The Dose

Welcome to The Dose, which tackles the finances behind local health care and life sciences and points to the most interesting national analysis. Your host is J.K. Wall.

Health Care & Life Sciences / Life Science & Biotech

Why are we so fat? Our food, health care are so cheap

June 2, 2014

Dr. Aaron Carroll, a pediatrician and health policy expert at the IU School of Medicine, drew my attention today to a fascinating study on the economics of obesity.

Since obesity is an especially big problem in Indiana, as I noted last week, I thought this study was especially relevant for Hoosiers.

Author Roland Sturm’s conclusion is strikingly simple: Obesity is a growing problem due to the simple fact that the real cost of food has fallen steadily for nearly a century. Americans today spend a smaller percentage of their disposable incomes on food—about 10 percent—than any other people at any time in history.

“Americans now have the cheapest food in history when measured as a fraction of disposable income,” wrote Sturm, who is an economist at the RAND Corp. “In the 1930s, Americans spent one-quarter of their disposable income on food, dropping to one-fifth in the 1950s.”

As we all learned in Economics 101, lower prices lead to higher demand. Americans’ consumption of calories has gone up and up—as has the percentage of Americans who are obese. And the rise in obesity has been remarkably consistent across income and education levels—as the charts in Carroll’s post show so clearly.

Sturm's study also debunks several common explanations for steady expansion of American waistlines.

According to Sturm’s long-term data analysis, rising obesity is not due to a decrease in overall physical activity. In fact, the opposite has occurred.

It’s not due to decreased leisure time. Leisure time has actually increased overall in the past several decades.

It’s not due to a lack of healthier foods, including fruits and vegetables. Their availability is greater now than ever before.

It is partly due to increased consumption of sweeteners and carbohydrates, which has been fueled by the greater availability of all kinds of food.

"As food becomes relatively cheaper, there is constant access, and individuals become wealthier (all of which occurred in the past 50 years), the simple economic theory predicts that obesity rates should increase,” Sturm wrote.

In other words, cheap, plentiful food makes it virtually impossible for someone to eat himself or herself “out of house and home.” And without that economic constraint in place, Americans eat more and more.

Of course, there are very expensive health consequences to long-term overeating. Diabetes, heart disease, joint replacement surgery--just to name a few.

But those consequences are felt only weakly because health care policy has suppressed the true cost of those consequences.

That much was clear to me when I read the latest report by actuarial firm Milliman Inc. on the cost of employer-sponsored health insurance for a family of four. It hit $23,215 last year.

Employers contribute on average 58 percent of those costs. Employees pay another 25 percent of the cost via premiums and are now, on average, exposed to out-of-pocket costs of $3,787 (although some of those are offset by employer contributions to their workers’ health savings and health reimbursement accounts).

As a member of a family of four, I am astounded by the fact that our health care costs $23,000 per year.  And yet, the way health benefits are structured makes the actual purchasing of health care a fairly low-cost affair.

The average premiums of $5,900 are salty. But since U.S. tax law makes employer-sponsored insurance a much better deal than buying individually, there’s little choice but to pay them.

Once an employee does pay premiums, the only way he or she can receive value from them is to consume health care. And when Americans go to buy health care, their deductibles and co-pays make them pay only 16 percent of the true cost of care.

(I got that 16 percent figure by dividing the average out-of-pocket expenses, $3,787, by the total cost of a family policy, $23,215.)

In strict economic terms, that means Americans will be willing to spend money on health care until the point that the value they derive from their health care purchases is less than 16 cents they would spend on anything else.

Or, looked at another way, it also means it would make sense for Americans to buy at least $6 worth of health care services before they’d be willing to spend an extra dollar on anything else.

So put these two things together. Americans have every economic incentive to consume lots of food and then, when that food creates health problems for them, to consume lots of health care to fix it.

And what do we see? A 2009 Health Affairs study found that health care for issues related to obesity approached $150 billion per year.

When food and health care are so cheap to the people actually doing the buying, there’s little reason to skimp on either.
 

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