RTI International is a trade name of Research Triangle Institute

Panel Presentation Presented by: Eric Finkelstein, Ph.D. 3040 Cornwallis Road ■ P.O. Box 12194 ■ Research Triangle Park, NC 27709 Phone 919-541-8074 Fax 919-541-6683 e-mail finkelse@rti.org ■ www.rti.org RTI International is a trade name of Research Triangle Institute

Outline • How individuals (might) make decisions • Role of Government • How To Evaluate Potential Interventions • Examples

Individual Choice? • Classical Economic Theory: Utility Maximization • Given all the choices we could be making, we choose the options that make us best off (i.e., the ones that give us the most utility) • Subject to constraints: time, money, biology • Increasing weight over time can be explained by changes in the constraints (i.e., it’s harder to be thin in today’s environment) • Preferences for thinness (or fatness) have not changed • For many, weight gain is the utility maximizing outcome given the changing environment • So, then what is the role of government?

Role of Gov. as Seen by Economists • Government should intervene only in the case of market failures (or undo past government failures) • Market Failure occurs when resources are not being allocated efficiently by the private sector • Externalities • Market Power • Public Goods • Imperfect (Asymmetric) Information • Consumer Irrationality Where are the market (or government) failures?

Is government intervention warranted to save money? • Overweight and obesity increase the annual medical bill by $90 billion per year • In the absence of overweight and obesity, health insurance expenditures would be 9% lower • Medicare expenditures would be 11% lower • The government finances half of the total annual medical costs attributable to obesity, or more than $45 billion per year • The average taxpayer spends $175 per year to finance obesity-related medical expenditures among Medicare and Medicaid recipients But is this a reasonable justification for gov. intervention?

So Is There a Role for Government? • Government imposes laws and regulations that influence food consumption and physical activity decisions • This ultimately influences rates of obesity • An appropriate role of gov. may not be to solve existing market failures, but to revisit past policies to determine whether they may be doing more harm than good • Farm bill, zoning,… • Provision of public goods is also a classic role of government, but little evidence of cost savings

So Is There a Role for Government? • Clearest case for government intervention concerns youth • Addressing childhood obesity should be a top priority for government • The utility maximization argument clearly fails for them • Bad decisions as youth are especially hard to undo • That is why we mandate schooling and ban alcohol and cigarettes for youth • But be warned, don’t try to sell the benefits of these programs in terms of dollars savings

Annual Medical Expenditure for Normal Weight and Obese Adults Source: Finkelstein, E.A. and D.S. Brown. 2006. “Why Does the Private Sector Underinvest in Obesity Prevention and Treatment?” North Carolina Medical Journal 67(4):310-312

My View of Obesity Interventions • Interventions that do not change marginal (incremental) costs and/or benefits are least likely to be successful • Explains why most diets fail • Information provision may have an impact, but likely to be limited • Interventions that change marginal costs and benefits are likely to be followed by changes in behavior

Evaluating Interventions • Prior to implementation, need to consider: • Is there a justification for the intervention (what’s the market failure)? • What are the intended consequences (will it resolve the market failure)? • What might be the unintended consequences? • How do we know if the intervention is successful? • Are there better alternatives? • May require cost-effectiveness analysis • Is it economically feasible • Is it politically feasible (of secondary importance for this class)

Potential Gov. Interventions • Targeted taxes and subsidies (fat tax) • Mandatory food labeling for restaurant food • Are these justified on economic grounds?

Targeted Taxes and/or Subsidies (Motivation) • Consumption of added sugars and added fats exceeds recommendations • Consumption of fruits and vegetables falls short of recommendations • Decrease in the price of less healthy energy dense foods is consistent with the relative increase in quantity demanded

Targeted Taxes and/or Subsidies • Is there an economic justification for the tax? • Reducing the ‘external’ costs of obesity is probably the best argument but not great • If external costs are truly the problem than what is the most efficient solution?

Targeted Taxes and/or Subsidies(cont.) • What are the intended consequences? • Reduce consumption of the taxed food and increase consumption of the subsidized food • Other intended consequences? • Improve health and/or reduce obesity • Raise revenue – Equal to the ‘external’ costs of obesity?

Targeted Taxes and/or Subsidies • What foods get taxed, subsidized? • For specific products lots of potential for substitution • People can even substitute for fat • Q: What are the own and cross-price elasticities? • How big should the tax be? • How will demand change due to an X% price change? • For whom will demand change?

Targeted Taxes and/or Subsidies(cont.) • Unintended Consequences • Poor people may be disproportionately affected • May increase food insecurity • Businesses will be adversely affected • Might change product attributes to minimize the impact of the tax • May still be worth doing but… • Are there better alternatives?

Targeted Taxes and/or Subsidies (cont.) • Are there better alternatives? • Largely depends on the objective • If the goal is to reduce obesity then this may be a very costly method: • Both monetarily and in decreased utility • Especially costly for those who are not currently obese • Note that nearly all foods are ‘healthy’ if consumed in moderation

Mandatory Food Labeling for Restaurant Food (Motivation) • The percentage of food spending on away-from home foods rose 60% between 1970 and 1995 • In 1995, away-from-home foods accounted for • 27% of eating occasions • 34% of total daily energy intakes • Away-from home foods are higher in fat, sugar, and salt than are at-home foods

Mandatory Food Labeling for Restaurant Food • Require restaurants to provide information to consumers concerning the health content of meals • Is there a justification? • Forces restaurants to provide information that they might not readily supply on their own • Perhaps but some firms (e.g., Subway) provide this information without government intervention • Remember Atkins?

Mandatory Food Labeling for Restaurant Food (cont.) • What are the intended consequences? • Consumers make more informed choices • Other intended consequences? • Alter dietary behavior to decrease consumption of unhealthy food • Improve health and/or reduce obesity • Change the health content of restaurant food

Mandatory Food Labeling for Restaurant Food (cont.) • What might be the unintended consequences? • Suppliers • Economic burden • Less likely to introduce products, change menus • Other supply responses? • Consumers • May not know how to use the information • Government • Burden of implementation, monitoring

Mandatory Food Labeling for Restaurant Food (cont.) • Are there better alternatives? • Depends on the objective • What if demand does not change? • What if obesity rates do not change?

Obesity and Health Care Reform (in my opinion) • HHS policies more likely to influence treatment rather than prevention • Other government agencies (e.g., USDA, DOT) could have a larger impact on prevention • Questions surround coverage for bariatric procedures and (eventually) other new drugs/technologies • Unlikely that broad coverage for diet/exercise programs will have much of an effect • Real change will require abandoning the current model of health care financing in the U.S. • And replacing it with one that provides incentives for prevention over treatment

RTI International is a trade name of Research Triangle Institute