. The second reasons is that there is an expansion of the types of treatment for more focused ailments. You can get treatment for things never before treatable. Third, there is demand. We have seen the benefits of medicine and everyone feels entitled to the latest, greatest, and most complete treatments available. When before we would have a $100 X-Ray we now have a $1500 CAT scan and a $3000 PET scan as well. The sheer number of treatments has skyrocketed. Next, medical professionals are taking on massive debt and working their butt off in school and they require huge salaries to compensate them for that. Finally, there is the ever increasing cost of malpractice insurance. What I’m saying is that people today are healthier than they have ever been and that is both the cause and the effect of ballooning health costs.

    @ kitty

    Your last two comments are right on the mark. I want to second what you have said.

    @ All

    Thanks very much for your contributions. I am glad to have opinions from both sides of the argument.

  15. Adfecto says:

    Everyone,

    I think it would be helpful to the discussion if people were willing to try and comment specifically on the six questions I outlined at the beginning of the post. It seems to be a good way to directly debate some of the issues. Anyone want to volunteer to give it a try?

  16. RC says:

    I smoke (hopefully only for a few more days). I currently pay slightly more (less than 10%) in premiums for life insurance, but that will increase as i get older. But after one year of being smoke free, my rates go back to that of a nonsmoker. How would they figure out that (a smoker who quits) for health care premiums?
    I’ll give the questions a shot.
    1.) &2.) Like you point out, there are so many variables, that it is in reality probably impossible to quantify properly, but i am certain the insurance companies would try-if it would benefit them. Not to mention, every year more and more things become “unhealthy”, it seems anyway.
    3. & 6.)-I don’t think it should be more. In reality, as someone mentioned above, I have a suspicion that people dying earlier from “unhealthy” habits could have a lower total cost than someone who lives to 90. Except for regular checkups,I have not been to the doctor in about 5 years. But I have co-workers that go every time they sneeze-Who costs more?
    4.) & 5.)-I think the line would be hard to draw, and the government would not let companies(employers) opt out, I would guess.

  17. I think the best system is similar to what companies are doing with smokers””don’t tax them more, just give non smokers a health bonus or an incentive that others won’t get. It’s hard to draw the line but this way you aren’t punishing anyone, you’re just rewarding those that are “healthy.”

  18. Bill says:

    Adfecto,

    “Everyone should pay the same for health care and equally share risk.”
    This is socialism. How do you feel about the discriminatory practices of auto insurance companies?

    Adfecto,

    “The idea of paying people who take preventative measures does get discussed and some employers are implementing these types of policies. This is not what my article addresses, which is insurers or employers charging more for covering “unhealthy” people.”
    this is only a perspective difference — paying ppl to take preventative measures accomplishes the same goal of charging unhealthy ppl more (see the end of this post). Your article focuses on the nitty gritty b.s. of true costs and exact calculations of health/unhealth…and briefly touches on the true meat of your reason for posting it…”Everyone should pay the same for health care and equally share risk.”

    ———-
    1. How do you decide who is unhealthy?
    I don’t. See question 2.

    2. Who decides if someone is unhealthy?
    the insurance companies. in a free market economy, the insurance companies should make these decisions. if the public then disagrees, the insurance companies will meet the demands or face competition from another insurance company that pops up and offers a package that is more closely tied with the public’s demands.

    3. How much extra should someone pay if they are unhealthy? 10%, 20%, 200%?
    see question 2.

    4. Where do we draw the line? If you are very unhealthy should you no longer qualify for any insurance?
    see question 2.

    5. Does it matter why you are unhealthy? What if a person was unlucky? What if a person was born unhealthy?
    darwinism.

    6. Why should unhealthy people pay more? Do unhealthy people really cost more to insure?
    this is the only debatable point that i see in this whole post of yours.

    don’t get me wrong, I’m all about positive reinforcement (compensation for healthy lifestyle) over punishment (higher premiums for unhealthy ppl) but the end result is the same. where would the compensation for a healthy lifestyle come from (tax write offs for healthy food, gym memberships, etc)? it would eventually be tracked back to the health insurance companies who would then subsidize it over everyone’s insurance premiums…and in doing so would have the same effect of costing an unhealthy person more for insurance.

  19. Brandon says:

    Insurance should be based on risk, but I see it in a different manner than Lazy Man. I imagine that no-disclosure insurance would cost a certain amount, but then you might be eligible for discounts based on a healthy lifestyle. Actually, many employers are doing that now! Maybe there could be further discounts if you were at low-risk for certain conditions. Of course, this should all be opt-in rather than required to protect medical privacy and such.

  20. Brandon says:

    Oh BTW, I don’t see increased premiums as a ‘tax’.

  21. SavingDiva says:

    @ kitty, No, I’m not taking any medications. I meant that I’m working on making healthy choices (even though I’ve never been over weight), getting a lot of exercise, not smoking, keeping drinking to a minimum, trying to minimize my life stesses, and just trying to lead a healthy life.

    Adfecto, I do agreee that health care costs are increasing because of the increase in technology. I acutally work in the health care field. The stress of medical malpractice suits is also killing the medical field. However, I see a huge number of people with lung cancer that can’t wait to sneak outside to smoke a cigarette (not kidding). One morning, I rode my bike past a pregnant women hooked up to an IV bag smoking a cigarette in a hospital gown outside of the hospital (I have no idea who let her out).

    My point is that people need to take personal responsibility for the poor decisions they make regarding their health.

  22. kitty says:

    @SavingDiva – nobody disagrees with you that smoking causes the vast majority of lung cancer cases or that many smokers don’t quit even if they are sick or if their kids have asthma. But your personal experience does not prove that they cost more (as much as I hate it when neighbour’s kids smoke under my windows…)
    @Bill, Brandon. Unlike car insurance, our health is much more complex and much less dependent on “responsibility”. There is also very little (if any) evidence of cost savings and there is some evidence to the contrary. All I hear from you is how people should pay by risk, but you have absolutely no evidence that healthier lifestyles actually save money. It seems really pointless to talk about “irresponsibility” when irresponsible people may actually save money and are only harming themselves.

    The biggest risk factor is age. It is expensive to treat lung cancer, but the years of preventive drugs and tests and office visits that healthy people have are also expensive. As the guidelines get stricter and stricter, most people over 50 are on one drug or the other – a statin, blood pressure medication, osteoporosis prevention drug, etc. Add to this years of screening, false positive evaluations, etc. and the cost for a “healthy” person will add up. Not to mention that even a lot of formerly healthy people need end-of-life care at the end.

    Obesity increases the risk of several deseases, but some of the heart attacks are instantly fatal so they cost $0 to treat. Exercising reduces risk of many condition, but those who exercise have more injuries. If the health insurance run as car insurance, the insurance for athletes will be high as well. Having a lot of children earlier reduces woman’s risk of breast cancer. Shall women who have many children early pay less and those who have children after 30 pay more?

    Take another definition of “responsible behavior” – screening. In most cases, you need to screen hundreds or thousands of people for one person to benefit. This is of course extremely important to you if you are this one person, but it is expensive especially after you add numerous false positives and one little known effect of screening – overdiagnosis. Do you know how some forms of screening increase the number of people diagnosed with the desease? For those who don’t know “overdiagnosis” refers to finding cases of early cancer that are either indolent or so slow growing that they wouldn’t have spread within one’s lifetime if remained undetected. Should people who forgo screening pay more because they miss a chance of catching a potentially treatable cancer early or less because as a group they cost less; with some tests – a lot less?

    The biggest risk factor for all deseases is age. So, if health insurance works like car insurance, the older you get, the more you’ll pay. But this is the time when you need your insurance the most. Do you really want your premiums go up as the chance of your needing it increases and so do your out-of-pocket costs? What about the fact that car insurance skyrockets and you may be thrown out after an accident? Do you want your health insurance to skyrocket to the amount you cannot afford just as you are diagnosed with cancer?

  23. Adfecto says:

    @ Bill

    All I can say about your “Darwinistic” approach to medical care is that I hope you are never in a position of power. You really think that insurance companies would not discriminate and abuse the authority you would grant them? The minute someone got cancer they’d be kicked out the door by each and every insurance company. As you aged the rates would slowly increase until only the very wealthiest could possibly afford to pay. The day your child was diagnosed with an sever disease they would be dropped from the policy. Unabashed capitalism / libertarianism is not the perfect solution for every problem. Regulation is needed. Free markets don’t look out for the little guy. Unless you are willing to recognize that there is nothing really to debate with you. Finally, if this is truly how you feel I hope you change your tune when someone you care about is faced with a potentially expensive disease (believe me if you have any social network at all this WILL happen to you one day).

  24. Jon says:

    Sara,

    Sorry for the late response. I disagree with you 100%. The doctors *choose* to give price breaks to the insurance companies. Why? Well obviously it is still profitable for them to operate at that price level — otherwise they would literally be losing money dealing with the insurance companies and that would make no business sense.

    So the conversation that goes on in pretty much every doctor’s head goes something like this: “Hmm… XYZ Corp only wants to pay me $100 to do a physical. That’s outrageous! And yet, I’m still making huge amounts of money doing that. Okay so I’ll play their game. But those poor saps who don’t have insurance… hahaha I can still charge them $200 because they can’t do anything about it!”

    Or are you suggesting that doctors are willing to have “loss leaders” in the same vein as Walmart? Get them in the door with “low low prices” for physicals, then they’ll stay for the more expensive procedures later on? That doesn’t make sense either because that would be equally valid for uninsured patients.

    I’m not suggesting that doctors are *conspiring* with insurance companies. All I’m saying is that doctors have a choice about what price they operate at. They give a better price to insurance companies than to individuals. It’s still profitable for them to offer the lower price or they wouldn’t do it. There’s no disputing that and thus far I’ve not heard a decent explanation of the financial necessity of charging $X for certain patients and $X + 50% for other patients.

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