Can Regulation Of Tobacco Affect Health Care Costs Economics Essay


23 Mar 2015

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The economic calculations associated with tobacco use are very complicated. For every savings, there are increased costs in other areas. Many productivity costs are subjective, while things like tax revenues are very definitive. These costs can be absorbed by various entities; public, private, and governmental. The tobacco industry has been viewed as the root of many of these costs. This industry has historically been exempt from oversight by any governmental agency, other than taxation. The Food and Drug Administration (FDA) has recently taken charge of overseeing and regulating many tobacco products, including cigarettes. Can the new regulations have any effect on health care costs?

Why is tobacco use such a big deal?

According to the World Health Organization (WHO), tobacco is the second major cause of death in the world, responsible for one in ten adults and the fourth most common risk factor for disease worldwide (2010). Costs (both public and private) associated with health care related to tobacco are astronomical. Productivity is reduced or lost when people are at their prime due to tobacco use. "A 1994 report estimated that the use of tobacco resulted in an annual global net loss of US$ 200 thousand million, a third of this loss being in developing countries" (World Health, 2010). This paper will look at the costs associated with tobacco use in the United States and the relationship regulation may have on reducing these costs.

Compared to the length of time tobacco has been used, the health effects of its use are just recently becoming understood by the general public. Prior to this knowledge, the tobacco companies were free to advertise without any regulation. 1789 saw the first tobacco advertisement in the U.S for snuff. Communication, transportation, and manufacturing constraints of the time prevented any major branding and marketing successes.

"The first strong national tobacco brand didn't emerge until near the end of the Civil War, when both Union and Confederate soldiers in Durham, North Carolina raided a local farmer's tobacco crop while waiting for a surrender to be completed. After the war was over, these soldiers began writing to the farmer, Mr. John Green, requesting more; Green went on to establish the successful Bull Durham Tobacco Company." (Collins & Lapsley, 2010)

The cigarette machine was one of the two major innovations that changed the industry and embedded tobacco into the minds of Americans. It was introduced in the 1880s and allowed companies to go from producing 40,000 hand-rolled cigarettes a day to over 4 million. The other major innovation came in the form of advertising. The color lithograph revolutionized advertising and packaging. These factors allowed companies to brand their products, searing them into the fabric of everyday life. Promotions, such as trading cards, were packaged with cigarettes and became collector's items.

World War II came and went with millions of soldiers and sailors addicted to nicotine courtesy of free cigarettes issued along with meals. Marketing remained pretty much unregulated throughout the 1950s. Advertisements promoted how healthy it was to smoke and how doctors (whom the public trusted) recommend one brand over another. Sponsorship of television shows, like The Flintstones and Gunsmoke, propelled cigarette smoking into a normal and expected part of life. "For tobacco companies, it was the Golden Age: cigarette ads featured endorsements from dentists, doctors, babies and even Yankees slugger Mickey Mantle" (Collins & Lapsley, 2010).

Research evidence was beginning to mount of a link between tobacco use and lung cancer. Filtered cigarettes were born, which eventually led to light and low tar brands - all of which have been proven to be no safer than regular ones. Rising public interest in health issues associated with tobacco use and concern about social costs associated with the care of sick tobacco users have created an atmosphere less tolerant than before. In the United States, social acceptance of tobacco use is rapidly declining.

1964 saw the first real public scrutiny of the tobacco industry when the U.S. Surgeon General released his first report on Smoking and Health. This comprehensive report outlined how tobacco had been shown in over 7,000 scientific studies to be linked to lung cancer, emphysema, and other diseases. This was the tipping point for many. Warning labels were mandated on packages. Advertising restrictions for radio and television were put in place. The public was put on notice that tobacco may not be all the things the industry was telling them. 18 Surgeon General reports have followed, as new findings have been proven. In 1996, cigarettes were labeled an "addictive drug". "The FDA sought to gain control over the industry and limit the sales and advertising of tobacco products" (Brant, July 2008). With presidential support, the Supreme Court ruled in favor of the industry in 2000 "claiming the federal agency was never given the proper authority to regulate tobacco by Congress" (Brant, July 2008).

Restrictions are not new to the tobacco industry. Extremely deep pockets have allowed them the opportunity to design ways around most hurdles in the past (See Appendix). Regulation comes in many forms. State and local governments have passed laws throughout the years, most of which regard taxation. The recent passage of the U.S. Food and Drug Administration's (FDA) tobacco regulation bill will give the national government much more power over the manufacture's actions. This is the broadest and most comprehensive regulation over the tobacco industry ever. The FDA will be able to control product ingredients, labeling, marketing, and determine whether new products should be distributed.

The budgetary impact of smoking

Costs related to tobacco use can be looked at from different perspectives. There are related costs that are only seen by the individual, their family, and those close to them. Then there are the costs that are seen by society. These social costs are what drive many of the regulatory policies we have in the U.S. These costs must be balanced and weighed with the benefits associated with tobacco use. Organizations from several fronts are quick to weigh in on advantages and disadvantages of such policies. Each has their own agendas and use data to support them. High social costs justify more restrictive policies, while lower social costs support the argument against such policies.

Calculating these costs is not simple. It is important not to count the same costs twice. A sick smoker that becomes dependent upon welfare payments instead of their job salary should not be seen as lost productivity and the cost of welfare payments. "The first is a 'real' cost (a real loss of resources) while the second is a 'pecuniary' cost (a redistribution of resources from taxpayers to the smoker)" (Adhikari, et al. December 30, 2008, p. 1227).

Health care costs in the United States continue to account for an ever increasing percentage of personal and public expenditures. The budgetary impact of tobacco use generally is looked at as whether the tax revenues cover the costs that tobacco use imparts on government agencies. These costs are not just paid by these agencies. Personal and business costs, such as those of health insurance companies, bear massive burdens too. "While we are often asked: 'Do smokers cover the smoking-related costs that the rest of the community bears?', the more relevant question is: 'Does the tobacco industry cover the community's smoking-related costs?'. The answer to this second question is almost certainly 'no'" (Lindblom, 2010, p. 2). It has been estimated by the CDC that "each pack of cigarettes sold in the United States costs the nation more than $7 in medical care and lost productivity" (2010).

The lifetime health costs of tobacco

It is important to understand the difference between the lifetime personal health care costs of smokers compared to non-smokers. There is an argument that smoking provides benefits as well. It may be obvious that smokers have higher costs during their lifetimes, but one must consider the non-smoker lives a longer, more productive life, and therefore uses health care services for a longer period of time. Philip Morris, a major tobacco company conducted a detailed data analysis and submitted a 1999 official report to the government of the Czech Republic that they should let Philip Morris sell cigarettes in their country. They (Philip Morris) said that the government would save approximately $1,227 US per person on savings of health care for older people and increase in taxable revenue (Philip Morris, 2000). The industry is in a catch 22 situation when arguing this point. Premature death associated with tobacco use must be admitted and the economics must outweigh human life.

The Center for Disease control estimates that male smokers have approximately $16,500 more lifetime health care cost and females have approximately $19,500 than those that do not smoke. (Campaign, 2010) This adds up to considerable amounts that someone must absorb. The nationwide total in 2004 was almost $98 billion(Adhikari, et al. 2008, p. 2228).

Measures to reduce tobacco demand

There are many different regulatory measures that can be used to significantly impact tobacco use, such as "bans on direct and indirect tobacco advertising, tobacco tax and price increases, smoke-free environments in all public and workplaces, and large clear graphic health messages on tobacco packaging" (Collins & Lapsley, 2010).

Tobacco taxation

Taxation is probably the most effective (and certainly the most cost-effective) means of reducing tobacco consumption. Studies have shown that higher prices equate to less people using, especially youth. Young people have less disposable income than older people. This makes them more sensitive to changes in price. Adult tobacco use also changes in relation to price increase too, but not as much as youth. "Burman notes that research has shown "that a 10 percent increase in the price of cigarettes would reduce youth smoking by more than 10 percent" (Brandt, July 31, 2008, p. 447). Taxes can be used to this benefit, along with the increase in public funds that can be focused on tobacco prevention programs.

Cigarette taxes can be seen as a double edged sword. Governments can become as addicted to the tobacco tax income as smokers are to lighting up every day. The amounts of money are astronomical. The President of the United States, Barack Obama signed into law on February 4, 2009 a 62-cent federal tax increase per pack of cigarettes, along with increases in other types of tobacco too. This money is to be used to fund the State Children's Health Insurance Program (SCHIP), a major children's health reform package. The federal cigarette tax is $1.01 per pack and the average state tax is just over $1.00 per pack. According to the Tax Trade Bureau, over 16 billion state tax-paid packs were sold in FY2009. The total tobacco revenue generated for government use is approximately $39 billion. This significant figure is enough to get any legislator looking for the source and wondering how to keep it.

Several states have hoped to fund health care with tobacco dollars. Massachusetts, California, Oregon, and even the federal SCHIP program have come under heavy opposition from the tobacco industry. The SCHIP program was finally approved, but the other propositions ultimately failed. The primary argument used against such taxes is that a tobacco tax is a regressive tax, meaning that it affects poor people more so than others. Approximately 33 percent of those living at or below the poverty level smoke. The argument is that a greater portion of their income is spent on tobacco, and therefore the tax would be greater. Counter to this argument for the SCHIP funding is that the program is designed to disproportionately benefit those in this income level. "And so, under an expanded SCHIP, low-income families would have essentially paid $164 to get $1,700 worth of coverage" (Robert Wood, May 18, 2009).

''There's a big difference in the cost to society and what society is getting back in tax,'' said Dr. Terry Pechacek, the associate director of the CDC's Office of Smoking and Health. ''We believe society is bearing a burden for the individual behavioral choices of the smokers.'' A study by the Centers for Disease Control and Prevention put the nation's total cost of smoking at $3,391 a year for every smoker, or $157.7 billion (Curfman, Morrissey, & Drazen, June 22, 2009). Poverty and tobacco are closely linked. Some studies have noticed that in some countries, the poorest households can spend up to 10 percent of their entire income on tobacco products. It is difficult to ascertain how this might have a direct impact on malnutrition, health care and longevity of life, as well as things like literacy rates. Tobacco has a wide reaching impact.

Restrictions on advertising and other promotion

Anti-tobacco campaigners support restrictions on advertising and promotion. It seems obvious that promotion and advertising increase the demand to use, or the industry would not spend the amounts they do. According to the Campaign for Tobacco Free Kids, "from 1998 to 2006, tobacco industry marketing has increased, nationwide, by more than 85 percent, with tobacco industry marketing in 2006 totaling at least $12.8 billion (or more than $35 million per day)" (2010). The tobacco industry addresses these concerns with the rhetoric that advertising does not increase the market size, merely determining the market shares of individual firms. While this point is difficult to determine, a key finding from the national youth tobacco survey indicates that the three most heavily used brands of cigarettes by teens are the three most heavily advertised by the industry.

Studies on the effect of these restrictions indicate that partial restrictions (i.e. location or type only) have little impact on demand. Restrictions on advertising and marketing do not change the amount the industry spends, only the location and types of activities. They simply shift to non-restricted types of marketing. This is why it is difficult to determine the effectiveness of marketing restrictions. When restrictions are imposed that affect multiple avenues, tobacco consumption goes down significantly. This supports the thought that marketing increases the market size, not just move customers from one brand to another.

Health information and counter advertising

Anti-tobacco campaigns use pro-health messages and counter-marketing campaigns have been show to have some effect in swaying people away from use. The premise is that the better educated users or potential users are, the better chance they will chose not to us the products. This is a difficult avenue to promote anti-tobacco messages, as it is extremely costly and directly competes with the marketing expenditures of the tobacco industry. There is no way to match, dollar for dollar. Success comes from the combination of efforts counter-marketing with the other restrictions. There is a synergistic effect.

Smoking restrictions and bans on sales to youth

Youth tobacco use is of utmost importance to the tobacco industry and the anti-tobacco movement organizations. "From the 1950s to the present, different defendants, at different times and using different methods, have intentionally marketed to young people under the age of twenty-one in order to recruit 'replacement smokers' to ensure the economic future of the tobacco industry" (Campaign, 2010). Where someone can smoke has become a frontline issue. Restrictions of the location, such as restaurants, workplaces, and other public places, make it more difficult for the smoker to light up. This creates an incentive to quit and reduces the opportunity for others to start. These restrictions reduce the amount of tobacco people use, reduce the prevalence of smoking, and have a direct impact on the exposure of second-hand smoke to others.

Other smoking cessation interventions

Cessation programs have made an impact on tobacco prevalence too. Pharmacological product advancements, from nicotine replacement therapy (NRT), to newer products such as Chantix â„¢ have helped the tobacco user assure success. These products are heavily marketed and many health care organizations provide them with little or no costs associated to the patient. Some argue the cost benefit of public subsidy of these products is a win-win based on health care costs saved.

FDA Tobacco Legislation

Through the Family Smoking Prevention and Tobacco Control Act, the Food and Drug Administration of the U.S. federal government was recently granted authority to oversee many tobacco products. Members of Congress and health organizations have worked toward this goal for many years. This new authority includes many of the items discussed above, i.e. manufacturing standards, marketing and sales practices. The legislation is a very comprehensive approach to changing tobacco use among Americans, now and for future generations. New standards for additives, flavors (other than menthol), restrictions on sales, distribution, and marketing apply. Detailed ingredients will have to be disclosed. The FDA will have the authority to require changes to products. This is the first major governmental step to protect the public from the harms of tobacco. The new law:

Restricts Marketing and Sales of Tobacco Products to Children - bans ads within 1000 feet of schools and playgrounds - eliminates sweetened (candy flavored) cigarettes

Requires Detailed Tobacco Product Disclosure

Provides Access to Tobacco Manufacturers Research

Strengthens Tobacco Product Warning Labels - warning labels must cover 50 percent of the front and back of the pack.

Allows FDA to Require Changes to Tobacco Products to Reduce Risk Where Technologically Feasible

Regulates Health Claims For Scientific Accuracy And Public Health Impact

Evaluates Reduced Risk Health Claims For New Products - eliminates cigarettes from being labeled "light" or "low tar"

Regulates Only Manufacturers, Not Farmers

The Congressional Budget Office's (CBO) examination of the new law shows an expected reduction in the number of underage tobacco users of 11 percent by 2019. CBO also estimates will lead to a further decline in smoking by adults by about 2 percent after 10 years. The expected impact of the legislation on the use of tobacco products stems from a combination of regulatory and economic factors. (Congressional, 2009)

Impact of FDA Regulation of Tobacco on Medicaid

The Congressional Budget Office (CBO) anticipates that the new FDA tobacco rules will lead to a reduction in smoking among pregnant women. Pregnant women that do not smoke during pregnancy are less likely to have low birth weight children. Low birth weight kids cost more at birth and during childhood. "As a result, state spending for Medicaid would decrease by an estimated $17 million over the 2010-2014 period, with additional savings in subsequent years" (Yang & Novotny, 2009). Medicaid expenditures are expected to be reduced by $100 million over 10 years. Other Medicare expenditures are positively affected by the FDA rules too. Heart attacks and stroke are less likely to occur in non-smokers, which will mean acute care services costs will decrease, but it is unclear as to by how much. Medicare costs may increase in some areas due to increased life spans and the payout associated with that.


A key aspect of tobacco prevention is that as people decide not to use tobacco products, their health will be generally better. "If all Americans stopped smoking-beginning with this generation of teens-that would do more to improve the health of the nation that any other reform" (Adhikari, et al. December 30, 2008, p. 1227). The economic calculations associated with tobacco use are very complicated. For every savings, there is an increase in costs in another area. Many productivity costs are subjective, while things like tax revenues are very definitive. Public and private costs have to be figured separately. However, there are situations where they overlap and care must be taken to count them in only one spot. For instance, someone that lives just below the poverty line and smokes may rely on public assistance for many things, like health care. That same person quits and their relative household revenue and productivity increases. They may not be as reliant on public assistance. The increase in their revenue and productivity cannot be counted if the decrease in public assistance spending is also counted.

It is certain that more regulation, like that in the new FDA program will indeed reduce tobacco use. It is certain that reduction in tobacco use equates to less money spent overall on health care compared to the smoker, but may increase health care costs long term due to extended life span. It is certain that overall productivity will increase as tobacco use decreases. The real questions occur when these issues are followed by the question of "By how much?". It is almost like Newton's Law of motion, for every action, there is an equal and opposite reaction. The factor that must be considered is the value of life length and productivity. These values can sway the equation massively in one direction or the other. "The latest estimates of total smoking-attributable health care costs approach $100 billion. Private insurance covers 50 percent of smoking-related medical costs for people aged 19-64" (American Academy, 2010). Education about the effects of smoking on health continues to escalate. As more is learned, the estimates increase as to the costs associated with tobacco use.


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