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C ECDNDI'IIIC' COSTS OF SI+OM<ING:: AN ANALYSIS OF D'ATA FDR THE UNITED STATES' by Dorothy P. Rice University of California, San Francilscoo and. Thomas A. lilodgson National Center.for Health Statistics . Presentediat: Alliied Social Science Associ~ation Annual Meetings San Francisco, California Diecember 28', 1'983'. Research for this paper is supported in part by THE CDfrYriDNWEALTli FUND,(Grant No. 6516)'. The statements made and,views expressed in this paper are solely the.responsibility of the authors. The authors~would like to express theirr appreciation to Peter Si'nsheimer for his assistance in the preparation of this paper.

Introductioni Cigarette smoking is a major cause of'morbidity andimortal!ity in the United States today. It has been linked toia variety of illnesses, including heart disease, cancer, respiratory illness, and several o.therr illnesses. Increasingq public awareness of the healtFn risks associated' Is with smoking has led to, a decline in the: proportion of adults who smoke,. Yet 38 percent of men and', 30 percent of women currently, smoke (,table. 1)'.. Among high school seniors 17-18 years of age, one-fif'th of the boys and more than one-fourth-of the girls are~ current smokers. Smoking, patterns have not improved: the proportion of adult smokers: who smoke 25 cigarettes or more a: has increased since 1965 (Nationali Center for Health Statistics, 1982a). The health hazards of cigarette smoking have been wel'~l-documented. Almost twenty years ago, the first Report of the Advisory Committee to the Surgeon General of the Pub,lic Health, Service was published.That report and a series of subsequent reports of the Surgeon General have carefully and systematically reviewed the scientific evidence from major prospective epidemiologic studies of'large population groups.in the United States and abroadi that established a causa,l' relationship between smoking and various -illnesses andi premature death resulting from them (U.S. Public Health Service, 1964, 1968, 1969, 1979, 1980). Iriore recently, two authoritive ~. reports have been released by the Surgeon General on The Health N Conseouences of Smokinqc the 1982 Report reviewed in depth the association, between tobacco use and various forms of cancer; the 19'83 Report focused ~ on the relatilonship between smoking and cardiovascular diseases (U.S'. ~ ~ Public HealthiService, 1962 ' and 1983). (~ W 1 Y -2'

C Iini addition to the health risks of smoking, the economic consequences are also serious and enormous. Morba~dity and mortality associated with, smoking, drains our economy heavily by reducing;economic productian through excess morbidity and premature death and'by diverting scarce resources from other need+s. This paper quantifies the magnitude of the costs to the economy of smoking in 19806 Briefly the method involves tu,o~steps. 1)' Estimation of the economic costs of illness, disability, andl premature death for all diseases by age and sex;~ 2) Estimation of the proportion of the diseases attributed to smoking for both sexes and' appli'cation, of these proportions to the disease costs. Economic Cost of Illness ' Economic costs represent foregone alternatives: direct costs are the value of resources that could be allocated to other uses in the absence of' disease:; indirect costs are the value of idle: resources and lost output. The detailed discussion of the economic assumptions and methodology usedl for estimating the costs of illness have been documented elsewhere (Rices 1966; Cooper and Rice, 1,976; Hodgson and! meiners,, 1982; andl Hodgson, 1983'). Findings of the updated estimates of the direct and indirect costs of morbidity and'mortality for the major diagnostic categories in the United States in 1!980 are presented here. C C 2

I Direct Costs Direct costs are connected with prevention, diagnosis and treatment. They include expenditures for hospital andlnursing home care, physicians' ~. and nurses' services, dirugas, medical research , medical personnel training, facility construction, and other public health expenditures. In 1 . 1982, the latest year for which data are available, a total of $322' billion, was spent in the United States for health and medical care, or 1M percent of'the Gross National Prioduct (GNP). This total represents an annual expenditure of $1,365 per capita (Gibson, Waldo, Levit:, 1983). The cost data in this paper refer to 1980. In that year total .spending, for health care amountedito $249 billion dollars, or 9.5 percent of'GNP. Of•this total, personal health expenditures comprised $219 billion, which are allocated by sex and diagnosis andlby, type of care. No attempt 'Was mada to allocate expenditures for nonpersonal services, i.e., medical research,.constructiony trainbngjand public health activities. Expenditwres by condition or diagnosis are shown in table 4. Diseases of the circulatory system rank highest ($33 billion)!, followed closeIy by diseases of the digestive system (including dental care-$32 billion). Diseases of the respiratory system accounted for $17' billion and neopliasms almost $14 billion-- all of these diseases are associatedl with smoking as we will see later. More detail by age and sex on the. disrtribution of direct expenditures are available im the forthcoming issue of Health, United States, 1983 (Hodgson and IKopste,in, 1980). 3 Y-4

Indirect Costs-- Mbrbid'ity Indirect costs are.the value of` losses in output,' such, as time lost from work because of morbidity, disability, and mortality.' The basic ,,e method for estimating the i'ndirect costs c)f illness is to appli prevailing average earnings to productive time lost by-sex and age groups for each ~ ma jor cause of death, and major type of ill'naess. Included are morbidity costs in a single year as ouell' as the value of losses in output for individuals aho~ die prematurely. If'an individual had not died in this year, he or she Would', have continued to be productive for a number of years. If he or she is ill and disabled this year and this disbil.ity continues into future years, his or her future productivity willbe affected. It is the present value of these future.losses that constitutes the appropriate measure of the costs of a disease. . In this paper, however, the calculations are limited to single year morbidity costs. Morbid'ity costs in, 19!8& are estimated at $71 'billion (table 4)., The- distribution by disease ranks the cost of respiratory disease highest ($1'7 billiion), followed by diseases of the circulatory system ($10.5 billian). Indirect Costs-- A'lortal i'ty For mortality, the estimated cost or value to society of all deaths is the product of the number of deaths and the expected value of an iindividual''s, future earnings with sex and age takerro into account. This method of derivation takes into consideration life expectancy for different age and sex groups, changing pattern of earnings at successive ages, varying labor f'orce participation rates, inputed value forr housekeeping services, and the appropriate discount rate to convert a stream of costs or benefits into its present worth., 4 E. Y-S'

One, if not the.chief, issue with respect to indirect costs is how to value life. The method in this study.is called the human capital or output accounting approach.because an employedlperson~is seen•as producing, a, stream of output over the years that is valued 'at the-individual's earnings. The main criticism of this methodology..is that it excludes intangibles,'only counts earnings, and undervalues some groups relative to others because earnings: may not accurately reflect one's ability to i produce. An, alternative approach favored by some is called the willingness-to-pay method, which values human life according to the amount people are willing,to spend to obtain reductions in the probability of' death (Hodgson, 1983). Objections to this method' are that the value of individual lives depend!on the income distri'bution, with the rich able to pay more than the poor, and that it is exceedingly difficult for persons to place a value on smalil reductions in the probability of death. For estimating the costs of smoking in this paper, the human capital approach is used. The Discount Rate The _ calculation of the present value of expected lifetime earning,s raises questi~ons about the importance of discounting and choosing the appropriate discount rate. From the economist"s point of view, the arithmetic sum of lifetime earnings overstates the present value of an i~ndividual. Determining the present value of the future earning s streamN is the correct way tolmeasure economic value over a period of time;U1 discounting converts a stream of earnings into its present value. ~ ~ LV Y-6

cc. Economists agree that the comparison of streams of earnings over varying time spans should employ the process of discounting, but there is no agreement on the discount rate to be used. The higher the discount rate, the lower the present value of a giveri stream. With a high dascount rate, earnings far, intoi the future yield a, relatively small present value. Conversely, lowering the discount rate increases the present value of . future earnings. The present values of lifetime earning¢ discounted at 4: and 6 percent are .shown~ in table 2. We have used 4 percent in this paper. For a male infant under age one, the expected lifetime earnings discounted at 4 percent are $417,055. _ The present value of male lifetime earnings reaches a peak of'$606,034 in the 20-24 age group arnd'.decreases steadily toi$1,175 for those aged 85 and over. The level of expected li'f etime earnings for females is somewhat lower than that for males up to the age group 60-64. An i'nfant female can be expected to earn $340,790 in her lifetime, or B24percent that for males. The highest expected lifetime earnings; $465,591are for females in the 20-24 age group. Peak male earnings, are about 1.31 times as large as those for females. Beginning with the age group 60-64, feamle earnings are higher. Discounted at 4 percent, lifetime earnings for females in this age group is $105,5119 compared with $71 „13'1 for males. At ages 85 and over, female C lifetime earnings are valued at $7',345 compared with only, $1,175 for I\: Q males. The higher expecte& earnings for females in the older age groups U1 are due to the relati'vely small number of males in the labor force and the ~ larger number of females keeping house. ~ 6 Y-7

0 -, C Applying the expected lifetime earnings by age and sex to the two million deaths in 196CIiresults in a loss of $198.5 billion to the economy at a 4 percent discount rate (table 3)'. For the more than, one mill,ion men who, died in 1980, losses, are valued: at $'126 billion6 About 91'S,00fl women~ died in 11980, representing a loss of $73 billion. 4, Total Economi'c Cost of P'torbidity and Mortality When the direct expenditures for illness are combined With the annual morbidity losses, and lifetime mortality losses, the total economic costs in 1980 amount to $489 billion, .based on.a 4 percent discount rate (table 4). The economic costs for males exceed!those for females by. 20 percent. Among the major diagnostic categories, the costs of diseases of the circulatory system rank highest, comprising, 20 percent of' the totall economic costs. Injuries and poisoning ranked second and neoplasms third. Attributable Risk Previous studies of the economic costs of'smoking employing the human capitad' cost-of-illness approach appiied global proportions attributable to smoking to illness 'costs ('Hedrick, 11971;, Luce and Schweitzer, 197B). For exampls, Luce and Schweitzer applied the following smoking percentages to updated cost-of-il!lness estimates orig4nally published by Qooper and Rice in 1976: Ineoplasms--20 percent, circulatory system--25'percent, andlrespiratory system--4D percent. For this paper, we have refined the estimates by applyi~ng the epi~dhmiologit me:thodblogy of "attributabls risk" to calculate the percent of the disease costs attributed to smoking. Y-8

As explained in the Foundations of Epidemiology by Lilienfeld and Lilienfeld (1980), attributable risk is "the maximum proportion of a dlsease that can be attributedlto a characteristic or etiologic factor." In this case the etiologic factor is smoking. Attributable risk is expressed'in the equation: C I d Attributable Risk (A'R)~-- b r-1 x 100 b(r-1! ) + 1 where: (r) is the relative risk-- the mortality ratio of smokers to nonsmokers; and' (b) is the proportion~of those with the etiologic factor inithe population-the percent of males and females whoismoke in the Unite6 States. For an example of how,we applied the attributable risk formula, let us compute the attributable risk percentages for males and females for one of the diseases related to smoking -- lung cancer. Listedl in the 1982 Surgeon's General Report,The Health Consequences of Smoking._ Cancer (,p.36) are eight prospective studies reporting lung cancer mortality ratios for male and female smokerss relative to nonsmokers. P1ean, mortality ratios were calculatedl by averaging the ratios for the indivi'dual studies. In this case the male mean mortality ratio equals 9.6 and the female mortality ratio equals 3'.8, representi~ng the value of r inithe equation. The percent of smokers in 1960, taken from the 1983 Surgeon General'"s Report -- The Healith Consequences of Smoking _ Cardiovascular Disease was 37.9 percent for males and 29.8 percent for females, representing b in the equation. By applying both r andlb values in the equation, the percent of lung cancer attributed to smoking is 76.5 percent for males:

.379 9.6 _1 ) .379(9.6 - 1'.) + 1 For females it is 45.5 percent: .298!3.®_1) , .2981(31.8 -1)+1 64 Because several epidemiologic studies have, not included women, mortali'ty ratios of smokers relative to nonsmokers for several diseases are not available for females. For those diseasesy the relationship between the percent of women and men smoking in 1980 (29.8 percent dividedd by 37.9 percent - 7®.6 percent), was applied to the estimated attributable risk factor for males. For example, the estimated attributable risk factor for males with chronic bronchitis is.72.3'percent. Since there are no prospective studies for this illness that include women, the 78.6 percent was multipliedi by the 72.3 percent to obtain an estimated! attributable risk of 56.8 percent for women. Table'5 shows the estimated!attributable risk factors for 21 diseeses in five major diagnostic groups that are associated! witKsmoking. This represents a more comprehensive list of diseases than that presented by the NCHS, in its 1982 report, "fhortality from Diseases Associated with Smoking", which li~s ed 14 diseases.. The application of the risk factors to the total number of deaths for each of the 21 disesaes results in an estimated exces of 290,313 deaths due to smoking in, 1980 (table 6). This figure compares favorably to the 300,000 used in the forthcoming nPreventiom Profile" of Health, United States, 1983. Productivity losses for the deaths due to smoking I1:. are estimated 2 billion discountedl at 4 percent The sex at $19 . ., . 0 ~ diff erential in mortality --1.88--ref'lecxs the higher risks amomg men who ~ smoke. The sex ratilo~ for producti'vi~ty losses associated withi smoking is ~ 1I higher --2.28 --due to the higher earnings of men compared with women. ~ cz I Y-10~ ~ I