Rising healthcare costs have become a central problem
for individuals around the world, specifically residents of the United States,
which has caused employers to shift a greater portion of insurance premium
costs to their employees. According to an annual poll of employers referenced
by the Wall Street Journal, annual
insurance premiums rose three percent during the year 2017 which outpaced
inflation. A portion of these healthcare costs can be attributed to
inefficiencies in the market due to a lack of risk measurement for workers. Presently,
the National Association of Heath Underwriters has found that lifestyle choices are accountable for as much as
seventy percent of health care spending. Employees who make unhealthy lifestyle
choices which include obesity, smoking and excess alcohol consumption require
more medical care and are therefore costlier to employers. The CDC website
states that smokers cost their employers an additional $5,128 a year in health costs
and decreased productivity. In order to contain these costs, employers can
utilize various methods which include higher deductibles, higher premium
charges and other cost-sharing tactics.

As health insurance costs increase, employees are
increasingly eager to maintain their benefits. As a result, workers will bear
the incidence of increased premiums because the changes in their healthcare
costs will be offset by changes in their salary which will not alter their overall
compensation. Employees make a tradeoff between salary and other forms of
compensation like fringe benefits. Ultimately workers are sensitive to
price because they are human and by increasing premiums for their unhealthy
lifestyle choices, it creates a negative incentive for them to change their

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If firms do not take into account the risk level of
each employee through factors like smoking and obesity, it can cause inefficiencies
in the labor market. If firms do not have some sort of differential to pay for
insurance premiums for workers with unhealthy lifestyles, firms might have an
incentive to hire underqualified workers as long as they are thin or nonsmokers
as presented by The Journal of Health Economics. Employees therefore should pay
for higher premiums if their healthcare costs are linked to lifestyle choices
because if not done, it could diminish incentives to be healthy and therefore
not decrease costs.

If firms can classify and separate employees who make
unhealthy lifestyle choices and provide negative incentives, like an additional
ten percent over the premiums that other workers pay, it can encourage employees
to modify their behavior and become healthier which is supported by American
Journal of Health Economics’ research.
If employees did improve their health, it would ultimately lead to savings in
healthcare costs for employers. Differentials in wage for benefits is economically
sound both for the employee and employer because otherwise some employees would
lose their jobs to more healthy workers but employers might receive less
efficient individuals. The differentials can be offset by the benefits received
and also increase overall utility of the employees and employers.


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