Study: Employers offset higher health costs in wages
By Kristen Gerencher MarketWatch
May 12, 2005
-- Obese workers long have had lower paychecks for what's thought to be prejudice over their appearance, but employers' concern about health costs is creating a new reason for employees to stay vigilant.
Obese workers with employer-sponsored health coverage pay for their expected higher-than-average medical costs through lower cash wages than those of their normal-weight counterparts in similar jobs, according to a study from Stanford University that also is a working paper on the National Bureau of Economic Research's Web site.
Researchers crunched federal data of 35,000 Americans from 1989 to 1998. Most of the obese workers studied were in their 20s and 30s and had the classical definition of obesity -- a body mass index (BMI) of 30 or greater, said Kate Bundorf, co-author of the report and an assistant professor at Stanford University Medical School's Department of Heath Research and Policy.
"The obese workers with health insurance earned $1.20 less per hour than non-obese workers with health insurance" on average over the nine years, she said. The gap appeared to grow over time.
"We don't know exactly how this happens. Our study design doesn't allow us to look directly at the mechanisms," Bundorf said, noting she doubts employers engage in a "conscious process" of lowering pay for obese workers.
Instead, fat workers likely are seeing smaller and less frequent raises in salaried positions, she said. Hourly obese workers lacking on-the-job coverage don't see the same wage difference.
"The fact that we don't find the differential in workers without health insurance suggests it is attributable to the higher cost of health insurance."
Nearly two-thirds of U.S. adults are overweight and more than 30 million are obese. Overweight people with a BMI of 25 to 30 don't seem to experience the same pay distinction, Bundorf said.
Getting around the law
A federal law prohibits employers from charging workers higher premiums based on their health status, but many appear to be compensating on the pay side, raising questions about fairness, discrimination and whether group health insurance cross-subsidizes healthy and sick people and pools risk effectively, legal and health policy experts said.
Economists largely agree that workers bear the burden of health insurance costs much more so than employers, said Mark Pauly, professor of health-care systems at the University of Pennsylvania's Wharton School of Business.
"In some ways, it's surprising. It says the distribution among workers in terms of whose wages get dinged is more precise than we might have thought," he said.
Many people wrongly assume that group insurance spreads risk equally, which it doesn't do completely, he said. "The hidden way the higher risks are charged more than lower risks is in terms of this wage offset, which is far from uniform."
Another study has shown similar results among insured women of child-bearing age, who have lower wages in states that mandate maternity coverage, Pauly said. "The older pay more, women of child-bearing age pay more and now we have another example of the obese paying more."
Roger Feldman, a health economist at the University of Minnesota, agreed. "The striking finding is that workers individually pay for the cost."
Fortunately, evidence suggests major, costly health events such as cancer and diabetes don't have the same effect, Pauly said. "Those do not lead to identifiable wage offsets."
No one from the National Association to Advance Fat Acceptance or the American Obesity Association returned calls seeking comment.
Getting out of the pool
A gradual shift is under way as the incentive for risk-pooling diminishes compared with the early years after World War II, when employer-sponsored health insurance became mainstream, said Lewis Maltby, president of the National WorkRights Institute in Princeton, N.J.
"Originally, nobody knew who was going to need expensive medical care, so it was in everyone's interest to pool the risk," Maltby said.
"The whole concept of cross-subsidized risk-sharing is unraveling because the people who on an individual basis would pay the least are rebelling against subsidizing the people who cost more," he said.
"As we learn more and more about predictive medicine, it's only going to get worse."
Feldman has similar concerns. "To the extent we begin to rate health insurance policies for chronic conditions like obesity, we destroy the purpose of insurance in providing lifetime protection against risk, and that's not efficient."
The ramifications may affect more than just obese people pinched by lower wages, he said. "If in fact wages are adjusting to offset the higher cost of health insurance, then ... employers who squawk about health-care costs putting us at a competitive disadvantage against the Japanese carmakers are really overblowing the issue"
While employers do face steep health costs, it's likely more of a problem than a crisis, Maltby said. "If employers are already covering the cost of people who have higher-than-average medical bills by paying them less, you could certainly argue employers are getting a lot of that money back."
The findings shine a spotlight on workers' significant stake in the debate, Feldman said. "The mistake is in perceiving it as a crisis for employers when in reality it's a crisis for employees. The emphasis has been somewhat misplaced."
Family health-care premiums at the University of Minnesota, for example, run about $10,000 a year, and many staff and lower-level administrative jobs pay only $25,000 to $30,000, he said. "A significant portion of their total compensation package is taken over by health insurance."
It's not the first time employers have tried to insulate themselves from the cost of workers' health habits, said Mark Rothstein, a lawyer and director of the Bioethics Institute at the University of Louisville School of Medicine.
Fifteen years ago, employers who refused to hire smokers -- even those who smoked off hours -- prompted some states to tighten their protections. More than half now have laws prohibiting discrimination against smokers in employment, with some extending protection to those who engage in any legal activity after hours, he said.
Earlier this year, Weyco, a Michigan company, drew criticism for firing workers who continued to smoke after several years of warnings and programs that tried to wean them off tobacco. See full story.
Since employers can't legally customize premiums, the act of paying obese workers less money to compensate for anticipated higher health costs may qualify as discrimination on the basis of disability, a murky area under federal law, Rothstein said. "The legality may depend on what state you're in."
Legal options may be limited even in the best of circumstances, he said. "It would be very difficult for an individual to make this case. What's more troubling to me is the clear implication that some employers are actually doing this, whether it can be proven or not."
Medium-sized companies may be more tempted to try the strategy than other firms, he said. "They can less afford the hit from high-cost users than the bigger companies, and the very small companies and small companies usually don't have benefits to begin with."
Still, having people pay for some of their own risk may not be all bad, Pauly said. "The alternative of saying employers shouldn't be allowed to do that means thin and fit workers are then going to have to pay. It's hard to get the boss to pay."
The study's findings may make some wellness promotions that promise rebates or other financial incentives for improving health habits reconsider their methods, Rothstein said.
"At some point an inducement for A becomes a penalty for B. If you get an incentive for lowering your cholesterol, and you have a genetic condition that prevents you from lowering yours, can they discriminate against you?"
The dilemma may incite lawsuits by people who see a pattern of discrimination, whether intentional or not, Pauly said. "There's a real ambiguity in our social attitude about this where everyone wants to share and share alike, except we want discounts for our own practices that lower our risk."
In light of the findings on obese workers, employers are wise to monitor their pay policies, he said. "My advice to employers would be, be careful here. There's potential danger."