When Arizona governor Jan Brewer proposed that certain participants in the state’s Medicaid program — specifically obese people and smokers who don’t take steps to change their unhealthy behaviors — should pay a fine of $50 a year, it didn’t take long for the reactions to come rolling in.

Those in favor state that people who eat to the point of obesity or who smoke should have to contribute to covering the costs of that behavior. In addition, they note that any money collected through these fees will help the state’s financially strapped Medicaid program and allow it to expand current coverage. Opponents of the proposal say that for some individuals, obesity is the result of occurrences beyond their control, such as accident or illness.

An article in The Wall Street Journal notes that 25.5% of Arizona residents were considered obese as of 2009, and about 46% of the state’s Medicaid participants smoke daily, according to a 2006 survey. Moreover, the Journal added, “Unlike private insurers, which often charge different premiums based on customers’ health status, Medicaid must enroll all those who meet its eligibility requirements.”

Knowledge at Wharton asked two Wharton professors — Katherine Milkman, professor of operations and information management, and Kevin Volpp, professor of health care management — for their thoughts on three issues raised by the Republican governor’s proposal.

First: Is this proposal fair?

Volpp: Many of the people in question likely have a BMI (body mass index) far above 30, the cutoff for being considered obese. It is unlikely that people with BMIs much above 30 would be able to successfully lose enough weight to avoid this penalty.

Differential premiums based on weight are tricky from an ethical standpoint; to the extent that weight is based on genetic factors or larger social/environmental factors that individuals can’t control, adjusting premiums based on weight undermines the concept of risk pooling that is the basis for insurance. To the extent that weight is based on behaviors that an individual can control, it is arguably fairer to adjust premiums than not to do so, since otherwise, people with healthy lifestyles subsidize unhealthy behaviors of others. We don’t really know, for a given individual, how much of their obesity is due to their behaviors vs. genetics/environmental factors.

Another important factor is that reasonable accommodation should be made to those who can’t meet a particular incentive; for example, those who are in wheelchairs.

Milkman: It is no surprise to me that people are concerned about the fairness of this proposal. Classic judgment and decision making research about what people perceive as fair shows that any loss relative to our current reference point is viewed as extremely unfair. In this case, the reference point is no surcharge (in spite of higher medical costs) for obesity and smoking, and the change relative to that reference point (a $50 fee) is experienced as a loss. 

We know from prospect theory (a Nobel-prize winning theory describing human behavior) that losses loom larger than gains, so in spite of the gains associated with this new program (coverage of more people, etc.), it is no surprise that the losses are getting more attention. I do think it’s wise that those who are obese or who  smoke will be offered actionable steps (and hopefully realistically achievable ones) to avoid the fee. 

2. Would this proposal be effective? Is $50 enough of an incentive?

Volpp: It is unlikely that this will be effective in making people lose weight. Losing weight and maintaining weight loss is extremely difficult for most people, and a one-time $50 penalty, once paid, will not provide sufficient motivation throughout the year. Most people are very focused on the present; a once-a-year incentive will not likely be effective in sustaining weight loss.

Milkman: $50 may not be enough to make a significant dent in the problem, but it should affect some people meaningfully. The question is, how many? It would be very interesting to calculate that percentage if the program is implemented.

3. Do you think this proposal will be passed, given its controversial nature?

Volpp: A similar provision is part of the Affordable Care Act (Section 2705), which stipulates that starting in 2014 employers can adjust health insurance premiums based on outcome-based wellness incentives using measures such as BMI by up to 30% of the total employer/employee premium. Employers currently are allowed to adjust premiums by up to 20% using outcome-based wellness incentives. Few use this full amount but clearly there is precedent for these types of approaches to be used more widely.

Milkman: I think it is likely that proposals like this will become increasingly common. I think that could be a good thing to the extent that these incentives help educate people about the risks associated with obesity and smoking and help motivate them to take steps to lose weight or quit smoking. However, there is also the risk that these types of programs will simply function as regressive taxes.

 From Incentives to Penalties: How Far Should Employers Go to Reduce Workplace Obesity? Knowledge at Wharton