By Helen Kean

On October 9th, the 2017 Nobel Prize for Economics went to Richard Thaler, a contributor to ‘behavioural economics’ and an advocate of economic ‘nudges’. The former relates to the psychology and economics of individuals in their everyday decisions and hypothesises that individuals do not always act rationally in their maximising of utility (or for illustration, happiness) given their constraints of time, money, etc. Following on from this, the latter relates to ‘nudges’, or incentives, that assist individuals in making the right decision or acting more rationally (with this being distinct to mandatory legislation or regulation that may be set with the same purpose but that essentially removes or reduces choice).

Coincidentally, two days after Thaler’s award, Econex was invited to provide an economist’s perspective in a panel discussion at the launch of Discovery Vitality’s ‘ObeCity’ results for 2017.[1] This launch was about the ‘ObeCity’ index that Vitality has created in order to assess Vitality members’ overall wellness and encourage improvement via the Vitality incentives that prove to already be working. One of the key themes of this was about ‘choice architecture’ and the idea of ‘making the healthy choice the easy choice’, i.e. ‘economic nudges’.

Considering the above two discussion points together, a lot may be highlighted about obesity, ‘nudges’ and relevance of both to economics.

In addition to clinical and social views, economists’ views center around the fact that, holding all else constant, less health equals a greater cost to the economy. This plays out via direct and indirect links. The indirect links, which globally are shown to be the highest, relate to the effects of less participation in the labour force due to overweight/obesity conditions. This is in turn driven by premature morbidity, more sick days and less productivity. Alongside this, the direct effects include much greater healthcare spending as a result of these and related conditions. The end result on the economy is less spending, saving and investment; with these in turn equating to a slow-down in the economy. Whilst this is theoretically appealing, research shows that these economic mechanisms do work as described.

Recent research shows that obesity has an economic impact that is equivalent to 2.8% of global GDP. This same metric is estimated to be 3% for South Africa. In countries like the US, it is also found that 20.6% of health expenses are attributable to obesity, and, holding all else constant, obesity raises health care costs by 160%. With South African data showing that 7/10 women and 3-4/10 men are overweight or obese, this economic problem is unlikely smaller than what is referred to here, and is likely to be increasing. The increasing trend is particularly concerning since Econex’s previous research shows that disability adjusted life years (DALY’s), and hence related costs to the South African economy, display sharp inclines for lifestyle related diseases. More specifically, our research also shows that overweight and obesity related diseases are on the incline. The data for example show that, amongst the medical scheme population, Type 2 diabetes (primary diagnosis) admissions, patient days and expenditure at Netcare, Mediclinic and Life Healthcare hospitals (aggregated) increased by 97%, 120% and 143%, respectively, over 2006-2014. Over the same period medical scheme beneficiaries increased by 24%.

Within this context, some health economists theorise that body weight is optimised by each individual in order to maximise utility/happiness, taking into account all constraints. However, other economists, largely in line with behavioural economics, argue against this, pointing out that individuals do not have all the information necessary to make optimal decisions (this is because there are, for example, different links between cause and effect/ health behaviours and disease, both across individuals and within individuals over time). Additionally, individuals do not carry all the costs that would influence them to make the optimal decision (in both public and private systems, health behaviour costs may not be fully borne by the individual but rather by the health system as a whole; moral hazard/ increased risky behaviour may also occur as one becomes aware of this). This motivates the need for economic ‘nudges’ – in the case of Vitality, more awareness and the assisting/ facilitating of the ‘right’ choice.

With the above in mind and having sight of Vitality’s ObeCity results, it appears that well-founded economic nudges may assist in lowering the cost of poor health and in particular obesity and overweight related conditions, to the overall economy. Of course, such actions need to be analysed and proven as effective in the population in question, with nudges designed to target the precise issue. As with all other sub-disciplines within economics, the net effect of policies or programmes (considering all gains and losses to all stakeholders) is what matters to economists.

Looking forward, this will be a space to watch and one that is relevant to all of us.

[1] A few media links:

Author/s: Helen Kean

Nothing in this publication should be construed as advice from any employee of Econex and should be seen as general summaries of developments or principles of interest that may not apply to specific circumstances.