In the most recent Capital Letter, I wrote about Wegovy and other weight-loss drugs such as Ozempic (so far only Wegovy has been approved as a treatment for weight loss by the FDA, but that seems likely to change) and on what they could mean for the economy.
Writing in the Wall Street Journal last year, Tomas Philipson (who has regularly contributed to Capital Matters) took a look at the economics of obesity.
Obesity afflicts 42% of the U.S. population. Many attribute America’s weight problem to genetics, addiction or culture, but the analysis Richard Posner and I began in 1999 demonstrates that the problem is an economic one driven by technological change. Agricultural innovations have increased output and cut the price of food dramatically. Historically, it wasn’t feasible to produce all the food necessary for an obese population this large, but today we can do it easily and cheaply.
At the same time, innovations that increased productivity in other areas of the economy, such as automation and computers, have made work sedentary. When more Americans worked in manual labor, they exercised for much of the workweek and got paid to do it. Now many Americans sit as they work and have to pay for exercise in gym fees and lost leisure time. Total calories spent a year has fallen nationally as more people have shifted to white-collar jobs. Even someone who is diligent about going to the gym only gets a few hours of vigorous exercise a week, while a manual laborer rarely stops moving.
These changes have overall been hugely beneficial for the U.S. and the world, but the side effects on weight gain are regrettable and hard to combat through behavioral modification. Aggregate food consumption has fallen even during some periods of obesity growth in the U.S., such as during the postwar period. It isn’t only a U.S. issue. Many economies where food is cheap and work isn’t physically taxing are dealing with the same problem. The World Health Organization estimates that about 650 million people world-wide were obese in 2016 and the World Obesity Federation predicts that almost a billion will be in 2025.
It isn’t hard to see how obesity could become so widespread. There are strong incentives pushing Americans to gain weight. But this also means there is now a large global market for obesity treatments, which has inspired innovation.
Amazing how that works. . . .
Philipson, writing in 2022, noted the reluctance on the part of insurers and Medicare to cover the new anti-obesity treatments. Some insurers have now changed their point of view, rightly, it seems to me (presumably the patients covered will have more than a cosmetic need for the treatment).
Philipson:
Doctors and insurers tend to view obesity as a preventable disease and treatments as lifestyle drugs. But using medications to fight diseases that are technically preventable isn’t unusual. That’s how we deal with many diseases, from HIV to Covid.
Focusing on an increase in drug spending is shortsighted. Insurers and the government could see their overall costs fall if these drugs can make a dent in the obesity epidemic. The cost of treating diabetes was $327 billion in 2017, according to the American Diabetes Association. Two-thirds of that was covered by the government through Medicare, Medicaid and military medical benefits, programs that have a large impact on the national debt. Add the costs of other obesity-related health problems—heart attacks, high blood pressure, strokes and some cancers—and the cost-benefit analysis is clear.
Wary insurers should consider the hepatitis C cure Sovaldi, which entered the market in 2013. The spread of hepatitis C can be prevented through behavioral change, but in practice it doesn’t happen. Hepatitis C was and still is a common chronic infection in the U.S. When Sovaldi came on the market, insurers threw a fit. A 12-week course of treatment cost $84,000. But once they began picking it up, modeling showed that their overall costs would fall. By covering Sovaldi, insurers helped patients avoid costlier treatments such as liver transplants.
These new antiobesity medications are worth it too. Extending coverage to Wegovy, Tirzepatide and future obesity-fighting drugs will help insurers, the national debt and the country’s health.
Writing about these medications for the Capital Letter, I noted how there was a distinctly puritanical strain in some of the more critical commentary about them. This may help explain the attitude of insurers, but bottom-line considerations probably weigh (so to speak) far more. These would be understandable if including these drugs in coverage was going, on a net basis, to be expensive, but, as Philipson explains and as also discussed in the Capital Letter, this may well not be the case. That said, the front-loading of the cost that comes with extending the coverage will, I imagine, be a problem, at least for as long as these drugs remain expensive. And it might well be some time before the cost savings would be apparent in insurers’ results.
To be sure, it would be good if people (if I!) took more exercise, or ate more healthily, but, particularly where the former is concerned, incentives, as Philipson explains, are pushing the other way. For example, as he notes, taking exercise “costs” more (sometimes literally) than it did when it was a natural part of the working day. Good medical practice obviously includes giving patients advice on improving their eating habits, but, ideally, doctors should work with human nature rather than against it.
Over at Populyst, Sami Karam (someone else who has written for Capital Matters) looks at the impact of Ozempic in stock-market terms:
Ozempic fever has spread wide enough through the market that it has negatively impacted the valuations of a number of companies, many of which have little or no relation to diabetes or obesity. With Ozempic, there would allegedly be fewer outings to restaurants (cue restaurant stocks), less need for dialysis (cue renal care stocks) or other health procedures (cue medical devices stocks) and even fewer deaths (cue funeral services stocks).
Funeral-services stocks hit by fears over falling death rates! The stock market can be a cold, cold place. There is an (I think) apocryphal story that stock in the British engineering company Vickers fell after the Munich peace deal was settled, prompting a headline in the Financial Times that the Vickers share price had been hit by “peace fears.”
As I noted in the Capital Letter, the share price of Novo Nordisk (the manufacturer of Ozempic, Wegovy, and Rybelsus, three weight-busting drugs) has soared this year, as has that of Eli Lilly, the manufacturer of Mounjaro, a weight-buster based on a different compound. Only time will tell if this is merely a display of, to borrow a phrase, “irrational exuberance,” or if it reflects the fact that these drugs will indeed be game changers. It should be noted that those two facts are not mutually exclusive. These products could indeed have revolutionary implications, but competition, regulation, management failures, and known and unknown unknowns could all mean that the current surge in these manufacturers’ share prices has been overdone.
Who knows?