Variable Healthcare Premiums: Why Law and Econ Can't Tell the Whole Story

Smokers and obese people use more healthcare resources over their lifetimes than people who aren't overweight or smoke. This indisputable fact has put a spotlight in recent years on the strain that those who live what can be blanket-labelled unhealthy lifestyles are putting on company-sponsored health plans. This has become ever more true in an environment with mandated coverage and ever-rising costs. As a result, many companies have recently made the decision to charge smokers and overweight employees higher premiums for insurance coverage. While this is potentially more fair to 'healthy' employees who would otherwise have to bear a disproportionate burden, it has also created far more questions than answers with respect to privacy and personal choice.

For example, should companies have the right to inquire whether employees are smokers? After all, despite it being a freedom which has been massively curtailed over the past decade, smoking is still legal. While it would be possible to avoid judgment calls by using physician-approved weight tables, should a company have the right to ask an employee their weight? What if the employee's weight gain (or inability to lose weight) is not self-induced but physiological? What about overweight smokers who nonetheless live well into old age and never place an added burden on the healthcare system? Why should they have to pay extra? After all, the very idea of insurance presupposes the averaging of lifespans and lifelong costs among a broad pool of people. Perhaps the choices of individuals in that pool shouldn't matter.

With such fundamental privacy issues involved and the overwhelming amount of healthcare legislation existing in the US, some among this post's readers will be wondering what the law is on variable pricing. According to the Reuters piece linked to above,


The programs have until now met little resistance in the courts. The 1996 Health Insurance Portability and Accountability Act (HIPAA) prevents workers from being discriminated against on the basis of health if they're in a group health insurance plan. But HIPAA also allows employers to offer wellness programs and to offer incentives of up to 20 percent of the cost for participation.

President Barack Obama's big health care reform, the 2010 Patient Protection and Affordable Care Act, will enable employers beginning in 2014 to bump that difference in premiums to 30 percent and potentially up to 50 percent.

In other words, despite the privacy issues involved, any potentially valid legal challenge available to those who are being impacted by these plans now is rapidly evaporating as America approaches implementation of provisions in what has been dubbed by some as ObamaCare. Assuming that sections of the legislation, or even the whole bill, are not struck down by the Supreme Court sometime over the next few terms, this could leave some with premiums up to 50% higher than co-workers.

Though there are issues in the realm of privacy, variable pricing arguably makes a lot of sense from an economic standpoint. In a law and economics type of analysis, it could be argued that the incentives and disincentives that variable pricing create reward cost-reducing behavior while still allowing people personal choice. In other words, added costs could provide an incentive for those who lead unhealthy lifestyles to change their ways. In another way of thinking about it, it would also provide a disincentive to begin smoking or gain weight in the first place. Particularly in a world where health insurance coverage is compulsory and health is valued, these ends are presumably desirable.

In addition to a favorable economic analysis of variable pricing, personal privacy issues can in some ways be addressed. Companies themselves do not have to be involved in the decision process at all. Life insurance contracts often require a medical professional to administer a check-up. Company health plans could do the same through independent third parties.

At this point, we have presented the notions that the law and economics analysis of variable pricing suggests that it is a positive, while privacy advocates would suggest that the negatives of such plans outweigh these benefits. Though we often advocate for the primacy of personal privacy on the site, we also think that the economics as discussed above would lead to a state of fairness. In other words, as outlined above, it is very possible to find merit in the arguments of both proponents and opponents of variable pricing plans. However, there is a third approach to analyzing such plans that tilts the scales a little more in a negative direction from our perspective; the likely reality of variable pricing.

We noted above that costs could rise by up to 50% for the 'unhealthy' plan participants. While this is undoubtedly true, practical experience would indicate that it is unlikely that such increases in costs will lead to commensurate reductions in costs for non-smokers. This is a political/corporate reality that the student of basic law and economics might unfortunately miss. In addition, despite it being conceivable that companies could have medical professionals determine who should be charged more, it is also true that, as a practical/administrative matter, companies will nonetheless be aware of who is paying more.

Therefore, in at least one very plausible (perhaps even the most likely) scenario, it would seem that individuals will face intense scrutiny into their personal lives without so much as an economic benefit as a result. When uncertain but likely unfavorable economics are coupled with a decidedly unfavorable personal privacy environment, no one wins (except perhaps insurers). Our fondness for the approach of law and economics aside, this is the main reason why BlawgConomics has to say that variable pricing is destined to be far more trouble than it is worth.