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The Costs of Poor Health Habits Z0806SL80Z

The Costs of Poor Health Habits

The Costs of Poor Health Habits £0806S680Z

THE COSTS OF POOR HEALTH HABITS Willard G. Manning Emmett B. Keeler Joseph P. Newhouse Elizabeth M. Sloss Jeffrey Wasserman A RAND Study Harvard University Press Cambridge, Massachusetts London, England 1991 I V08061C~g0Z

Preface In 1988 the five of us completed a study on the external costs of three poor health habits: smoking, drinking heavily, and not exercising. By external costs we mean the costs imposed on others by people who have these habits. Such costs arise from various sources. The ones we considered were collectively financed programs; for exam- ple, health insurance, group life insurance, retirement pensions, and lifetime taxes on earnings. We also considered the value of property damaged and lives lost in traffic accidenis as the result of excessive drinking. What we found is that smoking, heavy drinking, and lack of exercise have high costs. And although some of this cost falls on the individuals who have these habits, a major portion is paid by others. In 1989 we presented our results in two articles: "The Taxes of Sin: Do Smokers and Drinkers Pay Their Way?" in the fournal of the Ameri- can Medical Assoriation, 261 (March 17, 1989) ond "The External Costs of a Sedentary Lifestyle" in the Americwr Journal of Public Heidth, 79 Qune 1989). These articles and subsequeni reports in the media have created considerable interest in our results and the analyses that gen- erated them-in part because they have implications for taxes on tobacco and alcoholic beverages, the so-called sin taxes. The purpose of this book is to present our analyses of the costs of all three habits in greater detail, describing the results and our ap- proach, data, and methods more fully than was possible in the jour- nal articles. Inquiries about the study indicate that the book may have interest for a very diverse readership: for example, federal, state, and local policymakers; researchers in health cciences, health poli<y, and other academic disciplines; insurance cornpanies; corporate benefits managers; health and consumer advocatcs; the producers of tob.icco and alcohol products; and taxpayers. 90806S480Z

Contents Preface vii Copyright (f) 1991 by the RAND Corporation All rights reserved Printed in the United States of America 10 9 8 7 6 5 4 3 2 1 This bonk is printed on acid-free paper, and its binding malerials have been chusen for slrenglh and durability. Library of Congrrsa Catalaxingin-PuMimtion Data The Costs of poor health habits f Willnrd G. 1. An Overview 2. Conceptual Framework 3. Data and Statistical Methods 4. The External Costs of Smoking 5. The External Costs of Heavy Drinking 6. The External Costs of Sedentary Life-Styles 7. Conclusions, Limitations, and Implications 1 26 46 62 86 107 127 .i. Manning . . . let al.l. p. cm. I l d bibli hk l f d i d kf. 01^ ograp a re erences an nc u es n ex. ISBN 6b74-17485-2 (alAL paper( 1. Health behavior-Economic aspects, I. Manning. Willard 6. O IDNLM: 1. Alcohol Drinking-economics- Appendixes 2- Costs and Cost Analvsis. 3. Health Behavior. A Lit R f h U 4. Health Services-emnumies. 5. Life Style. 6. Smoking-economics. . erature eview o t e Costs of Smuking and Drinking B. Survival t arameters from the HRA Model 137 143 W 74 Cg425/ RA776.9.C69 1991 C. HIE Habit Batteries 146 338.4'33621-dc20 D. Statistical Methods 157 DNLM/DLC for Library of Congress 91-7C143 ap E. Comparability of HIE and NHIS F. Excise Taxes and Demand 161 166 G. Parameters Used in the Cost MCdel 186 H. A Note on the Alcohol Tax 190 pA Notes 195 Bibliography 209 Index 219 7Q8 UV7YOUZ if a/;OPl'

viii Preface To serve the various interests and purposes these audiences would bring to the book, we have adopted the following strategy. Chapter 1 provides a nontechnical summary of the issues, our esti- mates of the external costs, what determines those costs, and what can be done about them. It is intended for those who are primarily interested in the magnitude of the problem and its implications for policies and programs aimed at improving people's health habits, lowering the external costs, and/or making people with poor habits pay at least the equivalent of those costs. The rest of the book is intended for researchers in health sciences, health policy, and other field,, who are interested in our concepts, assumptions, data, and methods, as well as results that are not re- ported in Chapter 1. We assume throughout this portion that readers are familiar with economic concepts, terms, and analytic techniques. We have tried, however, insofar as possible, to make the discussion comprehensible to other readers who might be concerned about the nature and rigor of our analyses and, thus, the scientific credibility of our results. At the end we include several technical appendixes. We would like to acknowledge the help, advice, and support that we received in our study of health habits and in producing this book. Our work was conducted at the RAND Corporation, supported by a grant from the National Center for Health Services Research and Health Care Technology Assessment (NCHSR/HCTA), now the Agency for Health Care Policy and Research (AHCPR). We are partic- ularly indebted to Jean Carmody, Stephen Marcus, and Selwyn Wain- grow, project officers for NCHSR/HCTA, for comments and advice. We are also indebted to Erik Farag of the same organization, and to RAND for its support in producing the book. We greatly appreciate the assistance of many colleagues: Thomas Vogt (Kaiser Health Services Research Center of Portland. Oregon) provided suggestions and guidance throughout the work. We bene- fited from discussions with liernard Friedman, George Keeler, and Robert Leu. Robert Amler helped with the Health Risk Appraisal model. Jerry Green, Lester Lave, Charles Phelps, and Kenneth War- ner, as well as our RAND colleagues James Kahan, Bridger Mitchell, and James P. Smith, gave careful reviews that markedly improved our report. Bernadette Benjamin and Janet I lanley provided meticu- lous programming and data management, and Martha Cooper cheer- fully converted our various inputs into typed, legible English. Joyce Preface ix Peterson deserves our special thanks for revising the material to make it accessible to a wider readership. Finally, the opinions and conclusions expressed in this book are ours alone and should not be construed as representing the policies or opinions of the Agency for Health Care Policy and Research or its predecessor, the RAND Corporation, or any of the people acknowl- edged above. 10806S680Z

~1, An Overview Many signs suggest that the nation's health consciousness has in- creased phenomenally over the last two decades. "Health-helli" is a major category of the self-help books that pour out of publishing houses. Many news programs and newspapers regularly feature health segments. And a veritable industry ot health newsletters and magazines has sprung tip, spreading the latest word on the nature and benefits of good nutrition and other health habits. Health news has become big news, and people seem to be re- sponding- Consider just a few indicators. Most neighburhuods are now served by far more health clubs tban hospitals. That fact and the strong sales of exercise gear indicate that exercise has become a major leisure-time activity. People evidently are also taking nutri- tional advice to heart, to judge by the advertising dollars the beef and pork industries are spending to counter claims that fish and chicken are "better for you." As for smoking, health consdousness has obviously disturbed the market: 1'hilip Morris now publishes, and widely distributes, a free magazinc extolling the "smoking life- style" and championing "smokers' rights." Despite all these signals that health awareness has improved, sta- tistics indicate that we are not yet on the high road to health. In 1986, the national tab was $24 billion for tobacco products and $18 billion for alcoholic drinks.' Between 1977 and 1983, the proportion of the population who smoked dropped by ltl percent, bul the fractiun of people who were "less active than lhoir contemporaries" and the fraction of heavy drinkers rose by 12 percent and 28 percent, respec- tively (Schoenborn and Cohen, 198G).z Given these statistics, it is little wonder that improving health hab- its has become a significant concern. The prevalence of unhealthy habits has prompted large-scale efforts to promote healthy habits, and has raised questions of how government can influence behavior 608065680Z

24 The Costs of Poor I iealth Habits I An Overview . 25 About a sixth of the population is sedentary but not physically limited. Whether educational efforts would warrant the expense, whether subsidies to encourage exercise would make enough nonex- ercisers more active to justify the subsidy, are issues we must leave to others. If our estimate of $1,650 in lifetime external costs per seden- tary person is correct, a relatively small additional percentage of indi- viduals exercising could justify some subsidy. Taxes and l.ife-Styles T he costs of smoking, heavy drinking, and lack of exercise are high for individuals, their families, and others. Health promotion pro- grams attempt to reduce these costs by publicizing them and by giv- ing individuals who wish to lead a healthier life-style information on how to do so. Even with active health promotion programs, however, some individuals will choose to indulge in poor health habits.'" These individuals, for whatever reason, find the satisfactions from smoking, drinking, and avoiding exercise sufficient to offset the risks. Some may be tempted to say, "So be it; that is their own business." Such a position assumes that there are no consequences for others. But there are. Some are financial (for example, higher health costs paid by taxes) and some are nonfinancLil (an innocent bystander killed by a drunk driver). Indulgence in these habits would be closer to the individual's "own business" if sin taxes approximated the costs imposed on others r9 Such an approach implies that the nonfinancial costs are converted to some kind of dollar equivalent in aggregating costs. For exercise, the analogy to taxes would be subsidies of public recreation facilities such as swimming pools. We have estimated the costs that smoking, drinking, and lack of exercise impose on others and compared these costs with current tax levels. Although our estimates are necessarily uncertain, they are not too uncertain to preclude useful conclusions. Taxes on cigarettes are at a level such that smokers pay approxi- mately the costs they impose on others. This situation does not mean that cigarette taxes should not be increased, but it does mean that other grounds for increases must be found. Here are two such ratio- nales: higher taxes will discourage some adolescents from starting to smoke, a benefit they will later appreciate; and cigarette taxes cause relatively less distortion and tax evasion behavior than other taxes. In contrast, the costs on others impo.ed by excess drinking greatly exceed current taxes on alcoholic beverages, especially those on beer and wine. Our analyses strongly support the recommendations of former Surgeon General Koop to increase alcohol taxes. WeThe costs imposed on others byea sedentary life-style are also high, need to discover cosf-effectiv methods to induce individuals to exercise some minimal amewnt, because one cannot tax inactivity. Our analysis supports a considerable increase in alcohol t.ixes, but changing any tax leads to changes in inefficiencies and inequities. Decisions on the right level of the tax and the associated inequities and inefficiencies is a task that falls to uur political institutions. We hope that our work will contribute to more informed decisions. 6Z806M0Z

4 The Costs of Poor Health Habits earlier, he will pay fewer taxes for collectively financed nursing home care, Medicare, and Social Security. In other words, he will pay lower "taxes on eamings" that support nursing home care and retirement pensions.4 Yet he may benefit as much as, or more than, Jane from those programs. If John kills himself in an automobile accident, how- ever, he may have paid into Social Security and not collected any benefits. Then, indirectlv, Jane gains financially from his premature death. Collectively financed programs and taxes on earnings are not the only sources of external costs for smoking and heavy drinking. Al- though there is considerable debate about the magnitude of effects for "passive smoking," Ihe Surgeon General has estimated that 2,400 deaths per year result from breathing air filled with tobacco smoke (USDHHS, 1986). These lost lives are another source of external costs. To the extent that passive smoking generates health care and other collectively financed costs, a portion of those costs is also paid by nonsmokers. For heavy drinking, other sources of external costs are loss of inno- cent lives and property damage caused by drunk-driving accidents, and other crimes committed "under the inFluence." Some of the property damage is the drinker's, and many drunk drivers are their own victims. We do not consider those costs (or the costs of passive smoking within families) as external' Although they are part of the total costs to society, by our definition they are internal costs to the drinker. To return to our example, if John's accident claims lives other than his own, it imposes very high external costs.F No one knows exactly how many auto fatalities are caused by drunk drivers, but research suggests the percentage is large. A study of 44,000 fatal accidents indicates that 42 percent of the drivers involved were intoxicated (USDHHS, 1987, pp. 8-9). Drinking is implicated in many other crimes that generate high external costs from properly loss and damage, as well as from injuries and death of victims. There is some controversy about the drinking- crime nexus, but statistics show that many crimes other than drunk driving are committed under the influence of alcohol (ibid.). These crimes too impose costs on the criminal justice system. Regardless of what is known or not known about how smoking, heavy drinking, and lack of exercise affect health and well-being, it is possible to measure external costs. The nature and dimensions of these costs provide a strong economic justification and political An Overview 5 rationale for government (and private) efforts to curb these habits. The costs also, indirectly, provide evidence about how these poor health habits affect health and longevity. Estimating the External Costs of Poor Health Habits An enormous amount of research has been done on the (variously defined) costs of smoking, less on the costs of drinking, and much less on the costs of exercise, which is a relatively new area of interest. Widely varying estimates of these costs have emerged. In the case of smoking, the estimated annual costs have ranged from $50 billion to $66 billion (in 1986 dollars).' Apart from case studies on the costs of alcohol abuse to Individual corporations and industries, only two comprehensive studies of drinking costs have appeared so far. One (Berry and Boland, 1977) estimated that costs in 1971 were just over $85 billion [(1986 dollars)]; the other (Harwood et al., 1984) estimated that in 1983 costs were $129 billion /(1986 dollars)]. No comparable figures are available for lack of exercise. Some differences in cost estimates arise because different studies use different data and make different assumptions. Other differences result from the fact that studies ask different questions. (These factors are discussed at length in Appendix A.) We address two questions here: (1) When an individual decides to smoke, drink heavily, or not exercise, what are the lifetime external .osts-that is, by how much does society subsidize these habits7fl (2) What drives these costs? To estimate the lifetime external costs of these bad habits, we con- sidered how they affect life expectancy. use of collectively financed programs, and taxes on earnings. For smoking, we also included costs of fires caused by smokers, and for drinking, the costs of drunk driving-lost lives and property damage-and crime. Table I-1 shows the components of the external costs. Our study utilized a number of data sources, primarily the RAND Health Insurance Experiment (HIE) and the National Health Inter- viewSurvey (N1fIS). The fflE, a randomir.ed trial of alternative health insurance arrangements, was our primary data source for people younger than 60. Families at six sites participated in the study from 1974 to 1982. The HIE data contain a wealth of information on habits and medical reasons for use of care for 5,800 people. The HIE did not enroll anyone aged 62 or older. Fur information on people over 60, we used data from the 1983 NHIS supplement, which was admin- 64806S480Z

12 The Costs of Poor Health Habits likely than never smokers to visit a doctor. We included former smok- ers because their heavier use of medical care may be caused by the effects of their previous smoking. The picture was different for hospi- tal care. Smokers and former smokers were hospitalized much more: current smokers had 38 percent, and former smokers 13 percent, more hospitalizations. Smokers also had lower taxes on earnings. Some of these external costs were offset by the reduction in life expectancy, which lowered retirement and disability costs for these individuals. For Heavy Drinking Considering only the same cost components used in the smoking and exercise analyses, we found that the lifetime external cost for a heavy drinker is only $4,600. This value is driven largely by the differ- ences in medical care, sick leave, and taxes on earnings. Most of the costs for medical care and sick Icave result from differences for former drinkers. just as we regarded former cigarette smokers as "ever" smokers in estimating the costs of smoking, we regarded former drinkers as though they were heavy or problem drinkers. Current drinking has little effect on outpatient care. In fact, "ab- stainers" had 13 to 17 percent more outpatient episodes than light drinkers. But former drinkers had 22 percent more outpatient epi- sodes than light drinkers. Former drinkers also had 110 percent more hospital admissions than light drinkers, and significantly more sick leave. Among current drinker, we found no significant difference for light and heavy drinkers on any of these counts. While drinking does not have the drastic effect on life expectancy that smoking has, heavy drinkers tend to retire earlier and thus have even greater reductions in taxes on earnings than smokers do. What accounts for the difference between the $4,600 in external costs for these components and the $42,OW estimate we presented above? By far, the largest external costs of drinking are imposed by loss of innocent lives, property damage, and their concomitant effects on public systems and programs. We estimate that innocent lives lost in alcohol-related traffic accidents alone cost society $24,000 per heavv drinker. Loss of property, strain on the criminal justice system, and social programs add another 814,0of1 per heavy drinker. These costs account for a large part of the difference between the external costs of drinking and those of smoking and lack of exercise. I An Overview 13 For Lack of Exercise The primary external cost factors for sedentary people are higher use of medical care, work loss, and taxes on earnings. We found that lack of exercise had relatively little effect on outpatient medical costs. Moderate exercisers had 12 percent fewer outpatient episodes, but heavy exercisers had only 8 percent fewer, than light exercisers. The story for inpatient care was different, but only for strenuous exercis- ers and diagnoses related to poor health habits. These individuals had about 30 percent lower use rates than people who did not exer- cise. If work loss is any indication of gener:d health, however, exercis- ers clearly benefit (and have lower external costs): moderate exercis- ers had 18 percent, and strenuous exercisers 32 percent, less work loss than did light exercisers. In examining the costs of a sedentary life-style, we contrasted mod- erate and heavy exercisers only with those inactive people who had no constraints on their role or physical activity. Our purpose was to avoid attributing to exercise the adverse effects of health problems that simultaneously raise costs and limit the individual's ability to exercise. f-tow Reasonable Are Our Estimates? We believe they are reasonable, even conservative. The study does have some limitations, which are discussed later and summarized in Chapter 7. When we tested our estimates in analyses that used differ ent assumptions and different data, they fell about midway in the range of estimates generated by these assumptions. The tests support our belief that the estimates presented above are approximately correct. Table 1-3 summarizes the results of our sensitivity analyses, in which we used different data or made dif ferent assumptions than we did in the base-case analyses. For each habit we conducted a separate cost analysis (1) using data from the NHIS fnr all age groups; (2) comparing costs of people who had the habits with costs of people who actually did not (rather than our constructed group of, for exam- ple, nonsmoking smokers); and (3) limiting medical costs to care only for diagnoses possibly related to poor health habits.13 The second type of analysis should give an upper bound on costs because it S6806S480Z

2 The Costs of Poor Health Habits An Overview 3 that ultimately impairs health and shortens life. Indeed, health pro- motion has been a major element of the Surgeon General's agenda for two and a half decades. Belief in the efficacy of good health habits prompted Joseph Cali- fana, at the time Secretary of I lealth and Human Services, to say in the Iey9 Surgeon General's report: "A wealth of scientific research reveals that the key to whether a person will he healthy or sick, live a long life or die prematurely, can be found in several simple personal habits .-. One study found that people who practiced seven of these simple habits lived, on the average, eleven years longer than those who practiced none of them." 1'hese seven habits are not smoking; limiting consumption uf akohe+l; keeping weight within normal lim- its; reducing intake of fats, salt, and sugar; exercising regularly; hav- ing periodic medical checkups that screen for high blood pressure and certain cancers; and observing speed laws and using seat belts. Social concern thus far has focused on how health habits affect the health and well-being of individuals, their families, and the social fabric. T here is another compelling concern, however, that is not often considered-the economic costs that people who have these habits impose on otherc. 'lhe-,e "external costs," their magnitude, and what can be done to lower them are the subjects of this book. 7he habits we focus on are smoking, drinking, and lack of exercise. Why Do External Costs Matter? People with poor health habib+ can impose costs on others in various ways, not all of them financial. But the financial costs of health care are among the most obvious and significant-and the rise in those costs has been a critical public concern for the last two decades. In 1950, spending on health care accounted for 4.4 percent of gross national product (GNP). By L98N, the percentage was 11. l; and pro- jections are for still higher costs in the future. It is true that there is little empirical evidence that people with bad health habits use more health care, or that their increased use of such care is the prime mover behind escalating health expenditures. Indeed, health care costs have risen while smoking has fallen sharply. Nevertheless, poor health habits, including smoking, heavy drink- ing, and lack of exercise, are considered to be among the primary causes of illness and death in the United States. It seems plausible that a healthier nation (or corporation or union) might have to spend less on health care. The increase in medical costs has certainly provided an impetus for government, public and private health insurers, and the employ- ers who pay the premiums, to support programs that encourage bet- ter health habits. According to the Office of'I'echnoingy Assessment (1985), cigarette smoking may account annually for 5.3 million person-years of life lost, $22 billion of medical care costs, and $43 billion in lost productivity. Alcohol abuse may account annually for 22,4H) traffic deaths, 15,400 other deaths, $11.9 billion of medical care costs, and $20.6 billion in lost productivity (U.S. Department of "rransportation, 1986; Luce and Schweitver, 1978). To date there has been no similar research on the costs of sedentary living, but a rea- sonable estimate is that they are about one-tenth of the costs of smoking.'' people with these unhealthy habits, and their families, certainly bear some of the costs directly. 'Phey lose wages, pay a portion of their medical costs, and suffer from disability and premature death. These are what we define as internal costs. 'I'he costs we emphasize in this book are "external costs": that is, what smokers cost nonsmok- ers, what heavy drinkers cost abstainer. or moderate drinkers, and what voluntarily inactive people cost those who exerdse regularly. As we shall see, the existence of extern;d costs is a major reason for government concern about health habit,. Moreover, the magnitude of these external costs can be used to gauge the appropriate level of excise taxes on cigarettes and alcnhol. Collectively financed programs are a leading source of external cost. Such programs may cover some or:dl of medical care costs, sick leave, life insurance, nursing home care, and retirement pensions. Typically, the premiums or taxes for these benefits do not vary ac- cording to a person's health habits (this situation is especially likely in employer group health and retirement plans and public programs). That is, if John Doe and Jane Roe both have health insurance coverage through their employer, their premiums will be the same even though John is, say, a heavy drinker and Jane has only an occasional drink. If John uses more medical care than Jane-because of drinking-related health problems-Jane is in effect subsidizing his heavy drinking through the insurance program. The same is true for other collectively financed costs. At the same time, if his drinking makes John work less and retire 04806S680Z

32 The Costs of Poor I lealth Habits For heavy drinking we also include the costs of accidents and criminal activity. Assumptions Made in Lifetime Cost Analysis Cross-Sertion Used as Cohort Although the cost analyses follow a hypothetical cohort over time, the information on what happens at each age is based on recent (cross-sectional) experience for that age, and not on projections of what life will be like, say, in the year 2050 when those 20 years old in 1990 turn 80. Thus, we did not estimate the effects of secular and biomedical trends on smoking and its health effects. Instead, we used current estimates for parameters such as retirement, medical and nursing home costs, education, and life insurance arrangements. This simplifying assumption is commonly made (for instance, by the Na- tional Center for Health Statistics in computing life expectancy) be- cause the alternative is too difficult and conjectural. Costs fnr Others in Smoker's Household Costs imposed on other family members are difficult lo classify as either internal or external to the smoker. It is not clear whether these costs are taken into account by the smoker in decisions about where and how often to smoke. lf they are, then they should be treated as internal. Although our base-case estimates classify such costs as internal, we show the effect of treating certain costs bome by other family members as extemal.10 Bounding t)tr Ef/ects of Smokiqq Poor general and mental health, physical limitations, and chronic disease significantly increase medical and other health costs. Smok- ing also affects these costs directly. lt may affect them indirectly as well, through its effects on those other risk factors. Because we do not know how much of the difference between smokers and nonsmokers should be attributed to smoking and how much to other risk factors, we tried to hnund the true effects uf smoking. Lower hound. If smoking has little effect on intermediate risk factors such as high blood pressure and weight, then we should control for any differences between smokers and "nonsmoking smokers" in Conceptual Framework 33 such factors. The result is a lower bound on the effeds of smoking because we assume that smoking does not affect these other risk factors. We computed a lower bound in two different ways. In the first method, for mortality, we used the llealth Risk Appraisal (HRA) program (described later in this chapter) to calculate survival rates for nonsmoking smokers, without altering the values for other factors (such as blood pressure and weight) thal smoking might affed. That is, we assumed that nonsmoking smokers would have the same ac- tual values of blood pressure, weight, and the like that the smokers did. For covered medical and work-luss costs, we made a similar assumption, including other habits and health measures in the re- grc:ssion. In the second method, we estimated effects on medical costs only for those diseases probably related to smoking and other poor health habits." Upper lrotmd. If smoking has strong effects on intermediate risk factors, then the hypothetical nonsmoking smokers may exhibit the characteristics of actual never smokers For example, they may have lower blood pressure. In our cost estimation we obtained an upper bound on the effects of smoking by simply comparing actual smokers with actual nonsmokers, without controlling far othe r habits and risk factors. In the I IRA model we used nonsmokers' mortality as Ihe estimate of smokers' mortality if they had never smoked. The bound is an upper bound because people with one poor habit tend to have others, but the comparison attributes all the health and mortality costs to smoking. These two extreme assumptions should bound the true effects of smoking. Underreporting Various studies comparing self-reported consumption with national sales have shown that people tend to underreport bad health habits, smoking among them (Warner, 1978). Our study nsed self-reported data on the amount of smoking to estimate external costs per pack of cigarettes. Consequently, we multiplied reported packs per day in the data by 1.5 to correct for the difference between reported and aciual consumption. People also underreport cnnsumption nf alcohol. Pernanen f1974) noted that self-reported consumptinn nf akohulic beverages accounts for only 40 to 60 percent of alcohol salos. (lur comparison of NHIS SZg0s900Z

6 The Costs of Poor Health Habits TABLE I-L Cumponents of exterasl costs Collectively frnutced costs Medicatcsre Sick leave Group life insurance Nursing twme cam Retirement pension Insurance to cover direct costs Direct costs Motor vehicle accidents (lost lives, propeny damage, other) Criminal justice F'ues Taxes on eamings istered l0 22,148 people (20 percent of the NIIIS sample) by the Na- tional Center for Health Stati,lics. The Current Population Survey, the Centers for Disease Control, and other sources provided supple- mentary information. Our analysis differed from previous studies in several ways that should improve on their estimates. (I) lb estimate custs of medical care, most previous work has relied on imputed differences in uve by people with and without poor health habits. These imputed differences are often judged from differ- ences in mortality for the two groups. Being sick, using medical ser- vices, and dying are correlated, but not perfectly. For example, if John Doe is a smoker and has a quick and deadly heart attack, he will have little medical expense from heart disease. Prorating medical expenses by death rates would give the opposite impression. In con- trast, we based our estimates on observed differences in the actual use of medical care among peopfe with varying health habits. . (2) For people with a specific bad habit, previous work has tended to attribute all the differential costs of medical care, sick leave, and the like to the adverse effects of that habit. "ihere are two problems with this attribution. First, a host of other factors can affect general health and use of medical care. I'eople who have bad health habits may differ in those other factors. (For example, smokers tend to be less well educated.) In addition, bad health habits are often them- selves positively correlated--for example, people who smoke are likely to drink as well. When studies attribute all the differences to An Overview 7 one habit, they probably overestimate its costs. In other words, when they examine each habit in isolation, they effectively double count. To overcome these problems, we controlled for the other characteris- tics of smokers, heavy drinkers, and sedentary people, including their other bad health habits. We could do this because our two main data sources contained details on all three habits. (3) Previous studies have focused primarily on medical costs and sick leave to estimate the costs of habits. They have failed to consider the potential effects that bad health habits have on early retirement and disability, which can be considerable.° Our analysis examined all collectively financed costs. (4) Studies that look at use of all medical .services may incorrectly estimate costs. It seems unlikely, for example, that smoking explains why a smoker is treated for food poisoning and a nonsmoker is not.to To allow for this problem, we tested the sensitivity of our results to alternative assumptions about what categories of treatment are re- lated to each habit. We analyzed differenres in use for all care (exclud- ing maternity and welltare), as well as use for diagnoses that have been linked to the habits. (5) Much of the previous research looks only at current costs. It is true that some costs are immediate, for example, costs of smoking- caused fires and of drunk-driving accidents. For these costs we di- vided the estimated national annual costs by the annual packs of cigarettes or excess ounces of liquor rnnsumed. Smoking, heavy drinking, and lack of exercise also have long"term effects that may result in savings as well as costs. For example, both smokers and nonsmokers are covered by collectively financed programs. Smoking causes or aggravates a number of health problems, and it reduces life expectancy. The practical effect is that although current and former smokers may need more medical care while they are alive, they will collect less in pension benefits than nonsmokers will. If we consider only current costs, former and current smokers will seem to be subsi- dized by nonsmokers. If we factor in the long-term costs, the subsidy drops because smokers in effect subsidize the pensions and nursing home care of people who have never smoked. They do so by paying premiums and taxes to finance pensions and nursing home care, but collecting fewer benefits. (6) If we consider long-term effects, we have to discount future costs, such as pensions, in order to make comparable costs that occur at different times. A dollar paid into a pension plan today, for in- stance, is worth more than a dollar re,rived fifteen years frerm now Z4806S480Z

34 The Costs uf Poor 1 lealth Habits 1953 estimates with alcohol sales (USD1itI.S, 1983a) also yielded a 40 percent figure. Therefore, we multiplied reported alcohol consump- tiun by 2.5. We assumed that underreporting of both smoking and drinking was proportional to consumption, because we had no information that underreporting varies at different consumption levels. We also corrected pension and transfer income figures, because there is evidence that they too are underreported. Respondents to the Current Population Survey underreport pension and transfer in- come by 21 percent (U.S. Department of Commerce, 1986, pp. 165- 170), but negligibly misreport other income. Inflafimr Inflation can cause problems in combining cost estimates from differ- ent years. All components of costs +hould be expressed in dollars of a common year, so that thep can be added together. All estimates in the rest of this book are given in 1986 dollars. When an estimate for a particular cost component was available only for a different year, we assumed costs grew at the rate nf inflation and simply multiplied the estimates by the ratio of the 19t36 CI'1 to the CI'I in the year the costs were e.stimated. All our estimates of costs and taxes are stated in 1986 dollars, as they were in Keeler et al. (1989) and Manning et al. (1989). To convert to lune 199o dollars, multiply by 1.185. 'Phe Components of the Model Mortality The death rates for our abridged life table came from applying esti- mates of the relative risk of smoking to the 1980 National Center for Ilealth Statistics (USDHHS, 1984b) abridged life table of the U.S. population. Our two goals were to make the computed mortality for our sample match the national data for each five-year age group, and to correctly estimate the mortality ratio between smokers (both current and former) and nonsmokers. The relative risk of dying fnr smokers and nonsmokers was derived from the 1984 Centers for tNs- case Control version of the I IRA program. Robbins and Hall (1970) developed the HRA as a health promotion technique for use in a doctor's office as part of a physical examination. Originally designed for manual odculation, the program has been Conceptual Framework 35 updated several times by the Centers I'or Disease Control and is now available in numerous computerized versions. In the clinical setting, the patient usually completes a questionnaire on personal characteris- tics, family history, behaviors, and certain physiologic measure- ments. The individual's risk of dying in the next ten years is calcu- lated, from this inforniation in conjunctinn with national mortality slatistics and data from epidemiologic studies. The next step is esti- mating how much the individual could reduce that risk by modifying his or her behavior. The results are summarized and presented to the patient, accompanied by a list of suf;gested life-style changes that could improve the chances of a longer life. We have adapted this procedure for use in calculating the ten-year probability of dying for each individual in our two data sources (de- scribed in Chapter 3). We modified the input and output sections of the 1984 Centers for Disease Control version of HRA to accommodate our need to process data on thousands of people rather than a small group. Data from the two sources were fed into the HRA program, after translation into the format required by the program. 1'able B-1, in Appendix B, lists the 33 major variables incorporated in the IIRA calculations and summarizes the program's response to a missing value for each variable." The most important components of the risk calculation were the mortality probabilities for each of the leading causes of death by sex, race, and five-year age group. These probabilities were based on mor- tality data for the United States for 1975, 1976, and 1977, obtained from the National Center for Iiealth Statistics. The risk of dying was adjusted up or down from the averaW by applying "risk multipliers" formulated for the person's characteristics, health- related behavior, and physiologic measurements. The magnitude of the risk multiplier was based on information from major prospective epicfemiofogic studies, actuarial experience, and expert opinion regarding the rela- tionship between the risk factor and mortality rate due to a specific cause. The risk multipliers were combined to form a composite risk multi- plier for each major cause of death. (See Appendix B for an example of the method used.) The average probabilily for that cause of death was multiplied by the risk multiplier io produce a risk projection for each individual. 't'he sum of the cause-specific risk projections to- gether with the risk for "other cau.ae,;" yielded the risk of death for all causes. Numerous researchers have critici7eai the methods employed by 9Z8069690Z

56 The Costs of Poor Health Habits Each measure is based on the responses to the HIE medical history questionnaire." All data on health status were collected at the begin- ning of the HIE study and are summarized below. General health {rerceptions. The General Health Index is a continuous score (0-100, 100 being best) based on questionnaire items about perceptions of past, present, and future health. The items also ad- dress resistance to illness and self-concern about health. Twenty-two questions were asked nf individuals 14 and over, and seven of younger children. The index refers to health in general and does not focus on a particular component. The scale is a subjective asses,ment of personal health status. The reliability and validity of the index have been extensively studied and documented (Ware, 1976; Davies and Ware, 1981; Eisen et al., 1980). For example, the impact of hypertension, everything else being equal, is equivalent to 5 index points (Brook et al., 1983). The death rate in the study was 25 in 1,000 for those with index values lower than 63, 6 in 1,000 for those with index values from 63 to 76, and I in 1,0(1D for those with index values from 77 to 100. 1'hy.sical or role lirnitations. This measure is scored dichotomously (= I if limited, = 0 otherwise) to indicate one or more limitations in four categories: self-care (eating, bathing, dressing); mobility (con- fined, or able to use public or private transportation); physical activity (walking, bending, lifting, stooping, climbing stairs, running); and usual role activities (work, home, school)- Data for this measure came from twelve questionnaire items for adults and five items for chil- dren. The reliability and validity of these measures have been studied and documented by Stewart et al. (1977, 1978, 1981a,b), and Eisen et al. (1980). Chronic diseases and complaints. This measure is a simple count of diseases or health problems (from a possible twenty-six) for individu- als aged 14 or older (Mannin'g et al., 1981). The list of conditions includes kidney disease and urinary tract infections, eye problems, bronchitis, hay fever, gum problems, joint problems, diabetes, acne, anemia, heart problems, stomach problems, varicose veins, hemor- rhoids, hearing problems, high blood pressure, hyperthyroidism, and so forth. Mental health status. The Mental Health Inventory for adults is a continuous score (0-100) based on thirty-eight questionnaire items. They measure both psychological distress and psychological well- being, as reflected in anxiety, depression, behavioral and emotional Data and Statistical Methods 57 control, general positive affect, and interpersonal ties. The reliability and validity of this measure have been studied and documented by Veit and Ware (1983), Ware et al. (1979, 1980b), and Williams et al. (1981). A similar construct has been developed for children aged 5 to 13, based on twelve questionnaire items (Eisen et al., 1980). OTHER fOVARIATfiS Our analysis also included covariates for age, sex, race, family in- come, family size, education, and the use of seat belts. With the exception of family income, all these variables were measured before the study or at enrollment." We used measures of education and seat-belt use to reduce any bias that might result from differenres in health attitudes between people who do and do not have poor health habits. These attitudes may affect work loss and use of medical services-independent of smoking, drinking, or lack of exercise. For example, cautious individ- uals may have fewer illnesses becausr they take better care of them- selves. They may also be less likely to smoke. Cbnsequently, we might find a negative association between smoking and use of medi- cal care that reflects caution rather than the effects of smoking. Simi- larly, individuals with more future orientation are more likely to go to college and to get preventive care, and are less likely to smoke. Adding measures of seat-belt use and education should reduce the bias from possible differences in health attitudes among those with different habits. Data from the National Health Interview Survey (NIiIS) Throughout our analyses we used data from the NItIS for the elderly (those aged 60 and older). We also compared the nonelderly NHIS responses on habits with the HrE data. 'the former are from a 1983 supplemental questionnaire on habita that was administered to 20 percent of the NHIS sample (N = 22,418 persons) aged 18 or older. Outcome Meusures We used the responses to questions atxrut the twelve-month physi- cian visit and hospitalization rates as our medical use measures. The two-week work-loss response providrs uur meacure of work loss. 1£8065680Z

84 The Costs of Poor Health Habits Low birthweight is one of the strongest predictors for use of neonatal intensive care units (NICUs). An Office of Technology Assessment report (1987) on neonatal intensive care indicates that between 150,1)00 and 200,000 infants are treated annually in NICUs, and 50 to 80 percent are low-birthweighl babies. The average cost per baby of NICU use is $12,1)DO to $39,00(1. If we use the midpoint of each range, the estimated total cost for neonatal care of low-birthweight babies is $2.9 billion. According to the NIiIS, 35 percent of all women between 20 and 29 years were current smokerv in 1983. If as many as one-third of pregnant women persist in smoking, then smoking may be responsi- ble for as many as one-quartet of all NICU costs for low-birthweight babies. In 1986 Americans purchased 652 billion cigarettes (Statistical Abstract of the United Slates, 19NA, p. 719). Our estimates of the direct dollar costs of smoking, then, are probably too low by up to 2 cents per pack. In addition, the Surgeon Gcneral estimates that 2,500 fetal deaths occur because of smoking during pregnancy. If we were to value these infant deaths at the same $1.66 million that we use for adult deaths, and assume that the smoking mothers ignore the risks to their babies, then the external cost not considered by the smoker is 14 cents per pack. Our estimates for the external cost of fires take into account the likelihood that an innocent bystander will he killed in a smoking- related fire. In 1984 there were 1,6(10 smoking-related deaths from fires in the United States (John Hull, National Fire Protection Associ- ation, and John Ottoson, U.S. Fire Administration, personal commu- nications). Based on a willingness-to-pay for a human life of $1.66 million in 1986 dollars," and the total volume of smoking from the NHIS 1983 survey (corrected for underreporting), we estimate the value of the lost lives in smoking-related fires to be 9 cents per pack of cigarettes. Because virtually all of these deaths are smokers or members of their families, these costs can be considered internal, not external. Summary The major determinants of the external costs of cigarette smoking are medical costs, pensions, and taxes on earnings. Although the results from our two data sets are similar, the estimated magnitude of the The External Costs of Smoking 85 external costs of smoking are quite sensitive to methods, especially to the discount rate used. Because smoking increases these costs among the young and middle-aged but decreases the need for sup- port of the aged, the discount rate is a critical determinant of the net costs of smoking. Without discounting, smoking appears to save nonsmokers money because it reduces the period of aged depen- dency. At reasonable (real) discount rates, smoking appears to cost nonsmokers 15 or more cents per pack. Including all of the other costs discussed, the estimated external costs of smoking range from 31 to 52 cents per pack. 458069680Z

I The External Costs of Smoking Our results provide still more evidence that smoking is a pernicious habit for smokers and for the rest ot society as well. To recapitulate, the I lealth Risk Appraisal model applied to our data shows that it reduces the life expectancy of z 20-year-old by about 4.3 years, or 7 minutes per cigarette. Cnrrent smokers are more likely than former smokers or people who have never smoked to (I) be hospitalized for any reason and (2) visit their doctors for conditions related to smok- ing. Nonsmokers subsidize this higher demand for medical services. Because nonsmokers live longer, however, smokers effectively subsi- dize their pensions. tn fact, if the costs of smoking are not dis- counted, smoking has negative external costs. With a 5 percent discount rate, smoking has nei lifetime external costs of $1,(NAI per smoker. The external cnst per pack nf cigarettes (at a 5 percent dis- counl rate) is 15 cents. This chapter describes the analyses that led to these and other findings on the effects of cmok.ing. II shows the prevalence of smok- ing in the two filE and NI IIS s.imples and smokinR s association with both the use of medical servi:rs and work loss. It presents results adjusted only for age and sex, as well as results controlled for a fuller set of factors that may atfect health nutconies: age, sex, education, family income and size, and other health habits. Finally, it presents our estimates of the external costs uf smoking, that is, the costs im- posed by smokers on others through health insurance, sick leave, retirement, and othercnllectivrly financed programs. Prevalence of Smoking As noted earlier, to establish the prevalence and incidence of smok- ing, we classified the samples into four groups: never smokers, for- The External Costs of Smoking 63 mer cigarette smokers, current cigarette smokers, and pipe or cigar smokers. We then subdivided the groups byage, sex, race, residence, and years of education. HealtH Insurance Fxperinrent Data CIGARETTE SMOKING Pafterns. Table 4-1 shows this breakdown for the fIIE sample.' At the beginning of the HIE, 42 percrnl of people 20 through 59 years of age smoked cigarettes and an additional 17 percent were former smokers. The prevalence of cigarene smoking was highest for per- sons with less than a high school education (52 percent) and men in their thirties (49 percent). It was lowest for individuals with postgrad- uate education (25 percent) and rwomen in their fifties (33 percent). The relationship between smoking and education was particularly striking: the more education, the less likely people were to smoke. The highest prevalence of never smokers for any subgroup was among those with postgraduate education (55 percent). People in nonmetropolitan areas (Franklin County, Massachusetts, and Georgetown County, South Carolina) were also much less likely to smoke than city dwellers were. There was no appreciable racial differ- ence in prevalence of smoking. More blacks reported mever smoking and more nonblacks claimed to have quit. Duralinm Table 4-2 shows the duration of cigarette smoking for current and former smokers. Among fanner smokers, 11 percent re- ported less than two years and about 14 percent reported more than twenty years of smoking. Not surprisingly, duration was higher among current smokers: fewer than 5 percent had smoked less than two years and about 25 percent had smoked longer than twenty years. The two groups had similar percentages of hravy smokers. Because former smokers had not .moked as long or quite as much as current smokers, their pack-year exposure was lowrr.' Sfabifity qf status. Cigarette smoking status in the f1IE was very stable, as Table 4-3 shows. From en rollment to the end of the experi- ment, 94 percent of never smokers, 75 percent of former smokers, and 82 percent of current smokers maintained their status. Overall, 86 percent of persons 20 through 59 years of age did not change their smoking status during the three to five years uf the experiment, and 6 percent changed from smoker at enrollment to former smoker at exit. OV8065 L80Z

22 The Costs of Poor I lealth Habits _ mind-beyond the exigencies of their respective budgets and a ten- dency of states that produce these items to tax their products at very low rates (see Appendix F). At the turn of the centurv, excise taxes were the federal govern- ment's principal source of revenue. In 1902, 36 percent of federal tax revenue came from alcohol taxes and another 10 percent from tobacco taxes.P4 With the advent of income tax, the emphasis on progressive ta,ation, and the increase in social insurance payroll taxes, excise taxes have become much less important (Clark, 1984). Tobacco and alcohol laxes in 1984 each generated about 1 percent of overall tax revenues. Taxes on both substances have rffeclively declined, despite the nrnuntirrg evidence that their cnnsennption causes adverse health ef- fects and imposes considerable external costs. Between 1951 and Irr85, the Consumer I'rice Index quadrupled but the nominal rates (if cigarette and alcohol taxes changed much less. From 1951 to 1983, the federal excise tax on cigarettes stood at 8 cents a pack. In 1983, it was raised to 16 cents, and cvc have seen that as a result of OBI2A 1990 federal taxes have increased another 8 cents per pack. In 1951, the tax represented 42 percent of fhe purchase price; by 1982, only I I percent. It increased to 18 percent in 1983, when the rate doubled, and has fallen off somewhat since then. 'I'he story for alcohol taxes is similar. Between 1951 and 1985, the federal excise tax remained at $10. +0 per proof gallon of spirits but increased to $12.50 in 1985.=` Since 1951, federal excise taxes nn wine and beer have remained constant at 17 cents for a gallon (if wine with an alcohol content of 14 percent or lecs, and 29 cents for a gallon of beer (Distilled Spirits Council of thr United States, 1985). Given these declines in real taxes, it seems evident that taxation has not been applied in anv consistent way to the problem of limiting consumption, much less to the issue of external costs. 14eczuse nomi- nal external cnsts rise with the raie of inflation, we recommend that so-called sin taxes (on tohacco and alcohol) be indexed by inflation to prevent future erosion. When we look across states, the impression of inconsistency is even more pronounced- If taxes did reflect concern about either health or external costs, we would have to conclude that some states worry a lot more than others about the health habits (if their citizens and the consequent external costs. In 1987, state excise taxes ranged from a low of 2 cents per pack in the tobacco-producing state of North Carolina to a high of 38 cents in Minnesota. (Table F-2 in Appendix OZg059V80Z _ - An Overview 23 F shows taxes per pack by state.) Looking at state taxes on alcohol requires breaking them down by kind of beverage.'" In 1985, tax rates on distilled spirits ranged from $1.50 per gallon in Maryland to $6.50 in Florida. Taxes on wine varied from I cent in the wine-producing state of California to $2.25 in Florida. For beer, the tax variation was from 4 cents a gallon in Arkansas to 777 cents in South Carolina. If it were decided to increase cigarette and alcohol taxes to discour- age consumption and/ur reflect external costs, the tax increases should be made at the federal, not the state, level. Minimal variation among states is desirable to prevent bootlegging across state lines and, in the case of alcohol, driving to anuther stale to drink and then driving home. If taxes were raised, how much would be passed on to consumers, and how would they respond?'I'heory and history suggest that pro- ducers will pass all or most of the incre.+se along to consumers. The exact degree of consumer response is uncertain, but the preponder- ance of the literature suggests that con::umers, even Ihose addicted, will reduce their frequency of smoking:md drinking." What Afxatf Inck of f;xercfse? The difOculty with exercise is that there is no obvious way to make people who do not exercise pay their way. Lack of exercise differs from smoking and drinking as sins of omission differ from sins (if commission. From the standpoint of taxes, society can tax people for "wrongful consumption'"-per unit of the substance consumed. It is hard to imagine how they can be taxed for not doing the "right" thing. They could, however, be"rewarded" for doing it. Thus, the way to lower the external costs of sedentary lifestyles is by encouraging and rewarding exercise. Options here are educational efforts (including advertising), benefits to people who exercise, and subsidies to facilities and programs that promote exercise. These might include weliness programs in public and private institutions and corporations, public parks and other facilities that charge no fees or have fees below cost, or rebates on life and group insurance premiums for those who demonstrate that they are fit. Southern Cali- fornia Edison provides an example of the last alternative. The com- pany gives a rebate to cover a portion of employee health insurance premiums to those with good health-as measured by nonsmoking, low body mass index, low cholesterol, and low blood pressure (Mark Kailin, personal communication). w3r

60 The Costs of Pour Health Habits effects of poor health habits on the use of medical services (outpatient visits, outpatient episodes of treatment, and inpatient admissions) and on work loss. We used direct age and sex adjustment to provide simple contrasts for these outcomes, purged of the known association between age, sex, and habits. We augmented these results with estimates based on a negative binomial regression model. We chose the negative binomial tech- nique because of three characteri,tics of the distribution of medical expenses and work loss. First, a Iarge proportion of the participants used no medical services or had no work loss during the year. Sec- ond, the distribution of expenses among users and work loss among workers is strongly skewed. Third, the distribution of medical use is quite different for individuals with only outpatient use than it is for individuals with inpatient use. Accordingly, we examined inpatient and outpatient use separately. Because of these characteristics, techniques like ANOVA (includ- ing direct age and sex adjustmi-nt) and the analysis of covariance (ANOCOVA) yield imprecise though consistent estimates of the ef- fects of health habits on the use of medical services and work loss, even for a sample as large as the NHIS 1983 habits supplement. A model that exploits the characteristics of the distributions of medical expense and work loss vields more precise and robust estimates. We used a model based on the negative binomial distribution to estimate how admissions, outpatient episodes of treatment, and work loss respond to poor health habits. The negative binomial is an appealing distribution because it ran yield a large proportion of zeros and a skewed distribution of positive outcomes. It is also attractive because of its ability to adjust the estimates for different time frames for different individuals--that is, its convolution properties with re- spect to time observed. We have counts on episodes of treatment, admissions, and work loss that cover varying periods of time-from one day to five years. The technique can effectively annualize all of our estimates, while controlling for age, sex, and other confounding variables. See Appendix D for a formal description of the statistical methods. The negative binomial reKression model is more appealing than a Poisson regression because it allows for unmeasured characteristics generating overdispersion, that is, a variance greater than the mean. (Indeed a Poisson regression can be a special case of the negative binomial model.) Kg069WOZ Data and Statistical Methods 61 Correlation in the Responses Although we have several thousand observations, we do not have the information we would get from the same number of independent observations, because of substantial positive correlations in the error terms among family members and uver time among observations on the same person. These correlations exist in all of our outcome measures. Failure to account for them in the analysis yields inefficient estimates of the coefficients and statistically inconsistent estimates of the standard errors. As a result, the inference statistics (/, F, and X') calculated in the usual way (without odjusting for these correlations) can be too large. In the results presented in the rent of the text, we have used a nonparametric approach to correct the inference statistics for this pos- itive intrafamily correlation. The comrtion is similar tn that (or the random effects least-squares model, or equivalently the intracluster correlation model (Searle, 1971). The model is described in Rogers (1983) and Brook et al. (1984), based nn prior work by lluber (1967) on the variance of a robust regression.

76 The Costs of Poor Health Habits women smokers. These nondiscounted costs are the easiest to under- stand but are misleading for policy. Because of time preference and the possibilities for productive investment of society's resources, fu- ture costs must be discounted (see Chapter 2). We estimated that, on average, smokers will smoke 16,300 packs in their lifetime." Because their lile expectancy at age 20 is 55.5 addi- tional years (that is, the average 20-year-old smoker will live to be 75.5), this amounts to a little lesv than a pack a day (including zero for the nonsmoking years of people who quit). In addition to the external a~sts asstxiated with collectively fi- nanced programs, such as medical and pension programs, the exter- nal costs of smoking include the rosl of fires caused by smoking. Luce and Schweitzer (1978) estimate Ihe fire cost associated with cigarette smoking to be $340 million per year (1986 dollars). Because of fire insurance, almost all of these costs are external. Thus, fires add about $340 million annually to the external costs of smoking, or about $5 per smoker per year. As the table shows, medical ct,.qts and retirement pensions are the biggest cost categories. When we subtract taxes on earnings, the total net undiscounted costs are $13,330 per perscm." Comparing undiscounted cost; for all smokers with undiscounted costs for female smokers, we see that the latter have higher net costs because they live longer. Specifically, they have higher medical and nursing home costs, but lower in the other categories-and much lower taxes on earnings than the average smoker (including both men and women). Comparing the costs discounted at 5 percent with the undis- counted costs, we see a tremendous drop in medical, nursing home, and pension costs. The other costs do not fall as much, because a portion occurs early in adulthood. Difference in Costs hetween Smokers and Nonsmoking Smokers Table 4-14 gives the average lifetime external costs in each category for our hypothetical group of nonsmoking smokers. It shows the effect on these costs if ever smokers retained all their other character- istics and habits, but had never started smoking. We subtracted the values in Table 4-14 from the values for smokers in Table 4-13 to get the external costs of smoking shown in Table 4-15. The differences in costs for the two groups are the external costs caused by smoking. Life expectancy increases more than four years overall, but medical The External Costs of Smoking T.IffiE I-14. Ltfetlme exeemd coets of nonenroking smokers DiscnuntRa[e 0%Total 0% Women 5'hTnW 1pbToul tafe expectrncy, auge 59.8 62.1 19.9 10.2 20 (ywn) Costr' Medical eareb 53 58 9 3.2 Sickln•e 6 2 2 1.1 Gmup life inxioanee 4 1 I 0.3 Nursing hmne cme 14 17 1 0.05 Re[imnent pension 163 144 16 3.1 Fim 0 0 0 0.0 T.xee oo amings° 211 115 26 7.4 ToW net cosls'•c 28 10g 2.1 0.4 ---- LM:MtUA.tNlapYl/IXf6ofa0iILl. b.8ncl Weu maanity and wentae. c. (Sum of coets) minw t.aes on e.ming.. Ber..v.e nf mmxting. categories m.y not ..m to n.d. costs and group life insurance decrease. Because nonsmoking smok- ers live longer, their nursing home and pension payments are in- creased. But because they live longer and have less disability, their taxes on earnings increase. Consequently, the net effect of smokers not smoking is an increase in undiscotmted external costs to society. As we have said, however, the discounted external lifetime costs are more relevant to policy. Both the 5 and 10 percent discounts show that total net costs to society of nonsmoking smokers are lower than those of smokers. The decreased medical costv and group life payouts and increased taxes by nonsmokers are somewhat offset by higher nursing home and retirement payments. These "gains" bo suciety come far in the future, however, so discounting greatly reduces them. External Costs per Pack and thr Effifient Tax per Pack We divide the differences due to smoking (7able 4-15) by the lifetime number of packs to get the external costs per pack shown in Table 4-16. In undiscounted costs, for example, each pack of cigarettes Lti806S480Z

14 The Costs of Poor Health tlabits TABLF'. 1-3. Estimates of externzl costs with different data m assumptions Cost Per Unita (dotlars) CM PackofCigareaes Excers Ounce of Ethanolb Mile-Na-Walked Base case 0.15 1.19 0.24 NHIS dela 0.20 1.16 0.54 Gaxl habits groupc 028 1.13 -0.09 (nwer boundd -0.15 1.09 0.10 a. Cwts and pactsJuunces discourmd at 5 pertzss b. Resuluindudeconsuntcostot93asnufardninkdAvingacdoWerdrit~king-alaledcrimes. c. Cumpdson group is peoPle in wnples who did na hsve the pour hsbit in quesriun" d Medid cue cost. limited tu d'ug+~s po~ibly relared m habtts: slso. 6sMt has no effect on dme af reurenronL attributes all the differences in the two groups to the habit. The third shnuld give a lower bound because it assumes that the habit has such limited health effects. We alsu conducted analyses (reported later) that considert•d total costs and included different assumptions about value of life lost, and so on. Di/(erencrs in Srnnkirig Cnsfs 'fhe analysis using only the Nf IIS data produced an estimated exter- nal cost of 20 cents per pack of cigareltes, because of differences in work loss in that sample. Comparing smokers with people in the simple who have actually never smoked gave a high estimate of 28 cents per pack. Limiting the analysis to medical costs for habit-related diagnoses gave a lower bound that actually went into negative num- bers: every pack smoked represented a 15-cent subsidy for non- smokers. If we were to expand our external cost definition to include the costs of passive smoking, neonatal complications caused by mothers' cmoking, and other costs to individuals other than the smoker, the external costs would range up to 52 cents per pack. We have consid- cred most of those costs "internal" because they are borne largely by the smoker's family. If we were to add the internal costs of disability and premature death to our estimate, the costs could range from 78 cents to $5 per pack, depending on how we valued the lost years of life. In contrast, if we did not discount costs, smoking would actually have negative An Overview f5 external costs. In effect, each pack smoked would save society 91 cents: because smokers die younger, they do not cost society as much in pensions and nursing home care." Differences in Drinking Costs Our results for heavy drinking were not sensitive to data or to as- sumptions other than those used to estimate the costs of drunk driv- ing. This outcome reflects the overwhelming effects on costs of dam- ages caused by drunk driving. The external costs would have been even higher than our estimated $1.19 per excess ounce if (1) we had based our estimates of lives lost in drunk-driving accidents on figures only from states that test accident victims more thoroughly than oth- ers for evidence of alcohol abuse; (2) we had included external costs generated by families of alcohol abusers (insured costs of care for fetal alcohol syndrome, sick leave, disabJity, and so on); and (3) we had used a less conservative estimate of the value of a lost life (say $3 million instead of (,ur $1.67 million per life). 'I'ugether these changes would add 62 cents to our estimate, for a total of $1.81 per excess ounce. Internal costs are much higher because of the value of the drinker's own life. We show later that such costs could amount to up to $2 per ounce. Another internal cost is the price uf the drinks themselves, about $1 per ounce. Differences in Lack of Exerciee Cnsts Our results for lack of exercise were sensitive to different data sets and assumptions. Using the NHIS data for all age groups more than doubled the estimated external costs for Ihe base case. The primary reason is that the medical costs for young people in that sample who do not exercise were much larger than for those in the HIE sample. When we used actual moderate and heavy exercisers as the com- parison group, in order to derive an upper bound on external costs, we found that the effect was in the opposite direction, The negative cost of 9 cents indicated that exercisers at tually have higher external costs than sedentary people. This difference reflects two factors. First, actual exercisers are healthier in other wnvs than inactive people, so they have a greater life expectancy than the "active inactive" compari- son group used in the base case. This mvan.s that they collect more old-age benefits. Second, sedentary peopl!• spend less than exercisers 968069b80Z

16 The Costs of Poor Iiealth Habits on medical services because they have other characteristics associated with lower medical use (less education, for example). They pay the same premiums as exercisers but use less medical care and get fewer old-age benefits. Actual sedentary people, in fact, subsidize exercis- ers. But if they exercised, they would do so even more. Limiting medical costs to diagnoses related to exercise had the ex- pected effect of lowering net external costs. The difference was much greater than we found in the case of heavy drinking. In all, the results of the sensitivity analyses suggest that our esti- mates of external costs are well within the range of possible estimates, and somewhat on the conservative side. Thus, they provide a sound basis for considering what might be done to lower the magnitude of the costs. We must point out that there is a chicken-and-egg issue about exercise and health status. The links between exercise, fitness, and health are well established, and we controlled for as many other differenc•esbetween exercisers and nonexercisers as we could. Never- theless, we cannot be sure that inactivity causes poor health, or vice versa. The issue might be settled by a randomized experiment on the effects of exercise promotion, but such an experiment has not been run. We believe, and epidemiological evidence suggests, that exercise is advantageous to one's health; but we cannot be certain that this is so. What Can Be Done about the External Costs of These Habits? Our cost estimates demonstrate that smoking, heavy drinking, and sedentary life-styles rack up impressive external costs. Clearly, soci- ety has a big stake in lowering such costs, but how can we go about it? Is there come overall solution, or does each problem require its own "package" of solutions? Education and Other Alternatives One obvious mechanism is education, and it looks promising. By education we mean more than formal education programs, offered through schools or other agencies. These might provide a mechanism to prevent young people from developing bad health habits, but their i L48069680Z I An Overview 17 potential is still unclear. We are talking instead about the spread of public information concerning health habits. It can hardly be coincidental that the level of smoking in the United States has dropped so dramatically since the Surgeon General's first official statement, in 1964, linking lung cancer and smoking. Since that time the public has been inundated with infonnation about the detrimental effects of smoking, and per capita consumption fell by 23 percent between 1965 and 1986. It is no longer considered sophisti- cated to smoke. One writer wryly compared smoking's downward slide in public acceptance to the fate of public spitting-and specu- lated that ashtrays might soon be as rare as spittoons. The growth of the exercise "industry" also suggests how powerful informal education can be. Articles and public discussions abound on, for example, how exercise lowers cholesterol, high blood pres- sure, risk of heart attack, and how it increases life expectancy and works more effectively than dieting to teduce weight. As this kind of information has increased, joggers h.ive become an increasingly familiar sight, in and out of season. In short, the public seems receptive to infonnatiun about health habits, and education presents an attractive option. To judge from the case of smoking, however, it may take considerable time to affect poor health habits and thus their external costs. Furthermore, educa- tional efforts may have to be tailored and delivered differently for different audiences. Finally, public attitudes will have to be con- sidered. Public attitudes figured in recommendations made by Surgeon General C. Everett Koop in May 1989, when he was inaugurating a national campaign against drunk driving. The power of advertising and association was implicit in several of his recommendations: (1) banning the appearance of athletes and other celebrities in alcohol commercials, (2) prohibiting alcohol mannfacturers from sponsoring athletic events, and (3) matching the level of alcohol advertising with "equivalent exposure" for health messages about the risk from al- cohol. These recommendations raise constitutional and other legal issues, as did the proposal to ban tobacco advertising on television. That ban was imposed, and one can speculate that the absence of advertising contributed to the drop in smoking: becai.ise advertising was not con- tinually reinforcing positive images of smoking, public attitudes were more open to change.

64 The Costs of Poor Health Habits I The External Costs of Smoking TABIE 4-l. Smoking satus of perrona 20 Onmtgh 59 yevr of aga, Health huurafR.ro Eaperimenta 1 Cigarette Smoking I Subgroup Sample Size (N) Never Smoker (%) Fonner Smoker (%) Current Smoker (%) CtvmnYipe or C'y~ SmokeA(%) TOTAL 3,059 41.3 16.9 41.8 9.1 Males aged- 20-29 488 38.5 14.6 46.9 13.3 30-39 422 28.0 22.8 49.3 18.4 40L49 264 25.0 273 47.7 16.5 50-59 214 28.5 31.8 39.7 16.5 Females aged- 20-29 593 47.9 11.6 40.5 3.9 30-39 491 50.9 12.6 36.5 2.5 40-49 280 50.4 10.4 393 4.0 50-59 307 50.2 16.6 33.2 2.6 Race Black 439 49.2 8.9 41.9 11.0 Nonblack 2,620 399 18.3 41.8 8.7 Years of education 0111 823 34.8 13.0 52.3 10.5 12 1.177 40.4 17.5 42.1 8.6 13-15 555 44.0 18.0 38.0 7.4 16 323 48.9 21.4 29.7 8.3 More than 16 181 54.7 19.9 25.4 12.1 Rrsidence Daylon,Ohio 615 40.2 15.8 44.1 11.9 Seattle,Wash. 717 41.1 17.7 41.1 8.1 Fischburg, Mau. 374 34.8 21.1 44.1 8.9 Franklin,Mau. 472 37.9 24.4 37.7 7.0 Charleaton,S.C. 384 43.5 10.4 46.1 10.5 Georgetown,S.C. 497 49.1 12.1 38.8 8.0 a stuus an ur eaol6new, 1974-1978. b. Mrvrt pye w cigar smoking.nd dginala: amddng ue not munWly exdueire: all persons in the 6nrJ column nuy aho appear in one afthe mtee cigartne smmddng ptegories. 65 TABIF. 4-2. Cigarette smoking habits of fomur and current smokers among petsons 20 Owugh 59 years of age, Health Ineurarce Enpetimenta Former Smoker Cucrent Smoker SmokingChvscteristic (N=516)(%) (N=1,275)(%) Years of smoking I.ess than 2 10.9 4.7 2-5 26.7 15.6 6-10 21.7 22.9 11-20 26.9 32.2 21-35 11.6 20.6 More than 35 2.1 4.1 Average packs per day Less Ihan I 35.1 31.4 About 1 44.2 45.6 About 2 17.8 20.8 More than 2 2.9 2.2 Pack-years t.euthan2 21.9 ItO 2-5 20.5 15.3 6-10 15.9 19.0 11-20 22.3 26.8 21-30 8.7 12.0 31-50 Z4 10.9 51 or nwte 3.3 5.2 Physician advice to atop smoking Yer 16.7 24.7 No 83.3 75.3 .. NumbenrepteseMpncewageoffwrterwwmmamukers. Dauaeofenrollindx,1974- 1978. There were slight differences (nnt shown in our tables) in stability among different subgoups. Women (87 percent) and people older than 25 (86 percent) were slightly more likely than men (84 percent) and people under 25 (83 percent) to maintain their stalus. Similarly, a slightly higher percentage of those enrolled in the experiment for three years maintained the same smol.ing status than those enrolled for five years (86 and 84 percent, respectively). PIPE OR CIGAR SMOKING The most striking fact about pipe and cigar smoking is lhat its reia- tionship tn education is the reverse of the relationship for cigarette ~V806CJ MZ

72 The Costs of Poor Health Habits Habit ^ Outpatient Inpatient Group (Cunrator Fomler) df AU Habit- Rdatedb All Habit- Relatedb Work [.os Health Insurallce Experiment ChJdmn (0- Cigarette 2 2.31 0.14 1.57 1.94 NA 19) smoking Pipe or I 0.31 1.30 0.53 2.11 NA Nonsmoking cigar Cigartte 2 4.33 0.65 2.10 9.73'•' 1.83e adults (20-59) amoking Pipe or 1 0.04 0.76 037 0.04 0.89 National Health Interview survey NoesmokOtg cigar iguelte 2 .28 A .41 A .89 adulls (20-59) amotmg a. AlI owp.dem ore excludes rell~h.r HIE. AII inpuien ta2 exekNu malemity fw HIC. 8ignifiunce k.el: ••• I perecnl; otMwi.e imignintunN de IOpeunt orbeaer krel; df= degnxsofaeednm. G Habil-relatd diagnroes fmm Tale. 31 through 3-0. c LLblesudy. smoking adults the smoking status of the adult in their household who had the "worst" smoking habit.` As rows 1 and 2 in Table 4-9 indicate, passive cigarette smoking had no statistically significant ef- fect on children's use of either inpatient or outpatient services, for all care or for habit-related diagnoses. Pipe or cigar smoking did have an effect on children's inpatient use, but in an unexpected direction. For habit-related diagnoses, children who lived with pipe or cigar smokers had 50 percent less inpatient care than children who lived with never-smoking adults (not shown in the tables; f=-2.11, p< 0.05; significance level uncorrected for multiple comparisons). As rows 3 and 4 in Table 4-9 indicate, for nonsmoking adults passive smoking had no significant effect on any outpatient care. For inpatient care, however, passive smoking had a significant effect on smoking-related diagnoses (for nonsmoking adults). Although the use rates for all inpatient diagnoses were not statistically significant, The External Costs of Smoking 73 the magnitude of the difference was large (26 percent; not shown) relative to rates for adults in never-smoking households. Given our sample size and the fact that passive smoking effects are probably less than active smoking effects, we may not have had the statistical precision to detect clinically meaningful effects of passive smoking. Because we lack information on exposure lo passive smoke outside the home, we are unable to estimate the possible effects of passive smoking at work or other locations. Work loss. As the last column of Table 4-8 shows, former and cur- rent cigarette smokers did not have significantly more work loss than never smokers in the I flE sample.' Current pipe or cigar smokers lost 25 percent more work days (p = 0.10) than never smokers. I'assive smoking had a surprising effect on never-smoking men, which mir- rurs the effect of passive smoking on children: never-smoking men who lived with a current or former cigarette smoker lost 42 to 51 percent fewer work days than those who lived in never-smoking households (p < 0.05). The magnitude and statistical significance of the result were not affected by the inclusion of health status mea- sures. NIIrS RF.Sn1.T.S We also examined separately the effects of smoking using the 1963 NHIS for all adults and for the elderly (aged 60 or older). The NHIS findings for outpatient use were almost identical to those from the HIE. Both the HIE and the NffIS dala showed higher inpatient use for current smokers than for never smokers, although the difference was greater for the Nf iIS. The NHIS lound considerably more inpa- tient use for former smokers, but the difference between the two data sources was not significant at conventional levels. Only for work loss did the two data sources diverge markedly, with the NHIS data showing a much greater response to smoking. Table 4-10 shows that cigarette smoking was significantly related to hospitalizations for both the elderly arld all age groups (20+) but was significantly related to outpatient us(- only for all ages combined.' 'fable 4-11 indicates that current smokers had negligibly higher out- patient visit rates than never smokers (less than I percent higher), but former smokers had 10 percent morv visits (p < 0-01). Both cur- rent and former smokers had higher inpatient admission rates, 19 and 31 percent greater, respectively, than never smokers (p <r 0.(xt1). rJtiSUSMOZ

66 The Costs of Poor Health Habits TABfE 4-3. Cigarette smoking status at enrollment and at exit among persons 20 through 59 years of age, Health Insurance Experimenta Status at Enrollment6 StatuaatExit Never Smoker (N=1,159) Former Smoker (N=477) Current Smoker (N=1,134) Never amoker 93.5 10.5 2.2 Former smoker 3.5 75.1 15.8 Current smoker 3.0 14.5 82.0 Total 100.0 100.0 100.0 a. Numbas mpresem pertxmage or culuma mrat. b. Smbility (ag¢ement) of ciga¢ue smoking status between enoolhMnt aniE exit significantly bener than chunce (kapps =077, z= 55.71. smoking. The highest percentage ot pipe or cigar smokers was among people with postgraduate education. Overall, 9 percent nf the I1IS population were currently smoking pipes or cigars (TaMe 4-1) and, not surprisingly, more men (13 to 18 percent) than women (3 to 4 percent) indulged. We found no majnr differences in pipe or cigar smoking amcmg the six study sites. National ttrafth Irrlemiew Sunyy As Table 4-4 indicates, smoking patterns in the NHIS differed from patterns in the HIE (p < 0.0001 based on g' test). Overall, fewer people in the NI {IS currently smoked cigarettes and more were never and former smokers. These differences probably reflect the secular decline in smoking, especially for males, between the mid-1970s, the lime of the HIE, and the early 1980s, the time of the NI-1IS. The differences held for most of the subgroups in Tables 4-1 and 4-4. In both there is a higher percentage of former and current smok- ers among males than females in all age groups and a strong inverse relationship between years of education and percentage of current cigarette smokers. lhe racial difference was strunger for the NHIS: an appreciably higher percentage of blacks were current smokers. We had no information on pipe or cig.+r smoking for the NHIS sample. The Effect of Smoking on I lealth Care and Work Loss Having established the prevalence and incidence of smoking, we then calculated its costs in terms of medical service use and work The External Costs of Smoking 67 TABLE 4-4. Cigarette smoking atatus of perstms 20 through 59 years of age, Netionsl Health Interview Survey, 1983a Suhgroup Sample Size Never Smoker Former Smoker Current Smoker TOTAL 16,309 44.7 19.8 35.5 Males aged - 20-29 2,310 49.0 13.2 37.8 30-39 1,895 36.2 24.6 39.2 40-49 1,423 27.3 31.6 41.0 50-59 1.407 24.6 40.2 35.3 Females aged- 20-29 3,011 52.9 12.3 34.8 30-39 2,632 51.2 15.8 33.0 40-49 1,863 48.6 17.6 33.8 50-59 1,768 50.7 18.1 31.2 Race Black 1,634 48.0 12.8 39.2 Nonblack 14,614 44.4 20.5 35.1 Years of education 0-11 3,232 34.6 17.8 47.6 12 6,599 41.8 19.0 39.2 13-15 3,236 49.7 19.3 30.9 16 1,854 55.4 22.8 21.8 More than 16 1,312 57.0 24.9 18.1 a. Numbers repreaenr percenyqe of row W41. loss. We first conducted a descriptive analysis, which adjusted only for age and sex. It compared the use of current and former smokers with the use of actual never smokers- -rather than the "nonsmoking smokers" discussed in Chapter 2. Implicitly, this comparison attrib- utes all of the differences in results to smnking. We next conducted regression analyses, in which we controlled for all three habits and other characterislirs of individuals as well. This procedure estimated differences in health care and work loss between smokers and never smokers, controlling fnr other differences be- tween the two groups. Thus, we obinined the incremental effect of smoking on our outcomes, rather than the effect of smoking and any correlated drinking, exercise, or other covariates. For example, cigarette smokers might be less likely to exercise strenuously and Zti8065L80Z

82 The Costs of Poor Health Habits the difference in total earnings is 93 cents per pack, which stems from the nonsnioking smoker's greater life expectancy. The differences between the total costs shown in the last column and the external costs shown in the earlier columns occur because different areas are collectively financed to different degrees; for example, group life in- surance is fully financed collectively and does not change at all. Our estimate of the proportion of work-loss costs financed collectively is unreliable, Nevertheless, column 5 shows that even if coverage were complete, it would not have much of an effect on results for the components shown in the table. Two other costs borne by the smoker are larger than any of the costs shown in'Pable 4-17. Th-- biggest component of total costs is the cost to the smoker of premature death and disability. Because this cost is borne by the smoker, we have not included it in the tables. What is the cost to a person and his or her family of losing 28 discounted minutes for each pock of cigarettes smoked? In monetary terms, this is 93 cents of wages (see Table 4-17).n But surveys have shown that most people are willing to pay many times their expected increase in earnings for additional safety. Thus, this component of costs may be as much as $5.00 a pack (Howard, 1978). Another large component of costs to the smoker is, of course, the retail price of the cigarettes themselves, about $1.00 a pack. Because of the imprecision in the magnitude of this cost, we left the lower right entry in Table 4-17 a question mark. Sensitivity of Costs to Medical Prices and Wage Grorotlr In our calculations we assumed that medical prices and wages are constant over time in real terms. This assumption ignores the possi- bility of increases in real medical prices as well as real wage growth. "Ib correct for such increases, we would clearly need to know how much medical care prices and wages will grow relative to other goods and services. But given the history of medical prices and wages over the last three decades, it would be difficult to predict their future course. We can determine how sensitive our estimates are to changes in real medical prices. If real medical prices were to rise by 5 percent per year, then the medical costs per pack at a 5 percent discount rate would just equal the nondi.,counted medical costs with no medical inflation-in other words, medical inflation would cancel out the discounting factor. Thus, at a 5 percent discount rate with 5 percent _ The External Costs of Smoking 83 inflation, the external medical cost per pack would be 38 cents (rather than 26 cents with no inflation in real mediral prices) and the total external cost would be 27 cents (rather than 15 cents). It is likely that the 5 percent real rate of medical inflation would also apply tu nursing home costs and would decrease nursing home costs by 2."4 cents (= -26 + 3), thereby reducing the total external economic cost per pack to 4 cents. Moreover, if in the future we develop an effective cure for lung cancer (or heart disease), this treatnient would have a strong effect on costs. If the treatment were inexpensive, costs would fall; but if it were more expensive than the current ineffective treatments, costs would rise. Thus, it appears that the tax necessary to correct for the external costs of smoking is somewhat sensitive lo assumptions about the future course of medical prices. The likely direction of error is that wc have overstated the external costs; lhat is, if we were lu assume that medical prices would increase, thr tax necessary for smokers to pay their way exactly would fall. Other External Costs Our estimates of the costs of smoking do not include all the external effects of cigarette smoking. They ignore the adverse effects of pas- sive smoking on those outside the smnker's family, especially non- smokers, as well as mortality effects within the smoker's family and certain costs of fires. 'I'he Surgeon General (USDI IHS, 1986) reports that passive smok- ing is responsible for about 2,400 deaths per year due to lung cancer. Passive smoking has also been linked to reduced lung tunction in children of smokers, a higher incidence of respiratory problems for children and others, as well as the displeasure if consuming un- wanted cigarette smoke. Many nf these costs are within the family and therefore, tinder our a.ssumptions, internal. If, to compute.ui upper bound, we treated all 2,40(1 deaths as external costs and valued them at $1.66 million in 1986 dollars (based on Shepard and /eckhauser, 1984), we would add about 14 cents per pack to exlern•d costs. By omitting maternity costs from our calaulations, we have also omitted the extra costs of neonatal care incurred because some women smoke during pregnancy. l'hese women are twice as likely as nonsmokers to have low-birthweighl babies, and those babies av- erage 20(1 grams lower in birthweight than the babies of nonsmokers. U98U69L8UZ

Data and Statistical Methods 47 Data and Statistical Methods Uur study used a number of data sources, primarily the RAND Health Insurance Experiment (HIG) and, the National Ilealth Inter- view Survey (NHIS)- The t11G was the principal source for people younger than 60 years, because of its detailed information on habits and the medical reasons for using health care. Because those age 62 or over at the time of enrollment were excluded from the FIIE sample, we used data on the elderly frorn a 1983 supplement to NHIS. It includes information on poor health habits and overall measures of health care use and work loss. We also compared the NHIS data on the nonelderly with the HIFE data. 'lhe Current Population Survey, the Centers for Disease Control, and other sources provided supple- mentary information. This chapter describes the data sources, the outcome measures and explanatory variables derived from them, and our statistical methods. We deal explicitly with all three p~or health habits. Data from the RAND Hetlth Insurance Experiment Naturr n( fhr Experiment The HIE was a randomized trial of alternative health insurance ar- rangements in fee-for-service and prepaid group practices.' It col- lected detailed information on health status and the use of medical services, demographic and socinr•conomic characteristics, and the poor health habits of interest herr-smoking, drinking, and lack of exercise. Between November 1974 and February 1977, the I l1E enrolled fami- lies in six sites: Dayton, Ohio; Seattle, Washington; Fitchburg, Massachusetts; Franklin County, Massachusetts; Charleston, South Carolina; and Georgetown County, South Carolina. The sites were Z£8069480Z selected to (1) represent the four census regions; (2) represent the range of city sizes (a proxy for the complexity of the medical delivery system); (3) cover a range of waiting times to appointment and physi- cian per capita ratios (to test how having to wait for health care affects demand); and (4) include both urban and rural sites in the North and in the South. In each site families were randomized to an enrollment term of either three or five years. Families participating in the experi- ment were assigned to one of fourteen different fee-for-service insur- ance plans.2 The Samplr The sample was taken randomly from earh site's population, but the following groups were not eligible: (1) those 62 years of age and older at the time of enrollment; (2) those with incomes in excess of $25,000 in 1973 dollars (or $62,0On in 1986 dollars-Ihis excluded ;i percent of the families contacted); (3) those eligible for the Medicare disability or end-stage renal programs; (4) those in jails or institutionalized for indefinite periods; (5) those in the military or their dependents; and (6) veterans with service-connected disabilities. The sample size for each site is given below, excluding persons enrolled in the f-lealth Maintenance Organization portion of the experiment. Dayton, Ohio Seattle, Washington 1,137 persons 1,222 Fitchburg, Massachusetts 723 Franklin County, Massachusetts 889 Charleston, South Carolina 778 Georgetown, South Carolina Total 1,IXif1 5,&19 Dafa on Outcome Measures To estimate how poor health habits influence external costs, we ex- amined, among other effects, the use of medical care services (exclud- ing dental care) and work-loss days.3 USE OF Mr.DICAI. CARE SERVICES The measures of medical use included the number of episodes of outpatient medical treatment and the nnmber uf continuous periods of hospitalbation. Both measures were based on claims data filed

96 The Costs of F'oor Health Habits as those who reported an average two or more drinks per day (five or more actual drinks, with correction for underreporting).' As a base case, we used data from the HIE on those aged 20-59 and data from the NHIS on older people. For the f IIE sample, we included all medi- cal expenses (except maternity and well-care) and all covered work loss. For the aged, we included all medical use. From the NHIS 1983 sample, we assumed that men would account for 80 percent of the heavy and former drinkers. W-- averaged the results for men and women accordingly, to make up the drinkers' total. The first two columns show nondiscounted lifetime costs. We esti- mated that heavy drinkers will drink 70,400 ounces in their lifetime (and report drinking 25,6(X) oimces). This can be converted into drinks by multiplying by 2.2 drinks per ounce. Because the life expec- tancy at age 20 of these drinkers is 54 vears, this number amounts to slightly more than three reported (seven actual) drinks a day on aver- age (including zero for the nondrinking years of those who quit).10 More than half of the drinks (the 41, I(1(1 ounces in row 2) are in excess of five actual (two reported) drinks per day. The costs of drinking include more than the medical, sick leave, and other collectively financed costs that we examined for smoking. They include also the substantial costs of the criminal justice system, fire, and costs to others hurt or killed in traffic accidents caused by drinkers. Because our two data sets, the HIE and the NHIS, do not contain information on these costs, we have relied on the work of others. Estimating these costs poses parficular challenges. We could not model the way in which a per.on's drinking and other habits and characteristics affect the probability that he will damage property or kill an innocent bystander in an auto accident. For fatal accidents, we found no data that had the same structure as the HIE or NHIS on habits, socioeconomic variables, and whether or not an individual was implicated in a fatal accident. Such a data set would have allowed us to model the effect of drinking on these drunk-driving costs in the same way that we modeled its effect on collectively financed programs. Instead, we had to rely on a less direct approach. We assumed that these external costs could be measured by the number of nondrinkers killed in accidents reportedly involving someone who was "driving under the influence." In much the same fashion we used others' estimates of the costs of fires and property damage associated with drinking. The External Costs of I feavy Drinking 97 Our estimates of mortality, based nn the 1IRA, include the differen- tial probability that a drinker will have a fatal accident but do not include the likelihood that an innocent bystander or nondrinking passenger will be killed in a drinking-related accident. The U.S. De- partment of Transportation (1986) estimates that there were 22,360 deaths in alcohol-related traffic accidents. Of those killed, two-thirds had been drinking. Thus, the external costs of drinking should in- clude at least the lives of the 7,400 nondrinkers who were killed. The problem is how to apportion the cost of innocent lives, crime, fire, and property damage to heavy drinking. We have two straight- forward alternatives: (1) assign all ol the costs of innocent lives to heavy drinkers; and (2) prorate the rosts according to alcohol con- sumption. 'I'he first overstates the cur.ts of heavy drinking, while the latter understates it. For this part of the analysis we chose the first alternative. Our measure of heavy drinking is average consumption per day. An individual may have a low daily average, hut occasionally drink heavily and drive. Such an individual is not a heavy drinker by our fonnal definition, but his behavior-drinking and driving--could im- pose heavy social costs. On the othe•r hand, someone who drinks heavily on average is more likely to dtink and drive (although not all heavy drinkers do so). To estimate the costs of innocent lrves, we assigned all of the 7,400 deaths to the excess drinking of heavy drinkers (approximately 1n percent of the adult population) and used a willingness-to-pay for a human life of $1.66 million in 1986 dollars (based on Shepard and Zeckhauser, 1984). The result, per heavy drinker, is an estimated $23,8UQ nondiscounted, for the lives of innocent bystanders killed in drinking-related accidents." This figure is an upper bound on the costs of heavy drinking-heavy diinkers have been assigned the costs of all drunk driving, including accidents caused by individuals who do not regularly drink heavily. I lad we chosen to prorate the costs by total rather than by excess consumption, the costs of excess drinking would be 60 percent less. We based our costs of fire, crimn-, and property damage on the estimates of Harwood et al. (1984). m„tor vehicle acridents (prop- erty)-$3.6 billion; criminal justice -$3.1 billion; fires (property)- $507 million; and social programs (largely administralion)-$54 mil- lion (all in 1986 dollars). If we attril,ute all Ihese $7.2 billion in costs to excess consumption of alcohol, ihe external cnst is atnrut $14,000 per heavy drinker. LS806S480Z

20 The Costs of Poor Health Habits A different argument about taxing moderate drinking is that such drinking may have beneficial health effects; hence we should not discourage it. This thesis does not withstand scrutiny. First, the risk of a fatal traffic accident among youths aged 16-21 (data are not available for other age groups) rises with any consumption of alcohol. f3ecause traffic accidents generate more than half of all external costs, it is dubious that there are any overall external benefits from moder- ate drinking. Second, based on our later analyses, there are very small or no effects on medical costs from moderate drinking.=' Third, the bulk of any beneficial effects would accrue to the drinker and hence not be external costs. Theoredcally, excise taxes that charge a fixed rate per ounce are not as good as individualized taxes that impose the marginal external costs of their last ounce of consnmption on each individual. The person who has a glass of wine with dinner every night and does not drive afterward is much less costly to others than the person who consumes seven drinks on Friday night and then drives home. Each of these drinkers consumes the same amount of alcohol per week, and so pays the same alcohol tax. Even if excise taxes are set to cover external costs on average, problem drinkers pay less than the full costs of their actions; some of their external costs are paid by non- proMem drinkers. Unfortunately, it is difficult to distinguish problem drinkers from nonproblem drinkers at the point of sale; so tax rates are the same for everyone. Even though a flat tax that covers full external costs is imperfect, it is preferable to no tax or to the existing tax, which covers only part of the external cost of drinking. The increased tax will shift some of the burden of drinking back onto those who have caused the cosl (see Appendix H for further dis- cussion). If the primary concern in taxing cigarettes and alcohol is the revenue-raising effect, then there is a strong economic argument for such taxes: there is less induced inefficiency than for some other kinds of taxes (Ramsey, 1927). For efficiency reasons, economists pre- fer taxes that raise money with a minimum of distortion to normal incentives from a free market. To put it cold-bloodedly, taxing ad- dictive substances will have only modest effects on the behavior of those already addicted, an argwnent that could justify higher taxes on both alcohol and cigarettes. Less cold-blooded are arguments that have supported other gov- ernment and private efforts to prevent (or lower) consumption of these products. The first argument recognizes the regret expressed 6L806SL80Z An Overview 21 by most smokers, and their attempts to quit. Smoking tends to start in adolescence or early adulthood: about four of five smokers begin smoking before age 20 (Warner, 1986). At that age, people are usually not well informed and have not matured to the point where future ill health or mortality have much compelling reality for Ihem. Because cigarettes and alcohol are addictive, it is more difficult to stop than to avoid starting the habit. There is some evidence that the proportion of those who smoke before they are 20 can be inlluenced by the level of taxes (Lewit and Coate, 1982). Thus, taxing cigarettes may lower the percentage who become addicted.'= Some may see this argument as paternaislic, but that is from the perspective of experimenting adolescents. not from the perspective of addicted adults who are trying to quit The latter arguably detrr- mines the economically efficient tax. If the loss in life expectancy of 28 (discounted) minutes per pack is relevant fo economic efficiency because of later regret, an economically el ficient tax would be tin the order of $5 per pack, the estimated value uf the 28 minutes. Irrespective of the merits of these other arguments, the difference between the actual tax and the external en.sts of alcohol is so large that, in our view, federal alcohol taxes shuuld he increased. 'this is especially true for taxes on beer and wine, which are much lower (per nunce of ethanol) than taxes on distilled spirits. To the degree that the external costs of alcohol abuse are caused by people who drink in bars and restamants and then drive home intoxicated, there is a case for an additional tax on alcohol sold by the drink." Ideally, society would tax drrmk drivers to force Ihem to pay the external costs of drunk driving. To some extent, fines, suspension of driving licenses, jail sentences, and civil liability at- tempt to do so. Still, the present legal svstem does not make, nor could it reasonably expect to make, drunk drivers fully bear the exter- nal costs of their actions, especially in case•s where innocent lives are lost. Liability insurance, for example, pariially shields drunk drivers from the consequences of iheir actions, and the likelihood of appre- hension for driving under the influence i, far from certain. Differences in 9ux Kates Excise taxes on alcoholic beverages and cif;arettes are imposed at the federal, state, and (in some cases) local levels. A look at the history and current diversity of tax rates gives no indication that the legisla- tors who imposed them had any partiaelar economic rationale in

10 The Costs of Poor Health Habits I _ An Overview 11 among drinkers by how much thev consume. The rationale is that any smoking is considered harmfcrl, but the results of drinking are more ambiguous. Little evidence has been put forward that light-to- moderate drinking is harmful, and some studies have found benefits from it. Consequently, our analyses distinguished between moderate and heavy drinkers. Following the practice of the National Center for Health Statistics, we defined moderate and heavy drinking based on people's prorated daily consumption of ethanol. Ethanol is the component of alcoholic beverages that intoxicates. An ounce of pure ethanol is contained in approximately 2.2 mixed drinks, 2.2 (4-ounce) glasses of wine, or 2.2 (12-ounce) cans uf beer. We defined heavy drinking as the equivalent of two or more reported drinks a day. That may not sound like a great deal, but a comparison ot what people say they drink with tax reports on alcohol sold indicates that people substantially under- report their actual drinking. Ystimates of underreporting vary. For our purposes we assumed that people reported 40 percent of their consumption; in other words, they underreported by 611 percent, lhus, we assumed that two reported drinks equal five actual drinks. I leavv drinking exacts a serious tull on drinkers and their families. At age 20, drinkers reduce their life expectancy by 1.55 years or 20 minutes per excess ounce of ethanol consumed per day. They pay 6 cents per excess ounce in higher oubof-pockct medical costs, and lose 66 cents per excess ouncr in wages and salaries. An "excess" ounce is the ethanol contained in the third drink and any additional reported drinks per day. As for the external costs, we based our estimates on the differences between costs for a heavy drinker and for a "controlled" heavy drinker, that is, a heavy drinke•rwho retained all his other characteris- tics and habits but whose average daily consumption was just under two reported (five actual) drinks. In other words, he consumed no "excess" ounces of ethanol. 7 he lifetinre external costs of excess drinking amount to $42,011f/ per heavy drinker. This translates to $1.19 per excess ounce nf ethanol consumed, or.5d cents per excess drink. In thinking about the adverse effects of drinking, especially prop- erty damage and loss of innocent lives, it is impractical to base our estimate of the external costs on excess ounces only. 6y definition, excess ounces must he preceded by "nonexcess" ounces consumed. Further, it may be simple to draw the line of excess analytically, but not behaviorally: for some people, the first ounce may be "exces- sive."° When rue average the external costs over all alcohol consumption, every ounce of etharml has an external cost of 48 , rnts. This translates to about 22 cents per mixed drink, per 4-ounce glass of wine, and per 12-ounce can of beer. Lack of Exercise The costs to and for sedentary people are quite high. Such people pay 7(1 cents more per mile-not-traveled in higher out-of-pocket costs and lose 19 cents of wages and salaries. Our analysis indicates that not exercising reduces the life expectancy of a 20-year-old by about ten months. One study (Paffenbarger and Hyde, 198-1) estimates that time spent in brisk walking is just returned (undiscounted) in later life and that the life-saving benefits of exercise are n.oughly proportional to the number of miles traveled in walking, jogging, or running. Thus, jug- gers can get back double their exercise tinm in life expectancy if they go twice as far as walkers in the same elapsed time. Over a lifetime, ten months spent in walking is consistent with a moderate exercise program that averages a mile a day. Surprisingly, the lifetime external costs nf a sedentary life-stvie are actually higher than the external axsls of snoking. We estimate that each extra mile a sedentary person travels gives him or her 21 (undis- counted) extra minutes of life anci saves the rest of sxiety 24 cents in discounted external cosls. " Conversely, the external (ast to society is 24 cents for each mile-not-traveled, mhich tntnslate.< to $1,650 in lifetime external costs per sedentary person. What Drives These Costs? Our estimates of external costs are based on analysis of the compo- nents listed in Table 1-1. For Smoking T'he external costs of smoking are largely driven by medical costs, pensions, and taxes on earnings. Smokers and former smokers gener- ate more in medical costs than they would if they had never smoked. When we compared their use of services with that of nonsmokers, we found that whereas formersmokers h.rd 12 percent more epi5odes of outpatient care, curiously enough, cutrent smokers were no more ti 68065 480Z

The External Costs of Heavy Drinking 87 39bpwP IVrAL M.b.{W _- 20-29 30-39 40-49 The External Costs of Heavy Drinking 50.59 r .k,.r65 _ m-29 30.39 40-.9 50-59 1'eople who consume more than five drinks a day reduce their life expectancy at age 20 by about 20 minutes per excess ounce of etf3a- nol_ I(We define excess nunces a,9 anything over two drinks per day.) 'I'hese individuals also ring tip heavy external costs for the set of cnllectively financed costs we examined for smokers. For that set, the lifetime external costs per heavy drinker are $3,20(1 (at a 5 percent discount rate)--a great deal n3ore than smokers' costs. In addition, drinkers impose steep external costs through crime and auto acci- dents. When those costs are added, the net external lifetime cost per heavy drinker is a daunting $42,(HNI, or $1.19 per excess ounce consumed. As explained earlier, it is not possible to tax only "excess" ounces. When we prorate the c.3sts nver all alcohol consumed, every ounce of ethanol imposes 48 cents in external costs. This chapter describes the statistical and cost anal,vses from which we derived those estimates. As we did for smokers, we examine the prevalence of drinking and discuss its association with collectively financed costs. We also estimate the other major costs: the value of the lives of innocent bystandels lost in auto accidents related to drink- ing, property damage, and crime. We present findings from both descriptive and multiple regression analyses. We conclude with esti- mates of the external costs heavy drinkers impose on others, includ- ing the results of our sensitivity analysis. Prevalence of Drinking Our purpose in this project was to estimate the external costs of heavy drinking. Thus, we did not simply categorize people as ab- stainers, former drinkers, and current drinkers. We further divided current drinkers into four categories by the amount of ethanol they S1rW pr RRx af I>n.9w m lkuark ]9 Sep ~~1 qe. 55«Im 6~w.aeu PolpNbenl3 ..._ - - . .------._------ - c.ms uute6 N.n 111.c1, Nc6M.ck Pomw 0.0].U.21 V.22-0.49 I.n-i 3.0armne 5.^RtSLx AMNbv nNMn ~y ~r ~Wq o96cNM+r 3,011 35.9 21 PS6 20.i R.3 i.0 478 15.9 21.5 33.7 130 3.1 412 IR.0 79.5 35.4 14.1 4.4 260 i1.6 ou.0 19.6 1. 2 6.2 435 21.4 n 223 lJV 131 2.3 5!5 46.0 29.9 U.6 3.1 0.5 4RI 49.3 212 19.9 35 0.0 li4 555 23.6 11.2 '..2 1.1 306 4R r l/.5 Ii.O 2.9 0.0 431 51 5 NA 16.1 R.S 3.9 2.573 33.0 l'/.6 26.6 R.5 1 l 811 47.2 5.1 IR6 19.4 7.3 2.9 1.159 37.3 2.3 )6.fi 23.2 .t.6 2 U 543 30.2 1.5 2R.6 29.R 0.5 I5 320 21.6 11.9 31? 34.1 10.0 1 6 IlR IRA 0.6 31.5 1R.r 111.7 0.6 602 453 1.9 t9• 22.9 In.O 0.'/ '/01 23A 1.9 11.0 rld R.r 1.6 159 3] 0 2.l 24.7 19.0 ig 2.8 465 24.5 U.9 31,6 30.3 Ia1 1 9 381 42.1 36 24 1 16,6 9.0 34 497 50.7 7.2 11.9 16.Y 4.6 2.6 . N.~d»rtpee~an~qlro~ W. I. rspe.wne.a~..a,a.~a....wwur.6..enm...aw..derelaUL.ne..ww9er..al~r/,.k.N.n owse~l..iR~nvey,kq.w/Yperm45unaaVMT'.~ul.9.v1. reported cunsnming, on average, per day. The heaviest drinkers were those who reported imbibing 3.0 or more ounces per day (over six drinks of hard liquor or six cans ot Ix•er).' Health Insuranrc Experiment Prenaler2ce. When the filE began, 61 percent of people 20 to 59 years of age classified themselves as currrnt drinkers. As TaFle 5-1 shows, about 36 percent of the sample were "abstainers" (people who said they had never drunk alcohol (in a'regulnr basis), and almost 3 per- cent were former drinkers (people who reported consuming alcohol on a regular basis in the past, but not during the previnus vear). Just over half the sample reported drinking less than 1 ounce of ethanol per day, and only about 10 percent said they drank more than that. Patterns. More men than women identified themselves as current Z5g06500Z

106 The Costs of Poor Health Habits costs of drinking by all ounces for ad! drinkers, instead of excess ounces for heavy drinkers, our best estinrate of the cost of heavy drinking is about 48 cents per ounce of ethanol. Results from our two data sets are quite similar, but our assump- tion that the connection between carly retirement and heavy drinking is causal has a sizable effect nn external costs. Compared to smoking, heavy drinking imposes higher external costs but has less effect on own-life expectancy. The external costs of drinking are higher in part because of the number of innocent lives lost to drunk driving; with smoking, the loss of life is largely the smoker's. The External Costs of Sedentary Life-Styles The sedentary 20-year-old reduces his or her life expectancy by 10 months and imposes surprisingly high extemal cosls. Sedentary people nmsume more benefits than active p.rple frum collectivelv financed programs such as sick leave and health, disability, and group life insu- rance. Because they die earlier, they pay lower lifetime taxes on earn- ings. But they collect less in public and private pensions. As a result of these differences, the sedentary person imposes $1,650 in dis- counted lifetime external costs-almod double the costs of smoking. This chapter describes the analyses from whirh that estimate de- rives. As we did for smoking and drinking, we begin by examining the prevalence of exercise and its ar:s<xiation with use of medical services and work loss. We also present Ihe results of a descriptive analysis, which controlled only for age and sex, and of a regression analysis, which controlled for other factors that may affect health outcomes. Prevalence of Lxercise The HIE and NHIS data present a problem for comparative estimates, because the questions asked do not prrxtuce comparable categories. The HIE asked about the frequency and intensity of exercise (see Appendix C, questions 29 to 34). In contrast, the NHIS questionnaire asked respondents how much they e.ercised refntiue to other people of their age and sex. lliese differemr:s Ird to large apparent differ- ences in activity level between the two samples. Prevalence and Statrility in the tffE Sample Ifased on answers to the HIE questionnaire, we categorized individu- als as light, moderate, or heavy exercisers. We subdivided the groups Z9gOSJr~B0Z

Conceptual Framework This chapter lavs out the conceptual framework of our study, includ- ing the assumptions underlying the cost analysis. To make the con- cepts and assumptions more accessible, we couch the discussion in terms of smoking. The same principles apply to the external costs (if heavy drinking and lack of exercise. Basic Concepts of the Cost Analysis The principles (if our analysis closely follow Leu's (1984) conceptual framework for analyzing the social n+sts of smoking, which focuses on economic efficiency. Ihis framewnrk involves (I) the concept of external costs, (2) "nonsmnking smnkers" as the proper comparison group (that is, ceteris /xrri6us comparisons), and (3) lifetime costs. External Co.st.s In standard economic theory, smoking behavior is ecnrrumirnlly efficient if each smoker's net satisfaction Irom smoking the last cigarette equals its social costs.' Total social rosts of smoking are the sum of internal and external costs. Internal costs are the costs smokers pay, including their share of medical bills, their lost earnings, and their out-of-pocket expense for cigarettes. External costs are the costs they inrpose un olhers. 'fo clarify the distinction, take a~imple example for medical costs alone. Suppose a worker has a group health insurance policy that pays 75 percent of his medical bills, and he pays the other 25 percent. Suppose, further, that smoking a pack of cigarettes every day raises his medical bills by $6,000 over his lifetime (the total social cost). The amount the worker pays, $1,500 (0.25 x 6,000 = 1,500), is a compo- Conceptual Framework 27 nent of internal costs. The external coct, $4,F(]0, is the difference between the total social cost and the internal cost. [he external cost is the cost our study has tried to estimate.2 It is not easy to estimate the total external costs of smoking because of the numerous collectively financed arrangements and the long- term effects of smoking. Nevertheless, the concept of externality is usually clear: a portion of the costs is generally external if costs are financed by a large poul of insured individuals, and premiums (or taxes) do not depend on smoking statu.. We have seen that because smokers have shorter life expectancies and thus shorter working lives, they will pay less of the tares and preniums that finance health care, sick leave, and similar benefits. This differential adds to the lifetime costs that nonsmokers bear and must be taken into account. To simplify the calculation of how much smokers and nonsmokers pay annualFk to finance these programs, we assume that each pays a given proportion (if earnings, and that proportion is just enough to finance these programs, External costs include premiums and tlte taxes necessary to finance pensions, even though pensions may be considered transfer pay- ments in some contexts. The customary arguments for ignoring trans- fer payments in assessing economic efficiency do not apply here (see Arnott and Stiglitz, 1986). In the usual case, transfer payments do not depend on the behavior of the consumer. Thus, they do not alter behavior unless the payment is large enough so that income effects are considerable. In the case (if smoking, however, receiving the transfer depends on choices made by the conzumer--that is, because smokers have shorter life expectancies, smoking affects the amount (if pension payments they will realize (if any) and the amount of taxes they will pay. Those who remain skeptical that effects on pen- sions should count may consider the following hypothetical example. Suppose the government were to promise that everyone who reached age 70 would receive a million-dollar pavment (transfer). It seems likely that many people would stop smoking (or never start) and engage in other less risky activities so that they might receive the "transfer." The ability to change one's activities to get the million- dollar bonus implies that it is not a pure transfer. Another approach is to consider the consequences of smoking from the perspective of the rest of society. There is an externality due to smoking if there is a smoking-caused change in the total resources available to the rest of society. For example, smoking may draw re- sources away from the rest of society be,ause (if higher medical use ZZ806S480Z

The Costs of Poor liealth Habits rM1E~.J. Aix.lluKwtbnM.nlmumnrMT~x~M1Cy~Nn~aore{c.lrymptbtennu.Ik.MM1mv~..e Ne.nSmNew MmcSmeten ivu" lw 4.iqlar 0..iMla Aellspe+ A.mppc . Arv,{eyv Im P~.m ~.M. re,® Ir., pe+m )fr n.3 3.11 AAeq.mKew..InrapmE.Nr axt ne o.n 19.1 0.21 r1.edM.~.w,~x AY epwk. po1.M1 ^'Vlyd F 001 13 nD/ ].3 om .,~.~. AIIIa1.WIVtW.` ' 19 of9 19 0.10 104 n11 Axlnl+mrtuiwnlwwMrs n9 aul 16 0 02 1 13 ofR p~1.Nr rthlM Mtlai~ AnlnepimbaWnepaneNpm.ka 0.3 Mo or ILm 0.8 um a. wi.r Atltlt~MlnW IwNeN:er.r~~eJKnc~nAM..M`IIIEe.MFt.Ae,nyk~Ma~E_ ! [.,~.enM.•ee.aaeew.n.ryrf«al.ert. more likely to be heavy drinkers. If so, then the observed correlation between smoking and use of services could be due in part to lack of cardiac conditioning or the adverse effects of alcohol abuse rather than to cigarette smoking alone. 'I'he importance of using multiple regressions for estimating exter- nal costs is implied by the differences between the multiple regres- sion and the descriptive results. Desrriptiar Resldts for I tealllr Care Uu rrAn5NT Erlsnne5 Smokers could be expected to use more medical services than non- smokers because smoking causes morbidity. As Table 4-5 shows, that was not the case for outpatient care. Current smokers had no more overall outpatient contacts than never or former cigarette smok- ers. In fact, former smokers (84 percent) proved to be greater users of general outpatient services than either current or never smokers (78 percent for both). Former smokers averaged almost 3.6 episodes of outpatient treatment each year, while never smokers and current smokers had 3.2 and 3.1, respectively. The picture changes somewhat for conditions possibly or profably related to smoking (Table 4-5, row 2; see Table 3-2 for a list of these conditions). Both current and former smokers were more likely than never smokers to have one or more episodes of outpatient treatment, although differences were modest. These differences held when we The External Costs of Smoking 69 narrowed outpatient services to episodes profxthly related to smoking (Table 4-5, row 3; see Table 3-1 for a list of these conditions). HOSPITALIZATION The findings for hospitalization were different: current smokers had more chance than former or never smokers of being hospitalized for any reason (bottom half of Table 4-5). T'hose who currently smoked also had an increased chance of inpatient admission for the subsets of diagnoses possibly or probably related to smoking. Still, the magni- tude of the difference between the two kinds of hospitalizations does not account for the large difference between current smokers and the other two smoking subgroups for all hospitalizations. There are two possible explanations for the discrepancy. First, smoking may have a broader set of adverse consequences than those included in Tables 3-1 and 3-2. Second, smokers may engage in activities other than smoking that undermine their health. With the data available to us, we could nnt make Ihat dislinction. Later on, we shall describe our sensitivity analysis lo check the robustness nf our conclusions. PAS5IVE SMOKING In the HIE, exposure to cigarette smoke at home did not increase the probability of using any outpatient care. In fact, as Table 4-6 indi- cates, never smokers who lived with nlrrenl smokers were less likely to have any outpatient care than those who lived with never smokers and former smokers, in that order. This pattern holds for outpatient care limited to diagnoses possibly or probably related to smoking., lt does not hold for hospitalizations. Never smokers living with current smokers were most likely, whereas never smokers living with never smokers were least likely, to be admitted to a hospital (bottom half of Table 4-6). This pattern was consistent for all hospitalizations and for the two subsets related to smoking. Multiple Regressfnrr Results HIE RESULTS . Outpatfent uae for snrukers. We first etamined hypothesis tests and then the estimated magnitudes of the differences by smoking status. Using the IIIE data on the nonelderly adulLs (aged 20-59), we found a mixed pattern of results for outpatient tare: smoking was significantly £ti806S480Z

80 The Costs of poor Health Habits 2D 10 0 -10 -20 -30 -40 --so I _60 Figure 4-1. External cost per pack at alternative discount rates tions of the cost model. (Fur comparison, column 1 repeats the results from column 2 of Table 4-16.) First, to test the sensitivity to data source, we used values based entirely on NHIS data (for the young as well as the old). With these NHIS-only data, medical costs per pack do not change but covered work loss rises to 5 cents per pack and the total costs rise from 15 to 20 cents per pack. Second, to test sensitivity to our assumptions about the health effects of smoking, we contrasted smokers with actual never smok- ers, rather than the hypothetical nonsmoking smokers. As we have explained, this procedure should give an upper bound on health effects because (with the exception of taxes on earnings) it assigns all the differences between smokers and nonsmokers to smoking. Col- umn 3 of Table 4-17 gives the net never smoker versus smoker result of 28 cents per pack. With the NHIS data there is no change in dis- counted life expectancy (not shown) at 5 percent. Nonsmoking smok- ers are less healthy than never smokers at young ages, but become more healthy at older ages.10 Never.smokecs have slightly lower pen- sion and nursing home costs, lower medical costs, and less covered work loss than nonsmoking smokers. The wage rates for never smok- ers are higher than for nonsmoking smokers, even after controlling for education. It seems implausible that these differences are causally related to smoking. We have therefore continued to use the wages The External Costs of Smoking 81 TABLE 4-17. Sereitivity of external costs per pack to assumptions u 5 permd discount nte (1986 dollm) All Gnnp.riran NHIS to Never Lowrr Total Cast Base Caxs D.m Smoker 13ooridD CornF Coen per pack Medk:kl csre 0.26 0.26 1/30 0.15 0.36 Sick le.re 0.01 0.05 0.04 0.01 0.03 Croap life insurknce 0.05 0.05 0.06 0.05 0.05 Nuninghomecale -0.03 -0.03 -0.02 -0.03 -0.06 Rettremenlpenriond -0.24 -0.24 -0.20 -0.38 -0.2A Fires 0.02 0.02 0.02 0.02 0-02 Taxes on eemingn per peak -0.09 -0.09 .{1.pye --0.05 -0.93f Tolalnetcoalsper packs 0.15 0.20 02ge -0.15 qh a. From Table 4-16, cnlumn 2. Effect of d,a,ging, urrent smoken ud former amnken to never emoken: other chwclcrtutlca M1eld connrnl. b. Nrrow defimtion of mMka effesv: nn eRccm of snx.Nng ar evly ntirennn. c.InciudeiMernslcosu. d. lncmdes dinMnty trn+auxe. e. Velue ehuwn is normtpking smoker's differenslel: never emdan .ctu.ll1 1111 seme nurt ernings lu per pck th.n smakm becwre uf highcrenrn6ig nier. It Is inipleusi6k IhM tlrolr tdghv ernings vles ne causally rel.ted ro smoking. wid we have ewnwd Oey sr va Mr releted. Hed we used thc 6gure of 51 anH, mW nn rnns would be 63 cenu. f. Fin#ngs, r,ot u..es on evmrrgs. g. (Sum of cosp) minns u.es on eaming.. Bea.use of nwnding, cvn cntegorks m.y nnt sum m mWretcosla. hl.oa of life,.ud pkin md suffering by snnker en1 fwmly an nol included; see tex1t of smokers in our calculations. If we had used the actual wage rates of never smokers, the figure uf 9 centc would increase to 51 cents. Smokers may have different patlerns of medical use for reasons unrelated to smoking. As a sensitivity test, we examined the use of services thought to be related to poor health habits (iable 4-17, col- umn 4). This lower bound results in a net saving of 15 cents per pack. Finally, for those interested in total costs rather than external costs, column 5 of Table 4-17 gives total, not just external, custs for several components. These figures may perlnil cnmparison with olher esti- mates in the literature. Total medical costs nre 36 cents per pack, sick leave 3 cents per pack, nursing home payments 6 cents per pack, and 08069 680'L

irr 54 The Costs of Poor Health Habits years or older in one of four categories: former cigarette smokers, current cigarette smokers, current pipe or cigar smokers, and never smokers. People were classified as pipe or cigar smokers only if they were currently smoking pipes or cigars and had never smoked ciga- rettes.' To people younger than 20 and never smokers 20 or older, we assigned a passive smoking status. That status was based on the worst smoking habit of adults in Ihe family when they enrolled. We ordered smoking habits, from best to worst, as follows: never smoker, current pipe or cigar smoker, former cigarette smoker, cur- rent cigarette smoker. In this scheme a fonner-smoker household is one with a former but no current cigarette smoker. The approach understates the number of never smokers exposed to smoking when they were married to former or current smokers but were subse- quently widowed or divorced. We have no estimate of passive smok- ing at the workplace or at school. Drinking. 9b establish drinking habits, we used data from the HIF's twenty-question battery on present and past consumption of beer, wine, and liquor (see Appendix C). This batterv was administered at enrollment and filled out by every individual. We divided the population into abslainers (people who never or rarely drink or drank), former drinkers, and current drinkers. A person qualified as an abstainer if he or she had never had more than twelve drinks per year. Former drinkers had imbibed more than twelve drinks per year in the past, but none in the last year." For current drinkers, we collapsed the information on consumption of beer, wine, and spirits into a single varfable-monthly consump- tion of ethanol in ounces. Becau,e an ounce of alcoholic beverage contains less than an ounce of ethanol, to calculate ethanol consump- tion we treated a bottle of beer as 12 ounces of fluid, a glass of wine as 4 ounces, a bottle of wine as 26 ounces, and a fifth of liquor as 30 ounces. To convert ounces of fluid to ounces of ethanol, we multiplied the beer volume by 0.04, the wine volume by [7.15, and the liquor volume by 0.45. Given the small number of heavy drinkers, we coldai not separately estimate the effects nf the three sources of alcohol. Lnrk of exerrise. Data on the exer:ise variables came from the HIE's eight-question battery on the frequency and strenuousness of exer- cise (see Appendix C), also filled out at enrollment. We put each pcrson in one of four exercise categories--those with role or physical limitations due to health, thnse who exercised lightly or nnt at all 9£806S680Z Data and Statistical Methods 55 (mostly sitting or walking), those who exenised moderately or stren- uously several times a week, or those who exercised strenuously almost every day. We placed people with role or physical limitations in a separate category. People with such limitations use more medical and mental health services than others, and because of their limitations they probably exercise less. Had we included them among the low exercis- ers, we would attribute the effects of their limitations to lack of exer- cise. But lack of exercise can lead to physical or role limitation; so our approach was conservative. IN4URANCE PLAN VARIAa1.E5 We estimated equations for the use of health services as a function of the family's insurance coverage in the experiment (log of their average coinsurance rate + 1), health habits, and other explanatory variables. The I IIE insurance plans had nominal coinsurance rates of 0, 25, 50, or 95 percent, and one plan with free inpatient care but 95 percent coinsurance for outpatient services.° We used an indicator variable for the fifth plan. The value of tlre average coinsurance rate is the plan mean for out-of-pocket expenses, divided by the plan mean for total medical expenses ( x 100),10 For the cost comparisons reported here, we used that equation, substituting the value of the family's preeXperimental coverage for their experimental coverage, to predict their use of health servtces- because we wanted the cost projections to reflect a cross-section of actual coverage rather than experimental coverage." We used the values of the preexperimental plan because some of our plans, espe- cially the free plan, were more generous (lower cost sharing) than commonly available insurance plans. As the filH established empiri- cally, the lower people's cost, the more likely they are to use health care services. Thus, cost projections based on experimental coverage alone could overstate the medical costs for individuals with txlthgood and bad health habits. See Marquis (1986) for further details on the preexperimental coverage variable. MFASURr.S OP nEALTrr STATUS For some of our analyses, it was important to see how sensitive the results were to including health statu~ measures as covariates in equations for work-loss and medical services. We used four mea- sures: (1) general health perceptinns; (2) physical or role limitations; (3) chronic diseases and complaints; and (4) mental health status.

58 The Costs of Poor Health Habits Prices from the National Medical Care Utilization and Expenditure Survey (NMCUES) and wages from the CPS were employed to con- vert medical utilization and work loss into dollar values. Cx)rlartatory Variables We classified people as never smokers, former smokers, or current smokers, based on responses about past and present cigarette smok- ing habits. The NHIS did not ask about pipe or cigar smoking. For nonsmoking adults we created a second-hand or passive smoking measure in the same way as described above for the IIIE. Neither the HIE nor the NHIS provides data on exposure to cigarette smoke at work or in school. We based drinking status on responses about current and past consumption of alcohol. Monthlv volume of ethanol was calculated from reported consumption of beer, wine, and liquor, using the same conversion factors described for the 11113. lhe exercise categories were based on responses to a single ques- tion: Are vou less active, about as active, or more active than others your age? Those with physical or role limitations form a separate category. Thus, the NHIS categories differ substantially from those for the I lIE in that the NHIS measures the perceived amount of exer- cise relative to the average for that age, rather than the more objective IfIE measure of how often a person exercises. Corrrparir;q fhe NHlS and HIE We compared the habit responses in the I IIE data with those in the NHIS data for three reasons. First, we wanted to see whether the HIE results could be generalized to the nonelderly (those under age 60). The HIE sample is close to representative of the six sites studied, but the sites could differ from tlie United States as a whole. Second, we wanted to estimate possible changes in habits and their effects for data collected at two different points in time. Finally, and most important, when estimates are based on small to moderate sample sizes, the analyses should be replicated. If the studies agree, we can be more confident of the results. To compare the two data sources, we examined the prevalence of poor health habits, the average amount of medical use and work loss, and the response of medical use and work loss to poor health habits. (The comparison was necessarily limited to people less than 60 years Data and Statistical Methods 59 old.) Chapters 4, 5, and 6 discuss differences in habit prevalence between the twu studies. Among our various analyses of the relationship between health habits and use of medical care, we found a (nominally) statistically significant difference between the NI IIS and 11117 . samples only for the relationship between outpatient xisits and alcohol consumption. 7he nominal statistical significance is uncorrected for the multiple comparisons that were made. Estimated responses to the various habits were not significantly different between the two samples for either hospital admissions or work lu.cs. For smoking and exercise, there were no significant differences between the two samples for any of the three measures of medical use and work loss. Although differences in most responses were not statistically .cig- nificant, we found appreciable differences in the magnitude of some estimated coefficients. Some were so large that we performed the cost analysis two ways. First, we used data from the NHIS only, that is, for all age groups. Secnnd, we used data from the t1IB for those under age 60 and the NHIS for those (t) and older. As we show below, our qualitative conclusions wrre nnt changed by which data set we used (for those under fdl), but the magnitude of some of the costs of poor health habits was somewhat sensitive to the source used. Appendix E provides further details on differences in the response of medical use and work loss to poor health habits. Statistical Nlethods The unit of analysis in our study is a person. For our analyses of HIE information, we collapsed multiple years of data for each individual into a single observation. We used the person as the unit of observa- tion because the major determinants of the use of services are individ- uaI (age, sex, health status) rather than familial (insurance coverage, family income). We corrected for differences among families by in- eluding measures for family variables (family income and size) and by correcting for intrafamily correlation in the use of health services and work loss. MetlroJs We used analysis of variance (ANOVA) techniques (after direct age and sex adjustment) as well as multiple regressions to estimate the 8£806S680Z

16 The Costs of I'oor f tealth Habits the HRA. 9choenbach et al. (1983) n,viewed these articles and aum- mari2ed the objections. One is that the HRA does not acknowledge the uncertainties in extrapolating re:ults from population studies to the changes expected when a particular person changes habits. This cumment is not particularly relevant to our application, because we are trying to compute Ixrpidntion-widr effects of changed habits. Another criticism is that the methods used to calculate the compos- ite risk factor are ad hoc. Although the statement is formally correct, its force is blunted in practice: empirical assessments based on the major longitudinal population studies show that HRA-predicted probabilities of dying are roughly consistent with observed future mortality (Brown and Nahert, 1977; Wiley, 1981). Moreover, the mathematically more sophisticated models developed recently are not substantially more accurate (Areslow et al., 1985; Spasoff and McDowell, 1987). For our purposes, we believe the well-known HRA programs to be adequate. Mrdtcul Costs We constructed the external mediral and covered work-loss costs of smokers and of the hypothetical nonsmoking smokers from the data in two steps. To estimate the "pure" effects of smoking on use of medical services, we used multiple regression methods to control for differences between smokers and nonsmokers not causally related to smoking (see Chapter 4). Next, we took the former and current smok- ers in our data and used the estimated equations to predict their costs in two situations: once with their actual (former or current) smoking status, and once with their smoking status altered (counterfactually) to never smoked (thereby converting them to our nonsmoking smok- ers). We computed the difference in predicted use for each former or current smoker, multiplied by the percentage of the bill paid by pri- vate insurance or government programs (Medicaid and Medicare, for instance), and averaged the difference over five-year age and sex groups. These average differenes became the estimated external medical costs. As later discussion shows, the corrections for medical costs of sec- ondary or passive smoking by nonsmoking members of households with smokers were so small that we did not include them in our estimates." We had no estimate of passive smoking effects outside the household (say, at work), but if effects in the home are negligible, effects at the workplace are likely to be as well. Conceptual Framework 37 A separate issue arises from the retrospective nature of the NHLS, namely, their data do not include the expenses of the aged or of others who died in the past year. Hence, the expenses we estimated from the NHIS were lower than would come from a prospective study of next-year expenses of those who are alive at a particular time. According to Waldo and Lazenby (1984), deccdents spend on average seven times as much on hospital care in their last year of Gfe as survivors do. Thus, for each person in the NHIS who died, we multiplied the annual inpatient costs in the life table by seven. (We made no correction to NHIS outpatient expenses for decedents. ) We used data on medical services from the NIi1S only for those aged 65 and over. For those under 65, we used data from the HIE. No correc- lion was necessary for decedents becauce of the IIIE's prospective design. We based our cost estimates on a judf;ment that about 85 percent of hospital and physician costs are collertively financed and approxi- mately half of long-term care costs are collectively financed (Levit et al., 1985). Covered Work Loss We predicted costs using multiple regression models fitted to workers only; nonworkers do not have collectively financed sick leave. We assumed that health habits do not cause an individual to begin work- ing, although we allowed for their effe, ts on .vtopping work through disability and early retirement. Our estimates of the annual external costs of work loss are the differences in the product, for smokers and nonsmokers, of an indica- tor for employment, the predicted number of work-loss days (with and without poor health habits), the hourly wage or salary rate times eight (hours per day), and 0.38 the propurtion of sick leave costs borne by the employer." For men, we used two alternative work-loss predictions, one based on the I-IIE sample and lhe other on the NH15, but for women we used only predictions based on the NI IIS.'s For the HIE, we used actual wage or (hourly) salary rates foreach individ- ual. For the NHIS, we imputed wage rates using age, sex, and educa- tion level from the Current Population Survey (CPS). Life Insnranre Our calculations included only group life insurance, because most individual life insurance policies adjust premiums for habits (espe- LZ806SC80Z

The External Costs of Smoking 75 74 The Costs of Poor Health Habits TABLE 4-10. Wald tesu (X.2) for effects of smoking on all adults and elderly, National Health Interview Survey, 1983; smoking responsea Age Range Health Outcome df 20+ 60+ Outpatient visita Hotpitalintions Workloss 2 2 2 9.00" 3.48 25.17••• 5.84" 10.13••• 8.38•' a Slgnificuca kveh: • 10 peecem. •' 5 petcent. "• I petcenl; otherwise insign)fir.ra N Ihe 10 pncem or betterlerel; df=degn:m of freedom. TAB1E 4-I i. Effects of smoking, Ndional Hcallhh Interview Survey, 19838 Smoking Habit OutpatientWe Inpatient Use W ork Loss (WOrkersOnly) Never 1(q 100 IIXI Fonnercigarette Il0•" 131"'• 131• Cunent cigarette 101 119"" 152"' a. Significrxe kvels: ' 10 percent, •• 5 petcent, ••• I pen:em; aherwise rrot significant at the 10 perttnt or 6nler kvel. Level for each hal*i suted as percemage of nm of use (m work loss) for never smakers wim similar chauacterislia. TABf.E 4-f3. Lifetime external enats of smokers Discount Rate 0%Total 0% Women 5%ToW 10%Total Number of packs 16,300 16,800 6,400 3,700 Life expectancy at age 20(yean) Coetsa 55.5 58.7 18.6 10.2 Medical careb 59 67 10 3,9 Sick leave 6 2 2 1.2 Group life insurance 5 2 1 0.4 Nuning home c=re 10 13 1 <0.05 Retirement pension 133 122 15 3.1 Firea 0.2 0.3 0.1 0.1 Taxes on earningsa 201 112 26 7.4 Toulnetcostra-e 13 94 3.0 1.3 t Meaeaud in thoonnds of dotlers. -_ b. 8xeludm maternity and weltcartU c. (Sum of crn. ta) Mnus laaee nn eaminga. 6ecame iir munding. cahBnYes may nnt sum tn IoW. TABLF.4d2. Smokingresponseperpcrson,age-andsex-adjustedannualrales. Nationrl Health Interview Survey, 1983a Smoking Ilabil Doctor Visits Admissions Work-Lose Days Never 3.73 0.14 1.03 Formercigarene 4.23 0.18 1.31 Cunent cigarette 3.84 0.17 1.50 a. Adjusl<d ustng weights by age and sex Bom Ihe 1993 NHIS umpk, ages 20 and okter. As the last column of Table 4-I1 shows, cigarette smokers also had more work loss days. Among working adttlls, former smokers had 31 percent more work loss davs (p - 0.10) and current smokers had 52 percent more (p = 0.01), other things equal, than never smok- ers. Table 4-12 provides estimates using only direct age and sex ad- justment. With the exception of work-loss days, the qualitative pat- tern was similar to the results Irom the multiple regression results for HIE data (see Table 4-8). We could detect no significant passive smoking effect for adult never smokers living in households with former or current cigarette smokers (see last row of Table 4-9). Without data on passive smoking at the workplace, however, we are missing a source of exposure to cigarette smoke. Cost Analysis Resulls for Smoking Average Lifetime External Crtsjs for Smokers The average lifetime external costs in each category for smokers are given in Table 4-13 for uur base case, whirh used data from the I lIE on those aged 20-59 and data from the NIIIS on older people. For the nonelderly, the costs include all e>ternal medical expenses except maternity and well-care, and all covewd work loss from the r11E. For the aged, they include all medical service, and retirement costs. The first two columns show undiscounted lifetime costs, first for all smok- ers (assuming half are men and half .Ire women) and then just for 9V8069680Z

40 The Costs of Poor Health Habits TABLE 2-3. EtPoctr of disability retirmmnt Cigarette Smoking Heavy Ihinking ge Extra Disability Pension for Smokers (1986 S) Adjustment F.clor for Earnings Taxess Extra Disability Pension for Heavy Drinkers (1985 S) Adjustment Factor for Earnings Taxesa Males 45-49 117 1.014 271 1.037 50-54 280 1.033 271 1.037 55-59 397 1.052 271 1.042 60-64 1,091 1.202 812 1.231 Femalee 45-49 0 1.000 184 1.080 50-54 50 1.017 184 1.089 55-59 60 1.030 184 1.089 60-64 92 1.067 184 1.143 a. Compun:d from 1979 Nation.l nW 1h rnrcrvew Swvey n nonvnWen nosuet4em+al r.le/smokm' numeurement nm. Fur a deacripuun of eamings tases. aee IexL sion income) were taken from the March 1985 Current Population Survey (CI'S). They were summed and averaged for each five-year age-sex group. Pension amounts on the Cf'S are not classified by habit status. Therefore, we examined data from the 1979 NHIS on reasons for retirement. The health retirements were consistently asso- ciated with smoking status, but the other retirements were not. In the case of disability pensinns, therefore, we adjusted for the greater tendency of current and former smokers to retire for health reasons before reaching age 65 and hence to receive a disability pension; see Table 2-3. Because we assumed smoking is causally related to disabil- ity retirement, nonsmoking smokers receive less in disability pen- sions than do former or current smokers (the amount shown in the Extra Disability column of Table 2-3). Taxes on Earnirrgs lhe medical, sick leave, disability, group life insurance, and retire- ment benefits considered here are largely financed with premiums paid by the employee, taxes on wages and salaries, and other taxes. We use the term "taxes on earnings" (or "earnings taxes") to repre- sent all the payments into the system that cover these costs. For i Conceptual Framework 41 simplicity, we assume that these costs are financed solely by a con- stant percentage tax on earnings.19 To compute the necessarv rate, we took wages, salaries, and earnings from self-employment as re- ported in the March 1985 CPS and averaged them for each five-year age, sex, and education category. Because information on habits such as smoking is not available in the CPS, we used education differences between smokers and never smokers to estimate the difference in their earnings. We computed earnings for smokers and nonsmokers for each five-year age, sex, and eduratiun group. Based nn results from the FIIB data, we assumed there is no difference in wage rates by habit once education, age, and sex are taken into account. Using the resulting average wages by category and a 5 percent discount rate, we calculated that a tax un earnings of about 10 percent would pay the premiums for the health insurance, sick leave, group life, disability, and pension benefits that we are examining. Because most of the expenses for benefits come later in life than the earnings and hence the taxes, the discount rate has a large effect on the tax rate needed to fund the programs. 'fherefore, at each discount rate, we calculated the tax necessary to make benefit payments just equal tax revenues. Differences in mortality and early retirement act to reduce Ihe amount smokers pay in taxes below what nonsmoking smokers would pay. We adjusted for the mortality differences through the life table, but we accounted for the difference in tax revenues that results from varying ages of retirement by multiplying earnings of nonsmok- ing smokers by the following factor: (I I percentage point difference between smokers and nonsmokers opting for early retirement)/(per- centage of smokers working); see Table 2-V' We then applied our flat tax to these higher earnings. We did not otherwise account for differential taxes. In the case of pure public goods (national defense, (or instance), this omission may have caused us to underestimate the external costs of smoking or drinking. For any given level of national defense, the earlier mortality of smokers raises the tax burden to mmsrnnkers. We assumed that these effects were offset by nonsmokers' enjoyment of less pollution and less-crowded roads. In the case of government servites that are excludable (such as solid waste disposal), we assumed that the con- sumption of services by those who die ic offset by the taxes they pay. These assumptions may, of course, be wronK. Yet it seems likely that any such error would probably understate the external costs (if poor health habits. sZ80sMOZ

fs The Costs uf Poor I iealth Habits The Arguments for Taxation For alcohol and tobacco, there is another frequently considered option-raising taxes on cigarettes and beverages. As the health con- sequences of smoking and heavy drinking have become apparent, taxcs- have been viewed as a potential vehicle for limfting consump- tion and improving public health. 1'hat aim underlies the Surgeon General's recommendation (USDHl-1S, 1989) to substantially increase federal and state excise taxes on beer, wine, and distilled spirits, and index those taxes to the rate of infLdion. 'fhis argument fnr taxation ha s sometimes collided with the princi- ple of consumer sovereignty- that is, peuple should be free to drink or smoke as long as they are willinl; to pay the costs. But those costs should include external costs as well as internal. So the principle implicitly supports setting excise bnxes at a level that covers external social costs.15 liven if people disagree about thr appropriate incentives for mak- ing choices about healthy life-styles, we suspect there would be little dissent that, at a minimum, individuals should bear the costs of their actions. In other words, we can think of little or no reason to let people who have poor health habits impose costs and risks on those who do not share those habits. Taxing tobacco products and alcohol is an economically efficient, fair means of discouraging consumption-if excise taxes cover at least the external costs we have been discussing. We have estimated those costs at 15 cents per pack of cigarettes and 48 cents per ounce of alcohol consumed. flow do these costs relate to existing excise taxes? Our estintate of the external cost of smoking, 15 cents per pack, is well beforn the average (state plus federal ) excise and sales taxes o( 37 cents per pack.'" If, however, we were to treat all lives lost from passive smoking and fires as external costs, the 37 cent tax rate would approximately equal the estimated external cost of 38 cents. fo contrast, our estirrmle of the external cost of alcohol, 48 cents per ounce, is well afxrne the auerage (state plus federal) excise arrd salrs taxes of 20 cents per onnce.17 The data on taxes for our earlier articles (Keeler et al., 1989; Manning et al., 1989) are from the mid-1980s. Since then the federal government and several of the states have increased their excise taxes on alcohol and tobacco products. By 1989 cigarette taxes averaged 39 cents per pack (19W, dollars), and the Omnibus Budget Reconciliation Act (OBRA) of 1990 added 8 cents per pack (about 7 cents in 1986 dollars) in two increments of 4 cents each. Taxes on An Overview 19 alcohol have risen to about 25 cents per ounce of ethanol (1986 dollars) from the combined effects of changes in state taxes and OBRA 1990, By our calculations, raising taxes on alcohol can be firmly justified on the grounds of economic efficiency--that is, the taxes now im- posed do not equal the external costs of drinking. Smokers are al- ready paving their way, if we judge solely on grounds of economic efficiency. Two other arguments against taxing cigarettes--and alcohol as well-are based on equity. First, the taxes are regressive." in other words, alcohol and tobacco taxes constitute a higher percentage of income for poor people than for the affluent. Second; light drinkers could argue that heavy drinkers, not thry, impose Ihe high external costs. Therefore, raising taxes on their "nonexces.s" ounces would be inequitable. These arguments are easily countered. Consider first the argument that such taxes are regressive. Because alcohol and tobacco taxes each supply only I percent of federal revenues, rather small changes in the individual income tax structure can readily compensate for the effect that increased taxes have on im,,me distribution-if such a change were deemed desirable.'° To the argument of light drinkers that raising alcohol taxes would affect them unfairly, there are two responses. First, suppose that the government must raise a given amount nf revenue to finance r•zpendi- tures that benefit society at large, such ar basic research. This revenue can be raised from a variety of taxes, including excise taxes on alco- hol. fn this situation people who pay .in average amount of other taxes and who consume less than the national population average of 1.7 reported drinks (more than 4 actual drinks) per day will benefit from shifting more of the tax burden to alcohol taxes and away from other taxes (for example, payroll taxes). In fact, three-quarters of adults drink less than this amount. Although 40 percent of the ounces drunk are "excess ounces," the 10 percent who are heavy drinkers consume two-thirds of the alcohol. They will pay the bulk of any increase in alcohol taxes.20 In other words, greater reliance on alcohol taxes actually lowers the tax burden of light and moderate drinkers if total tax revenues are the same. Second, fu the degree that higher taxes deter alcohol abuse (Cook, 1981; Cook and Tauchen, 1982; Grossman et al., 1987), external costs will decrease, and that decrease will offset the increased alcohol-tax burden of light and moderate drinkers. For a discussion of related issues, see Appendix I f. j 86806S480Z ~

30 The Costs of Poor liealth Habits _ Conceptual Framework 31 may be other significant differences between the two groups. The omitted differences (for example, bad dietary habits or an affinity for high-risk activities) may be correlated with smoking but not (per fec6y) with the habits we controlled for. If so, our methods will attrib- ute part of the adverse effects of the omitted habits to smoking. To test the sensitivity of our results, we also compared costs for smokers and never smokers, attributing all ol the differences between them to smoking. We use this calculation, which should overstate external costs, as an upper bound. 1_ifrtlrrte Costs and Discntnrtiqg Becauce bad health habits have long-term effects, our study estimated lifelime costs for smokers. We tracked custs tor Iwo hypothetical cohurts of men and women from age 20 to dealh.I One cohort smoked; the other did nnt. We developed lifr tables for each cohort showing the probability of surviving to each age after 20. In looking at the costs of smoking, we were concerned with the costs of ever srrnking wrsus ncocr ±mal.ing. therefore, we did not focus on current smokers versus never smokers. Former smokers must be considered with current smokers rather than with nonsmokers be- cause they may still be suffering from the adverse side effects of past smoking. For example, a smoker may develop emphysema from .smuking. Even if he or she quits, the external costs of that emphy- sema are smoking related. Without including thoce extra costs, we would generate too low an estimate nf the external costs of smoking.' In judging long-term effei ts, we nurst discount fulure costs to make cumparable aosts that occur at difh,rent times." Because the proper rate of discount is controversial, we have computed results for rates that span the range between 0 and Itl percent. We also discounted number uf cigarettes consumed and life expec- tancy. We discount cigarettes for the same reason that we discount rusts. A cigaretle smoked thirtv year5 from now has different implica- tions for revenues than one consumed todav-in terms uf both dol- lars and health. Consider a world where we make smokers pay the external costs uf their actions by paying an excise lax, 1. per pack uf cigarettes. Over the lifetime uf the ever smoker, hr• has to pay enough into the tax fund to cover his costs. I fiv total tax payments are f times the number of packs ever smoked. Bul early payments into tlre system can be invected and earn interest. fhus, i pack smoked today yields more taxes than one smoked thirty years from now, because of the thirty years of interest on the tax receipts. Because the tax rate is constant, discounting cigarettes is equivalent to discounting the revenue stream from the tax for the purpose nf calculating the tax per pack that will cover lifetime external costs.' Calculating Net External Costs We construct an abridged life table tn compute the differences in expected costs that are due to each habit. The net external costs are the sum of innnediafe cosfs per pack and cnrrrulnting lifetime costs per pack. We assume that the costs of fires caused by smoking are imme- diate: each cigarette has a certain probability of causing a fire immedi- ately after it is purchased, but once it is smoked the probability drops to zero.8 For such costs, we divide the estimated national annual costs by annual packs (or excess ounces). The cumulative net lifetime costs are given by the following formula: vs ~ r ~111 8'"""x P(AI f1), x C(H)r-~S'.r" X P(AINH)rx C(N7f)r, r -m where S indicates the annual discount factor (I/f l I r]) if r is the dis- count rate; P(AlH), the probability of ~mrviving from age 211 years to at least age t years, conditional on having the habit ff (smoking); C(H), the annual costs minus taxes and premiums for smokers of age t; P(A INH), the probability of surviving from age 20 years to at least age f years, conditional (in not smokityg; and C(NH), the annual costs minus taxes and premiums for smokers of t years if they had never smoked. The lifetime external costs of smoking included in our analysis are the following: Covered medical costs° Covered work loss and disability Group life insurance Widow's Social Security bonus Covered nursing home costs Pensions Taxes needed to cover lifetime external costs Fires VZ8065 480Z

94 The Costs of I'oor Health Habits TABLE 5-9. Drinking coefficients for National Health Interview Survey, 19830 Fonner In (Monthly Volume ln2 (Monthly Volume Chi outcome Drinker Abstainer Ethanol) Ethanol) Squaled(4) Outpatient -0.162+•* -0-003 -0.159••• 0.0334"• 18.98••• Inpatient 0.121' 0.353"•• -0.062 0-0071 42.02••" Work loss 0.216 0.356 0.121 -0.0212 2.18 (workers only) .. SigniGcana levels * IOperuerl, •'v I p~nxnl: dhrwiae Insigmficant at tle 10 pertxnl a beon kvel. Unib fordependenl .ariable are Ing visiu, vJmissione, orwmk-lon dsye. hospitali7ation. I'able 5-9 shows that NHIS former drinkers have 15 percent (e-o'F' = 0.85) fewer visits (p < 0.01) and 13 percent (r o"' = 1.13) more admissions (p - 0.10) than infrequent drinkers. Ab- stainers do not have a significantly different visit rate than infrequent drinkers, but (as Table 5-9 indicates) they have 42 percent (eo.as_ 1.42) more hospitalizations (p < 0.01) than that group. (In the HIH results shown in Table 5-7, abstainers had 13 percent more episodes and 38 percent more admissions.) For those who are currently drinking, we observed no relationship between monthly ethanol consumption and hospitalization rate. For office visits, however, there is a significant U-shaped relationship. As with work loss, the number of outpatient episodes falls with in- creased consumption up to about 0.8 drink per day and rises after that point. (The estimates for NI IIS are derived from the coefficients in Table 5-9.) Cost Analysis Results Our cost analysis for drinking differs from the analyses for smoking and lack of exercise because drinking imposes an additional category of external costs. These costs arise from property damage, loss of innocent lives, and expenditures on the criminal justice system be- cauae of drunk driving. AOerage Lifetime Esterrml G.afs for Heavy Drinkers Table 510 gives the lifetime e\ternal costs in each category for cur- rent heavy drinkers and former drinkers. We defined heavy drinkers The External Costs of Heavy Drinking 95 TABLE 5-70. Lifetime external costs for heavy rhinkersa Discount Rate Cost 0% Total h% Women 5% Total 1(Mb Total Total oums 70,400 53,200 27.800 15,700 Excas ounces 41,100 25,500 13,800 8,600 Years of life 54.1 57.5 18.1 10.1 expectancy at age 20 Collective(y fuumced costsb Medical care° 56 68 10 3 Sick leave II 2 4 2 Omup tife 8 2 2 1 insurance Nursing home 8 13 0.4 <0.05 care Retirement 134 122 15 3 pension Immediate costs for motor vehicle axxidenls and criminal justiccd Lives of 4 5 4 4 nondrinkers All other costs 14 9 14 14 Taxes on esmingab 246 I( g 32 9 Total net cosub,e 9 113 38 39 i Qurxza cmrected for undersepornng. b. Me.umed in WomrW of dollars. c. Exciudn mqtmity nd we1l'eree aAsrunesslltlcrolW-mWedinnedttlewsbrmdeemesasstlriiting. tfimte.Ocorbre proparlunal to rummst drulk, theu rnrb need to be muldplbd by 0.68. the flacfxm of aMsl akvhol tlw ir cansamed by heavy drinkers. Cons rrt curopmeG by multiplying eetlnmted invnediate coes per ounce by (diemrmed) IifeGme ountte. e(Sum of cusb) minw tan on errings. NduAn the value of innocmtl Nvea erime, flrer, and pmperry darmge. Becwre of munJ4n8„caYgoriea msy nm sum W tmal. 9S806S680Z

/nall ~II II 1~1YY~Ili ~ II` ? ~la YIIIR I . ilW~ll 102 The Costs of Puor I lealth liabils more relevant than nondiscounted costs in considering problems that have long-term effects. Table 5--12 shows total external costs dis- counted at 0, 5, and 10 percent. Throughout this range the costs per excess ounce fall gradually as the discount rate rises. (Some drinking costs are for hospitalization and early retirement, which occur later than much of the drinking.) At a 5 percent discount rate each excess ounce of elhanol imposes an external custof $1. 19, while at 111 percent the external cost is $1.08. Prom a policy perspective, particularly for tax purposes, it makes more sen,e to divide costs uf drinking by oll ounces for nfl drinkers, instead of excess ounces for heavy drinkers. Prorated over all con- sutnption, our best estimate nf the cost of drinking is about 48 cents per utmce of ethanol. Sensitiad y nrtnlysis We conducted sensitivity analyst-s varying some uf the assumptions of the cost model. For cnmparisan, column I of Table 5-13 repeats column 2 uf Table 5-12 Because our sensitivity analyses focused on the collectively financed programs (such as medical care and pen- sions), Tahle 5-13aioes not include the subslantial external costs asso- ciated with crime and drunk drivmg.'fhose costs would add 93 cents to the net in each column, except column 3: light drinkers might well be responsible for drunk-driving acridents, but abstainers could not be. "In test the sensitivity to data source, we used NIifS data for all age groups instead of only the old. Column 2 shows that the principal change with the NI IIS data is that covered work loss is not affected by drinking and hence the net rxlernal costs (excluding (he drunk- driving costs) are 23 to 26 cents per actual excess ounce. "I he consis- tency of the other findings is reavsttring. lb test the sensitivity to how we estimated the health effects of drinking, we contrasted heavy drinkers with abstainers and light drinkers rather than with the hvpothetical controlled drinkers. We should thereby get an upper b,rund on health effects and on the tax, because it assigns to drinking all the differences between heavy drinkers and others. Column 3 gives the results. The difference in life expectancy between heavy drinkers and the group of moderate, light, and never drinkers is more than twice the difference between heavy and controlled drinkers (19 versus 8 minutes per excess ounce). 'Ihere are two reasons for this variance. First, we assume that con- TABIE 5-l3. The External Costs of Heavy Drinking 103 Sensitivity to assumptiona: medical and pension costs per excess ounce, 5 percent discount rete (1986 dollars) Cort per Excess lTnce Base Casea All NHIS Data Ab:tainers and Light Drinkers luwer Boundb Total Coatac Medicaland pension cnxu Medical camd 0.10 0.11 0.07 0_ I 1 0.16 Sick leave 0.(15 <0.01 0.10 0.05 0.13 Group life 0.02 0.01 0.04 0.02 0.02 insurance Nursing home <0.01 <0.01 -0.01 <0.01 <0.01 care Retirement 0.03 0.05 -0.15 -0.05 0.03 pcnsionc Taxes on -0.06 -0.06 -0.14f -0.03 -(1.648 earnings Net medical and 0,26 0.23 0.20 0.15 7i pension coatsh Life expectancy -8 -7 -19 -8 -8 at age 20 (minutes) a From Teble 5-12, cdumn 2. Effect of chenginn leavy drinker to vxNOlkd drinken other chvackdslics held cusuM. b. Nenowder7nllfnnofmntiNelTtttn:noeffectn~emlyrturtment. c. Includes internal costs. d. Exctudee matemity, well-cue, and dental. e. Includex dieeh0ity immence. f. Earnings of eEutsinen and light drinken used I,, crmyxnc uuee are eomidemhly higher ihan wnings uf driNeeu, even afler avnVOlling fur educxtion. 'I'o dle extent IM dru ruNng. dillkrenm are nat caused by ddnking, drinkeei ear nings slxruld he used; in that r:me the +1.14 figun: would Ee-0.01. g. Earnings, not lazes on earnings. tt (Sum nf cusn) minue taxes on eaminge. Becan¢ of rnmxling, nuegoriee mny nd aum ro uaal. f. lam of life, and p.in and sutTenng are rla incfuMd. , trolled drinkers consume fourteen reported drinks a week and so have more automobile accidents than the abstainers and light drink- ers. Second, drinkers have other poor habits. Differences in sick leave and group life are doubled, but mediral costs are smaller (heavy drinkers are less apt to get medical ~.ire).'I'he additional years of life mean that abstainers and light drinfrrs get mnre retirentent income 09806S680Z

I I I I 90 The Costs of Poor f tealth Habits rANF5a Mnululili,NimMlbvNtRtmmppenrnlr MIIlnoneM13<Yemrr•rlge,lryM1UdmeRlauF IMPh Ierunme e.perimmit CuneM nr/nken - --- ~nol-Uel n.]l-09~ Inz.W ...innwLrMtluy AMUircn oma'eMny o rce/by mneer/3r ree ---------------------- Avntae A.er. ae Artnae Avttrre Avenre O1irnNmn 'Av0 l n•n•K per ('trun M1.rrlM1l - ler Ivan M1vXlrl 1 t.•.xnt I^ P',M •Fvi1M1l rx rer Pt,xrn 9FrMM1l nm•x[ yer n'nrrfn AI ]M1.l l)1 Pl] 121 AU4 1.]1 lt.r 1.31 N,5 IlR P/ri~.kRrywiFly rtINeJMAinhq,a 16 0.111 fi{ ~IIW )a OW II!• a.ll II'I 014 •111Mwpilali,Ninrrlr H/2 oll 7/ nln al 1110 n I11, I/IS 1.1 0W Hmai~NnNiem In,••M1IY rtlawrl b dnnknrt I1 0111 no noI Il Ilal In II@ ItV nnl . Aa Iiryre..IlxrrM Rrr µnnN ~. ueiq rM1e ~rm, rnnR•~ ~Ir/r nIF enu~Inev.aqL.,.m.MJ. I• F.e1.4sq.httn~MH r IsnwMl.••prai.ninmr and other characteristics of individuals as well- Thus, the regression results ire more likely tu represent the effects of heavy drinking alone. Desnipliim Rrsldfs fur HenlNt Care Tables 5 4 and 5-5 present thl, descriptive results for the IIIFE and the NHIS sample, ru•spectively. A.s'f'able 5--4 indicates, people in the HIE sample who reporled con..uming large yuanlities of alcohol (3.0 ounces (ir more per day of ethanol) were much Irss likely to have otdpatienl episodes than the rtst nf the sample. Only 45 percent uf them had one or more epist3dcs, while 77 percent of the abstainers 7ABLE 5-5. Drinking reslrRmxe: age- and sex-adjusted annual rates, National Health Interview Survey, 1983' Drinking Status DI><tor Visits Admissions Abstainers 3.75 0.17 o.m-0.21 oanee/day 3.98 0,15 0.22-0.99 ouncefday 3.42 0.13 I.IXt-299 cwnceslday 3.70 0.11 3+ ounces/day 5.71 0.20 a. Weighled rn NHIS-19g3 pnpulanan mix irage 2]tl. Y7S U67YOUZ The External Costs of Iieavy Drinking 91 and 83 percent of lighter drinkers had one or more epistrde.a. Vogt and Schweitzer (1985) report a similar finding. This was not true of the NHIS sample, where the heaviest drinkers had the highest num- ber of doctor visits (5.7), followed by tlle light drinkers (3.9)., For diagnoses related to drinking, however, the t IIE heavy drinkers were the most likely to have outpatient episodes (l:ible 5-4, row 2, column 9; see Table 3--3 for a list of these diagnoses). Hospitalizations were highest for moderately heavy drinkers and abstainers in the HIE. In the Nf11S, the very heaviest drinkers had the highest rates, followed by the abslainers.s Multiple ReKressinn Results In the multiple regressions we estimated the effect of drinking on outpatient episodes, inpatient use, and work-loss days, controlling lor a large set of variables in the HI)- and NHIS 1983 data. 7'he con- Irast group was "lighl drinker,s•" (thuce with a monthly ronsumptioll nf 1.0 (,unce of elhanul).' NrE RESULTS Outprrtivnt e(li.ahtes. As'Table 5-6 indicates, the number al outpatient episodes was not significantly related lo uur drinking variables taken as a group-former drinker, abstainer or infrequent drinker, loga- rithm of monthly volume of ethanol, and logarithm squared of monthly volume. This result largely reflects the fact that increased monthly volume has no effect. Table 5-7 shows how insignificant the monthly volume terms were. The indicator variables for being a former drinker or abstainer were individually significant at better than the 10 percent level. Abstainers tended to have 13 to 17 percent TABLE 5-6. Wald tests (X2) for drinking response of persons 20 through 59 years of age, Health Insurance Paep•rimaua OutpatientUse InpatteMUse Excluding Habit-Relaled Hxcluding I4bil-Related Habit df Well-Care Disgnoxes Maternity Diagnoses Drinking 4 7.48 4.51 13.18"• 14.21"'" a. Sigri5carxx levels: "• 515ereent.'"" I percenl. IslMrwixe imignificaM at tlle IU permnl or bener b•et: dr=dereee of freedlm. HaGt-relued dugrlnses from Teblea 3-I lhnwgh 1-4.

28 TABLE 2-1. The Costs of Poor I fealth Habits Costs of smoking Type of Cost Internal Cost External Cost Premature death Smoker and family Co-workers and others Pain and suffering Smoker and family Co-workers and others Medicd costs Copaymenrs Insurance reimbursements Sick leave Uncovered sick loss Covered sick loss Disability Forgone income not Disability insurance replaced by disability payments insurance Group life insursnce Negligible Death bencflt Pension Defined contribution Social Security and plans defined benefit plans Wages Forgone disposable Taxes on earnings income Othcr costs Property loss due to frres, Insured pmperiy loss due paid by perron to fires '1'obacco products Cigareue purchases Cigarette excisc taacs by smokers-higher use that they did not in fact pay for through higher insurance premiums. A similar argument can he made for pensions, and other so-called transfers.' An individual works in return for wages or salary, and fringe benefits. I le or she may elect to consume some of these now and defer some until a later date, such as after retirement. If smoking decreases the likelihood of receiving retirement benefits, then a claim 10 future earnings is forgone. That is, smoking leads to a shift in future claims or benefits from smokers to nonsmokers, thereby yield- ing a positive externality to nonsmokers. If smokers are less produc- tive but retain and collect the same benefits, then smoking has cre- ated a negative externality. Table 2-1 illustrates how social costs are divided into internal and external costs. Some terms in the table need clarification. The princi- pal costs, premature dcatlt and pairr and su)`fering, are borne by the snioker and thus are not a part of our analyses. We have not adjusted for altruistic feelings about death, pain, and suffering caused by smoking. We have treated such toelings as internal, since they are more likely to be felt by family than by outsiders. Premature death and suffering among family members and co-workers are also caused by passive smoking. In general, we classify costs borne by other family members as internal because the family constitutes an eco- Conceptual Framework 29 nomic unit (it pools income), but we show below certain ways in which our results would change if we consider these costs as external to the smoker. As for group- or employer-covered arrangements, conered sick loss is sick leave that is subject to some kind of insurance or income- replacement plan. Defined henefif pertsfon plans pay an amount upon retirement equal to some function of an employee's wages, often a fraction of the it highest-earning years. The estate of an employee who dies before retirement generally receives no benefit from a de- fined benefit plan. By contrast, defined <ontrifmtion frensiorr plans are like employer-enhanced private savings plans. Tke accrued payments belong to the employee or his or her estale until retirement, when they may be converted to an annuity. In the analysis of external costs, we have ignored defined conlribution plansand treated all retirement plans as part of external costs. Our rationale was twofold: (f) defined contribution plans are a minority of private pension plans, and (2) even in defined contribution plans, the arnnunt of the annuity is usually not a function of habit status. Cigarette excise taxes could be consideicd negative external costs. If we defined them thus, the nbject would be to determine whether the external costs are zero, rather than equal to the current excise tax. Some studies have so defined them. We preferred to keep them sepa- rate so that we could compare cigarette laxes to the external custs. Nonsmoking Sruoker.a Smokers differ from nonsmokers in many ways besides their smuking habit (Farrell and Fuchs, 1982). For example, they are less future oriented. Therefore, an estimate of external costs should not simply contrast smokers' medical and other costs with nonsmokers' costs. That would attribute all the differences between the two groups to smoking and probably overstate the costs of smoking. The preferable way is to compare smokers with a hypothetical group of "nonsmok- ing smokers" (Leu, 1984), who are like smukers in every way except that they do not smoke. To accomplish this goal we mntrolled for age, sex, race, education, drinking habits, exercise habits, fanrily size, income, self-assessed measures of physiral, mental, and general health, and seat-belt use. Thus, we can calculate the external costs of smokers if they had rrener smoked bul had retained all their other characteristics. We may still be overstating the cosb: of smoking-because there £Z8065480Z

126 The Costs of Poor Health Habits (1984) estimate that time spent walking at 2.85 miles per hour is just returned (undiscounted) in later lifc, we can compute the amount of lifetime exercise equivalent to the 300 days of additional life expec- tancy that sedentary people might realize by changing to moderate exercise. At that speed 3(Jll days ot walking covers 20,520 miles. At age 20 the average sedentary person can expect to live 56.9 more years, or 20,780 days, as Table 6-111 shows. Dividing miles by days . yields approximately one mile per day, which might reasonably he called "moderate" exercise. In "fable 6-14 we have divided the costs shown in Table 6-11 by the appropriately discounted number of miles, to show the gains to the rest of society for each mile a seden- tary person travels. (The gains from exercise per mile are about the same whether the exerciser walks, jogs, or nms.) Summary If sedentary individuals were more active, they would live longer and reduce the costs they impose on others. Lower covered medical and work-loss costs are associated with an active life-style, coupled with the higher taxes active individuals pay over their longer life- times. I 'hese more than offset the additional (collectively financed) pension payments active people gei because they live longer. By our best estimate, a sedentary person imposes $1,f-511 in lifetime external costs. lhis figure falls well within the range of estimates that emerged from our sensitivity analyses. Under varying assumptions, the costs range from negative external costs of $I,IIX) to positive costs nf 94,30(1. Conclusions, Limitations, and Implications In this book we have focused on the magnitude of the coets that people with poor health habits impose on others. Such external costs include the subsidies from health insurance of increased medical use and sick leave for additional time lost frum work; the collective fi- nancing of excess disability and early ratirement; and pension and life insurance effects. For smoking, thev also include the damage from fires that smokers cause, and for drinking, the value of innocent lives lost and property damage from dnmk driving and other crime- related costs. Summary of External Costs Cigarette Srrmkin,,z Our best estimate is that the external cost per pack of cigarettes is 15 cents. Smoking leads to higher medical costs (principally hospital costs), more covered work-loss days, les:+ years of work and life, and more disability retirements than not smoking. 7'he external financial impact of smoking is greatly reduced, however, by the effects of early death. Because smokers die younger on average, they receive less in pensions, Medicare benefits, and other long-term care.' Thus, smok- ers subsidize nonsmokers' Medicare and retirement henefits, while nonsmokers subsidize smokers' medicol care, disability, and sick leave early in life. Our estimate of 15 cents is sensitive to two assumptions: the appro- priate rate of discount, and which health aiifferences between smok- ers and nonsmokers are rmesrd by smof.in}; as opposed to merely associated with it. The discount rate is crucial because cmukers' costs come early in life whereas the °,gains" to nonsmokers nf lower pensions and Medi- ZL8065L80Z

99 The Custs uf I'oor I lealth I-labils Rough though they are, these calculations indicate that the costs of fire, crime, and auto accidents (for both property and innocent lives) are much larger than one might expect- $3R,IX10 per heavy drinker, nondiscounted. Geuder dif(erenre.c, Comparing nondiscounted total costs with costs for women, we see that wnmen drinkers have substantially higher nel costs because thry live 6mger Ihan men. Specifically, they have higher medical and nursing humo costs, but less sick leave, group life insurance costs, pensions, and much lower taxes on earnings. Di.cconnding and tnfnl crfrrnrJ cn.ts. 7o this point, we have discussed only mmdiscounted costs, but discounted custs are more relevant fur policy. Comparing the collectively financed costs discounted at 5 percent with the nondiscounled costs, we see a tremendous drop in nursing home and pension costs. Iho nther costs do not fall as much because some of them occur earlv in adulthnud. Whichever discount nrte we use, the results are swamped by the costs uf innocent lives lost, lire, crime, and property damage. These are immediate costs and thrrefore are not discounted. As the dis- count rate rises, the nther components (especially the distant nursing home costs) become smaller and relatively Iess important, because the immediate costs do not change. Thus, at a 5 percent discount rate taxes on earnings paid by heavy drinkers are barely sufficient to pay for insured medical carr, pension, nursing home, and other collec- tively financed costs. fhey are not sufficient to offset the costs of innocent lives lost, fire, crime, anai property damage. When we add all the costs and subtract taxe5 on earnings, the total net lifetime cost per heavy drinker is'6.1H,IqG. The Di(ference (k•hueerr Heavy Drinkers nnd Controlled Hrninr Drinkers Table 5-11 shows the effect rm all these costs if the former and heavy drinkers had never drunk to excess but retained all their othercltarac- teristics and habits (that is, if their drinking status changed to exactly five actual, or two reported, drinks a day). We constructed a table (not shown) similar to "fablc 5-10 for these "contrulled or limited drinkers" and subtracted the resulting values from the values in Table 5-10. Controlling drinking increases life expectancy by 1,55 years overall (row 3), and greatly reduces medical costs. Because controlled drinkers live longer, their nursing home payments increase. For pen- sion payments, however, two effects conFlict. Many heavy drinkers retire and start to receive prnsions early. This offsets their shorter TABLE 5-11. The External Costs of I leavy Drinking 99 Dlfference between heavy drinkers and controlled luavy drinkers Disarunt Rate Cost 0% Totsl 0•~Women 596 Total 10% Total Total ounces 41,100 25,500 15,800 8,600 Excess ounces 41,100 25,500 15,800 8,600 Yearsoflife -1.55 -0.55 -0.24 -0.06 expectancy at age 20 Collectively financed costsa Medical caret' I 1 1 M1 1.6 0.5 Sick leave 2 tl.l 0.8 0.3 Group life 0.7 0.I 0.3 0.2 insurance Nursing home -0.6 -0.3 <2115 <-0.05 care Retirement -L5 2.1 0.5 0.2 pension Immediate costs for motor vehicle accidents and criminal justicec Lives of 4 5 4 4 nondrinkers All other costs 14 9 14 14 Taxes on earningsa -14 -5 -1.1 -0.1 Total net extemal 64 47 42 39 costsa,d a Conx arz extem.l. Menued in Ihourseh nf 1986dd/ars. - - b. 8xoludu mumd ty and .ro0 cne. c. Aseumes all dcolrol.rtlMed Irnnedi.te mna art due to excr-st drinking. If irulnd enb re pmywtfpW 1. xrwM drw@c these cuels srAd w be munipiied by 040, the frvcfenn of mlrJ alntlml dut is excess drinking by Ix.vy drfnken. Cats we cornpuled by muldplying estimated inmediMe wsts per ounce by (ffneuunted) lifetime ouncm. d(Sum of msb) mlmn uxes on e.nunge. Includer lives lw~, erimq Ott4 wid poperlyLmage. &rrpc afrwndirg, cMeg~ nMy ^a eum m nMd. 8S806S480Z

APPENDIX C HIE Habit Batteries EIEEE ANO ExE/1C1EE TE. IM AN AVERAGE 24 11 pL1 PERIOD, AODUT HOW MANY NOUE! 00 YOU EM1D tIEEVINOT (Circle OM) 8 EONf Of IMr .................. .............. 1 7 EOUn ........................... . ............... 2 B nwrn ._..........._.....,..._ -.... .. ..... 3 9 homt or mon ................. 4 EE, HAS ANY DOCTOR EECEITIY fUOCL'STED THAT YOU GET MOBE EEENCIlE OR RIACTICE CEeTA1N EYENCOEEV YM .__......... .... . .......... .... ... ........ I -AVna Y}A.B NO .......... ..................... . ..... . .... . 2 -00/0 3B. n..Ip.E. EFA. N/IAT IE THE REASON R011 THIS ExENC1EE1 lCkW M. nYTa/ M ..W. u,..~ YM No Ta Mprex Nwr 9M./.1 MMN 1 2 To Inpe.. 1'.IE MIWtN bMl/ 1 2 Ta yr...n1 Il..rt GN..M .~- 1 2 . To br NEIII 1 .Z__ Trptmwrl NI rpMR pn mrrW. a lro1rM lan. 1 2 TIwMrMt M NEINIM ~ _ 1an. oTw nrerr 1 2 1YM1T -- 7FE. NOw OFTEN DO TOU ~ THE E%ENCIEE THE DOCTON EUOGEETEOT IClrcn VM) AIw.Yt~ n.w+ mIM .............. ............... . 1 Moat o1 the Ilrtn .............. 2 ACOnI h.I/ the tim. 3 l.u Ih.n hElf tM ErM ........ .... .. ~........ 4 Nwn/. Conl Jo i1 M NI ............ ...... .. .. 5 Z88U6Sb8UZ

LL806S480Z APPENDIX A ....~...~~r~ Literature Review of the Costs of Smoking and Drinking Costs nf Smoking The enormous literature on the costs of mmoking gives quile varied estimates of costs. Some of the differences result front errors and differing data and assumptions, bat most arise from the f.rct that the research asks different questions. Many sludies of the cost of smoking nre descriptive: a gexkl example is a study by Rice and Hodgson (1983). It Adresnes two questions: "In 1980, how many work days were lost and how mudr was spent on medical care for conditions caused by smoking? Mon• important, how much future pm- ductivity was lost due to smoking-related deaths lhat erccurred in 1980?" The authors first estimate the proportion of c,rtain diseases that can be attributed to smoking, based on differences in mortality rates between vmokers and nonsmokers. They then multiply the cmds of illness, disability, and prema- ture death for age- and sex-specific calegories by Ihe proportion of these diseases attributable to smoking to get a total cost of $61.7 billion (in 1995 dollars). Rice et al. (1986) have updated their evtimate of the economic costs of the health effects oF smoking. For the thrce major diagnostic categories most clearly associated with smoking--neoplnsms, diseases of the chculnlory sys- tem, and diseases of the respiratory syslem--differences between smokers and never cmokers in rates of medical cnn• utlliration, work loss, and disabil- ity were used to derive the proportion ot these cnsts attributable to smoking. In Rice and tfodgson (1993) the proportion of each cost category attributed to smoking was based nn differences l+etween smokers and never smokers in mortality rates. The change in method improves the theorotical basis for the calculations, but, empirically, the esnman•d cost rrmains about the same. The more recent study estimates the hawl rconnmic cnsls of smoking to he $56.4 billion (in 19155 dollars). Studies using similar methods include I,ure and Srhweitzer (1978), which

172 The Costs of I'rmr Health Habits based on those studies would predict. Because of this uncertainty, the forthcoming I IRA model revision says only that exercise is proba- bly good for one's health, and dues not attempt to quantify its life- extending benefits. We attempted to control for this problem in two ways. In the de- scriptive analysis, we included a category of people with physical or role limitations. In the regression analysis, we excluded such people. 'I'o check the sensitivity of uur results to the possibility that health status may affect exercise, to our list of covariates we added general and mental health indexes and a count of the number of chronic diseases affecting each individua. In other ways the exercise analyses were similar to those described for smoking and drinking. Descrildiae Results The descriptive analyses did not support the hypothesis that those who exercise heavily use more health care because of injuries. For the I BE, Table 6-4 shows that, in general, those who have a physical or role liniitation (the "physically limited") are more likely to receive outpatient or inpatient care than the other three exercise subgroups. This relationship holds for all di.tgnoses and the diagnoses related to exercise or lack of exercise. (See "I'able 3-4 for list of diagnoses.) For both kinds of diagnoses, outpalUent and inpatient use are higher for light exercisers than moderate ,-xercisers. 'Ihere is a small difference in the opposite direction for all outpatient care, excluding well-care. The chance of having one or more hospitalizations is also consistently higher for those reporting light exercise than those with moderate exercise, and higher for those reporting moderate exercise than those with heavy exercise. Again, it is nlso higher for hospitalizations possi- bl_v related to both exercise and lack of exercise. For overall care we found generally the same pattern in the NHIS data, except for the advantages of more strenuous exercise. As Table fi-5 shows, people who reported more than average exercise had the same hospitalization rates as average exercisers and somewhat higher rates of work loss; there were negligible differences in their rates of doctor visits. The presence of an acute or rhronic health problem is quite likely to deter an individual from etercising, a case in which causality clearly runs from health and associated medical use to exercise rather than vice versa. The increase in outpatient and inpatient care for injuries among those who reported physical limitation or light exer- The External Costs of Sedentary Life-Styles 113 rAatE 64. Anma wllvnan nf ankn anwq ~ 'a16^'nyl, f9>.ur nr.ae, lry.*~e' R.~u.. ne.IN in.un~ce n.pnenev unax.non mi ~h - aMAm y.dM] tt1AW A lurt IX e.n Le 94b9[. 9wunr aplntle. IaniMy nYWn1.kM tteae a ~n Imryu.n.amm pw,rolr n1.M In e.ertme Iloepinli..,lon. pm.iMr ,el.e I.ek m rhnkalr LiuxN LqM MMeme /len. R ri~h l a Ave..R G wXh I Arm ~. °• aih l Avmre A r,IM1 l Avo.ae FR rc~n a M Ve~nn " p n r~`nn ... m rv r!.~.m - 8 5.7 4lR Tl.9 11~ 119 ].95 76,v 7 11 34,3 0.5/ 15.3 0.51 24 6 n.]+ 3<.x 0.19 I1 .3 0 .21 C.a 1 .11 1.v 1. 10 1 1 1 ~w .3 1 075 109 01! 299 1145 1c.1 017 14.1 0.]U 96 U.1! 74 IiN+ I b Un,. 3.4 OJm 1,6 nna tt um 0,6 M1nl n.r anl n.l o.1q U.3 nql 3.9 ll 05 2 3 0111 nnn UU] TABLE 6S. Annual rates of outcomes per p•rcnn h,v exercise status, National Health Interview Survey, 19831 Group IXlctor visita Admissions thlya Physical or role 8.34 0.34 2.44 limitation Leu than average 4.06 0.20 1.31 exercive Averegeexercise 2.92 0.12 1.05 More than average 2.96 0.12 IJ9 exercise • Age-and sensdj9ercd lo NWS1983 pupnlnri.n, mi dxge2211. 99806S480Z

8 The Costs of Poor Health Habits (even without inflation). A person can invest today's dollar and earn interest; when fifteen years are over, that dollar will be worth more than two dollars (at 5 percent interest). If we fail to take this effect into account by discounting, we overestimate long-term costs. Discounting is especially important when we look at policies with long-term effects. If we consider only the economic costs of smoking, a program that costs x dollars today to reduce the effects of smoking should be considered practical only if it saves more than x dollars in the future. If it does not, we would be better off investing the x dollars to pay for the future costs when they arise. The "correct" discount rate is always a matter of controversy. The cost estimates in this part of the book reflect a 5 percent (real) dis- count rate. In Chapters 4 through 7 we show the sensitivity of our estimates to this figure. Table 1-2 summarizes both the external and internal costs of smok- ing, heavy drinking, and lack of exercise and indicates the major components of those costs. Our estimates represent the differences between costs for people who have these habits and costs for people who do not. It is important to understand who we mean by "people who do not." We do not mean actual people who have never smoked, people who have never had a drink, or people who exercise. Instead, the figures in Table 1-2 result from comparisons between people with the bad habits and people who are like them in other characteristics and habits, except for the habit in question. Our pre- ferred comparison group for smokers is a group of "nonsmoking smokers" who are like the smokers in all respects except that they have never smoked. We can thereby derive a more realistic estimate of the costs that can be attributed to the particular habit. Smoking Because smoking shortens life expectancy, the internal costs to smok- ers and their families are high. Smoking reduces the (undiscounted) life expectancy of a 2u-year-old by 4.3 years, or, as Table 1-2 shows, 137 minutes per pack of cigarettes. Smokers also pay 7 cents per pack more on out-of-pocket medical costs, and lose 86 cents in wages and salaries- Finally, the retail price of a pack of cigarettes is about $1 per pack. But what are the external costs? We have said that our estimates are based on the difference in costs if a smoker retained all his or her other characteristcs and habits but had never smoked. In other An Overview 9 TABLE I-2. Analyris of the caats of poor health lubiu Cost Per Unita Baurce External (dollars) Collectively financed tnunediate costeb Taxes on eaminge Toutextemalcosts Imenul l.oss of life (minutes) Owne Otherfamilye Medical out of pocket (dollsa) Lost wagea and selsrieeg (dollars) Cost of poduct (dollan) Pack of Ciguettes 13xcess Oum:e af&hamol Any Ounce of Ethanol Mite-Na- Walkdl +0.05 +0.20 +0.08 +0.23 +0.02 +0.93° +0.37d 0 -0.09 -0.06 -0.02 -0.01 +0.15 +1.19 +0.48 +0.7A -137 -20 ltl -21 -5 -6 -2 0 +0.07 +0.06 +0.02 +0.10 +0.86 +0.66 +0.24 +0.19 1.00 1.00 [A0 0 NOTE: Oneounce-2.2dsinb. Exlerntlmeu=(sumofcostt) minusuxesoneamin6. All dolter amuunu ae in 1996 ddollars. To conven to Iune 1990 dollus, muldply by 1.1 g5. >. Cw1; rnd pwksJounces/miks discountd et 5 pertnL b Firer,neonat.lnue.innocentlireeandpsapertylostindmnkdnvins,.ndca.uotcAmind ju.dx. c. Assumeeallcwadnetodrinksinexeessoffirepttdeybylr~.ydrhden. d. Assumne etlwol caxu psupnniwrl to amounl drunk. e. Noldiecounu:d. L Because leahh effecb of modenle drinking sse cuntrovsninl, loss of Ofe expecuncy wss nul compneA for "eny dridc." g. w~k los0. easlr ntbemenl, and e.rty death. words, we are asking how much more or less would have been con- sumed in specific services and benefits, how much more would have been paid in premiums and taxes that finnnce such services and bene- fits, and how much less fire damage would have been caused. The difference amounts to $1,tXX) in lifetirne extenlat costs per smoker. Divided by the number of packs smoked over a life6me, this difference costs other people about 15 cents per park. Hcavy Drinkiqy Estimating the costs of heavy drinking is complicated by having to distinguish not only between drinkers and nondrinkers, but also CWSSWOZ

104 The Costs of Poor Health Habits than heavy drinkers, even after the early retirement of heavy drinkers is taken into account. After we have controlled for education, the earnings for abstainers and light drinkers still are considerably higher than for controlled drinkers. Part of the reason is the lower wage rates of former drink- ers, and part is the early retirement of drinkers. To the extent that earnings differences are nut effecls of drinking, we should use drink- ers' earnings; the 14 cent figure in Fable 5-13, column 3, should be 3 cents. To compute a lower bound for the external costs of drinking, we restricted medical services to those known to be related to drinking. The resulting estimate of medical costs is l1 cents per excess ounce, about the same as the overall estimate. Even though drinking-related medical costs are less than 10 percent of the discounted total medical costs, they contain all the differences between the controlled drinker and the heavy drinker. This finding implies that the higher total medical costs are causally related to drinking, and does not support the view that heavy drinkers are hypochondriacs or that there is some other noncausal connection.'z Early retirement can have a substantial effect on both pensions and taxes paid on earnings. " Because we have few longitudinal data, we attributed early retirement to prior heavy drinking. It is possible, however, that retirement for other reasons permits people to drink, rather than that drinking causes people to retire early. To test the impact of our assumptinn that the difference is caused by drinking, we recalculated retirement values and taxes on earnings assuming that drinking had no effect on early retirement. This result is also shown in the lower bound column. The retirement payments change enormously: the earlier deaths of heavy drinkers cause them to re- ceive 8 cents per ounce less than if they were controlled drinkers. Also, if drinking has no effect on early retirement, the earnings taxes paid are 3 cents less than for controlled drinkers. All together, the lower bound on net medical, pension, and other collectively financed costs of drinking is 15 cents per excess ounce. Adding crime and the losses from drunk driving (not shown) yields a lower bound estimate of the total net cost per excess ounce of $1.08. Several components of total costs are shown in the last column to permit comparison with other estimates in the literature. Per excess ounce, total medical costs are 16 cents; sick-leave costs are 13 cents; group life, nursing home, and retirement payments do not change; and the difference in total earnings is a loss of 64 cents. These changes The External Costs of I leavy Drinking 105 from external costs relate to the differing rate of collective financing in the various areas. Two other costs borne by the heavy drinker are larger than any shown in Table 5-13. The biggest component of total costs, his or her own premature death and disability, is borne bv the heavy drinker and so is not included in the tables. What are the costs to a person and his family of losing 20 minutes of life and bearing a larger amount of disability? We have calculated that on average this is 64 cents of wages per excess ounce. But surveys have shown that most people are willing to pay many times their expected increase in earn- ings for safety. This component of costs may well be up to $2.00 an ounce (Howard, 1978). Another sizable component of costs to the drinker is the price of the drinks themselves, about $1.00 per ounce of ethanol. Finally, the external cost of drinking is sensitive to the loss of inno- cent lives, because that loss accounts for nearly half of external costs. Phelps (1988) suggests that the usual estimates of drunk driving are underestimates, because some slate, are less likely to test those in- volved in motor vehicle fatalities for evirlence of alcohol abuse. If we were to base our estimate of lives lo,t on states with more thorough testing, there would be 9,4(X) lost innocent lives, which would add 16 cents per excess ounce to the esternal costs of heavy drinking. Also, if we were to use a less cnnservative estimate of the value of a lost life, say $3 million instead of $1.66 million, the cost per excess ounce would increase by 46 cents. Our estimates are also conservative in that they omit the external costs associated with the effects of alcoholism on spouces and chil- dren (for example, the use (if insured mental health services) and those associated with the measured risk of alcoholism for these de- pendents. Summ.try The major determinants of the external costs of drinking are the value of the lives of innocent bystanders in drinking-related auto accidents (58 cents per excess ounce) and the cast uf crime and property dam- age (35 cents per excess ounce). Of secondary importance are the costs of collectively financed prograrns such as medical insurance and retirement; these come to 26 cents prr excess ounce. The total external costs of heavy drinking are $1.19 p,r exress ounce. If we divide the 49806S680Z

The Cnstc of Poor 1lealth Iiabifc TABLF 6-2. Physical exercise qatus at enrollment and at exil among persons 20 Ihrough 59 years of age. Health lnsurance Experimenta Stal1S at Exit ` Status at Enrollment ' Light E:.crciscr Moderale Exerciser Heavy Exerciser ll4= (-62) (N=1,779) (N=357) Lightcxerciser 47.6 1i6 8.4 _- Muderateexerciser 5n0 780 66.4 Heavy exerciser :. 3 6.4 25.2 a. Stability Iagrecmen0 o(exerciee vatus hetween enrollnu:nl and exit significanlly bener (han crwa.e /kappa=0.27. z- 1 R.6). Numh,-rs rcprcunt pcrccnlagc of column tord. TABLF. 6-3. Level of physical rxercise of persons 20 through 59 years of age, NaOmml Health Interview Survey, 19838 Level of Exercise Subgroup Sample Si'z _i---- -- Lcss Active than Average Mme Active Avenge than Average ~ Pmal 16,26'7 13.2 49.6 37.2 Males aged - 20-29 2,310 9.3 46.7 44.0 30-39 1,895 9.1 47.0 43.9 4"9 1,414 12.2 44.7 43.1 50-59 1,398 14.0 44.3 41.8 remales aged - 20-29 3,(104 16.5 57.2 26.3 30-39 2,62s 15.0 52.4 32.6 40-49 1,855 12.2 51.1 36.8 50-.59 1,761 16.1 45.3 38.6 Race Black 1,630 17.2 47.0 35.8 Nunbiack 14,576 12.8 49.9 37.4 Years of education 0-II 3,21N 18.1 50.6 31.3 12 6,584 123 52.0 35.7 13-15 3,231 12.7 47.0 40.4 16 1,848 10.9 47.2 41.8 Morcthan 16 1,310 10.6 44.4 45.0 i Num6en repreaem percenUge of ~uw tnW. The External Costs of Sedentary l.ife-Styles 111 percent felt they were less active nnd 37 percent felt they were mure active. Uespite the differences, the two o-amples showed sume similar pat- terns. At all ages, a higher percen6r);e of men than women saw them- selves as more active than their peers. For men, con[parative self- rating of exercise generally dropprd with age, but as women aged an increasing percentage classified themselves as more active than their peerc. With regard to race, the patterns differed for the two sample<. In both data sets blocks had a higher percentage of less active (light) exercisers and a lower percentagr of average (moderate) exercisers. Nonblacks in the NMS, however. Itad a hij4her pertentage of more aclive (heavy) exercisers than wr•re found in the 11117. I'attems ac- cordinK to ecfucatiun also differed in I Ite Nf 115: the hi};her the educa- tion level, the more likelq peopL- wele to say thal they exercised more than others Iheir aKe. Effects of Sedentary Lifc, Style Causality presents a major prohhom in analy<Ing how exrrcise relates to use of health care and work locs. If exercise causes injuries, the analysis shnuld show a higher incidence of health rue fur exercise- related condilions. 'I'he causal rcl.ninnship should ht• fairly straight- forward. Nonetheless, the relatianship hetwcen lark of exercise and heallh care uce is not thal simpir to esl.lblish. People in general may use health care more because drev have cundiliuns that exercise ntight prevent or anrelinrate. Allernatively, people ntay exercise less or not at all because they have such cunditions. Eithwr way, analysis would show a correlation helwoen uee of inedical services and lack uf exercise. 1Le aecociatiun between exzn-inv and nwrtalitv raices the same chicken-and-egy issue.'I'he IIRA model treats exer<ice as an impor- tant risk factor for heart disease. Many epideminlogic.studie.c have shown dramatic differences in future heart diseace between those who •lre sedentary and those wlw exrrc'ISe (I'affenharger et al., 1986; 1'owell et al., 1987; Hurdelle and Mohr, 1t77(j). lhe•:e analyses have cnntrnlled for age and other ht•.dth habitc Still, il is hard to rule out the possibility that heavy exercisers nrr, inherently ntare heallhy than sedentary people in unmeacur'd wavs, so that inactive persons who take up exercise will not enjoy Ihe p; linsin lifeexpeclanry that mudels ti9806S480Z ROOOMPOWANOW r .

128 The Costs of Poor Health Habits care come late in life. As a result, smoking actually reduces nondis- counted external costs bv about a dollar a pack (that is, the costs are negative). Above a 5 percent rate, costs are not very sensitive; increasing the discount rate from 5 to 10 percent only increases our estimate of the external cost per pack from 15 cents to 24 cents. On the causal relationships, if we attribute to smoking all differ- ences between "ever" (current and former) and "never" cigarette smokers except the higher earnings of the latter, the estimated exter- nal cost is 28 cents per pack, at a discount rate of 5 percent. This estimate is almost certainly too high because it assigns all differences, not just smoking-caused differences, to smoking. At the other ex- treme, if we narrow the list of medical services to those associated with diagnoses known to be caused by smoking, and assume that smoking has no effect on early retirement despite its effect on health, the estimate of the external costs is only 4 cents per pack. This figure is probably an underestimate because of its overly restrictive scope. Our "best" estimate of 15 cents per pack lies in the middle of this range. The costs are not as sensitive In other assumptions. For example, the estimated external costs varied by only 5 cents per pack de- pending on which of two data sources we used for the nonaged. But there are two exceptions to this generality. The first is the course of future technology. We have in effect extrapolated current technology. If, for example, a cure for lung cancer were discovered, our estimates would markedly change. Depending on how much the cure cost, they could either increase or decrease. Although our estimates are uncertain and sensitive to some modeling assumptions, under no reasonable assumptions could smoking cause external costs of several dollars per pack.' The second exception is our addition of the medical costs and Inst lives of low-birthweight babies of smoking mothers. If we were to include only the medi.al costs, the external costs of smok- ing would rise by 2 cents a pack. If we were to include also the value of lost lives, the cost per pack would increase by 16 cents. Ilenvy Drinking Our best estimate is that the external cost per actual (not reported) excess ounce of ethanol consumed by heavy drinkers is $1.19 (or about 54 cents per excess mixed drink, four-ounce glass of wine, or twelve-ounce can of beer). This estimate includes 26 cents per excess ounce for medical care, sick leave, and pensions; other social costs Conclusions, Limitations, and Implications 129 for crime, fire, and property damage in auto accidents of 35 cents per excess ounce; and an estimate of 58 cents per excess ounce for the value of the lost lives of innocent bystanders of drinking-related acci- dents. Because one cannot tax only excessive drinking, tlris $1.19 per excess ounce becomes 48 cents per ounce of alcohol (22 cents per drink). Of the external costs that we ourselves estimated, the major ele- ment is higher medical costs, with most of these costs arising from extra inpatient care, especially for former drinkers, as well as those who report consuming two or more drinks a day- More covered work-loss days, fewer years of work and life, and more disability retirements add up to an amount slightly smaller than the medical care component. Our estimates are in marked contrast to those of Berry and Boland (1977) and Harwood et a]. (1984), who reported substantially higher costs in lost productivity than in medical care. But their estimates included lost earnint;s due to premature mortality (which are internal, not external costs), while ours included only the external costs associated with sick leave. Our results of $1.19 per excess ounce or 48 cents per overall ounce again are sensitive to two assumptions: the value assigned to lives lost and the amount of underreporting of alcohol consumption. Our estimates depend critically on th-• dollar value assigned to lost lives- If we had used a human capital approach to valuing lives, rather than willingness-to-pay, the cost irr ounce would fall, because not all victims are working (children and the retired, for instan(e). If we use Rice and Hodgson's (1983) estim.ite of the value of life (as mea- sured by lost productivity) for 30- to 35-year-olds, ourestimaled value of lives of innocent bystanders will fall by 13 cents per actual ounce.3 With regard to potential underreporting of alcohol consumption, Pernanen (1974) states that self-reported consumption of alcoholic beverages accounts for only 40 to 60 percent of alcoholic beverage sales. A comparison of apparent alcohol sales (USDI IHS, 1983a) with NIIIS 1983 estimates of consumption suggests underreporting by about two-thirds.° We have assumed that respondents report 40 per- cent of their actual consumption. A more truthful (higher) response would raise the cost in proportion to lhe ratio of the true r.ete to 40; for example, had we assumed resprmdents reported 60 percent of their actual consumption, our estimatea: uf the costs per oun,:e would be 50 percent (60/40 - 1.5) higher. Moreover, our estimated costs are Ino low because we omitted several categories of cost. Our cakvlalions did not include certain £L806S680Z

rri rrarriim 1178 The Costs of I'oor I lealth Habits by age and sex, race, years of education, and site of residence. Table 6-1 shows the results. Overall, only 24 percent of the HfE sample claimed to be light exercisers, while more than 75 percent claimed to exercise moderately (fr,3.4 percent) or heavily (12.6 percent). 7hese totals mask differences among the subgroups: (1) Men were more likely than women to be heavy exercisers and women were more likely to be light exercisers. Approximately the same percentage of both sexes reported exercising moderately. (2) For both sexes the older (lie age group, the higher the percent- age of light exercisers. In general, the percentage of moderate and heavy exercisers declined with age for both sexes, except for women who reported heavy exercise. For that group, the percentage of heavy exercisers was higher among 1(1- to 59-year-olds than among the 20 to 39 age group. (3) As for race, a higher percentage of blacks reported light and heavy exercise, while a higher percentage of nonblacks reported moderate exercise. (4) The correlation with educntion was also mixed. The more educa- tion, the more likely people were to be moderate exercisers, and the less likely they were to be light or heavy exercisers. Our cite results require somr clarification. Table 6- 1 suggests that Dayton had a radically lower percentage of moderate exercisers and a radically higher percentage of heavy exercisers than we found at the other sites. In fact, these findings probably result from dissimilarity in the wording of the question about exercise in Dayton and at the other sites. Where the question was worded the same, we found that the two rural sites (Franklin and (;eorgetown) had a higher percentage of heavv exercisers than the urban sites. Our findings suggect that people are less stable in their exercise habits than they are in smoking and drinking. Overall, only 64 per- cent of the sample maintained the same exercise status from enroll- ment to exit. Table 6-2 shows that this overall rate broke down to 78 percent for moderate, 48 perccnl for light, and 25 percent for heavy exercisers.' Stability Iu•rcentages did not differ by age or sex. Prrvalenee in the NHIS Because the NHIS and HIE asked different questions, it is problemati- cal to compare exercise prevalence for the two samples. The HIE asked how often and how strenuously respondents exercised. The NIIIS asked if they were more, less, or about as active as others The External Costs of Sedentary Life-Styles 109 TABLE 6-1. Level of phyaicd exercise of perrona 20 through 59 yeera of age, Health Insurance Expermtent" Level ofHxercise Subgroup S.mple Size Light Moderetc Heavy TOTAL 3.074 24A 63.4 12.6 M.ler aged - 20-29 495 11.5 70.9 17.6 30-39 424 18.2 63.0 18.9 40-49 264 21.6 60.2 18.2 50-59 217 717.0 55.8 14.3 Aemales aged- 2(-29 593 22.3 71.7 6.1 30-39 495 28.5 62.6 8.9 40-49 279 33.1 55.2 11.5 50-59 307 37.8 52.4 9.8 Race Black 441 28.1 55.6 16.3 Nonblack 2,633 23.3 64.7 12.0 Years of education 041 832 29.6 54.6 15.9 12 I,iRO 22.4 65.1 12.5 13-15 555 20.7 6R8 10.5 16 325 2(c.9 69.2 9.9 More than 16 182 24.7 65.4 9.9 Reaidence Dayton (see text) 615 28.9 44.2 26.8 SeatOe 723 22.4 71.1 6.5 Fitchburg 376 22.9 69.4 7.7 Franklin 474 15.4 73.6 11.0 Charleston 386 29.0 61.4 9.6 Georgetown 500 2.5.4 63.0 11.6 a Status a enruliment. 1974-1978. Numbm .eprccnnt pemntage of mw toul, their age. People may uncnnscinusly compare ihemselves with others when they are asked how often aud how strenuously they exercise; nevertheless, the HIE was asking for an absolute answer, whereas the NHS asked for a comparative nnr. As Table 6-3 shows, about half of the N1f15 respondents reported that they were about as active as other people their age, while 13 £98065480Z

78 The Costs of Poor Health Habits The External Costs of Smoking 79 TABLF4-15. Diffemlce in lifetbne external coru between amokers and nonsmoking s nokers T.1BIE 4-16. Extenul mats per pack of cigarettes (1986 dollan)' r Discount Rate (percent) Discount Rate Cost 0 5 10 l 0%T l 0% W 5%Total l0%Total o a omen Costs per pack (dollan) Difference in life -4.25 -3.38 -0.34 -0.04 Medical careb 0.38 0.26 0.18 expectancy at age 20 Sick leave 0.011 0.01 0.01 (Years) Group life insursncc 0.11 0.05 0.02 Nursing horne cate -0.26 -0.03 0.00 Differences in coataa Retirement penaiunc -1.82 -0.24 -0.02 Medical careb 6 9 1.6 0.7 Fresd 0.02 0.02 0.02 Sick leave ' 1 0.1 0.1 Group life insurance 2 1 0.3 0.1 Taxes on earnings to -0.65 . -0.09 -0.02 Nursinghomecase -4 -4 -0.2 ' ftnance abeve programs Retirementpension -30 -22 -1.5 0.1 (dollars) Fires 0.2 0.3 0.1 0.1 Total net costs per pack -0.91 0.15 0.24 Taxes on catningsa -11 -3 -0.6 -0.1 (dollars)e DiRerences in mtal net -15 -14 1.0 0.9 Life expectancy aI age 20 -137 -28 -6 coslba•c per pack (minutes) ---- - NOTE: ' indicates value lesc than 0.05. a- Mesmcd in Ihousands ofdollen. b. Facludes maternity and well.'se. c. (Sum of cosU) minus taxes on eamings. Bec.use of rounding, categories may not sum to toW, causes a 38 cent increase in medical costs, a saving of $1.82 in pen- sions due to a reduction of 2.28 hours in life expectancy, and a net saving of 91 cents in total undiscounted costs. The change in life expectancy is about 7 minutes per cigarette. As Table 4-16 shows, for each pack of cigarettes discounted at 5 percent, society pays on average 26 cents more for medical costs, I cent more for covered work loss, 2 cents more for fires, and 5 cents more for group life insumncr payments. Society pays 3 and 24 cents less in nursing home care and retirement pensions, respectively, and receives 9 cents less in taxes un earnings. 'hhis leads to a total cost of 15 cents per pack overall, with women exhibiting a cost considerably higher than men (not shown in table). The loss of discounted life expectancy per pack is 0.46 hour (28 minutes), which means that the lost 2.28 nondiscounted hours occur, on average, in the smoker's late fifties. At a 10 percent discount rate, the cost is 24 cents per pack, which is due primarily to medical costs related to smoking. (Fhe other NOTF.: Packsofcigatenesasecrotrectedfurnnderteporting. .. CosU per psak an: calculated by dividing by the discnunted number of pxiin smnked. b. All but matemity, vvell <ee, rM dental. c. IncWdes disability insurance. d. Cakulated by dividing annual coste by anm1al packs smoked. e. (8um of costs) minus taxes on earnings; e.g., costs u 5 percent equal 0.17 m 0.26 + 0.01 + 0.05 -0.03 -0.24+0.02-(-0.09). Because of roumling envrs, cost categodes may not sum to lout net ooeu, ss in this example costs are negligible at this discount rate.) Because any cigarette tax would be collected over the lifetime of the smoker, the number of packs smoked must also be discounted (assuming the tax stays the same in real terms). That is, we wish to find the tax rate that equates the discounted tax revenues with the discotmted costs. SeftsltiUltl> of Cos!< to Assumptions Figure 4-1 shows total external cosls discounted at various rates from 0 to 10 percent. Between 5 and 10 percent the external costs per pack are not sensitive to the choice of discount rate, but below 5 percent the rate has a substantial effect. Table 4-17 shows the effect of varying some of the other assump- 8b8069680Z

frYl W.YYwrrW~l/rYY1r~M ~l W IIU II W rirllri..rrur 142 Appendix A cases of rrime and social program,) of motor vehicle accidents, crime, fires, and social programs due to airohol abuse.' As already noted, the two studies reported the indirect costs differently, and the Harwood study included some indirect costs that were omitted by Berry and iioland (such as lost production due to incarceration). In order h, minimize confusion, only the Harwood results are used in this text. There is considerable uncertainty regarding the extent to which there is a causal link, as opposed to an association, between alcohol abuse and the occurrence of all these events. The estimates of the costs of crime due to alcohol abuse may be particularly problematic in this regard. Despite the fact that the authors of both studies made careful attempts-relying nn both the literature and expert opinion--to ~urive at an appropriate "causal factor," in the end they convey a strong sen:e of skepticism regarding the proportion (if the costs of criminal activity that can he properly attributed to alcohol abuse. The Harwood report estimated the direct and indirect costs of these activi- ties due to alcohol abuse in 1983 (repurted here in 1986 dollars) as follows: motor vehicle accidents, $3.6 billion; crime, $6.4 billion (external, $3.1 billion); fires, $507 million; and social programs, .554 million. APPENDIX B Survival Parameters from the HRA Model Calculating Appraised Risk Under the HRA method, questionnain• resplmses aru translated into risk multipliers for related causes of death. (eanmim.e: A two-pack a-day 45-year- old smoker has twice the risk for lctng cancer of the average male ol that age, and ten times the risk of a nonsmoker.) If there is more than one risk multi- plier (RM) for a cause of death, then a compusite risk multiplier (CRM) is calculated as follows. First, multiply all RM's , 1. Second. subtract 1.11 from all RM's > I and add. Third, add the results of steps I and 2. If all RM's are greater than 1.0, add 1.0 to the result. exAMrl.s 1: RMI = 0.4, RM2 - 0.6, RM3 - 2.5, ItM4 - 1.3 CRM = (0.4 x 0.6) + (2.; - 1.0) + (1.3 - 1,11) = 204 ExAMPI.E 2: RMI = 2.5, RM2 = 1.3 CRM = (2.5 - 1.0) + (13 -1.0) + 1.0 = 2.9 exAMrr.s 3: RMl - 0.4, RM2 - 0.6 CRM-(0.4 x 0.6)=0.24 The composite risk multiplier for a particular cause applies tn age-, sex-, and race-specific mortality rates for that cause. The procedure is repeated for the twelve leading causes of death. Causespecific mortalilv rates for these twelve causes are then summed with the average rate for all other causes of death to yield an overall risk of death. There is no result from the prograrn if information on sex, age, height. weight, smoking status, or cigarettes per dav is missing. If other data are missing, a value is imputed as shown in Table U-1. Converting Ten-Year to 1•ive-Year Survival Ratios One technical problem arises because the I IRA data give ten-year survival and we use five-year steps in our life table. To convert the IiRA ten-year 068 06S r'OOZ

116 The Costs of Puur 1lealth Habits rate than Ihose with little or no rxercise. For outpatient care, there was an insignificant 6 to 8 percent decline. For adult males we did observr a significant and beneficial effect of exercise on work loss. As Table 6-7 shows, moderate exercisers had IR percent fewer work-loss days than those with little exercise, while those with heavy exercise had 32 percent lower work loss (p < 11.U5). We could not do a sensitivity analysis for work loss, becau.se we were unable to tell which work-loss days were attributable to which complaint. NnIS RfSU1.15 We also examined the effects of Ltck of exercise using the 1983 NI IIS for all adults and separately for the elderly (aged 60 or older). As table 6--B indicates, level uf exen ise was significantly related to out- palient and inpatient use for both the elderly and the nonelderly. It was signifitantly related to work loss only for the nonelderly. ihe NI IIS results show more pronounced exercise effects than the IIIH results do. As a coniparisou of fables 6-7 artd 6-9 indicates, moderate exercisers in the NHIS had 28 percent lower rates than light exercisers, but only 12 percent lower in the I ilE. Because of the difference in definitions, comparison nf the two sources is somewhat problematical. Unfortunately, wc had no alternative. We wanted to see if our results would have been measurably different had we used the Nf IIS approach-with its different population and definition. In the NI IIS, people who reported exercising less than average for their age group had 39 percent (11001721 - 1) more office visits (p c 0.001) and 52 percent ((l(10166) - I) more hospitalizations (p < 0.001) than those who exercised niore than average, other things being equal. For both use rates, the differences were negligible between people whn reported average and more than average exercise. Cost Analysis Results Because there has never been a direct trial of the lifetime costs of sedentary habits, we had to use several observational studies to esti- mate the components of external costs. The main uncertainty comes from the validity of our assumptions, rather than from statistical noise. Therefore, we undertook extensive sensitivity analyses to show how our computed costs vary with the assumptions. The External Costs of Sedenlary Life-Styles 117 TABLE 6,4. Wsld teste (7C2) for adult e.ercise response, National Heattlr Intervtew Survey, 19834 Habit df 20+ 60+ Visits 2 48.91•'• 45.4f••• Hospitdizsoons 2 4LI0"•r 70.53••` Work ton (workers oNy) 2 5.07• 0.69 a Significuu.e kveh: • 10 percent. ••• I percent: atmrwigr insignificmt w the 10 perma ur 6etror krel; 6r= Aegnwe of frtedam. Average f.i/etime External Costs for Li(elmly Sedentary people We first estimated the costs for people who do not exercise even when young, and even though they are not physically limited. 'Ihey constitute about 12 percent of the men and 21) percent of the women in our population. Table 6-10 gives the lifetime external costs in each category for those who classify themsehes as not very active physi- cally. In this base case we used data from the f IIp. on those aged 20-59 year:c and data from the NHIS on older prnple. For those 20 59, we included all medical expenses (except rn,tternity and well-care) and all covered work loss. For the aged, we included all medical use. 13ased on the male-female proportion just cited, we assumed the not very active population to be 36 percent male. Columns I and 2 of Table 6-10 show nundiscormted lifetime costs, which are easiest to understand but misleading for policymaking. Medical costs and retirement pensions are the largest external custs. When we subtract taxes on earnings, Ihe total net nondis(ounted costs are $27,0(k0 per person (for both sexes). The nondiscounted costs for women only are considerably higher, TABLE 6.9. Exercise reaponn, National Health Interview Survey, 1983a Level of Exercise Outpatient Use In{atienl Use Wurk Loss Little 100 100 100 Moderate 72'"' 66••• 70 Strenuour 73"•" 65*•• 78 a Significerce levet: ••• I percent otberwlse imignil innl al the IO peKenl or brlkr rintry irldidas effect of exertise an use of serviae or wr,k trna, stale4 as a pertentagr 4 1Mne wirh litae exen.ise who have stmilar nonexemse cluncte lrstic.e. L9806S680Z

48 The Costs of Poor Health Habits ! Data and Statistical Methods 49 during the experiment. An episode of treatment is defined as all of the visits and related charges associated with the treatment of a bout of illness. The aggregation was based on information from claims data on diagnoses, time since last charge for related diagnoses, and information from the provider on treatment history. Outpatient episodes fell into one of three classes-acute, routine chronic treatment, or well-care-defined as follows: • Acute episodes: all unforeseen and undeferrable outpatient epi- sodes (in particular, chronic flareups). • Routine chronic treatment: the foreseen annual care for each chronic condition. • Well-care episodes: conditions and services that are deferrable without great loss, such as immunizations and gynecological ex- aminations. TABfE 3-1. Diagnostic calegoHes pmbably rolated to smoking Codea 140-149 150 157 161 162 188 189.0,189.1 410-414 440 491 492 496 Condhion Malignant neoplaans of twccal cavity and pharynx Maligmnt neaplums of esophagus Malignant neuplaanis of pancreas Malignant neoplasms of Iarynx Malignant neoplasms of trachea, bronchus, uld lung Maliguont neoplasms of bladder Malignant neoplas<ns of kidney Ischentic heart disease Aneriosclerosis Chmnichronchitis Pulmonary emphysema f7hronic obstructive lung disease (COLD), NECh a. Disyxxtic cotlen ne hwed on Commi.aion on Pmreainnal snd HoepiW Acnrniea (19t3) 8th rcviswn H-ICDA. h Ha<ISewtcectusified Keeler et al. (1982, 1988) and Keesey et al. (1985) describe the theory and construction of episodes in greater detail. CLASSIFICA'r1ON OF DIAGNOSES RFLATED TO nAa1TS Although use of medical care mav differ for people with and without each habit, the differences may or may not be "caused" by the habit. We addressed this problem by examining two kinds of health care usage. First, we looked at use uf all services except well-care and maternity: it seemed implausible that those could have any causal relation to the habits.° We also examined use for only those diagnoses that evidence suggests are causally related to poor health habits.'I'his approach should increase the chances that medical usage is caused by the habits. In both cases we adjusted for differences, across indi- viduals, in age, sex, race, education, income, and other habits. Smoking. Employing a substantial body of literature, we compiled two lists uf diagnoses-those probnbfy related to smoking (Table 3-1) and those fro<sibly or prnlmfrly related to,moking (Table 3-2). Probably related are cancers at several site5: buccal cavity and pharynx, esoph- agus, larynx, trachea, bronchus, and lung. Smoking is also probably a contributory factor in cancer of the bladder, kidney, and pancreas (USDHHS, 1982). The other probably related conditions are arterio- sclerosis and the slightly broador category of ischemic heart disease (USDHHS, 1983b), as well as chronic bronchitis, pulmonary emphy- sema, and chronic obstructive lung disease (USDI11-IS, 1984b). Table 3-2 shows the second list of diagnoses, which comprises TABfE 3-2. Diagnnstic categories posibly m probably relaled to emnking Codea 140-149 150-159 160-163 188,189.0, 189.1 410-414 415-416 430-438 440 460-470 480-486 490-493, 496 502 503 3(16 508 519 531-534 Condition Malignant neoplums of buccal cavity and pharynx Malignant neoplasms of digestive nrgans and peritorroum Malignant neoplasrns of respiratory system Malignant neoplesms of blatkler and kidney Ischemic heart disease Disorders of heart i hylhm Cercbmvascular disease Arteriosclerosis Acute upper resphatory infections Pneumonia Bronchitis, emphysema, aslhma, COLD Chronic pharyngitis and nasopharyngilis Chronic sinusilia Chronic laryngitis Other diseases of upper respiratory tract Other diseases of resphalory system Ulcer: stomach, dinodenal. gastrnjejunal, site unspecifted a. Disgrnrttic codes sre besed on Commiseian un Profcssional uM I lospital Activitkn (1973) ®thre.ision H-ICDA. £E80s9WOZ

r, 92 The Costs of Poor Health Habits TABLE 3.7. Healar Insurance 13xperlment drinking coefficients (e statistica)a In (Monthly In2 (Monthly Former Volume Volume Chi Type of Care Drinker Abstainer Ethanol) Ethanol) Squared(4) Outpatient care All except 0.197 0.123 0.0389 -0.00674 7.48 well-carew maternity (1.72)" (2.321"" (0.86) (-0.66) Habil-related 0.286 0.153 0.0741 -0.010 4.51 diagnoses Inpatienl care (t.70)" (1.82)' (1.08) (-0.75) All except 0,744 0.323 -.0.00811 0.0150 13.18•" well-cartor maternity (2.34)"* (t.891'• (-0.06) (0.59) Habit-related 1.054 0.371 -0.135 0.0619 14.21 diagnoses (2.20)" (1.24) (-0.58) (1.45) .. Signinwat levels: • 10 percent. "" 5 1e¢em, ••• I percenC otherwise ireigni6rans r We 10 percent or betler level. Unin for dependent variables.re log vism or adrmssions. Efsenbdly, Nie mudel is a muldpk r<pgession of log visitr or log huspibtiralian vasus uie variabks listrd anose Ibe ay,Jlbe table and mher covarimes. more outpatient episodes than those who drank very little (the equiv- alent of a couple of drinks per mnnth), based on the exponentiated value for abstainer coefficient in '1'able 5-7 (r u 1E3 - 1= 0.13, or 13 percent). In contrast, former drinkers had 22 percent more of the broadly defined episodes of outpatient care and 33 more percent of the narrower habit-related episodes than light drinkers.' The signifi- cance of the former drinkers is surprising, given the small number of such individuals in the HIB sample. Inpatierrl care. Table 5-6 shows that drinking had a significant effect on the number of admissions under both the broader (everything except maternity) and the narrower (habit-related diagnoses) defini- tions of use (p ~ 0.05). As with outpatient care, we could not detect an effect of increased drinking within the group of current drinkers. Table 5-7 indicates that, compared with light drinkers, former drink- ers had higher rates under oither definition of use and abstainers had higher rates under the broad definition. Compared with light drinkers, former drinkers had 110 percent more hospitalizations un- S98069480Z The External Costs of Heavy Drinking 93 der the broad definition and 187 percent more under the narrow definition.a An issue to be considered is how much of the drinking effect is due to adverse effects of drinking and how much to related problems (depression, for example). A person can be depressed because of alcohol, or drink because of depression or anxiety. We tested the sensitivity of our findings to this phenomenon by including health status variables as explanatory varinbles. 'I'o the extent that drinking is mediated through health status, Ihe significance of the drinking variables is reduced. This reasoning applies with special force to the mental health index, which is based 1o a large degree on items related to depressiun. Including mental and other health stalus covariates did not alter any of our earlier conclusions. After health status was added, the estimated differences among the grnups were less prec'ise, but still significant. The size of the variablr coefficients for former drinkers and abstainers fell by one-quarter tu one-half. The coefficients of the monthly volume variables remained insignificant. Wurk-lo.ss Aays. For HIE men, we found that drinking had a signifi- cant effect on work loss-primarily for former drinkers. 'I'hey had 38 percent more work loss than either abstainers ur infrequent current drinkers (p < 0.01; not shown). Among current drinkers, work loss was not significantly related to the volume of monthly consumption. Nationnf Fieafth Interoirm Survey Results As Table 5-8 indicates, the NIifS data show that drinking has a significant effect on outpatient visits and hospitalizations for all age groups combined, but not for work loss (both males and females). Among the elderly we observe significant drinking effects only for TABLE 5-8. National Health Interview Survey, 1983, drinking response (X2)a -- -- Oulcome df ~_- All Ages 60+ Visits 4 5.75 Hospitalizations 4 42.02"" 14.15•"• Work bse (workers only) 4 2.18 6.57 a. Significncxkvel: ^"lpercent;ot6erwben®iguifirenlatlM10pen:enturbetterkvel;df= depeea of Fleedasn.

50 'hhe Costs of Poor I lealth Habits TABLE3-3. Diagnostic categories poestbly related to drinking Codea Conditinn 140-149 150 151 153 154 155 157 161 251,1 260-269 299.8 302 305.6 309.9 313 347.t 357.9 401 425 427.9 429.0 531-534 535 571 577 790.9 Malignant ncoplasma of buccal cavity and pharynx Malignant neoplasms of esophagus Malignant neoplasms of stomach Malignant neoplasms of large intestine Malignant neoptasms of rectum Malignant neoplasms of liver Malignant neoplasms of pancreas Malignant neoplasms of larynx Hypoglycemia Other nutrinnnal deficiencies and malabsorption Prcseniledemmritie Mental diampkrs associated with alcohol Senile or presenile txain discase Unspecified psydtoses, including mental delerioration Alcoholism Cerebral aml cortical atrophy Pcripheral neuropathy, NOSb Hypenension Other diseexes of myocardium, including other cardirnnyopathies Congestive hcan failure Cardiotnegnly Peptic uleer disease Gastritis Cinhosis of liver, including alcoholic hepalifis Disearmsofpancreas i:etoacidosis a, [Tagnovuc coder art be.vetl an Crnnmon Profesrional and Hospital Activities (1973) 80 rtvialon H-ICDA. b. Not onrtrwise ryetified1 conditions both probably and possibly related to smoking. The indi- cations for possibly related diseases were as follows. Malignant neo- plasms of the digestive organs, peritoneum, buccal cavity, and phar- ynx were included because cancer of the stomach has been associated with cigarette smoking (USDH}IS, 1982). We also included cancers of all sites within the respiratory system because of their direct expu- sure to the carcinogenic components of smoke, and other acute and chronic conditions of the recpionory tract because of an observed increase in incidence and prevalence of these conditions among ciga- retle smokers (USDHEW, 1979). As for diseases of the circulatory Data and Statistical Metltods 51 system, experimental evidence implicates nicotine in disorders of heart rhythm, and data from prospective mortality studies support an association between cerebrovascular disease and cigarette smoking (USDHHS, 1983b). Observations also indicate an increase in inci- dence t)f and mortaliiy from peptic nlcer disease among cigarette sniokers (USDHEW, 1979). Drinking. T'he association between drinking and disease has been investigated, but the conclusions are not as strong or as consistent as they are for smoking and disease. Sn we compiled only Table 3-3, conditions ixrssi6ly related to drinking.' Several of the conditions are more strongly implicated than that, however. Alcoholism .urd cirrho- sis of the liver are closely related to ahohnl consumption. Evidence indicates that alcohol is probably or p,ssibly implicated in tancers of numerous sites: buccal cavity and pharynx, esophagus, stomach, large intestine, rectum, liver, pancreas, and larynx (USD1If (S, 19H1). Various conditions uf the nervous tystem have been associated with chronic heavy drinking: presenilv dementia, mental disorders associated with alcohol, senile or preseuile brain disease, peychoses, cerebral and cortical atrophy, arni peripheral neuropathy. I leavy us- ers of alcohol exhibit heart muscle disorders without a specific cause (cardiomyopathies) and a higher prevalence of hypertension, as well as symptoms associated with congestive hearl failure and rardinmeg- aly (USDHIIS, 1981). The irritating effects of alcohol on the digestive tract lead to the stomach disorders and malnutritiot) common among alcoholics (USDHHS, I9R3a), including nutritional deficiency, peptic ulcer dis- ease, and gastritis. Ketuacidosis may occur in nondiabetic alcoholic patients in corrjunction with alcohol-induced hypoglycemia, or the two metabolic states may occur separalely (13erkow, 1982). Chronic alcoholics account for more than 75 percent of cases of chronic pan- creatitis in the United States (U9D11HS, 1983a), We include this con- dition and other disorders of pancreatic function as "diseases of pancreas." Lnck of exercise. Identifying conditions related to exercise is less straightforward than for the other tw,, hal.its, berause pcnple may need medical care as a result of either exerrise ur lack of exercice. As Table 3--4 shows, we included diagnostic categorirs related to both. On the one hand, exercise can result in dainage to the musculoskele- taI cystem (Koplan et al., 19A5). We livted several diagnoses falling into this category: fractures uf upper ur lower limb, dislocations, and other musculoskeletal injuries. On the ~ dher hand, numernus chronic ti£$0sMOZ

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132 The Costs of Poor Health Habits they reached age 50. Our sensitivitv analysis revealed that under either assumption the lifetime external costs drop to $700. The effect for switching at age 50 comes abrnit because medical and sick leave costs are lower for the period before 50 years of age. Limitations of the Analyses 'I'he first, and most important, limitation of this study is that it is observational. As such, it contains a measure of uncertainty about which differences between groupc (smokers and nonsmokers, ab- stainers and drinkers, heavy and light exercisers) in the use of health services, work loss, and life expectancy are causally related to the habit in question and which are merely associated with it. To reduce the quantitative magnitude of this problem, we have taken certain steps: (1) we have excluded services known to be unre- lated causally to, but correlated with, the habits (maternity care and well-care); (2) as a sensitivity analysis, we have examined the use of health services for only those diagnoses thought to be related to poor health habits; and (3) we have used multiple regression methods to control for other habits and chararteristics that influence use of health services and work loss. Although these methods limit the scope of the causality issue, some inherent uncertainty remains. At best, then, we can define a range for external costs. Second, sample sizes for the hvo data sets we used are sufficient for detecting main effects-- differences, say, in overall medical care use by overall smoking status-but are too small to permit reliable estimates of interactions. For example, we cannot determine whether people who both drink heavily and smoke cigarettes are especially affected. For purposes of assessing tax policy, however, a main effect is the most relevant because taxes are generally imposed per pack and per drink; it would not be feasible to tax heavy smokers more for their alcohol than light smokers are taxed. The sample size is also too small to assess reliably the external costs of various types of alcoholic beverages. Third, as explained in Chapter 2, we have not explicitly accounted for externalities of pure public goods (such as national defense) and excludable services (for example, trash collection).° It could be argued that premature death and disability from bad health habits leave those with better habits paying a higher share of any given defense Conclusions, Limitations, and Implications 133 budget, and thus represent an external cost. We have assumed that such costs are offset by reductions in public evils such as congestion and pollution. That assumption, however convenient, is clearly spec- ulative. In the case of excludable services, we assumed that consump- tion by people with varying habits equals the costs they pay. Fourth, any assessment of the extenial costs of smoking needs to include the effects of passive smoking nutside the home. Neither of our data sources included such information. Because we could not detect the effect of passive smoking on medical costs in the house- hold, such costs from workplace smoking probably are also small. Yet the Surgeon General (USDHHS, 1986) estimates that 2,400 people a year die from lung cancers due to passive smoking alone, and additional lives are lost in cigarette-related fires. Using a value of $1.66 million per life lost (in 1986 dollars) and treating all these deaths as external would add 23 cents to the external costs of a pack of cigarettes. Because many of these deaths are actually within the fam- ily, the adjustment is likely to be oversiate.l. Incorporating neonatal costs due to smoking adds 2 cents per park. Including 2,%NI infant deaths (also valued at $1.66 million per life and not considered by the mother who persists in smoking) adds another 14 cents per pack. Fifth, we have relied on the estimates of others for the value of life, especially for nondrinkers killed in drinking-related traffic accidents. Although there are theoretically correct mechanisms for valuing lives ex ante (Schelling, 1968; Mishan, 1971), there is little consensus on appropriate empirical magnitudes. Nonetheless, our conclusion that alcohol taxes should be raised would not be altered underany reason- able estimate of the value of life. Sixth, our estimates of the external costs of a sedentary life-style may be too low. 'Che costs that sedentary people impose on others are indirect; sedentary people do not drive their armchairs into innocent bystanders. Most of these external costs are captured in the model, but the possible effects of inactivity on early retirement are not. In a study of those obtaining permanent disability S<xial Security benefits in 1975, the primary diagnosis of 38 percent of retiring workers aged 55-64 was cardiovascular disease (Burdrtte and Mohr, 1979) . Assum- ing the year 1975 to be typical, we can estimate that 3 percent of those 55-64 years of age retire early because of cardiovascular disease, to which lack of exercise can contribute. Early retirement has large exter- nal costs associated with it, because it both decreases taxes paid and increases pension and disability insurance payments. 9L8069b80Z w

114 The lLstS of I'nur Ifealtil I labits cise mav he evidence of reverst• causality. As we have said, the role of reversr causality can be redured by controlling fur ubserved differ- ences between those getting v.vious degrees of exercise, which we did in thc multiple regres.sian:rnalyses. Mulfiple R;qression Results 1he multiple regression analyr,•s used both the If1E and NHIS 1983 data. For 1116 nrHpatient expi,ndes and inpatient use. we also em- pluyed a broader definition (all use excluding well-care and ntater- nity, respectively) and a narrower definition related Io pour health habits; see Tables 3-I tn 3-4. 4lthough the regression analyses ex- cluded people with physical hmilations, our limitation nleasure is dichotumous and thus only a crude measure of ability tu exercise. l'u check the sensitivity uf omresults to the possibility that health status may affect exercise, for the I3IPE data we added lo our list of covariates Ihe genrral and ntental health indexes and the count uf Ihe number of chronic diseases. IIIF RF5111 T5 Analylical results for the I l1E data were mixed. In the first analysis, which excluded only people v,ilh physical limitatinns, exercise made somr siKnificanl diffetences in outpatient and inpatient use. In the second analysis, when we added the health status indexes, these differences were no longer sip,nificantL Evidently the magnitude of the effects of exercise depends nn how une treats the causal relation- ship between health status and exe•rcisa2 As Table 6-6 indicates, a joint test on all exercise variables (light versus moderate versus heavy rxercisers) failed to show that exercise was significantly related to the number of outpatient episodes. There was weak evidence that exerci,e reduced use. Table 6-7 shows that moderate exercisers had a significant 12 percent fewer episodes than light exercisers, but strenuous exercisers had an insignificant 8 per- cent fewer overall episodes and 7 percent fewer habit-related epi- sodes. We also found that heavy and moderate exercise were not significantly different from each other. The pattern of the effects was consistent across use in general and for habit-related diagnoses. For inpatient use, 9'able 6-b indicates that exercise did not relate significantly to overall care, but was significant for use involving the habit-related diagnoses (p < n.10). lable 6-7 shows that amount of exercise had uneven effects. On the one hand, heavy exercisers had TABLE 6-6. -- The External Costs of Sedentary Life-Styles 115 W ald tests (XZ) fur exetcise tesrmae uf Peraons 20 dnuugh 59 years of age, Health Insurance Eaperbm-nts ----- - InpatkntUse OutpatientUse Excluding HaMDRdated Excluding Habit-Related df Welt-Care Diagmaest' Malemity Diagltosee8 E.ercine 2 0.89 1.66 3.94 5.116• variables t Signirrcancekvel: •10perttm;othetwiacnignihrenlatlhel0percemorbeimrkvel:d(= degrtea of freabm. b. Indudes all diagnoses rer.ed ro Puu health bMlr Iieksl in TsMes 3-1 thmugh 3-4. alnlut a(1 percent lower use rates Ihan light exercisers, but the differ- ence was significant only for overall rara On the other hand, moder- ate exercisers had inconsistent results across thr• two definitions. They had 10 percent less general inp,uient use, hut 15 percent higher use for exercise-related diagnoses; neither result was statistically sig- nificant. When we tested the sensitivity of our results to the possibility that health status affects exercise, the signifitance disappeared. The new analyses yielded statistically insignificnnt exercise cortficients for both inpatient and outpatient care (re5ults not shown in tables). The results were insensitive to the definilion of health services used- the broader definition (excluding only well-care and rnaternity) or the narrower (habit-related) diagnoses. For inpatient care, the heavy exercisers had an insignificant 20 to 23 percent lower hospitalization TABLF.6-7. Exercise resprmse at enrollnwnl uf persons 201hrtwgh 59 years of age, Health Insurance Experiments Outpalient Use Inpstient Use Excluding HabibRelated Hrduding Hxbit-Related Male Work Habit Well-Care Diagnnsesa hlatcrnity Diagnoseslr Lou Exerciae Light 100 IOo t0o IW Mukrate 87.5•"' 84.4" 8u.8 114.9 Heavy 92.1 92.8 72.2• 71.3 IIXI 82.5 67.9" .. Significance kvele: • In percent. •• 5 prrtew, ••• 1 percerH; ~xhrrniae mi signiNcent u the lll perttnt or belter IeveL Signifreance kvelr rvv cunected for midtilrle rnml>sriaont. b. Includae ell diagnoser mlated to naer health IwMU listed in Tsbks 3-1 tMmy.h 3d.

134 The Costs of I'onr liealth Habits One of the largest uncertainties in our calculations concerns the degree of causality in the link between exercise and health status. Although we excluded the physically limited and controlled for sev- eral other differences between erercisers and nonexercisers, we can- not be certain that the association we found between inactivity and health-related costs is cumpletek causal. In principle, this issue could be settled by a randomized experiment on the effects of exercise pro- motion, bul such an experiment is not available. The issue of causality remains tu plague any observational attempt to estimate external costs of inactivity. 'fhe assucialion between some exercise and mortality raises the same chicken-and-egg issue. M.my epidemiological studies, control- ling for age and other health habits, have shown dramatic differences in future heart disease between those who are sedentary and those who exercise (13urdette and Mohr, 1979; I'affenbarger and Hyde, 1986; PPowell et at., 14H7). Stifl, it is hard to rule out Ihe possibility that heavy exercisers are inherently more healthy than sedentary peo- pie in unmeasured ways, so thal inactive people who take trp exercise will not enjoy the gains in life e\pectancy lhat models based on those studies predict- Of course, if exercising has no effect on mortality and morbidity, then there are no benefits to making sedentary people more active. Because of this uncertainty, the revised HRA model says only that exercise is probably y,orxi for you; it does not attempt to quantify any life-extending beucfits. Sevenlh, our estimates have not incorporated directly the altruistic concern of the rest of sncietv for lhe welfare of smokers, heavy drink- ers, or the inactive. Such concern may lead to public health interven- tions to prevent people from acquiring poor health habits. When individuals start a poor health habit, they may not be fully informed about its consequences. Sncieh• at large may be willing to pay more than we have calculated to prou•ct these individuals from themselves. Finally, there is the loss of human life of those addicted to smoking and alcohol who would prefet to quit (taking their present desire to quit rather than their earlier tastes as relevant to economic efficiency). To the extent that current smokers would stop if they could, or that heavy drinkers would moderate their drinking if they ccnrld, there is an argument for including the value of their lost lives in calculation of the optimal tax. For cigarettes the discounted cost is 0.4 hour per pack for the smoker, while fot an ounce of pure alcohol it is 0.2 hour for someone who reports an average of two or more drinks per day. At $5 per hour, these costs amount to $1 to $2 per pack or per drink. Conclusions, Limitations, and Implications 135 Implications for 1'olicy These limitations notwithstanding, some policy implications can be safely drawn from our analysis. First and foremost, there is compel- ling evidence that the current tax level for alcohol is too low generally, and far too low for beer and wine specifically. At a minimum, this suggests raising the tax rates on beer and wine to the same level as the rates (or liquor. Preferably the overall taxes on alcohol should be at least doubled. Second, it may he desirable to increase the tax on alcohol sold in bars and restaurants more than the tax on alcohol purchased for home consumption. A major elemenl of the external costs of drinking is the loss of innocent lives caused by dnurk driving. 'I'axes would have a more direct impact on drinkmg that is likely to he followed by driving if higher taxes were imporrd on alcohol consmned in bars and restaurants than on afcohol in };eneral. Third, at the time of the Korean War, alcohol tax rates were at about the level we are suggesting. The rates were set in nominal terms, however, and over the years inflation has appreciably dimin- iuhed their real value. Tn prevent future erosion, alcohol tax levels should be indexed by inflation. We hope that our results will help to inform the public debate on these subjects. Because we have not tallied the costs of addiction, the regret of those with poor health habits (or of their families), or the costs of passive smoking, our numbers indicate where the minimum should be for taxes on alcohol and cigarettes as part of a wider public strategy for combating poor health habits. 9L8069480Z

Notes 1. An Overview I. These figures are based on average weekly expenditures per household unit (if $4.84 and 63.60, respectively (U.S. Pepartment of Commerce, 1989), pp. 438-439). 2. After 19&3 the fraction of heavy drinkers dee-reased. 3. There are more emokers than sedentary pi~nple, and lack of exercise does not take the health tnll that smoking docs. 4. By "taxes on earnings" we mean all the payments into the system that go toward medical care, sick leave, group life insurance, disability, and retirement benefits. These may be made by third parties or individuals, and they may be paid as taxes, premiums, payroll deductions, or em- ployer contributions. Not all payments are taxes on earnings, but we approximate the actual mix of taxes with the assumption of a payroll tax. See Chapter 2 for further discussion. 5. In order to provide conservative estimates ol the external costs, we are considering the family as a single decision-making unit and treating cosls imposed on other family members as intrmal. To the extent that smokers and heavy drinkers do not consider ihe eftects uf their actions on other family members, however, the costs of those actions should be consid- ered external. Later in the hook we indicatc huw sensitive our results are to this assumption. 6. Not all heavy drinkers are drunk drivers, and vice versa. But when people are drunk enough to cause acridenls they nre, at least at that time, heavy drinkers. Thus, we incluch, external costs of drunk drivers as a cost of heavy drinking. 7. Rice et aL (1986); Office nf Technology Assrssment (1985). 8. With the exception of f eu and Schaub (1983, 1985) and StodJart et al. (1986), all studies have looked at total costs- 9. Some economists consider retirement prnrinns and taxes as transfer pay- ments and hence not as external costs Wi~ explain in Chapter 2 why they are incorrect. 10. If food poisoning differs systematically between smukers and nonsmuk- ers, it is probably because of other undo rlving differences benveen those who smoke and those who do not. 906065680Z

88 The Costs of Poor Health Habits TABLE 5-2. Drinking slnus at enlullment end at exit among penona 20 tlnough 59 years of age, ttealth Insurance Experimenta Stams at Enrollment SutusatExit Abstainer (N=9g1) Pomler Drinker (N = 67) Currerlt Drinker (N=1,640) Abstaintt 73.7 34.3 13.0 Fonner ddnker 3.1 37.3 2.4 Cunentdrinker 23.2 28.4 84.6 a Slabilily (yreemenn of drin5ing.uuul hetween emullmenl and evt signiftcenUy betla th.n chancc (tappa =0.59, x= 33.2). Numhen Irpre<ent penem.gc af tvlumn tonl. drinkers, and they reported drinking more per day. More nonblacks were current drinkers than blacks and, in most categories, reported drinking more. But more blacks fell into the "heaviest drinker" cate- gory, saying they drank 3.0 or ulore ounces of ethanol a day. Recall that in the case of smoking, we found that the more educa- tion people had, the less likel) they were to smoke. For drinking we found the reverse. With thr exception of the heaviest drinking category, the more education, the higher the percentage of people who drank. Among the heaviest drinkers, the situation reversed: the less education, the higher the percentage who drank. As for sites, Dayton, Charleston, and Georgotown had much higher percentages of abstainers than the other three sites. Franklin and Charleston also had a higher percentage than all the other sites of people who fell into the two heaviest drinking categories (combined), Stafrilitry nf status. Drinking status was fairly stable during the exper- iment, but not as stable as smoking. About 79 percent of the sample maintained their status over the course of the experiment.l Table 5-2 shows that 74 percent of abstainers, 37 percent of former drinkers, and 85 percent of current drinkers maintained their status from en- rollment to the end of the HIE. Men were more stable in their drink- ing habits than women (82 and 78 percent, respectively). National ffealfh I)tternietu Sunrey A comparison of Tables 5-1 and 5-3 reveals that the NHIS sample had fewer self-reported abstainers than the HIE sample (30 and 36 percent, respectively), but more of the NHIS sample reported being former or light drinkers (p < 0.0001 based on x2 test). Sex and race The External Costs of I leavy Drinking 89 rAlLgsJ. IxlMinr rnlm orpnn9nt 2o iM1OUrI~ 595em 91 ryle. N.~laul Nedni mtwMr, 9arvny, t9U• ___-- _ nmm nrhtak s.mple Vartrtr ~ o.m o]17 ~ n.]z-0.9)~ SuFgwp Slx Alnniner tkMkn eux<6hy nrmaM.y TOT/y 15,rl ~ P II 15 )2.1 22.a Mak yW- 2039 2,262 163 30 lxl 34.7 AH9 I,E45 1]a 611 1LP 21 InJ9 1 174 n.2 w.l 2V e 25.r 5n-59 IJ52 Itn 12.2 1v.i 21.9 t4m.k..red-- 2fF29 291R 35,2 2.7 3<..9 NL3 t0.39 2.567 ik.l 42 3S> 11.5 40.d9 I,Bn 4tR 44 31'/ 131 5(ti59 1,123 02 59 21.] 144 I:n.n Hlack 1,512 463 ]X 2511 157 NenM¢k 14,247 tNll 54 319 23.6 rr,„ or.rol9.n99 o-u 3.112 U.! 9.2 216 16.1 12 6.427 3LI 13 111 214 IS-I6 1.149 234 /.3 11 1 5 26.1 16 ISII 21] 33 316 292 MmeM.n16 1.299 207 SA L..I 29.3 I.o-2.99l.awmm oum+pny wn<cr/d.r r.2 11 5 56 11.5 il 19 16 1.6 93 1.7 94 IA 4U 1.6 . NemMn rtlxere,n IemMye Mmn ~rtl. 6 Reprt~rb s~+nrerrM~. MM.W mne~mil.ily.t~r6^n r'P~ IrrlnFe,rl /erc I9 M oou nh.wnrynm.x bm1..Fe ~n IS maeerMnWwrrre Nrtl. wtl R'r.. tnef mxe.MnrN.enx rnpml differences in drinking roughly mirrored the differences in the HIE, except for the heaviest drinker category. In the NH15, blacks did not have a higher percentage in that cate5ptry. I:ducation oulcnmes were also similar, except that education did nul have as stront, an inverse relation for the heaviest drinkers. The Effects on Health Care and Work Loss As we did for smoking, we calculated the effects of heavy drinkingon collectively financed programs, both destriptively and with multiple regression. In considering outpatient and inpatient use, we looked at effects under two definitions: all care (exciuding well-care and ma- ternity) and care fur diagnoses relatell to all three poor hl:ilth habits. The descriptive analysis adjusted nnl•; for age and sex, and compared use of medical services by abstainen. and the four categnries of cur- rent drinkers. The regression analysra tvrnnulled for all three habits £98069L80Z

124 The Costs nf Poor Health Habits TAB[F- 6-13. Sensitivity of costa to asstnnptions at 5 percent discount ratca Alternative Assumptions Narrow Inactive AO Defnition Individuals NHIS Active of Mcdical Switch Total Cost if Active Dao Individuals Cosub at 50 Costs Coxtab Medical costse 1.6 3.9 -0.3 0.8 1.0 2.3 Sick leave 0.4 0.3 0.3 0.4 0.1 t.l Group life 0.1 0.1 0.1 0.1 • 0.1 insurance Nursingllamecare -0.1 -0.t • -0.1 • -0.I Retirement -0.5 -0S -0.6 -0.5 -0.4 -0.5 prnsion Taxesoncamingr -0.1 -0.1 0.1 -0.I ' -0.7e Total net coslad 1.7 3.8 -07 0.7 0.7 7e . Meuured to thwvuids of 19% dollarr • indicatee figum is less tlun 0.(I5. All cosu are e.wnW. ex<epr l.x column. b. Only ensss to disgroaes dus are"pruDSbly r•lakn" m exnciae; casts for "utive inanive' Inlividwli, c f inings.notb.esoneuninp. d. /Snm of coan) minua uxes on eamings. ILceuse nf ~ovnding, camgunes may nnt aum lo wul. e. Ins. onifa+nd pein anG sunenng m inaniv<aM f.miy arc nM included. difference due to exercise itself and one-fourth to other character- istics. lhird, exercisers may have different patterns of medical use for reasons unrelated to exercise. As a sensitivity test, we examined the use of services known to be related to exercise. Column 4 gives the results (the comparison group hrre is the active inactive group). This estimate of the effect of exercise on medical costs is $800, about half of the overall difference from the base case in column 1. Work loss for conditions related lo exercise is slightly smaller. Fourth, because many peuple become less active later in life, we tried to estimate the costs that they impose on others. We assumed that they were like moderate or heavy exercisers up to age 50 and then became sedentary. Column 5 shows the differences in external costs between these people whu become inactive at 50 and the inac- tive Kroup that hypothetically exercises. Because the differences caused by a sedentary life-style start late in life, effects on sick leave and medical costs are diluted. Recause dying before age 50 is rare, and the mortality model considt•rs only current exercise status, the The External Costs of Sedentary Life-Stvles 125 TABLE6-74. External costs permile-not-walkrd by n rtlelively inactive persons Discnsmt Rate - ~-- Coat 0%Tdal 0%women 5%Total 10%Total Minutes oflife expectancylost Cost per mile (dnl lars) 21 11 4 f Medicalcareh 0.71 080 0.24 0.12 Sickleave 0.05 0!13 0.06 0.06 Grouplifeinnsratce 0.02 • 0.01 • Nursinghomecare -0.05 -0.03 -0(It -• Retlsesnentpension -0.34 -0.l5 -0.07 -0.01 Taxetoneunings -0.05 -• -0.01 Differences in total net 0.45 0.64 0.24 0.17 .. Casu are eaterrol meuured In 1956 tlollus. dlvld:d bY discumtd numbv of milen coveed on fouC" Indiuses figure is kss than 0.007m b. Excludes masemity snd svell-as<l e. (Sum of amts) minua uxes on enmings. Because n( mumting. cakgtuin may rnM emn to to4i. effects on mortality and on old-age cnsts resemble those for people who were always sedentary. At a 5 prrcent discount rate, there is a loss of 16 minutes of life expectancy and external costs are $700 smaller than if this group exercised. 'I'he reason for the decrease in costs is that young workers pay into the system more than they receive. This money comes back later in life as medical and retirement benefits. People who become sedentary late in life contribute as much money in their young working years .ts lifelong exercisers, but they take out less because they die sooner. Finally, the last column in Table 6-l;t gives several connponents of total costs rather than external costs. By definition, total costs are higher in all areas where people pav only part of the costs them- selves. We estimate that the total of Ihese social costs would be $3,600, a ftgure that does not count what premature death or disabil- ity costs the sedentary person and hw nr her family. Although this cost is probably larger than any of the costs shown, it is hard to quantify." Thus, we have left the total out figure in culumn 5 as a question. Table 6-14 presents the external costs per a unit of exercise-mile not walked-for sedentary people. U,ing Paffenbarger and I lyde's 4L806S680Z

154 Appendix C ~ HIE Habit Batteries 155 44. AEOUT NOW OREN DO YOU CAMIMLY DRINK NA/1D 40UOR - LIIIE WNIEKEY, YODIG, OR aN9 (CIrcN on.) Ev.ry EaY .............. ._.... ........ ....._._.... A/m4at everY Eq' _ ......... .......__............. ._......_.... 3 or 4 Eays 0 wMk ................ I or 2 E.'P . w..k ............................... 1. 2 or 3 drye e moMN LeM m.n onc. a month Eut mon Ihan 3 t/mee a Yar.._ ............._.. 3 timen e Yn, or M1M ...... ........... ...___... DonY drink bvG liquor .I all _._....._......... .. 6 nnnr 44-A -ao ro u {4A, WNEN YOU DRINK /UIRO 1ID110R, AEdIT NOW MUCN DO YOU UEUALLY D/UNK IN A OAYi prcle onq MoN than I quart or Illm ..... ................... 1 AEON I ount er Iilm ._..._ ..................... 2 Mtlre than 1 plnt but IMe 111an 1 Quart .......... 3 /1bOut 1 Pint ...- .... ............... ........_... 4 11 - 15 ounun or aGac ._ .............__,_... s 2- 10 ounc.e or stloN .....-~.~~~......-.-..~~~ 6 a- E 4uMea nr aMD ......... ...... ...._....-... I 1- 3 ouncn or etWN _._ ........................ 6 aE. OURINO TNE PAST 3 MONTN6. NOW MUCM HAS YOUR DRINKINO WORRIED OR CONCERNED YOU? (Clrcle one) A great Ce.1 .._.____...... -..................... t 6um..Na ......... .............. ..._............... 2 A IIttN .............................................. 3 Not at ell ............. ....... ..._................ a N. DU/tlND TN[ PAST 3 -MQNTNE. NOW MUCN OP T1R TIME HAS YOUR DRINKING KEPT YOU FROM OO/NO TNE MNDE OF TNINDE OTHER PEOPLE YOUR A0E DOT (CIrcN one) M oi iM tlrrw ....... .............._ _........_.- 1 MoN ct the IIfM ..... ............................. 2 Sume o1 the tlm. ............... 3 A IlUle of the time ....... 4 Nonm 0 the tlm. ....._.._...__ ................ 5 47. DUN//0 TNE PAET 7E DAYE NOW MANY DAYE NA. YOUN DRINKNIO KEPT YOU IN EED ALL DAY OR MOST OF TNE DAYT UI nNM, vwlN N "E"t _ EIIn m Ee! IM mn01 Y. ARE YOU CUMIENTLY DOING ANYTNINO TO CUT DOW/1 OR TO STOP YOUR OR/NKINOT Ye. ._ ......................._............. ........ . 1 -M.wEr 16-A No ............ ....... ......_........... ............ 2 -Oo le 4E Y-A. WNAT ARE YOU DOING TO CUT DOWN ON STOP YOIM D1NMt(INO1 (CIrtN arl. nurM.r an .al KtN./ OaNp M M (AMNwMe. AmnPrlauq E.MM e Pe/drols/e1 M Ce1eMeKNt__ E.wnE a eeene. TeILIrIF 1D A KCI/t 110r11M OI CMMbr Y.. No T.kInE nNwawal (AmwNw, .N.) UaM +IM Oo+ar. Kry1nE Ne OINer 2 2 2 2 tE. A. HAE A DOCTOR EYER TOLD YOU TO STOP OR CUT DOWN ON YOUR DItINKN/02 YM ._.... ---- ......................... t No ................ ..._.... 2 E. HAS A DOCTOR EVER EAN) YOU MAD C1NRipME (N.r/tOE-.N) OF TNE LI4ER, ALCOHOLIC l/YER DIEEAEE, ON 'FATTT U1ER'9 YN ........................ ........................ 1 No ._ ...................... ........................ 2 C. NAYE YOU EYER HAD D.T.'4 (ELMIUM TIIEMENE (a-LEERw INn-7111101.)T Ye. ........................ ...... _....... ......... 1 No ......................... ........................ 2 988069680Z

12(1 The Costs of Poor Health Habits The discounted external lifetime costs tell a similar story. Relative to the nondiscounted figures, external costs would fall in all catego- ries ex,ept pensions and nur~inF home payments. At a discount rate of 5 percent, lifetime external costs of relatively sedentary people are $1,650, a figure greater than the cost of smokers ($I,0(1(1), but less than those (if drinkers ($42,( HH)).4 SensilinitU Armh/sis For several reasons, we have less faith in otn exercise results than in nur drirtking and srm,king n-,culls- (I) I.es.s is known about Ihe effects of exercise, and problems of reverse causality are potentially substantial. (2)'Che I LRA model attributes improbably high life expectancy ben- efits to exercise.s Further, with regard to smoking and drinking the f II2A model has been checked on several data sets. Despite its meth- odoluf ical flaws, it secros tu wurk quite well on average (Wiley, 1981; lirrnvn and Nabert, 1977; Sniilh et .d., 1987). No similar cherking has been done fnr exercise. (3) <lur data are more complete for drinking and smoking. These cunsideratiuns merit further discu,sion because they inform the a.c- sumplions in our sensitivity analysis. 'fhe fIRA model estimatr~ are implausiMe for two reasons: first, the mndel fails tu accnunt fnr the tact that better health may lead a person to exercise ralher than vice versa; second, the adjustments for declining effects with age are inadeqrmte. Studies have shown that exercisers have lower mort.ilily (especially from heart disease) than nonexercisers. f3ut better heelth may permit exercise, rather than ex- ercise's causing better health. Furthermore, sick people may be un- able lu exercise.6 The resulting bias probably causes the HRA's large estimated effects of exercise. The exact source (if the I IRA model's figures is not documented, hut the multiples match unaljuslyd observed mortality differentials in some reports nn (mostly) yinung and middle-aged men (Paffenbarger et al., 1986; Chave, 1978). In several studies that estimated multivari- ate relationships, the ratios /in exercise were much smaller than those for smoking.' In addition, the I IRA model inadequately adjusts the exercise risk multipliers for age. This cmrrtes three main problems. First, the current HRA model multiplies the risk of dying from a disease by a factor that deprnds nn the habit level 6ut rmt on age- This The External Costs of Sedentary Life-Styles 121 method is not a bad approximation when the risk of dving is small, that is, when the multiple is close to 1. It does not work well, how- ever, for exercise of nlder men. If we alter ex,•rcise fnnn the least possible to the most possible, the model halves the risk ol dying from heart disease. For 75-year-oId men in our sample, the average risk of dying from heart disease is 26 percent, with a mortality of 64 percent from all causes over ten years. In the HRA model generally, the risk mudtipliers are applied to the probabilitv of dying itself, rather thon to more statisti,ally tractable alternatives such as the logit of dyinl,. This practice leads to prohlems such as probabilities of dying of mnre than IIM percent for old people with rnriltiple risk factors. Even if we Iruncate the probability uf any individual's dying in tlre next ten years at 1tNl percent, the model predicts that our group of sedenta,y 7+-ycar-nlds has an unreason- ably high 89 percenl average probabilitv of dying in ten years. This figure cunlrasts with 63 Irercent if Ihe same individunls were very activa Modeling m,rtlality with the-:-- multiplic:dive coostants can he misleading. In short, the same (unstanl that changes a 6 percent chance of death to 8 percent (94 and 9,^2 percent survival) shordd nut be used to change a!,(1 percent chanre uf death tu NO pei « nt (dll and 2(1 percent survival)." Second, the model's multipliers for snwkinti are morr rcalislic than those for exercise because there are murr data specificallv nn smoking and mnrtalily for older men. "Ihu•., the mrdtildier fnr smoking or, death from heart disease for older men is 1.3, as oppused In Ihe 2.0 value for exercise, which applies I,, all ages. There i, little or no evidence nn the effect (if exercise in ~dderly people: it ,chnuld fall with age, because survivors among thrn;e who are sedentary are a more select group than survivors among those who exercise.' Natural se- lection reduces the effect (if heart disease faclors su,h as smoking and blood pressure at older ages, and it probably does so for exercise as well. Third, peuple become more ,srdh•nlnrv as they aF,r. In Alatneda County data the percentage of cey aI live men drnps steadily frnm 48 to 14 percent with increasing af;e (Schoenbnrn and Cohen, 1986), while Ihose labeled sedentary riao Innn 35 to 73 porcent. With a higher percentage (if sedentary individiial,, ov,n if the nrnrlality ralio of sedentary to active is preserved n abuul'1, hoth midtipliers chou)d fall (relative to moderately active) sn Ih.d the average ri, -k would stay at l, Thi, correction wnuld rrdnce Ihr reUmaled efferl „I eren ise on total mortalitv tmcause the rnulliphrrs.iffect only heart disvaw• "'fhe 698069680Z

160 Appendix D APPENDIX TABLE D-3. Pre:dlcted and obsrned HIE work luss, adult males Number of Days Predicted Percenlage Observed Percentage 0 41.06 39.95 12.34 12.13 2 '1.55 8.19 3 5.41 5.76 4 4.17 5.72 5 3.35 4.90 6 2.76 3.16 7 2.33 2.25 8 1.99 1.95 9 1.72 2.21 I0 1.50 1.69 1f+ 15.81 12.09 --- N(llli: Apd2n-59. DramverperindvofvayfnFlrngth. differences in the predicted and observed distributions are statistically sig- nifican0 xr1ll) - 57.78. Because the absolute differences seem relatively small, and for re,sons of convulution and aimplicity, we have used a negative biewmial model. Correlation in the Error Ternrs Although we have observations nn nearly twenty thousand person-years of tlllf data and over twenty thousand pelnons in the NHIS, we do not have thv same number of indrpendod observations, because of substantial positive .nrrelalinns in Ihe error terms among fatnily members and nver lime among ob~ervations on the same person. 1'hesa correlations exist in all of our out- enme nreasures. Failure to account for them in the analysis yields inefficient eaimales of the coefficients and statistically inconsistent estimates of the slandard errors. As a result, the inferenr statistics (t, F, and g2) calculated in the usual way (without adjusting for these correlations) can be too large. In Ihe results presented herein, we cnrrected the inference statistics for Ihis pcuitive inlrafamity correlation using a nanparametric approach. The mrrection is similar to that for the randorn effects least-squares model, or equivalvnlly the intracluster correlation model (Searle, 1971). It is described in Rargers (1983) and Brnok et al. (1984), based on prior work by Huber (1967) uo the variance of a robust regression. APPENDIX E Comparability of I-IIE and NHIS We compared the IiIE and NH1S data for three reasons. First, we wanted to verily the generalizability to Ihe nunaged (those under age 60) of thr response at the six HIE sites. The HIE sample is representative of the six sites studied, but these sites could differ from the United Slales as a whole. Srcond, we wanted to estimate possible changes in habile mtd their effects for data col- lected at two different points in time. And must imfn.rtant, when results are based on small or me>derale sample sizes, ii is important to replicate the study on other data. If the results agree, we can be more confident of their reliability. To assess the comparability of the two dala <nurces, we examined the prevalence of poor health habits, the average amount of inediral use and work loss, and the similarity in the resprms.• of utilization and wrnk luss to pewr health habite The comparability is limited lo those under 60 years of age. Prevalence of Poor Fiealth l iabits Tables E-1 to E-3 present Ihe prevalence of poor health habits in the two samples.'t'he distribution of never, former, and current cigarette smokers is roughly similar between the twn data sets; but the differences are statistically significant (p < O.OWI). The lower proportion of rurrent smokers in Ihe Nf fIS may be due to shifts in smoking between 1974 1978, when the IIIE data were collected, and 1983, when the NfIISdaIa were collected; or it may result from differences between the If1E siles and a national pmbability sample. The HIE has more moderate to heavy drinkers thau thv NH[S. Again, the differences are statistically significant (FrC I1.18101). Although similar, the batteries are not identical; this discrepan.y may account for some of the differences between the two data sets. The exercise responses are substantially different in the two studies (p < 0.(1WI). Thirteen percent of HIE resprnidenls get heavy exercise, while thirty-seven percent of NHIS respondents get more exercise than llu- average person their age. These variations are probably due to differences in the 68806S480Z

rrr.rr~rrw~rrw ir~rr llllf The Costs of Poor Health I labits life, so controlling drinking increases nondiscounted pension pay- ments only slightly. Early disability also decreases the lifetime wages of drinkers. The net effect of controlled drinking is a large decrease in nondis- counted external costs. These results differ from nondiscounted smoking results because drinking has a substantial effect on innocent bystanders. Also, early in lifr, drinking has a larger effect on medical costs, sick leave, early retirement, and so on, and does not have such a significant effect on life expectancy. Heavy drinkers live longer than smokers, but have ntore exprnses along the way. The discounted external liletime costs, which are more relevant to policy, show a similar pattern. Total net costs to society of controlled drinkers are much lower than Ihose of heavy drinkers. In all catego- ries except nursing home pacments, heavy drinkers impose external costs on society. The largest of these costs are due to crime, property damaFe, and the loss of innocent lives. It may seem paradoxical that Ihe nondiscounted external costs of heavy drinkers are only 49,0([0 in l:ible 5-10, but the external costs nf heavy drinking are $64,IX>tl in l:ible 5-11. In the former, we are simply reporting that drinker: cost $9,Oq7 more than they pay in. In contrast, Table 5-It indicates that if heavy drinkers had never been heavy drinkers Ihey would have cost society even less (no extra medi- cal care, no extra sick leave, no extra fires and property damage, and no extra lives lost). They wnnlai also have paid even more into the system in taxes. The difference between what they did as drinkers and what they would have dnne if they had never been heavy drink- ers is $64,0(Nl nondiscounled. The removal of the fires, property damage, and innocent lives cffects an immediate saving uf $38,t100- f leavy drinking also results in a luss of $14,000 in taxes on discounted earnings that would otherwi-:e have been paid into the system. The reason is that men earn mon• than women, and heavy drinkers are disproportionately male: according to the NHIS 1983, over all ages men are about four times more likely than women to be heavy drink- ers. These two components alone account for $52,000 of the $fi4,ODO nondiscounted external costs of heavy drinking. Discounted at 5 per- cent, the lifetime costs of heavy drinking are $42,W0. Extenw! Cmts per Excess Ounce To estimate the external costc of drinking per excess ounce, we di- vided the costs due to drinking by the lifetime number of excess ounces. Table 5-12 gives the results. 6S8065680Z The External Costs of Heavy Drinking 101 TABLE 5-12. Eatemal costs of heavy drinkers per excess ounce (1986 dollars)a Discount Rate Cost per Excess Ounce Medicd and pension costs Medical careh Sick leave Group life insurance Nursing home care Retirement penaiono Taaes on earnings Net medical and pension costs Motor vehicle accidents and criminal justice axsts Lives or nondrinkers All other coeted Total net costse Minutes of life expectancy at age 20 0% 5% 10% 0.26 0.10 0.05 0.0! 0.05 0.04 0.07 0.02 0.02 -0.01 <0.005 <0.005 -0.04 0.03 0.02 -0.35 -0.06 -0.02 0.61 0.26 0.15 0.58 0.58 0.58 0.3, 0.35 0.35 1,56 1.19 1.08 -20 -8 -4 a Cosu pn e:oss ounce art akv4ud by diviAing by the dismnnled numbrr of e.ces. ouncer. b. Eacludes rrWemity, well.cre,.nd denW. Alw, doex nor inchxle easu of nrdiwl eme to omhen <aroW bydmnkdrivingy c.lnctudeadisebilityireuruvs. d. The 35-mn figme is high bcwu.m orMin of rhe asu are Imemal, such ea me pnperty damage in motor vehicte accidenn paid by thr alcuholie driver in deducGbks ar other enpxymnm and higher prtndums. Anyovenutenrcrs,bowe.er,iappoWblynpxetfryouromissianofoe externalcmts am.iebd with the effects of alcolqlism on spoux. and chitdmn (e.g. rheir use af innuM mental Iralth.ervias) ad dmee aseo[ised with the incrra:ed risk of atcoholixm for thrse dependenu, some mru ofwhich wilt 6e eatenW. e(Sum of cosu) minux taxes on eurengs. Becuure of romWing categories rtwy nq sum to bW. Each actual (as opposed to reported) excess ounce of alcohol causes a loss of 20 minutes of life expectant y (I(1 minutes per drink). It also leads to a 26 cent increase in nonctiscounted external medical costs; a 6 cent rise in covered work loss; sm.Jl effects nn group life, pension, and nursing home costs; 35 cents 4.•!:c iu taxes on earnings; SR cents for lost lives of innocent bystander~; and 35 cents for fire, crime, and other property damage-for a total external cost of $1.56 per excess ounce. As discussed earlier, from a policy standpoint discounted costs are

130 The Costs of Poor Health Iiabits external costs of alcoholism and alcohol abuse. The exclusion of ma- ternity care means that we umiiled the costly treatment of fetal alco- hol syndrnme Our numbers also excluded the costs (psychological and financial) to the spouses and children of alcoholics. Some of the cost of their treatment or work 1, -ss is paid for by collectively financed health insurance and sick leave. Our recommended alcohol tat is, if anything, luo low because it is based on the average external cost I~r drink, rather than the concep- tually correct incremental cost uf someone's drinking more (see Ap- pendix 11). That is, our number is the average of the small or negligi- ble costs of light drinkers and Ihe high costs nf heavier drinkers and drunk drivers. Otu average indudes single or occasional drinks, which have less potential for dunage than heavy drinking at a single sitting, especially if such drinking is followed by driving. If a person drinks half a can of beer a night and does nnt drive, he is less danger- ons than the person who consumes seven cans at one sitting every two weeks and then drives. Both generate Ihe same average daily vulume, but the second raises more concern and is the person we would like to target. Of course. this cystem also means that we over- tax light or rare drinking. Light drinkers may argue that it is both unfair and inefficient to tax their drinking because they impose few or no external costs.'fhere are at least three arguments to counter this. First, although our pro- posed tax change would tax light drinkers more per drink, it almost certainly would leave them bearing a smaller share of the tax burden. As explained earlier, light and moderate drinkers constitute a major- ity of the population but a minority of the consumption. Especially because they are disproportionately highly educated, they almost surely pay more than half of all taxes (income, sales, payroll), but they pay only a third of alcohol taxes. Thus, higher alcohol taxes would shift taxes onto heavy drinkers and away from light and mod- erate drinkers, former drinkers, and absfainers. Second, as our numbers indicate, the average heavy drinker is custing everyone, not just heavy drinkers. Because higher taxes deter alcohol abuse (Cook, 1981; ( ( ook and 'fauchen, 1982; Grossman et al., 1087), the resulting decrease in external costs will offset in- creases in the tax burden of light drinkers. 'Ihird, penalizing light drinkors for damage they did not cause, so that we can penalize heavy drinkers, is in fact better than not raising the tax un alcohol at all. prom an economic point of view, we are trading any losses from overtaxing nonabusive drinkers against the Conclusions, Limitations, and Implications 131 gains from making abusive drinkers pay more appropriate prices. As long as the gains from providing more appropriate incentives to moderate drinking are greater than Ihe losses to light drinkers, soci- ety will benefit from a tax increase. We discuss this issue at greater length in Appendix fi. lack of E.xrrcise We estimate that lack of exercise imfoses external costs of 24 cents for very mile that sedentary people do not walk, jog, or run. The biggest uncertainty in our calculations concerns the degree of causal- ity between exercise and health status. Although we excluded the physically limited and have controlled for several other ditferences between exercisers and nonexerciser5, we cannot be ceitain that the association we have fuutid between inactivity and health-relaled costs is causal.5 Ihe relationship between exercise anc( mortalily raisec the same issue. We collducted extensive sensitivity analyses to address these uncertainties, as well as assessing the sensitivity ot our results to other assumptions and data sets. Hypotheses about how exercise odfects mortality have important implications for our results. '!he exlental costs nf inactivity decrease the more we assume that exercise exlends life. If exercise has no effect on mortality, the costs for sedentarv people rise because they use more sick leave and medical carr. In that case their Iilettrne exter- nal costs rise to $2,2110. If, as the unadjusted I IRA model assumes, exercise greatly increases life expectancy, sedentary pr•ople actually subsidize people who exercise. The latter live to collect the sucial security and nursing honie benefit, that the former helped pay for. In that implausible scenario the sedentary have negative external costs of $1,000. Looking at health costs, we ffnd an analogous effect when we con- trast sedentary people with actual exerciters. [n the base case we contrasted them with a hypothetical group uf people who were like the sedentary in every way except amount nf exercise. When we contrast them with actual exerciser:, we find that the sedentary have negative costs of $700. There are two reasons for this: inactive people have other characteristics associated with lower use of medical care (less education, on average); and they die earlier. Sedentary people might also hate lower external rc,sls if (I) the only medical costs they imposed were fnr specific diagnoses possibly related to poor health habits; and t2) they became inactive only after V18069 680Z

Bibliography Arnott, R., and J. Stiglitz. "Moral Hazard and ()ptimal Commodity TaxaI tion " Journal of Puhlic Economics 29 (1986): 1-24- ---- - "Equilibrium in Compelitive Insurance Markets- The Welfare Hconomics of Moral Iiazard. C Basic Analytic.." Distussion Paper' 165, Queens University. Kingston, Ontario. 1982. Atkinson, A. B., and J. L. Townsend. "F.conomir Aepects nf Reduced Snrok- ing." Lancet (September 3, 1977): 492-494. Baltagi, B. H., and I). I.evin. "Estimating Dynamic Demand for Cigarettes Using Panel Data: The Effects of Ikotleggin}7. Taxation and Adverlising Reconsidered," Reniere of Ecnnnmin and Stati•:fics qtI I PMt6)' 148-15>. Barzel, Y. "An Alternative Approach to the Analesis of iaxa(ion." Jonrmil of Politirnl Econormy &4 (1976): 1177-97. Baumol, W. J., and I). F. Bradford. "Optimal Departures from Marginal Cost Pricing." American Economic Reoiern 60 (197B)265-283. Berknw, R., ed. T/re Merck Manual of Dingnasis and'fhernt.y. 141h ed. Rahway, N.J.: Merck, Sharp, and Dohme Research l;iboratories, 1982. Berry, R. E., and J. 1'. Boland. The Economic Cost n/ Alndml Abuse. New York: Free Press, 1977. Breslow, L., J. Fielding, A. A. AfiB, et al. "Risk Faclor Update Pruject." Atlanta: Centers for Disease Control, 1985. Brook, R. H., J. F.. Ware, A. Davies-Avery, et al. "Overview of Adult Health Status Measures Fielded in RAND's Health Insurance Study." Mrdirnl Care (suppl.) 17 (1979): 1-131. Brook, R. H., J. E. Ware, W. It. Rogers, et al. 'Does Free Care Improve Adults' Health? Results from a Randomiv»d (.omrolled Trial." New Err- gland Journal af Mrdicirre 309 (1983): 1426-34. Brook, R. H., J. E. Ware, W. H. Rogers, et al, Thr E.f/rct n(Coinsurance ou the Iieultlr of Adults. Santa Monica: RANI) Corporalion, R-3(155-I IIIS, 1084. Brown, K. S., and W. Nabert. "F.valuation of the fxistiny, Method for Calcu- lating Health Ilazard Appraisal Age." Final reporl nn service cnulract between Non-Medical Use of Drugs; fhrerlur:de, Health Protedion Branch, Health and Welfare, Canada; and Universily of Waterloo, On- tario. August 31, 1977. £66065L80Z

L urlimlm I ui iuuIuIriUrrrrrirrii 114 Af+pendix F' APPENDIX TARLE E-5. Test statistics (7.'') for habit response, Ileahh Insurance Experiment and National Health Interview Survey liabit df Visils Hospilalizations Work Loss Cigarette smoking 2 1-n0 2_55 1.39 Exercise 2 2.10 1.25 3.34 Drinking 4 11.(,1° 1.99 4.31 All 8 1ZRIa 5.98 8.94 NO'I'6: VisiLs ard Irnspi WinGom are mmual me.ourts. Wmk-loss Jays we for all aJUlb nnd are na cnNitioneG on employnenl nalus. NI IIS work nns rates lave Men amuelixeE tlnough the negative biennnial regreaxMn. Ages 211-59; df=drpeec of freedam, a Significant at 5 percent level. I)rtipile Ihv pruhlem af Id [nr wOnk luc~, tve Irll Ihdl il rea. ;mpurl.ml h, liud a modcl Ihal zeuidvd Ihr lintv [rame pinbh-m, cunlrulleJ [nr cmnriatas, .md vielded a prupurtiunal lesl. Over all hahita, we fnund Nztisticalh' significanl dif[vrenres (n-twrrn Ihc Nl llti and I IIL`, onlv for uutp.tlirnl visils. l,lhlr 1:5 pmsenls Ihe chi-.qnare stalistics lor the Wald test lor equalil) if fhe h.ihil crmfficients brlween Ihc nvn daln arur<es.'I he eslinrated nmdel mvluJes rnvarialev furall Ihree heallh habils age, sex, and educaIiou level As IIIC I.thle indieales, Ihe eslinratv4.l rrspanse, tvere nol significanth• dilferrnt fnr rither admissions nr wnrk lo.~. I-or smnking znd exerdse, Ilierv were nu significant ditferenee~ helwren Ihe Iwo sludies for anv if the three ratee For drinking, unlv uulpatienl virifs showvJ a <ig,nificantlv differenl revpnn~e. Allhou,Gh masl uf Ihc rrspnnsvn weri no[ *talis-licalh• siKnificanllv diflerent Irmm iine annther, there werc appre, ilhly difforvnces in snme nf Ihe esti- matod rueffieients. TaMr E 6 pre.enh the hahil roeffirienb fur earh if Ihc Ihree ~,ul('orrvc-adminiuns, visils, .,ud wnrk lass the coefficients shuuld be ewponenlialed to ohtaitt INUpurlion.d effrds- APPENDIXTABLEE-6. Habit response of persons 201hrough 59 years of age, Health Insurance Expniment and National Health Interview Survey 111E ~- - NHIS Outcome Variable p t (1 Vlalta Former smoker 0.065 0.78 0.119 2.61 Cutrent smoker -0.092 -1.39 0.019 0.41 Abstainer 0.019 0.20 -0.220 3,43 Former driNrer -0.041 -0.26 -0.018 -0.21 Log monthly 0.074 0.96 -0.188 -3.46 volume (l.og ... )2 -0.025 -L45 0.039 3.08 Moderate 0.045 0.50 -0.055 -1.37 exercise or average Little exercise or 0.189 1.82 0.203 3.43 Hospilalizations less than average Fonner smoker .074 .fi2 .287 .15 Current sttaker 0.120 2.25 0.201 ?.36 Abstainer 0.063 0.43 -0.011 -0.13 Fortnerdrinker 0.22(, 0100 0.301 2.56 Log monthly -0.139 -1.16 -0.200 -2.61 volume (l.ag . . - )2 U.035 1.48 0.035 2.00 Moderate 0.12-5 0.93 -0.039 -0.63 exercise or average Little exercise or 0.311 2.08 0.169 1.79 Work loss lese than average Former smoker 0.045 0.42 .053 .35 Cunent smoker 0.066 11.67 0.260 1.98 Abstainer 0.242 -1.71 0.064 0.33 Former drinker 0.549 1.29 0-581 1.99 Log monthly -0.163 -1.2g 0.212 1.50 volume (Log-„)2 0.030 1.06 -0.043 -1.55 Moderale 0.207 1.51 -0.135 -1.02 exercise or average Little exercise or 0.268 1.74 0.091 0.52 less than average NOIE; CaeRrckrosaeonAebguale. Fxpanenfiew:m~nyropmrirmoltlifbmrcn~_-_ 1I68067Y80Z

;: ar+rwn.rrar~r.rrrr 118 The Costs of Poor Ilealth Habits TARfF. 6-10. Lifetime cxtemal cosle of a relatively inactive person (1986 dollars) Discount Rare Cost 09%Totat 0%Women 5% Total l0%Total Years of hfe 569 59.4 18.7 10.2 expectancy at age 20 Cossa Medical careb 60 66 10 4 Sick Icavc 5 2 2 I Group ufe insurance 4 2 0.8 0.3 Nursing home care 11 14 0.6 <d05 Relirenicnt pension 129 121 14 3 Taxeson earningsa 183 112 24 7 Total net costsa-c 27 92 3 1 Mea ived in tlrouavxts of Aollvs. b. ExcludesmammitymdwelLcarts c. (Sum uf coau) minus taxes nn eamings. Becauae of munding, categmles may not amu tu topl. for several reasons. In our data more women than men were secfen- tary. Inactive women have higher net cosls because they live longer and pay less taxes on earnings than men do. Specifically, they have less sick leave, smaller group lile costs, and lower pensions, but have higher medical and nursing home costs and, again, much lower taxes on earnings. UiscountinK at 5 percent yields much lower nursing home and pension costs. The other cost, fall less because a portion of them occur early in actulthcwd-'fhe discounted lifetime external costs fall tn $3,000 at a 5 percent discount rate, and to $1,000 at a 10 percent rate. Difference in Cosfs If FrllenYnry Pcrrple Were Active To estimate the external costs that may be attributed to lack of exer- cise alone, we compared the costs for the sedentary with costs for "active inactive" people-a group analogous to our nonsmoking smokers and controlled heavy drinkers. These individuals retain all the other characteristics and habits of Ihe sedentary, except that they exercise regularly. The External Costs of Sedentary Life-Styles 119 TAR[E6.11. Diffe2na between external coxls of relatively inctive Ixrsons and those same irxiividuds had they been activea Discount Rste Cost 0% Total 0% Women 5% Total 107oToul Daysoflifecxpectancy at age 20 Differences in costs -300 -I61 -21 2 Medical careb 15 17 1.6 0.5 Sick leave I 0.6 0.4 t).2 Group life insurance 0.3 • 0.1 • Nursing home care -1 0.7 -0.I - • Relirementpension -7 .3 -0.5 -• Taxes on eamings -1 - • -0.1 _ • Differences in total net 9.3 13.9 1.65 0.7 coatsa•c i Meuurcd in tMweudr of 19864d1an; • indicai^- fignm is Ims Uwn f50. ----_-- b. Exclu4es mxernity aid well-cue. c. (SumUfcaet9)minV.taxeson•amings. Reuwi•nfn~udlingcetegnrietmaynarrumm taal. For rea.suns to be given below, wr unifurrnly altered the }iRA's age-specific relative mortality risks of not exercising so that male exer- cisers lived 1.5 years longer than m.,le nonexerrisers.' We did not adjust values for women because very little is known quantitatively about the effects of exercise on women. 'nco principal studies have all dealt wifh middle-aged men. As a restdt, onr estimates of the external costs are probably conservalive. Table 6-11 shows the effect on costs if the sedentary changed only their exercise habits. '1'he net effect is a decrease in nnndiscounted external costs. According to our recalibrated IIRA model, increasing exercise increases total life expectance by 3INI days overall, while re- ducinR medical costs. Because active individuals live longer, nursing home payment.c increase. We did nnt have firm data oil the effects of exercise on early retirement, so we acsumed that less artive people would retire at the same rate as more artive penple. 'fhe low total benefit on life expectancy is the result nf two facfors: (1) our ar,nump- tion that exercise adds only 1.5 year•, nl lifr for men, and less for women; and (2) the low proportion of inen (36 percent) in the seden- lary group. 89806S480Z

HIL^ Iiabit 6atteries 149 30. SOME PEOPLE, IN THEIK JOES OR IN THEIR WORK AROUND THE HOUSE, HAVE TO SPEND A GREAT DEAL OF TIME DOING H . OR ETRENUOUS WORK - LIKE UFTINO 00 CARRYING HEAVY LOADS. PUSNINO OR SCRUEEINO TNINOE, OR HANDLING HEAVY MACHINERY. OTHER PEOPLE DON'T 00 ANY STRENUOUS WORK AT ALL. IN YOUR JOB• OR IN YOUR WORK AROUND THE HOUSL ABOUT HOW MANY MOURS DO YOU SPEND DOING HEAVY OR STRENUOUS WONR IN AN AVERAGE WEEK? (CircN anel Nons. donl do enY nOwY wotlh ................... 1 1 hour or Mfs 2 2 to 3 Iwurf a WNS 3 1 to 5 noVn a wssY • S lo 10 nnurf a wevk ... .. .. .......---.-5 More than 10 noun a weeM 6 31. THEN THERE ARE JOEE OR HOUSEHOLD TASKS THAT REOUIRE A MEDIUM AMOUNT OF PHYSICAL ACTIVITY - UKE EEINO ON YOUR FEET OUIT! A B1T, STOOPING, SENDING. LIFTING OR CARRYING LIGHTER LOADS. HANDLING LIGHTER TOOLS OR MACMINERY. ON IRONINO CLOTHES. IN YOUR JOB. OR IN YOUR WORK AROUND THE NOUEE. ABOUT HOW MANY HOURS DO YOU SPEND DOINO THINGS THAT TAKE A M[DIUM AMOUNT OF PHYSICAL ACTIVITY iN AN AVERAGE WEEK9 CIreN ons) Nune. dun'1 do sny meElum work ..... ........... 1 2 nouN or laes 2 3 lo 5 noors a wlw4 ................... 3 6 lo 10 nOun a wMh .. .............. ........... • 11 to 15 Irours a wnk 5 Mon tnan 15 M1aun a wwk ............._........ 6 32 IN THEIR RECREATION OR L 1 U ACTIVITNiS, SOME PEOPLE SPEND A LOT OF TIME IN STRENUOIRi ACTIVITY - LIKE JOGGINO. OR RUNNINO, PLAFINO NANDEAII OR TENNIE, VIGOROUS fWIMMINO, CLIMB/ND. 1El(INO, OR DOING /1EAVY WORK AROUND THE HOUEC OTHER PfOPLE DONT ENOAOE_IN TNIE KIND OF STRENUOUS ACTIVITY AT AIL. ABOUT HOW MANY HOIIS DO YOU SPEND. IN AN AVERAOE WEEK, IN STRENUOUS LEISURE TIME ACTIVITIES LIKE THESET (CkGe oM) Nrme, Eont do Fllenuous ettlvlry ._.._..._.._.. 1 1 hour or lesa ..................... ....._......... 2 2 to 3 hours 2 week 5 • IC 5 nours a wMk ....._......_.._........... 4 5 to 1011ouv E weeR ........_.__._...._..... 5 klon than 10 nours ..vseR B 3Y THEN THERE ARE LEISUIIE ACTIVITIES THAT REqU1RE A DIUM OR MODERATE AMOUNT OF PHYSICAL ACTIVITY - LME UANCJN0. N.AYINO GOLF, GARDEN/NO, OR WORKING WITN HOME T00LS. ABOUT MOW MANY HOURS DO YOU SPEND, !LI AN AVERAOE WEE IN MEDIUM ON MODERATE LEISURE TINE ACTIVITIES LIKE TMESEY (Clrcle onn) NoM donl Eu meElum activ% -... ........._.. 1 2 hours Or lefa ........... ... ...... ...... .. 2 3 to 5 noun . week 3 6 1. 10 nou0 a wNk . 11 le 15 hours a week ... ........... ............ 5 Mora man 15 Noun a weak .........._.,. ....... 6 3E. MHICH ONE OF THEEE STATF.MEIITS BEST DESCRIBES PHISICAL ACTIVITY. IN OBMERAL'/ tClrcla one) Not very ¢Iiva pnysWally. usoellY lusl Sittln0 or walktny.. 1 Falrly activs Pnyelcslly, muEwate or stranuous activity sevsrel IImN a wwk . ... ... .......... 2 Oulle acovs PnyNcUly, N laml modnrete ectlvXy every dsy.._ .._.._.._.. .._ ] ~ ~ ~ .. ... Entremely .cllve ynyebtllY. anenuoua aC11vI1Y rrqN EaJ ... ................... 1 YOUR SAFETYl 36. DURING THE PAST 12 MONTHEr ABOUT HOW MANY MILES OID YOU DRIVE OR RID! IN A CM OR TRUCK? (ClrcN one) NUM ...................... ... . ........ 1 2.000 milM or la} ................................. 2 More than 2.IJ00 to 5.000 .......................... 3 More tnan l.DOO to 10.aa0 Mon Nan 10.001110 16,000 .._......_............ 5 Mcn than 1S00q to PO,OOS _.___,._......,.... 6 Mon Inan 20,W0 mlles .. .... ... ................ / 16. WHEN YOU IIIDE IN A CAR OR TRUOK, MOW MUCH OF TNE TIME DO YOU IJEE A EEAT EELTT (Clrc/e oIN) All ol Ine IIrnE ........... .... .. .._............ 1 MoK ol Me Ome ,........ 2 Some ot Ma tlm. _....... .. 3 A INEF ol IM Nme ...... .... ........... . ....... 4 NorN ol lhs Nme ._.__... ... ._....._ ___ 5 No•sr ride In car or Vock ............__.,....... 6 L00067Y8 0Z

140 Appendix A could save himself $46.IXXI (1980 dnllars) over his lifetime by quitting. The incidence-based method attempts h, predirt lifetime costs on a disease-by- disease basis, rather than looking al costs and mortality for all diseases together and statistically trying to isolate the difference due to smoking. Berause the incidence model has a sounder biological basis, it should in principle be better than the statistical methods, hut it suffers from three practical prublems. First, detailed data on habit-related incidence for all but the commonest conditions are hard lo find. Second, a tremendous amount uf work is involved in following the .trchastic course of the disease. Finally, there are few data on joint incidence, but addingcosts from different diseases overestimates their combined costs because of double counting (competing risks) and correlation of resistance to disrase_ Because the saihe person can gel both lung cancer and heart disease, for example, it is improper simply lu add estimated lifetime costs that lollow the incidence of each. Moreover, variation in resistance implies, that Ihosr smokers who resist getting one disease are less likely to get others, anolher reasun why the sum if various disease-costs overestimates the total costs of smoking. Costs of Alcohol Abuse The litrrahue in this area is considrrablv less extensive than the literature un the cosls of smoking. Apart from published case studies on the costs of alcohol abuse incurred by individunl firms, induslries, and so on, only two comprehensive analyses have aplw•ared thus far. 'I'he first, published by Berry and Boland in 1977, estimated the economic costs of alcohol abuse in 1971 to he just over $SS billion (in 1986 dollars); the second study, written by C'ruze ot al. at the Researeh TrianKle Institute (Itll) in 1981 and updaled in 1984 (flanvoud et al.), eetimated Ihe 1983 costs at nearly $129 billion (1986 alollars). Bvlh nf Ihese estimates are cunsid,•rably higher than the economic costs of smnking rrported in the litemture. Moreover, the authors claim that their estimates of the costs of alcohol abuse are ronservative. While thr objectives of the twn smdies were similar in that both estimated the major costs attributable tu alcohol abuse (health care, lost prnduction, motor vehicle accidents, crime, fires, and social welfare programs), the meth- clds uced tn generate estimates of particular components of the overall costs often differed. r1EAtrlr CARE COSTS Perhaps the greatest difference in approach between the two studies lies in the method used tu estimate health care custs due to alcohol abuse. Berry and Boland used a population-specific approach, which essentially entailed comparing per capita health care utilization of alcohol abusers with that of nonabusers and attributing any observed difference to alcohol abuse. 7he difference in per capita use was multiplied by an estimate of the prevalence Literature Review 141 of alcohol abuse to arrive at apprnximatefy$2.2.5 billion (in 1986 dollars) as the estimated total annual health care cosl of alcohol abose. In contrast, an illness-specific or event-specific approach was used by Har- word and colleagues. They identified illnesses that are either partially or entirely attributable to alcohol abuse, estimating the costs associated with providing care to patients with each of the conditions and then summing across the conditions. The resulting estimated total health care cost was $16.4 billion (1986 dollars). The population-specific approach tends to overstate the health care costs of alcohol abuse because it fails to correct hv factors that are associated with but not caused by alcohol abuse. (To the rxtent that this approach fails to capture the health care costs associated with nccasional drinks, these costs will be understated.) On the other hand, Ihe illness-speciftc approach will understate the health care costs of alcohol abuse to the degree that It fails to include diseases caused or exacerbated by alcuhul abuse. LnST PRODOCI'ION The results from both studies indicate thai lost produclinn, due tn increased morbidity and premature mortality, accounts for the largest proFrortion of the total cosl of alcohol abuse. Although details of the methods used to calculate these costs differ between the studio.s, both used a human capital approach fnr valuing the custs nf prematmr mortality. Apart frnm the general limitatinns associated with this approach (menhurred in the review (if the smoking literature), the Berry and Boland study suffers from an additional drawback in that it failed to include costs nf reduced household (nomnarket) productivity and, more important, neglecled to estimate productivity lost by women in the work force. In addition, Berry and Boland used data on total income rather than earnings to value prodnctivity losses. This u~age under- states the differential between abusers and nonahusers because transfer pay- ments to abusers appear as income. The estimated value of lost production due to alcohnl abuse differs mark- edly between the two studies. Specificaflv, Berry and Boland eslimated it as over $40 billion (1986 dollars) in 1971, while the Harwood grnu)i s estimate for 1983 was over $98 billion (1986 dollam)_ Needless to say, a substantial part of the difference ($16 billion) in thr two estimates can be explained by the liarwood inclusion of nonmarkel prrniuction losses aS well as lost productivity on the part of women in the work force. In addition, their estimate includes the costs of lost production dur to motor vehicle arcidents, crime, and fires, whereas the Berry and Boland study reports separatelv the lost production attributable to these evenb:.2 MOTOR VEHI('LE ACCmFNTti, CRIME, FIRFS, ANI) %nC1Al. WELFAREPROGRAMS For the most part, the two studies used Ihe same methods and data sources for estimating the direct economic costs (which exclude "transfers" in the 618069680Z

158 Appendix D 7he convolution property of the negative binomial model is especially desirable for our application. We have counts on episodes of treatment, admis- sions, and work loss that cover varying periods of time at risk-fmm nne day to five years. 't'he negative binomial technique can effectively "annualize" all of our estimates, while controlling for age, sex, and other confounding variables. The negative binomial can be formulated as a mixture of Poisson variates. I.et the ith individual's admissions (or episodes) be drawn independently from a Poisson distribution with rate A,: p(admits= nIa„ T,) _ (k,TJ"exp(-k,r,)/ni where T, is the period observed for individual i. If different individuals have different rates that are sampled from a (type IIl) gamma distribution, h.e(A) ° 1/i"I'(o)I 'A° ' exp( -kfP). where A, n, and (i arc all greater than zern, then the observed number of zdmissions Follows a negative binomial distribution (Johnson and Kntz, 1969, pp. 122-142) where prob(admits - n) 1;+ ,~ J+_ In Ihe resulls below, we specify the parameters a and /3 in terms of linear combinations of observed individual characteristics. For admissions and work loss, the log of the parameter a i:: a constant. For outpatient episodes, it is a linear function of sex, income, and insurance coverage. The log of the parameter S is a linear combination of all characteristics mentioned in the Iext such as insurance plan, health stalus, age, sex, education, and income: In(i - -- x,fi, where x, is a row vector of given individual characteristics, including an intercept, and 8 is a column vector to he estimated. The model is estimated by maximmn likelihood. Inpatient Use 71Le estimated model provides a good fit to the actual distribution of admis- sions over the three- to five-vear period; Table D-1 compares the actual and predicted density function for those who stayed until the end of the HIE; the x'(7) = 3.94. There is similar agreement between predicted and observed if we break the sample by length of enrollment. Statistical Melhrxis 159 APPENDIXTABLED-!. Predicted and observed HIE admissions Number of Admiraiona Predicted Percentage Observed Percemage 0 74.60 74-32 1 15.46 16.22 2 5.33 5.31 3 2.z1 1.92 4 1.05 1.03 5 0.54 0.40 6-10 0.60 0.66 11+ 0.10 0.13 NOTE: Adutn rW 20-59. AdjoaH for dme on Ne.nidy. Outpatient l)se We conducted a similar analysis for the use of outpatient care.1 The estimated model provides a good fit to the actual distribution of the outpatient epi- sodes. Table D-2 compares the actual and predicted distributions; the g1(g) - 8.42. Work-Loss Ilays The estimated model for work-loss days does not fit the data as well as the corresponding outpatient episode and admission equations did. fable D-3 presents the results for HIE adult males, aged 20 to 59 years. The observed data have fewer cases with many work-loss days (I1 +) than do thr predirted data. The observed distribution is more peaked than the predicted one. These APPENDlXTABLE D-2. Predicted and obrervcd IIIE outpatienl episarles of treatment Number of Episodes Predicted Percemage Otncrved Percenmge 0 9.R 10.2 1-3 25.4 24.2 4-6 19.3 19.R 7-9 13!I 11 -3 10-12 9.11 10.6 13-15 6.8 6.7 16-18 4.7 4.8 19-30 8.11 8.4 31+ 2:I 1.9 N078: Aduluged20.59. Adjwtdforfimeonlhrsmdy. - --- 888U6S680Z

A Note on the Alcohol Tax 191 APPLNDIX H A Note on the Alcohol Tax Unlike smoking, where the external costs are roughly proportional to the anrounl smoked, the external costs of drinking vary by the amount drunk aid circumstance. It is difficult to distinguish problem from nonproblem drinkers at the point of sale; as a result, there is some cross-subsidy of prob- Iem drinkers by nonproblem drinkers. Although a tax such as the one we propose (total external cost divided by total drinking) is imperfect, it is still preferable to no tax or to a tax that does mot crn•er the full cost of drinking.' In the text we argued that penalizing light drinkers for damage they did not eause, so that we can penalize heavy drinkers, is in fact better than not raising the tax on alcnhol at all. Here we elaborate on that point. Prom an economic point of view, we are trading the losses from overtaxing nonabusive drinkers against the gains from making abusive drinkers pay more appropriate prices. As long as the gains from providing incentives to heavy drinkers to face the full consequences of their actions are greater than the losses to light drinkers, society will benefit from a tax increase. "Co illustrate this point, let us consider a simplification of a tax model that Pogue and Sgontz (1989) used to makr a similar point. Assume that there are only two classes of drinkers, heavv (H) and light (L) drinking groups. For the sake of argument we assume that light drinkers impose no external costs, whereas heavy drinkers impose external cosls that sum to E. Let both groups of drinkers have linear demand curves: Q,-a,+h,(p+tJ, i=H,L where Q is the quantity of alcohol, p is the before-lax price, I is the tax, and a and F are constants that differ for heavy and light drinkers. If we could distinguish light and heavy drinkers at the points of sale and consumption, then the best tax would be zero for light drinkers and (E/Qr) for heavy drinkers. Only the heavy drinkers would have to pay a tax to offset the external costs they impose. But we must settle for a common tax (T) on drinking, rather than separate taxes, b•cause of the difficulty of identifying heavy drinkers at the point of sale, a' 060 V 7 mZ To answer the question of whether an average tax is more efficient than no tax, we will determine whether the increase in welfare from raising tlte price to heavy drinkers is greater than the loss in welfare from taxing light or nonproblem drinkers. To do so, we will use the usual Harberger measure of the welfare loss from less than optimal pricing.2 It is 0,5 (Ap)(r)Q), where the A indicates the change in price or quantity. In this instance we examine the loss from using the average tax T,i = 6r(Qte 4 Q,), rather than tre =(E/ Qu) and t, , = 0. The welfare loss from the average tax is (ISlflt(iA12)' + bu(Tn/2)'1 . while the welfare loss from no alcohol tax would fm (1.510 + brr (2 Ya12)° I. Tn compare the two welfare losses, we need to know the price response of the two groups and the relative magnitudes of Qtand Qt. We know that heavy drinking is about one-half of the total, bul we do not know ihe relalive magnitude of the price responses of the two groups. The demand for alcohol is price responsive (see Appendix F), and we can infer that problem drinking is price responsive because fatal auto acddents are negatively related lo alco- hol taxes (Cook and Tauchen, 19R2). If the two grnups have the same price response (hte = b,), then using the averag, tax is more efficient than using no tax, because the average tax welfare loss is half what it would Ire without a tax increase. 1'ogue and Sgontz (1989) examined the general case, allowing for differ- ences in the price response across drinking groups. They showed that the single acl valorem tax (., stated as a proportion of the before-tax price of alcohol, p) that makes the optimal economic trede-nff is proportional to !//1 + (,,tt/,,r)(tota) Qt/total Qtt)I where rl is the price elasticity of demand.' In their formulafion the optimal tax on alcohol need not cover exactly the external costs of heavy drinking or drunk driving for two reasons. First, if the light drinkers are much more responsive to price than are the heavy drinkers, then the optimal alcohol tax may well be less than the average external cost of drinking. To set the tax at Ihe average level would impose too much of a welfare loss on light drinkers.'Ihe importamr of this possibility is unclear; we are aware of little research in Ihis area.' Serond, they focus on the incremental or marginal damage that rrsulls from drinking, rather tlran the average. To the extent that the external custs imposed by prohlem drink- ing rise more rapidly than volume consumed, then Ihe tax revermes shnuld exceed the external costs of drinking. The approach by Pogue and Sgontz does nnt necessarily ensure that reve- nues from alcohol taxes would just cover costs.'fo the exlent that the e}ternal costs are an increasing function of quantity consumed, then their marginal

192 Appendix Ii tax approach would generate higher rrvenues than costs. To the extent that light drinkers are more price responsive, their approach would generate lower revenues than costs. In either ca=e, how the excess revenue or shortfall is financed can have additional welfare implications. Pogue and Sgontz assume that the difference between revenue and cost can be returned or financed by lump-sum lransfers to or from alcohol abus- ers, without introducing any income effects or altering prices (see their note d). In a world where choices can be made over time, lump-sum taxes are not as neutral as they appear in simple one-perind models (Arnotl and Stiglilz, 1982). Suppose that individuals are deciding whether to be light or heavy drinkers by maximizing their lifetime discounted utility. In the absence of an alcohol lax, assume that there is an ammal transfer of costs, T, to each abuser Irom society as a whnle. Then the lihvlime transfer is approximately Th, s.rhere , is the discuunl rate. 't'hus, in Ihe absence of the alcohol tax, the transfer nf co<t5 via a lump-sum tax ariually lowers the costs of heavy drink- ing and thereby encourages mure of it. If heavy drinkers are IIt percent of the adult population, then the welfare loss frum the transferis approximately 1.11 rl2r- Further, it is difficult to target the lumpsum transfers to drinkers only. Inability to do so is the source of the external cost associated with health insurance, sick leave, and other colle( lively financed programs. In the ab- Sence of an alcohol tax, the external o~sts uf medical care and other collec- tively financed services are reimbursed by health insurance, disability, rettre- nren6 and other premiums paid ultim.dely by all workers, whether or not they drink. Shifting the burden of these costs to an alcohol tax reduces the welfare costs fmm taxing labor, by putting ttre costs onto drinkers-altmit on all drinkers, not just alcohol abusers. If more revenue is generated, the excess can be used to reduce the welfare burden of taxing labor to finance other burdens. In either case the welfare gain (one-half the change in wages times the change in hours worked) is nmilted from the Pogue and Sgontz formula. If theextra term had been included, then the trade-off of overtaxing light drinkers as drinkers, instead of iaxing them as workers, would have been clearer. [he result would be a higher tax on alcohol than their formula SnggYsts. , A stronger version of the argument we are considering is that moderate drinking has external benefits relalive lu no drinking or light drinking. This hypothesis seems unlikely to be true, as noted in the text. First, the risk of a fatal traffic accident among youths aged 161o 21 (data are not available for olher age groups) rises with any consumption of alcohol (Phelps, 19A8). Because traffic accidents generate more than half of external costs, this fact alone makes it doubtful that there are any overall external benefits from moderate drinking- Second, there is no observed difference in inpatient use between light and moderate drinkers. In the NHIS there is a U-shaped rela- tionship with outpatient use ( Cahle 5-4), but in the HIFE there is an insignifi- A Note on the Alcohol Tax 193 cant inverted U-shape (Table 5-7). Between abstainers and any drinkers, there is increased inpatient use among abstainers in both data sets, a trend that is consistent with the existence of srote external Irenefrts from modest consumption. The problem with this cnmparison is that abstainers are differ- ent from drinkers in many measurable wavs (they are notably more female, more black, and less educated; see Tables 5-.1 and 5-3), which raises the possibility that they differ in important nunmeasurable ways and that the differential hospital utilization we observe iv not causally related to drinking. Moreover, if there were health benefits to moderate use, it seems plausible that moderate drinkers (say, one actual ounce per day) would also show some benefit relative to light drinkers (say, one actual ounce per week), but the data just cited give little support to that Ihesis. In sum, the data do not suggest that anrong light and moderate drinkers any reduction in drinking resulting from higher taxes would lead to a Large increase in external costs; it seems more plausible that there would be a reduction in external costs. Thus, our as•:urnplion of no external rosts or benefits from light and moderate drinking seems tenahle. 9U6U6MOZ

152 Appendix C M. /MYE YOU EYER HAD A DIIINK OE EEER, WINE, OR LMLIOIM Ym .................. .... ...... .................... I -An.wo 40-A No .................. ..... ........ .......... 2 -(3oto 69. paEa 21 b-A. DURINO TNE 12 k10NTN6 OF YOUR LIrE WHEN YOU D/UNK 101 MOET. ABOUT HOW OFTEN DID YOU DNIrIK REEK. WINE, OR LIQUOR? (Clrcls one) Ererr day _._......... ......... .... 1. Almoa.verv day ....._._...._........._.._.. 2 3 or A daYs A weak ......................... 3 t or 2 E.Ya a wwk ............................... a-Anewer 41 1. 2 or 3 arys a montn ...................... 5 Lees Inan onC! a month. but mon Ihan 3 Mmee a year ..................... 6 3 limtl a rear or IBf ..................... r-OOro537 paEe 2a 41. DURINO THE PAST 12 NOMTH6. ABOUT HOW OETEN OIO YOU DRINK EEEN WINE. OR LIQUOR? (ClrUla one) E.arY dey ........... .................._...._..... AMnoN every daY 3 or a oaYS 1 wUt i or 2 daye a wNk 1. 2 or 3 dara a montn 5 Lees tMn once a rmntn. EuW mora tnen 3 Ilmea._...._...._ .............. 6 -Anawer 42. n..tpeye 1. 2 or 3 times .... ..__..._ .................... ri -Go 1. AE. Haren't had & drink in Yssl 12 monthe ........... 81 papa22 HIE Habit Batteries 153 12 AEOUT Now OfTEN DO YOU CU/N1ENflY 011NIK EEEN1 (Circle anq Er.ry, d.Y .......................... ................ 1 AMmoN arwry day .................. ................ 2 3 or 4 daYe a we.k ..... ......................... 3 1 or 2 dry" a wwk ..... .................- a-Anawn 42-A 1. 2, or 3 dkYS a mon1N .......................... 5' Lws than once a monlK . but more than 3 Ilmw a ysM .................... 8 3 8mM . Year or Np ...__.._ ..............._. r rMn't drink nev at NI ............................. 6-OO to 13 /2-A. WHEN YOU DMNK EEER, ABOUT HOW MUCH DO YOU USUALLY DRINK IN A DAn ICimle one) 6 Vu.ns or mon (16 Elanm. Eottlex or cene) .- 1 1- 5 ouarls (12 - 15 EWn.. Gonla or esna) -. 2 2- 3 ouan. (6 - E Vleew.. Conlw ar cana) 3 I puM (about 3 Elsaant t,onlw or cana) 5 2 Elaew. Ea81as or <uN ......................... 5 t Elaq. Dotne or can (or I.x) ................... 6 411, ABOUT NOW OFTEN DD YOU CUNRENnT DRINK WINEI (CncN on.) Er.rY day _ .............._...._....._.........._ 1 AImoR oery dn ......... ......................... 2 3 or / daYs a wwk ............................... 1 or2 dsYf s w'M ..................................... 4 1. 2 or 3 dayk a monM ...... ..................- 5 LaN 111ln onCa a monlRt bul mon Tan 3 fiTM a Y.ar ..................... 6 3 tlmM a Year Er IeY ... ........................ I Dan'1 drink wM at all ............................. 6 ewM 13A -Do ro ". naer paye 4}A. WHEN YOU UIeINK WINE, AEOUT HOW MYCH DO YOU USUALLY ORINK IN A DAY? (Clmle OM) 3 or mon EGt6n ........ .... ............ ....... I 2 Conera .._ .............. _................ ........ 2 AhGU1 I GCnN (6 - I wine Dlae...) .............. 3 5- 6 wrne 21N+n (3 water pyeeee) ............. 4 3-1 wwN glasses (2 water plaauel 5 /- 2 wIM plnMS (I water yl!>a) ....... ...... 6 588069680Z

156 , I j i Appendix C I I HRV[ YOU EVER HAD AN ACCIOENT, WHICH REOUIREO MEDICAL ATTENTION, WNILE UNDER TNE INFLUENCE OF LIOUOR, LIKE FALUNO DOWN ETIARE OR BEING HIT BY A CAR? Yp .....-_ ......... ..................._._._... 1 No ... ..... ................ 2 51. HAVE YOU EVER HAD A TRAFFIC ACCIDENT, OR BEEN ETOPPEO EY POLICE. WMLE DRIVING UNDER TNE INFLUENCE OF LIQUOR? Yn , No 2 ¢. 1MVE YOU EVER ETOPPEO DRINKING COMPLETELY? Yee .. ........._. .. _ .. ._.. ..._.-....... I ._ -Anawo 52~A ~ ,_ ........_....._..._ 2 -Oato5J. MYIOe9w s!-A. HOW LONG 010 YOU ETOP STOPPED? COMPIETELY. THE LAST TI ICi.c~e one ME YOU l Leen Inen 2 -eki .. . . . ._...._. ._.,__..... 1 2 wML. Cu, Nfs Men 1 I monin but uu men 8 3 mantna but leee men 6 8 months but lesf tn9n I montM1 ................... 2 muntn. ..........._.,..- 3 modn> a yep .-.._-...-.~..~ 5 i ve.. w mM1r. ._. ._ ..._ ..__.__...._... . a APPENDIX D Statistical Methods We used analysis of variance (ANOVA) hrhniques (that is, direct age and sex adjustntent) as well as a negative Idnnmial regression model 10 estimate the effect uf poor health habits on th,• uso uf medical services (ordpatient visits, outpalienl episodes of trealmeud, and inpalient admissions) and on work locs. With direrl age and sex adjlmtment we derived snmpte means for these ordcomes to provide simple contmsts purged of the known association between al{e, sex, and habits. We augmented these results with estimales based on tlte negative binomial mndel. Three rharacteristics uf the diatllbu- tion of medical expenses and work lona caused us In ch<xrse this estimation technique. First, a large proportinn uf the parlicipants use no medical services or have nu work loss during the year. tiecond, Ihe distribnlinn of oulpatient and inpatient services among users and wnrk Inss among workers is verv skewed. fhird, the distribution of inedlial nye is quile different for individu- als with only outpatient use than for individu.Js with inpalivnt use: thus we separated inpatient from outpatient usc. Because of these characteristics, techniques like ANOVA (invluding direct age and see adjustment) and the analcsis of cavariance (ANUCOVA) yield imprecise though consistent estimates td the effects of health habits on the use of medical services and work loss, even with a sample as large as the NHIS 19N3 habits supplemenl. A mexlel that exphoils the rhnraclerislics of the medical use and work-loss distributions yields more preclse and robust estimates. We used a model based on the negative binomial distribution to estimate the response to poor health habits rd adlnissions, outpatient episodes of treatment, and work loss. The model is appealing because it can yield a large proportinn nf zeros and a skewed distrihutiun of positive uutromes. It is alsu attractive because of its ability to adjust I he estimates for different time fra nles for different individuals- that is, its conrvnhrtion prnperties with respect to time nbserved. The negative binomial regrrssion mrnlel is nvNe appealiny, than a Pnisson regression because il allnws fnr unmeasured characterislirs to generate ever dispersion. In our cas,• the oun<1mes have variances larger than their means. 18806SL80Z

70 The Costs of Poor Health Habits 71 The External Costs uf Smoking rAa/F4d. AnrrwqilMalionef.urke..mmare.:rmrtm.2011wrr11s9Yanol.re.4yauuudllr/dmrdlM1lrnav. H<+IN Imr.ce E..perimml' _--_-Ne.er3xdmsl.bbRwOf- -- Ne.erSmNn. IbnrvSrrWm Cmvlranrhl+ tMlivlbn %xrA1m Amqepn ir'x~Ia. Lrron A.aareptt ier.m %wlmlw A.n.rerer ler.re Allrpwdu' 790 . ~_31n_.- A6A _ - 1N-..- l3A 3107 All epiwM pw+1MY^rA^6rMr 159 1.31 IG) nl1 15.0 P]3 reltleEwmMiry wmlm4rT^I"MrrtLIMb 0 9 Irnl I/I 002 09 n.ol a,v.ma AIIMpLnruimF 69 nlla RI 01. n aV n.ll AIIMnyiWVVi.m,yarlMyn n5 xlll 1.2 001 la /LM I'^a+MYM.rNbrrmlice AIIMnrlulitaMVn/xM.Mrrel.xJln n.3 I/m IL3 nUl 03 Irnl .nrnklnr __. ^n rrem rarv.aa m..R.a....h rle e..n imeoa.-nn .r..ur.~. n..~.....r..wie. ~ EvLkrTw.k. r,6rNnmwrriiry ukv,ll.'m , i..4k.Myn.N,.IMnp.Er..mYmll~.n11•-p".a'r TAAI-64-7. WRld tesls (%I) for smoking reapfmse of f>Crsons 20 through 59 years of age, Ilealth Insurance Experimenla OutPatirntUse InpatientUse Smoking Habit df Excluding Well-Care Habit-Related Diagnosesb Excluding Maternity Habit-Related Diagr2axsb Cigarette 2 6.gg"` 2.22 149tN*" 6.19r" Pipe ur cigar 1 0.62 1.99 0.01 0.02 a. Signincance levels: '" 5 percenL "** I frercent; nther.-.ise ineignifcant at the IU percent or benerfevel; df=drglees of frttdnm. b. Ilabil-rrlaYd diagnoses fmm TaMea 3-1 through 34. related tu all outpatient episodes, but Only for former smokers. Al- though current and former smnkers had more episodes for habit- related diaRnoses than nonsmokers had, the differences were not statistically significant. As Table 4-7 shows, cigarette smoking status was significantly re- lated to Ihe number of rnltpatient episodes (excluding maternity and well-care; p< 0.05), but not to episodes for diagnoses known to be related to habits. When we compare current smokers with people who have similar demographic and other characteristics but who never smoked (la- beled "never smokers"), Table ]-8 indicates that the increase in epi- sodes occurred for former but not for current smokers. Former smok- r6V806S480Z TAEtE 44 . arfeer of .motlq, FWM 4.Ie.rlu E.P'rlrmrM U w<Im xe.ar.nrrts3' -- -_.-_- -_ pwpr4rrt Uc Irpplen Us Smuttr{ Habit BvdWin{ WrI1Lue WNI-ReIwM Ulrrnmrr r•.IUdN.R MII<rnlrr ILMeRelrwd tM.,naae. MW Wmkrn. Nerr 1001-) 1001-) Iqbl - 10M-1 __.IVU(-i - Pipewtipr IOf.M09a) 113.1(1.39) IOIa(0.512 II0.3(0.93) 125.2(161)' Rmxrdyurw I1]A(].3U)•' 101 1n+(0.9"p 120E(0.i0) tl.q-0.99) CuneM vf{art+t 99.](-033) 91.1(-0./6) IiaJn.56)"" 1U/(230I" I00.nn011 . 69es iu W re..+a.u..n.. x.L.Ae•'Me.+-i a. alYAe.Ye wrcn~-~~npn... «S 9x+•:•~ ~ma rr.l. Y~MM.1Mel01wm1feebka ll<n,leaaexaxlwlLwaiYe.Iw.~~MwnwYyllfW. ElkrnrwlandoeM1Ue bwl nMR a mnn.#wf ~It4aV"6~'dlMbp IIPt nillieMnlLyw, amnr.N41.1 teey6)A. ers had 12 percent more epis(ldes of outpatient treatment, other things being equal, than never smokerc (p -; 0.05).^ But current smok- ers were not significantly different from never smokers. Indeed, they had 1 percent fewer episodes of owpatient treatment than never snrokers. For episodes of outpatient treatmenl for the habit-related diagnoses ('fable 4-8), the observed effect was nl roughly the same magnitude but no longer statistically significant. Former smokers had 9 percent more episodes than never smokers. Comparing the significance levels in the first two columns shows that none of the habit-related esti- mates were statistically significant. Again, current smokers did not differ significantly from never smokers. InPalicnt use for smokers. As Table 4 8 shows, current smokers had more inpatient care than never smokers for all diagnoses (excluding maternity and well-care) and for habit-related diagnoses alone. For all hospital care, current cigarette smokers had 38 percent more hos- pitalizations than never smokers (t = 3.56), while for the narrower definition smokers had 44 percent more (I == 2.30). For both catego- ries of diagnoses, former smokers also had more hospitalizations (13 to 21 percent) than never smokers, but the differences were not statis- tically significant. Pipe or cigar srnoking. Individuals who smoked a pipe or cigar, but had never been cigarette smokers, had higher inpatient and outpa- tient use than never smokers-(see Table 4-8, row 2). llle estimated effects were not statistically different f rom never smokers at conven- tional significance levels, and the re;+nlts were insensitive to the set of diagnoses examined. Passive smoking. The effects of passive smoking are a contentious public issue. As noted above, to examine those effects for the HIE sample, we assigned children (undr-r 20 years (if age) and never-

170 Appendix F APPENDfX TABLE F-2. State cigarette excise taxea per pack (aa of November 1, 1987) Stale Tax Rale (cents/pack) State Tax Rate (cents/pack) Alabama 16.5 Montana 16.0 Alaska 16.0 Nebraska 27.0 Arizona 15.0 Nevada 20.0 Arkansas 21.0 New Hampshire 17.0 California 10.0 New Jersey 27.0 Colorado 20.0 New Mexico 15.0 Connecticut 26.0 New York 21.0 Delaware 14.0 North Carolina 2.0 Dist. of Columbia 17.0 Nonh Dakota 27.0 Florida 24.0 Ohio 18.0 Georgia 12.0 Oklahoma 23.0 Hawaii 30.0 Oregon 27.0 Idaho 18.1 Pennsylvania 19.0 Illinois 20.0 Rhode Island 25.4 Indiana 15.5 South Carolirn 7.0 Iowa 26.0 South Dakota 23.0 Kansas 24.0 Tennessee 13.0 Kentucky 3.0 Texas 26.0 Louisiana 16.0 Utah 23.0 Maine 28.0 Vermont 17.0 Maryland 13.0 Virginia 2.5 Massachusetts 26.0 Washington 31.0 Michigan 21.0 West Virginia 17.0 Minnesota 38.0 Wisconsin 30.0 Mississippi 18.0 Wyoming 8.0 Missouri 13.0 SOURCE: Tobacm hnatuk, 1987. cigarette consumption depends on (1) the extent to which such tax increases are incorporated into the prices consumers face and (2) the degree to which the demand for cigarettes is sensitive, or responsive, to price increases. Em- pirical evidence suggests that exclsr tax increases are in fact passed on to smokers. The evidence concerning the response of smokers to increaed prices, in terms of the quantity of cigarettes they demand, is somewhat more ambiguous. One measure of the degree to which smokers are responsive to price changes is the price elasticity of demand-the percentage change in quantity demanded divided by the percentage change in price. Estimates of the price elasticity of demand for cigarettes vary enormously from study to study. In a review of the early work on cigarette price elasticities, Laughhunn and Excise Taxes and 1)ernanLi 171 AR/NnrRTMlf FJ. Maz sN .~aw tlWrafw or eena kr Nprtn,. snar enx mrtor liweme m.al.nr ax,nna er w~Mnwn cemmm~. atlql nq 1<.In -0.]t -0.00r (19eE1 n nan. ey11 (19r01 -n.l 0.]r HamiMO. IlVrl -0.11. 0.73 LanrtlunarA Lrm IIY/n -O.rl 0./r Le. (19rl1 -I Ua o.9] Lewhet.r(14an -LI9 -IAa NueMmRN Le.auqtum a9rn -OAa UOS Wmeefl9dn -0.3l Nqe[tlmMCl wrnemmn9rr) -U.]) -0023 Wwn.nw <~ al (IYiO) .005 ro a.mn WNNPm -e31 Il.ll (1983, Ymna (IP111 -0.J3 O.li 11./invr Icu qwe[ ar Poeletl emns.:.a oa H.uxn.n Tarlur Kn..vk[ Ma. ll.x ell,tincr aP~m.RM RLrr nPrzspn Tam-n+indn:lts. nnliouy Inp q..e[ 'Mx.[enn A[4 IIS. P.1"an ~ep.ukn nNetl cm,nR.q[1 v/ Ha0-ne. G[I4 U.S. Or~n..ry lenp qu.e. rYa nnn ,Mp swivnrW CQNlmLntqu.e[ avtlNa Ymltlytlm laenl Qa.n11n em1iel leem[1 nnf~iinyle.nryuve[ ®mkW.MqeWie. nnliivyle.[Iquvn TMe.,ene[Nn:It3. rkue,aln.lnmraudel (iav.uAlmaMn:U.i. 0.4" .rylem.uluve[ '11trc-."k.Mn:1'K aldp mennim uem.n.e qqncaMn M Wj1r[ mrckl •Pie.unnCmn..Yl¢nM1UnL}nwMSFSall4ll. .- _....._ Lyon (1971) found estimates ranging frem - 0. 10 to --1.4g. Lewil and Coete (1982), in their review of work completed since 1970 that used data from the United States, reported estimte.c that had a conlrwhat narrower range, -0.4 to -1.3. The studies summarized in ]able F-3 shnw a similar amount of variation. The rather disparate estimatvs are attributable to differences in data and estimation techniques applied. The data and methud.dngy used in each of the studies, along with any interesting or unusual findings, are de- scribed briefly below. Estimates of the income elasticity of chomand for cigarettes are also shown in Table F-3. Apparently the demand for cigarettes is income inelastic, with the estimates ranging from a low of --0 fN)2 to a high nf 0.93. 1-his suggests that cigarettes may in fact be considered a necessity (at least among smokers), probably because of the addictive nature nf smoking. 0allagi and Levin (1986) pooled cross-sectinnal and time-series data fmm forty-six states between 1963 and 1980 to eslim.3te their cig:IreOe demand model. The results of their log-linear model indicated an own price elasticity of -0.22 and a neighboring-state price elastirily of 0.(15.' This finding implies that if prices were increased by 10 percent in all states, per capita consump- tion would fall by 1.4 percent, a rather small overall effect Ihat prompled ti68069480Z

Parameters Used in the Cost Mtxlel 189 Appendix G 188 AYYrNnlx r.Nl£e.r. Pa.IW 6e.19 6"lien 1'in/Y t-Ix.InN M,e.n xre 1`Fevw~ s.nnn cn.ertE nulp.rrnl rwnnl mr•lM~n c,nertd Wq6 Reryne! Lnu r.e.uoWr.e. rm.ron IIXOme rola W.M Mae. 20 0.9rN 1612 101l1 91?I 29 11 91 9,)13 096fi1 i1.15 195.9: 159.53 32.12 nl 16,210 09640 99.65 1l211 .1050 1/ 31 212 I1,3a3 09]9r 91 ,19 1r601 6{9V6 5011 196 21,106 09M6 9611 46611 1129r 46,91 406 >5,9t1 •5 0951F 114.22 669.19 14463 11 11 5 331 24,43] U9231 173,53 649.73 411143 11 . 1 1,125 ]1,359 090GO 216.31 I,W]91 500 63 3 71 62 1.89. ]a56] 01,17 7 63,011 14J4,11 ~9.99 Il 19 . ~2R 1,0E2 0.119 9 IU2 02 I,1r9,20 I l.ll 2190 9.696 1.119 0,7s23 9].33 1yY1lu 137 19a4 9,074 z424 0-666fi 11NL,51 19t1.1/ Ofi. 991 6.L~U 1,573 0.5U. 1119u ].ntu9 OOl 119r r.w LIW/ 00000 1111] :.391.Y• 000 10 29 6,114 662 rma.. 20 0991, 97 14 4 173 <.1 I6 15 14 11 14 S-nU 7 , 0 9944 11.IJ IOA.1, <0.11 764) 11I 9,763 lu 099i] 146 <4 3261., ]916 913 192 )6r0 3f 0 91123 23 n uzu nl u 2l r9 T26 LSYV .o 09610 n6.05 2P3 ~. 1117 3E 5~ 194 1 I tnl1 45 09641 165 ~5 leb no 1541 Ir92 141 6393 30 09fiA6 1.0 64 4 751~1- 1i31 5 1. n .0] 9131 f5 11.9ErJ IR0113 431./~ 5669 3.64 )113 1,26) 6U 0 93U0 71 1. 6 1,1Q017 3215 n116 3,19/ 3,141 63 90r1 113 1. 1 660,'~} 4 63 u 94 5,079 IAll6 .0 0.6563 11119 1993911 636 4,39 5131 694 a.6065 112.9] 2,M3,~/ 0,Q0 9.15 5,639 ]10 a *041 rln 60 I (26.1x 0.110 1u.54 3,102 111 o001ro 12326 1.123.11 00U n.lt 4,99t 16 ~ tables are very close to one, reflecting the fact that drinking on average has ~ little effect on women s longevity. The Covered Outpatient, Cnvemd Inpatient, and Covered Work Loss col- umns give external annual costs. Tu get the five-year period costs, we multiply eosts for each survivor by 5(yi•ars) and costs for each decedent by 2.5. For inpatient costs, decedents get an additiunal sixfold increase, as explained in the text. Reported Pension Income is the annual sum of Social Security, Supplemen- tal Securitv Income (SSI), public assistance, veterans' compensation, and private pension incomes. To correct for tmderreporting of pension income we divide by 0.79. Total Wages are the annual sum of earnings and self-employment income. l'hese are also multiplied by 5 fer survivors and 2.5 for decedenls to get period sums. Estimated Packs in Table C-1 are reported numbers per day for current and former smokers (who report 0 packs) multiplied by 1.5 to correct for underreporting. Reported Excess Ounces of alcohol in Table G-3 are those in excess of twenty-eight drinks per month and are given by month for current and former drinkers. We e re less sure of the underreporting factor here, so have not built it into the parameters. APPEND/XTABLEG4. Pooled heavy nondrinking drinken (units explained in text) Cov<red Covered Covered Age Survival Ratio Outpatient Inpatient Work Loss M.les 20 0.9960 38.06 90.47 82.21 25 0.9974 73.65 172.86 127.00 30 0.9954 97,03 239.55 399.98 35 0.9917 93 .93 317.54 564.26 40 0.9883 92 69 386.53 244.82 45 0.9913 109.08 499.90 245.19 50 0.9923 169-00 514.30 222.08 55 0.9857 205 49 750.93 342.99 60 0.9912 55 55 1,078-13 37.07 65 0.9906 89 82 1,309.33 11.34 70 0.9908 86 15 1,378.01 6.95 75 0.9993 90-02 1,458.45 0.67 80 0.9885 95 14 1,486.79 0.03 85 NA 99.25 1,752.46 0.00 Females 20 0.9996 94,59 142.14 26.92 25 0.9991 70.56 K4.93 40.71 30 0.9993 136.86 241.48 27.34 35 0.9965 122.27 258.77 38.57 40 09941 17007 581.30 41.09 45 0.9961 161.14 6115.99 68.55 50 1,0007 24701 564.80 74.52 55 1.0017 16ti,z9 281.09 52.34 60 0.9989 65.54 958.33 20.46 65 0.9986 99.10 1,180.62 4.07 70 0.9997 98.89 1,4(M.83 5.44 75 0.9969 100.26 1,47 1 .65 0.00 80 0.9919 101.78 1,270.67 0.00 85 NA 107.16 1,521.12 0.00 £0606S480Z

200 Notes to Pages 39-46 I Notes to Pages 47-57 201 18, Waldo and lazenby (1984) give $443 per person over 65 not paid out of pocket, and $443/4.79 percent •$9,247. (From the National Nursing Home Survey-Van Nostrand et al., 1979-4.79 percent of those over age 65 are in nursing homes.) 19. Although lower-income people pay a higher percentage of earnings than higher-income people for private health insurance, they pay a lower percentage of earnings for nursing home care and they collect propor- tionately more in Soc-ial Security payments, so the error in assuming that overall financing is proportional to earnings should be small (Pechman, 1977). We assume that costs of fires, motor vehicle accidents, and crimi- nal justice are immediate and calculate them as the annual cost divided by annual packs of cigarettes smoked. Even though a portion of their costs is financed by fire and auto insurance, because the cost of these factors is immediate we do not need to account for them in our tax figure. 20. Our use of average wages (stancl:vdized for age, sex, and education) to estimate smokers' wages involved a slight double count of wages, but the averaging was necessary to get the smoking differential right. 21. I( there actually were such .t spillover effect on the medical, labor, and insuranre markets, then our estimates would be too high. Less smoking would reduce the demand for modical services, which would lower the cost of medical services, which would lower the external costs of smok- ing. As a result, the lower the level of smoking, the lower the external cocts, and hence the lower the carrective tax. 22. Market imperfections in other markets could also lead to a modification of our results. This traditional second-best concern is beyond the scope of the present honk. 23. In the absence of corrective taxes, it would be better to have a profit- mazimizing monopoly on cigaretle production. Monopolies reduce nut- put from the competitive level to increase their profits. The exercise of such monopoly behavior here wuuld have the beneficial effect of reduo ing consumption. 24. For example, if the monopolist faces a straight-line demand for cigarettes, and if the unit costs of production are constant, then an increase in the exciae tax of 10 cents per pack will result in an increase in the price per pack (including the tax) of 5 cents.'Ihe remaining 5 cents is absorbed by the monopolist in lower prices, net of tax. On the other hand, if the market is competitive, the price hi the smoker will go up the full 10 cents. If the market is imperfectly compelitive, we would have an intermediate result, with some of the tax being shifted to producers. 25. The reported standard crrnrs are 1.1 and and 1-3 percent, respectively. 3. Data and Stalistical Methods 1. Newhouse (1974) and Bronk et al. (1979) provide fuller descriptions of the design. Newhouse et al. (1979) discuss the measurement issues for the second generation of social experiments, to which the HIE belongs. Ware et al. (1980a) discuss many asprK-ts of data mllection and measure- ment for health status. For our analysis of the effects of health habits, the HIE was not a randomized trial but an observational study. 2. This study does not use data from participants enrolled in a prepaid group practice. 3. We excluded dental care on the grounds that mnst dental care is not causally related to poor health habitv. 'Tu the degree that it is related (for example, if smokers were to get their leeth cleaned more frequently), any effect would be modest because only 36 percent of dental care is collectively financed (unpublished data made available by the Health Care Financing Administration). 4 In subsequent chapters, for ease of expnsition, we sometimea fail to note the qualification about well-care and maternity and simply use the term "all medical care." 5. As hable 3-3 shows, many of the drinlin);-mUted conditions also relate to cigarelte smoking. 6. For the Seattle and Massachusetts sites these were the first rrvo years of the IIIE, while for the Dayton and Snuth Carolina sites thrse were the second and third years. 7. A pipe or cigar snoker who smoked or had smoked cigarettes was classi- fred as a current or former cigarette smnker, respe,:Tively. A former pipe or cigar smoker who had never smoked cigarettes was cluvsifred as a never smoker. 8. We seleded these definitions because they contirrm as closely as possible to the drinking status measure of the NHIS. 9. In all bul the last plan, there was a maximnm out+tf-pockrt limit per year nf $I,IHXI or a percentage of family income, whichever was lower. The percentage was 5, 1(/, or 15 percent, depending on whir h plan the family was assigned. In the last plan. Ihe limit was $150 per Imrsnn or $45D per family per year. 10. The average rates were 16, 24, and 31 I•ercent respertively (nr the 25, 50, and 95 percent plans. !1. The average coinsurance rate for the preexperimental plans was defined using the service mix on the 25 percent coinsurance plan. 12. 1'his questionnaire was self-administered for people 14 years or older. Parents responded for children 13 or younger. 13. Family income data are from 1975 in Davton. 197a for thr three-year group in South Carolina, and 1976 for a ll other participants. 'Ihe first year of participation for the Dayton parlicipsms was 1975 (about a quarter participaled for two mnnlhs in 1974, arrd anolher quartor parliripated for one month in 1974); the South ('arnlnia lhn•e-yrar group hegan parlic- ipating beginning in late 1978 (abnui a quarter pnticipatrd fur Iwo months and another (uarter for one munth). The remainder uf the HIE sample enrolled in 1976 or January 197?. We n,ed income datn from the first year of the study, which were collrcted nn forms keyed lo income tax returns. 60606S480Z

176 Appendix F tobacco program to the federal government-because of both general budget- ary distress and widespread criticism that the government should not con- tinue subsidizing the production of a cornmodity associated with distinctly adverse health effects--enacled the "Nn-Net-Cost Tobacco Prngram." The new program stipulated that, in order to be eligible for price supports, to- bacco producers must contribute to a fund designed to ensure that the to- barco loan program operates at no cost to the government except for general administrative expenses, which currently run about $15 million a year (Clark, 19N5). While the tobacco program has been quite successful in slabilizing tobacco prires and farmer incomes, it has certainly nut served economic efficiency. According to Srunnerand Alston (19fW), deregulation ofU.S. tobacco produc- tion (including the elimination of rather ~:tringent output restrictions) would lead to an increase in output of 50 to 101 percent; a reduction of 20 tn 30 percent in the price of tobacco; a subsOmtion of domestic tobacco for most inlported tobacco leaf used in cigarette manufacturing; a 3 percent drop in the price of cigarettes; and a 1C1f1 percent increase in tobacco exports. Nevertheless, the economic inefficienoies in the tobacco program may have inadverlently improved the publids health. Cnntrasting the tobacco program wilh olher agricultural price suppcxt prngrams, Johnson (1984) has noted: The program is an income transfer prugram, whereby income is trans- ferred from consumers to producers. 'Pobaceo consmners are the ones who are at potential risk from the eBects nf smoking. Two side effects are brought about by raising the prir, of the program: Fit'st, consump- tion is reduced and there is less smoking. Second, by paying the higher price Ihe smokers are paying for the transfer to producers, in effect taxing Ihemselves. These bits of ironv seem losl on certain antismoking individuals and groups. If this view and the empirical estimahos of the tobacco program's effects (lower output and higher prices) generzled by Sumner and Alstnn are cor- rect, then society may on the whole be better off maintaining, and perhaps even strengthening, the tobacco prograin rather than seeking its abolition on the grounds that it provides a prima br.ie subsidy to producers. Excise Taxes and the Demand for Alcoholic Beverages TAX aATFti AND AEVENUF. lixcise taxes un alcoholic beverages (distilled spirits, wine, and beer) are imposed by all three levels of government: federal, state, and local- Between 1451 and 1985 the federal excise tax on distilled spirits stood at $10.50 per proof gallon (defined as a standard U.S. gallon containing 5(1 percent ethyl alcohol by volume). On October 1, 19N., the tax was increased to 512.50 per proof gallon- Federal excise taxes on wine and beer have remained constant Excise Taxes and Demand 177 since 1951, amoun ting to 17 cents for a gaik m of wine having alcohol content of 14 percent or less and 29 cents per gallon of beer (Distilled Spirits Council of the United States, 1985). Measured on the basis of alcohol conlent, the respective taxes on wine and beer are roughly 5 percent and 30 percent of the tax on distilled spirits. Because nominal taxes on these beverages have remained unchanged for almost thirty-five years, the real tax has declined substantially, as the purchasing power of Ihe dollar has fallen by 75 percent since 1951 (U.S. Department of Commerce. 19R4). Determining state excise taxes on alcoholic beverages i.s complicated by the fact that eighteen states (referred to as the control states) have state-run monopolies in liquor sales- It is extremelv difficult--if not impossible-to determine effective excise tax rates since, av Mosher and Beauchamp (1993) have noted, "in control states the 'tax' is n function of official excise taxes, and also of commodity prices and rates of profit." Table F-4 contains tax ra tes by beverage lype for the remaining slates and the District of Columbia, known collectivelp as the "license" slate:s (because they grant licenses to sell alcoholic beveiage< at the wholesale and retail levels). Tax rates in 1985 on distilled spirit, in the license states ranged from a low of $1-50 per gallon in Maryland and Ihe Di.slnct of Columbia to a high of $6.50 per gallon in Florida, with an avernge tax nf $3.(1R. 6tale excise taxes on wine and beer are considerably less than the taxes on distilled spi,its, on both an alcnhol t ontent and per gallon basl,I For instance, the state tax levied on wine varies from 1 cent per gallon in <alifornia to $2.25 in Florida, with a mean of 56 cenls. Beer taxes range from i c•nts per gallon in New Jersey to 77 cents per gallon in South Carolina, an average of 18 cents. In addition to the state taxes, local excise taxes are inlpnsed un alcoholic beverages in six license states. In 1984 federal excise taxes on alcoholir beverages generated over $5.7 billion in revenne. State and local taxes in the license states alone resulted in an additional $2 billion in revenue (Distilled Spirits Council of the United States, 1985). Pa1CE AND INCOME ELAsTrCIT109 OF DEMAND The results from models of the demand for alcoholic lreverages vary widely. The problems encountered in estimating surh models are even mure complex than those associated with demand moalrls of cigareltes. In general, the divergent results can be explained by difh-rrnre<; in the data analy'red, the estimation techniques, and by the fact th.u some studies have attempled to estimate demand foreach type of beverag, (dislilled spirits, wine, and beer), whereas other.c have aggregated the diffewnl types and produrod estimates of the overall demand for alcohol. Efforl; to estimate tlw price elasticities for the different kinds of beverages an furthvr conlpiicated by the fact that spirits, wine, and beer may be substilutes for nne another. 1 hus, cross- elasticities of demand must be considered xs well. L6806S480Z

144 Appendix B AePFJIDn'TAalf.a.l. rwninnuf,,-IR.erutlnlnnRApopam A.YYMe - VviaNe Uw in rm/Nr RC9«Je b M/NLVr e.b a@ aa14 x r.br nm rn.WY rJUl W x e « orq. y / rwap nqrtlwr i+b. yq Aalpn .0ik, muaYpMc A/e /mup rnwolRY No yqrJW a.iFM R¢mnncrrhtMNy.e/rM No ryprtirtl weiser RermmeyN! IWy weirM No pqJW To1.av 1 NO, unm. Ixrumn/. Nn NpuW AleMnl MVA. arnMJ. Aeapu ere.ye tly fAwO a rrtdiurlas MYA AWpw .rnya M Mi1ex A/ren Ic yev MVA A.irne I,tW mYn Searizltrue MVA Ayirm U11 wye rDyYeel enirlry krd (1al Amrne emeR rli Pamily M.My of IeN a~k lHD Anip. ernye rl! Fmilr Nmy M.FWerer Ilulrerc. Axlpn e.nere n.k Perwrul Mrmry M M.leb Ilart Ji.eue AuIM' e•mrn .Irt Rcatel rmmlr InnrmJ u .r Ankrn ceJe 2 f-) Rcrel Mad6y, IrenrnN emr• Anirns eoJe 2 fro) AnnW raol eum I«ermel unrr Arym e.enre riR CTUmrk M1nvlritis or m¢AY~me Peumuni~ Auyne cak 31rrn) al..d Levwe C.Eiu.bnrW dissue A.u!^. evn.re rih CTUlnrerol C10 AWrr. .rvye riek D...cnreinn nf M>JUl MWrA Sck:k Auirr. em.re n1 ure ..mfwrion sutl@ Arrirm .renpe rbk SlrerqN M KKia lie So,,. Anipr. .rmr[ rsk ILrwa rf.lsp Suicrk An/rru e.mrc rvk rMnuf bu n miek.lrs Svkkk Alnpre ..n.6• rbk Witrex w rldnxe aar.rcMe Auqm evmre rirk /bmkiJ rid IeMM1 aomrcM A.eipe .va.F riA n)rrerecrwvl cer.icJ C~Cr Aeupa ceCe 2 (-) er.quency a(r.p errv CmkJ eab.r Auym ..myc rak AV nneu mn.J CnvJJ rav AuiM .vnere riet PunilY NneM r{ yrurt uner &e.n c.nm Auipv c«4 3/-) areen .elfevrn anW unrm Aa.iAne cme 3 Ir.raiy. rrever) CuncrA m.aJ rlerva Sucit A.Jrru eren6e rid: survival ratios of those with different habits to fkve-year survival ratios, we assume the effect of habits is to change the force of mortality from h to h+ k. The pnplilation depends on the average force of mortality h(t) according to P'fU =- 1rP. Let H(t) be the inh•gral from 0 to f of h(t). Then In [Pft)lP(0)] _- H(t). Suppose the 11RA ten-year survival value for those in a certain habit group is P`. Let In IPelP(0)j - - K - 11(t). Since In (P'IP(0)] also is i- kt - 11(t)/ by the force of mortality assumption, we have K= 10k. Ad- justed five-year survival is exp [ - H(5) -(K)2)]. Thus, the square root of ten-year survival can be averaged to give the survival ratios at five years. This process ensures that the survivabnf our group of smokers is adjusted to the national smoker survival rates. We compute the survival ratio Kla at ten years for nonsmokers over evrr smokers. The square root of Kle repre- sents relative survival, Ks, at five years. Because we know the percentage of people who never smoked, PI„ in rach age group, we can solve KzSsPH + Ss(1 - PH) = tota11980survival Survival Parameters from the IIRA Model 145 for the national five-year smoker survival rates Ss. Once the values for the ever smokers are obtained, we can multiply by the survival ratios to get the values for the nonsmoking smokers and for the never smokers.'Che survival of the never smokers is simply Ks x Ss- The nonsmoking smokers have survival SsIL, where L is the ratio of the square root of predicted ten-year survival for five-year age-sex groups with Ihe habit to that of the same groups after changing to never smoking. t'SOU69LEUZ

168 Appendix F as a group, will inevitably incur. Alternatively, higher excise taxes can be viewed as desirable insofar as they will raise the price of alcohol and toharco relative to other g(xldc, thereby discouraging their consumption and improving the general level ol health in the nation. It should be noted, with respecl to Ntunnell's last puint, that if higher excise taxes are indeed successful in redu( ing alcohol and cigarette consumption, then increases in these taxes may h.lve the effect of raising the cost of the Medicare program (Wright, 1986), bevause taxes would lengthen the lives of smokers and heavy drinkers. Finally, ourcurrenl excise taxes on alcoholic beverages and cigarettes have not been set in a manner that suggeMS that the federal and state legislatnrs who impnsed them had any prtiCuLlr economic rationale in mind, tither than allowing them tn nleet the exi frncies of the relevant budgets. Excise Taxes and the Demand for Cigarettes TAx RATFS AND aEVaNDE Excise taxes (rn cigarettes are Inlposl`d at t)le federal, State, and local ICVCIS. Between I951 and 1982 the fvderal e,e ise tax stood at 8 cents per pack; it was raised to 76 cents in 1983, where it lemains t«lav- &•cause the tax did not change in a period of marked in0atiem, Ihe real tax ilas declined dr,nla lirnllv over the last thirty-five years. As Table P- I indicates, in 1951 the Inx ropre- senled 42.3 percent of the purchase prire uf a parkage of cigarettes. In con- trasl, in 1982 the tax rate as a perccntage uf the purdlase price fell tn 1/1.7 percent; it increased to 17.8 percent in 1983 when the 16-cents-per-pack tax look effect and then fell off sumcwhel in 1°I84. State excise taxes, shown in Iable F-2, varv cunsiderablv, ranging fram a low of 2 cents per pack in the t(Ibar% n-prexiuciny state of North Carolina to a high of 38 cents per pack in Minnesota. Additionallv. 392 cities, towns, and munties in 6 states (Alabama, Illinois, Missnuri, New York, Tennessee, and Virginia) impose cigarelte ta.es. These local laxes range between I and 15 cents per pack. f nr the fiscal year ending )une 30, 1987, federal, state, and local cigarette excise taxes generated over 59.6 billion in revenue. -the federal and state shares of the total were nearlv equivalent, with each realizing approximatelv $4.7 billion in revenue; combined lrxal revenues amounted to $197 million. . a negligible 0.06 percent of all local tax revenues (Irnbacco Institute, 1987) Given that just under 30 billion packages nf cigarettes were sold in 1987, this implies an average tax burden of ovor 30 cents per pack. rRIfF AND INC(1M! FI ASTI('ITIFS nl nFMANn Apart from their revenrle-grneraling pntenlial, excise laxes have all influencr nn the qaantitv of cigarettes demanded, with higher tases causing a luwrr level of cansumption. The abililv ot excise tax increases actunllv to reduro Excise Taxes and Demand 169 APPENDIXTABI6F-/. Federal cigarette• excise taxes, 1951-1984 '-- a Tax Rate Current Tax Rate 1984 Average Pdce Current $ Tsa Rate Year S (centsJpack) S (cems/pacq (cents/pack) (percent) 1951 8.0 32.0 18.9 42.3 1952 8.0 313 19.9 40.2 1953 8.0 31.1 20.9 38.3 1954 8.0 30.9 21.2 37.7 1955 8.0 31.0 21.3 37.6 1956 8.0 30.6 21.8 36.7 1957 8.0 29.5 22.4 35.7 1958 8.0 28.7 23.2 34.5 1959 8.0 28.5 24.2 33.1 1960 8.0 28.1 24.9 32.1 1961 8.0 27.8 25.1 31.9 1962 8.0 27.5 25.4 31.5 1963 8.0 27.1 25.9 30.9 1964 8.0 26 N 26.4 30.3 1965 8.0 26.3 27.7 28.9 1966 8.0 25 6 29.1 27.5 1967 8.0 24 9 30.2 26.5 1968 8.0 23.9 32.1 24.9 1969 8.0 22.7 33.9 23.6 1970 8.0 21.4 37.0 21.6 1971 8.0 20.9 38.7 20.7 1972 8.0 19.9 40.9 19.6 1973 B.0 18.7 42.0 19.0 1974 8.0 16.9 44.1 18.1 1975 8,0 154 47.3 16.9 1976 8.0 14.6 49.3 16.2 1977 8.0 13.7 51.6 15.5 1978 8.0 12 7 54.3 14,7 1979 8.0 11 4 57.3 14.0 1980 8.0 10.1 62.0 12.9 1981 8.0 9.1 66.9 12.0 1982 8.0 8 6 74.7 10.7 1983 16.0 16.7 90.1 17.8 1984 16.0 16.0 96.3 16.6 SOURCE Imtituh for the StuGy of Slrrnking Helwvia axl Ihillcy, 19R5, p. "/0.--_-- L Incllsl<A CRd6e Ii2er. £6806S480Z

Parameters Used in the Cost Model 187 APPENDIX G Parameters Used in the Cost Model 1'he abridged life table is based on five-year periods. Deaths within each period are assumed to occur after 2.5 yvars, except for 85-year-olds. Men of this age are assumed to live 5 addition.tl years; women, 6.4 more years. The columns headed Five-Year Survival in Tables G-1 and C-3 give the probability that those with bad habits will live to the next period. The Sur- vival Ratio columns in Tables C-2 and C-4 give the ratio of "survival with bad habit" to "survival with had habit SnrrectedY Thus, the probability that PBnXArr-. nreYm Aye Survlral Male. ]0 0.9691 30 35 4U 41 50 55 0,9091 096% 09652 0.97,9 0.966. 094 25 5 O9zn O.6X05 0 1211 n O.i41! 0.6646 0.5417 0.0000 FemJs 2a 09012 0.0966 0.9955 0.9928 0.986] 0 9601 0.9216 0.9600 09310 0.9093 U.6661 O.3i91 0,6651 O.0W0 Rdel a.xlan Omn a p1,mo6 b„~.a C.neree Co.ne6 Cormtlwwk iliahvamC xmam Fen<lon Toul Ou1W1ieM InPal"'nl Loaa Pad. Lcoox W.6n 43 49 I I1.E5 105,13 1.0615 101 1,912 76.35 16a.95 15117 7 1 C03i 93 17,603 IOi.li 2611.65 22319 1 Ui06 2.7 21 )61 103.21 13910 391 90 1.07]] 190 24.392 96.01 476.39 2l].119 10902 420 25161 130.16 331 41 295?i 1 aI24 574 24,l4t 175,51 ]96.6r 299 11 1 09370 IJ1S6 23.549 ir196 61.73 31.99 0d0n 1.980 20.617 37.53 I,193.29 3610 06169 4.168 15,151 9411 1 6Yr.31 n./9 0.5419 8.769 5.723 39.31 I16974 311 Oa092 6,976 2,316 96,61 1,913 " 4 077 a.iltl 8.027 1.411 10736 6 2,o42n U-04 0.1611 i lu 1-144 106A6 2.30,51 0. 0 00.65 6.630 655 125.35 187.03 5641 0.9233 75 5.330 I2P.51 T2A.91 51.10 0.9493 121 1,031 166.12 313.16 69713 0.9402 153 9,96, 159.06 3211.93 6/93 0.9752 2a9 1.753 16194 606.51 54]9 1.0666 222 9,r5e 163.63 51594 511, 09630 309 '/.97t 22..64 316.97 56.52 0.9150 436 e,ne0 323.46 Sm.53 47 19 9 0..296 676 5,661 67.26 1,203.41 1r.2] 0.7190 2,17e 4,594 101.10 1.527.0) 7 72 2 0.5466 4,8r0 1,717 101.m Lq7.66 399 0.3963 5,360 646 105.1I 3.OOO.i6 0 42 0..19i 5.162 207 u644 1.14.51 1 01! 0.]534 5,849 10. 03.51 ].31].t7 a0U 0.4393 5,273 27 APPENUIXTABLEC-2. Puoled non3moking smoker6 (units explained in taat) Age Survivel Ratio Males 20 0.9998 25 0.9994 30 0.9981 35 0.9954 40 0.9907 45 0.9841 50 0.9761 55 0.9631 60 0.9424 65 0.8953 70 0.8573 75 0.8853 80 0.9111 85 NA Females 20 0.9999 25 0.9996 30 0.9990 35 0.9980 40 0.9959 45 0.9925 50 0,9882 55 0.9843 60 0.9744 65 0.9571 70 0.9324 75 0.9080 80 0.9200 85 NA Annuel Dullan Covered Outpatient Coveral Inpaticnl Covered Warck Losa 42.93 84.95 107,25 73.85 143.98 160,74 98.18 199.61 232,18 98.87 262.12 395.34 94.28 367.63 289.95 115.34 452.60 313.62 166.52 472.28 309.27 173.45 549.85 338.51 54.42 959.17 26.65 89.23 1,199.51 8.67 84.90 1,307.13 2.76 90.71 1,391.16 0.58 100.64 1,472.43 0.03 97.75 1,683.39 0.00 122.46 141.14 40.349 125.42 171.39 35.366 161.91 237.12 47.258 154.80 244.72 45.472 182.69 452.99 36.928 159.11 392.27 36,(135 215.32 444.33 38.962 215.95 393.88 33.252 63.95 905.68 13.143 98.94 1,149.19 5.609 95.39 1,355,76 2.849 99.40 1,481.05 0,319 111.53 1,429-56 0.109 107.03 1,649.18 0.000 a male nonsmoking smoker will survive front ago 60 tn age 65 ia u.A805 (from Table G-I) divided by 0.9424 (from Table I;; 2). In addition to heavy drinkers, exdrinkerare rateguri>rd a91i{thl drinkers. In some cases Ihe risk in the HRA prnglams n3av Ihrreby Iv' mceased. Among 50- and 55-year-nld women there nrr mmriv mnre former drinkers than heavy drinkers, so there is an anrnnaluas slight fnll in urvival fur controlled drinkers. All a,t the survival mtina for wnn5en in the drink,ds iiQV0V7 YB 0Z

Ij 198 Notes to I'at;es 26-31 subsidv) is the cost imposed on others by the marginal cigarette or drink (or mile walked). Average and marginal costs may be similar for ciga- reltes, but in the case of drinking the marginal cost is considerably higher than the average cost. The implication here is that we have probably underestimaled appropriale alcohol taxes. 2. Conceptual Framework I. This statement assumes that rigaretles are private goods. sold in compet- itive markets, with all parties having complete information and tastes that do not change. It also assumes that other, nonrelated people do not care, for instance, if a smoker dies, except for the financial effects of such a death. These assumptions rule out later regret at addiction and allruis- tic regret of nonrelated people. Economic efficiency requires that each individual pay the marginal social easts of his actions, 2. We can ignore the effects ot smoking on a smoker's insurance premium becau.e it is negligible- to a first apprusimation, I/nth the insurer's share of rxtra costs if there arr rr menthers in the group. 3 We are indebted to Jerry Green of Ilarvard University for this argument. 4. We did not begin before age 211 for two reasnns, First, we are interested in eslablished habits; an adulescenl who reports smoking may be only ex)mrimenting and subseqmmtly yuit. Second, we are concerned about underrepnrling to an even greater dcgree for teenagers than for adulls. 9. Similarly, in estimating external ci,sts nf drinking, we treated former drinkers as part of the group who had ever drunk. In estimating the external rusts of nnt exercising, we excluded the physically limited from thr group that did not exercise. G. In poliry terms, if we consider only the economic costs of smoking, a program that costs x dullars luda, to reduce the effects of smoking shoidd he considered efficient nnly if it saves more than x dollars in the future (discounted Fack to today). If it does not, we would be better off investing the x dollars to pay for the future costs when they arise. Be- cause the value of life itself (as opposed to the effects un life insurance, pension, and work) is not external to the smoker or his family, it does not enter into our model. 7, We discunnt life expectancy for similar reasuns: the value of the health benefits eif not smoking is less if they occur in future years. Benefits in life expectancy are discounted at the same rate as future monetary costs to maintain a common perspective nn their value. Analyses that discount future casls but not fulure survival benefits can lead to peculiar and undesirable recommendations (Kecler and Crelin, 1983). Fortunately, in- asmuch as discounting life expectancy is contruversial, whether it should be discounted is irrelevant Io our tax calculations, e. For heavy drinking, we assume that the costs of motor-vehicle accidents and criminal justice are immediate. 9. By "covered," we mean covered bv a public or private insurance policy whose premiums do not vary with smoking status. 806069480Z Notes to Pages 32-3A 199 10. In the model we estimate the costs to the average family of these second- ary effects and add them to those of the individual with the bad habit. For example, the costs associated with the secundary effects of husbands' smoking on nonsmoking wives are multiplied by the estimated fraction of smoking men who have nonsmoking wives, and added to the medical costs of smoking men. 11. For each habit we used the effect of that habit on all diagnoses related lu poor health habits in 1'ables 3-1 to 3 4 in Chapter 3, contrulling for age, sex, and socioeconomic status. 12, These data came from the selfadministered medical history queslion- naire and the physical examination enBected al the beginning of the Health Insurance Experiment (H1E). Deta front the Natinnal Health Interview Survey (NHIS) were prepared for input hased on a 1983 interviewer-administered questionnaire. Of the thirty-four variables listed in Table B-1, twenty-five are availablr horn the IiIE and eleven from the NI IIS. 13. In principle, such costs wordd include luw-hirthweight infanls born ln smoking mothers. In a sample the size of the HIF there was not enough precision to detect such effects- We do tv:r pther data, however, to pro- vide an estimate of the costs of such infauls. 14. The 38 percent value comes from Price (1Yfif.) and is one of our "snftest" numbers. Bul our estimates uf total external costs are insensitive to it. Even doubling this number would havr only a modest effect on our results. 15. The H)E data include snapshots of emplopment.stams, and a continuous history of work loss. To estimate the work-loss model conditional on being employed, we assumed stability in employment status between snapshots. For men there was little prnblem, given the high employment rates and stability of employment for primeaged mates. For women such an approximation was inadequate, given Ihe turnover in their labor force status. In contrast, the NHtS provides labor fnrce status and work loss for the same two-week period, which makes it possible to condition work-)oss estimates on labor force status. 16. The $19,300 figure was derived by taking 45 percent (insurance that is group coverage) of f6(1,000 (the amount of insurance of the average household) to get an estimate of the group coverage per household, and dividing it by 1-4 workers (average per household) to obtain thr group coverage per worker. (Inflated by the Consumer Price Index, from data in U.S. Department of Commerce, 1982.) 17. Because we used an average pension for women in our calculation that already includes this bunus, adding in the bonus leads to a slight double count. We did so to distinguish smokers trmm nonsmokers; Ihal is, both smoking and nonsmoking women who nre themselves alive were im- pttted an average pension, but only widows get the Social Security bo- nus. For our purposes it was more important lo estimate the differential impact of smoking correctly than lo estimale eractly the overall level of pensions.

W ~1an..rn~.r--'---__ rr M . ,. 162 Appendix E Comparability of IIIE and NHIS 163 APPENDIXTABLEF.-1. Smoking snms (petcentages) APPENDIX TABLE E-4. Annual measures of morbidity. Health Insuranct Experitnent and National Health Interview Survey k k F S t S k C Survey onrrer mo er Never Smo er unen mo er tIE NIIIS Health Insurance 41.3 16.9 41.8 Experiment, ages 20-59 Measure Mean S.D. Mean S.D. Hospitalization 0 15 11 46 0 14 46 0 National Health Interview . . . Visits 4.08 7.27 3.59 - 8.22 Survey 18 19 Weat-loss da s 6 25 3 07 21 85 Ages 20-59 44.7 19.8 35.5 . y . . . Ages 60+ 50.2 31.0 18.8 (males only) APP6VDIxTAa1F 53. U4ikMS b5~ Ilett,nrerrl .ikn IFrme, 1101-0.21 0.22-099 1D-299 30wMae Swrr Abrl.inv Pnkr IM..r/U.y 0.~4ar n~^naN.f owttyUy eWl,k Nrwas F..ev/oeal. .a. to-w 35.9 1 .3 25.6 25.2 r.5 2.0 WmW w.pm emrv. 5wey .rer X,.f9 .74 W 1 23.1 e22 7 2 Nae Ve+ 60' 29.8 i5 52.1 21.9 A.2 1.7 APPENDIX TABLE E-3. Exercise status (percentages) Level of Exercise Survey Light Moderate Heavy Health Insurance Experiment, ages 20-59 24.0 63.4 12.6 National Health Interview 13.2 49.6 37.2 Survey, ages 20-59 wording of the two questionnaires. 'I he HIE asks about frequency and level of activity, whereas the NHIS asks vach respondent to assess his exercise level relative to others in his age group. Rates of Use and Work Loss Table E-4 presents the overall outpatient visit, admission, and work-loss rates for the two data sets, The admission rates are virtually identical for the two studies. The H)E visit rates are higher than those for the NHIS, a NO'IEE Agn 2n-59. AO raCS aee uaxnl. In Ihe omot Nt11S woR lofx. Ne 1wowuII eeppeel vtluerwe5emultipliedby26 HlEviriuexchtleprychmlemfry,whechaverages QM16vlarfM pnem per year (S.D. =4.29). discrepancy that could reflect differences in insurance coverage or reporting methods. Although most peoplein the United States have relalively complete inpatient coverage, their outpatient coverage is less generous than that of tvpical HIE participants. If the insurana• coverage were equal, we would expect lower visit rates for the HIE than for the NHIS, because the HIE rates are based on claims data, whereas thuse for the NHIS are based on twelve-month recall. Claims data tend to generate fewer visits, in Ihat doctors do not bill separately for visits associated with maternity and certain inpatient surgical procedures. Instead, thep bill for these services on a luwnpsum basis at the time of hospitalization. The average annual number of work-In<s days for adult males is cubslan- tially higher in the HIE than in the NH[S, probably because the definitinn of work loss differed in the two studies. It, the IiIE time lost due tn doctor office visits is counted as work loss; in the NI IIS those days may not he so counted unless a whole day was missed. Effects (if Poor Health Habits We al.so compared the magnitude of the rstimated effects of Ihr three ponr health habits on visit, admission, and work-lusc rates. Given the observed differences in levels of use and work loss, we might expect that the response to habits would differ as well. We are Interested in proportional effects---do smokers have r percent more visits than Ihose who never smoked? We used negative binnmial regression methmis to adjust admission, visit, and workdnsc rates for age, sex, and edncation in eslimating the effects of the three poor health habits; see Appendi. 1) hor I'urther details. 7'he negative binomial mndel's convnlutiun prnperties allowed us lu adjurt for different time frames for the measures in the two d:da sets. Although admission and visit nambers are annual in both studies, I lIli wnrk-tuss data cover perinds that vary frnm person to person, while NI IIS work-Inss data are biweekly. 068069680Z

2(12 Notes to I'ages 6.'-R2 4. The External Costs nf Smoking I. Unlike the rest nf our analysis, Table 4- 1 contains a column for current pipe or cigar smokers thut drres not depenf on cigaretfe sntaking stuhrs. Else- where, we define pipe or cigar smokers as such if, and only if, they have never heen cigarette smokers. The reasnn for the discrepancy is that here we are describing the prevalence of the habits. Elsewhere we are interested in the effects of cigarette smoking, bul do not want to confuse never smokers with never cigarette smokers. 2. Pack-years are the product of the number uf packs smoked per day times the number of years smoked. 'fhey arr a commonly used measure of cunlulalive cigarette exposure. 1 One possible explanation for this pattern is that zmokers may slnp smok- ing at hume if a member of their Imu..ehold is sensitive to cigarette smoke. 4 lhat is, in Table 4-8 oulpatient use exc9uding well-care (in column I) for the former smnker (row 3) is 112.4 percent of the same use by the never smnker (row l, which is set at the index level of Iq)). 5. Owing In lack of data on other sources of secondhand smoke, we limited ourselves In the effects from smoking by household menrtx•rs. 6. For the work-loss analysis, we were interested in workers only. We as- sumed that ponr health habits such as smoking do not causally affect labor force participation, althouy,h both labor force participation and smuking mav be related to somc third fat tor Fnrther, with the HIE data we examincd the effect of smoking nn work loss far men only. We knew that mnsl nren were working at any poinl in time; we did not know the empluyment status of women exrrpt al cerizin periods when we cul- Ieded data. 7 I'oor health habits, as a group, are signilicant at p% 0.111, if we adjust for age, sex, and educatiun. 8 This figurr is based on the nurnber uf parks snnked fn the 1989 NHIS supplement, bv age and sex, and the HRA life tahle. 9'I'lir tax on rarnings shown in'IaMe 4-13 is the amount that will cnllec- tively finance lhe costs of the insurance programs shown, the most im- porlant cumpunents of which are pensions and medical care. Each dis- ,vmnt rate has its own earnings tax rate. Ill. Ihis trend rvflvcls differential survival--<mokers who live longer are a hardv gruup except for their smoking habils, so ojder nnnsmoking smok- ur, have a grealer life expectancy than older never smokers, The differ- enm in surcival pattern is reflected in life expectancy; undiscounted life r.prtanrv plart-s relatively greaher emphasis on survival in later years and is larger for nonsmoking smokers than for never smokers, but dis- ca.wrted life expectancy is larger for never smokers. (For tnnre on the ctlects of differential survival, see Shepaid and 7,eckhauser, 1984.) 11. 'Ihk figure includes a value of >ero for wagec of nonworkers, including the relired. Notes to Pages 84-96 203 12. In the absence of a market in human lives, it is necessary to infer a value for the loss of a life from people's actions. (lne method is to determine how much more must be paid tn workers to undertake more hazardous jobs. The implied value of a life is then the difference in income divided by the difference in Ihe risk of dying. Similarly, one can infer the valua- tion of life by whether people are willing to pay for ur use safely equip- ment (seat belts, for example). Otu estiurate uf $1.66 million is based on a review of the literature by Shepard and Zeckhauser (1984) and is in the lower part of their range, For more recent reviews see Rice et al. (1989, pp. 101-Rt4) and Miller (1989). They find an average value of $2 million (in 1985 after-tax dollars) across twenty-nine studies. Fnr a theoretical diseussinn see M ishan (1988) or Rosen (1988). 5. The External Costs of Heavy Drinking I_ One ounce of pure ethanol is the equivalent uf approximately 2.2 mixed drinks, 2.2 glasses of wine (4 ounces), or 2.2 cans of beer (12 ormirs). 2. As noted earlier, actual consumption is 2.5 times reported consumption. We categorized the sample and established prevalence according to re- ported consumption; our cost analyses are ba~o•d on actual consumption. 3. Eight percent switched from abstainer to drinker and another R pF-n ent went from drinker to abstainer. The switch frum drinkrr to abstainer probably resulted from our definition of an aF+stainer as one who rarely, if ever, drinks. In contrast, for smuking 16e queslion is whether the individual ever smoked dgarettes. "Ever" is more crisply defined Ihan "rarely." 4. An "episode" has at least one visit, but may have more. Because we could not construct episodes for the NHIS sample, we used "visits" as our unit for analysis. 5. Actually, in the NHIS former drinkers had the sacond highest rales of outpatient visits and the very highest rates of inpatient admissions. For the sake of comparability, however, we did not include former drinkers in Table 5-5. 6. We use the natural logarithm of ethanol consumplkrn as an explanalory variable to make the results more rohust, that is, to reduce Ihe inFluence of the extremely heavy drinkers. 7. 7hese figures are based on the exponentiated value of the coefficient for the former drinkers in Table 5-7. 8. Again, these figures are based on the exponrntialed value of the ax-ffi- cient for the former drinkers in Table 5-7. 9. We assumed that rmderrefxnting is propnrlinnal tu consumption; we could find no evidence for differential reporting al varying levels of con- sumption. Our category of heavy drinkers ciarprises about 20 perrent of men and 5 percent of women. U6065L8OZ

211n Notes to I'ages 12c1-174 ecample, the Office uf Technologv Assessment (nTA) estimate of $2.17 prr pack. First, UTA estimated total costs induding the costs nf a shorter life, which we do not count because /irt the most part they are not e.u•rnal costs. Second, OTA compared this year's costs of dying, due presumably to past cigarette consumptiun, with this year's cigarette purchases--a cnmparison that avoids discounting the latency period. J'Ihr cnsl of innocent lives is 23 cents per,actual ounce in our analyses. 4. II the underreporting is due to the sy,dematic exclusion of skid row alcnholics and the hnmeless, as polich md (lrvis (1979) suggest, then Ihvre may be no bias in our estinrates from using the reported consump- lion for the general popu lation. We are unable to generalize our estimates to these highly relevant groups, hinvever. They were effectivelyexcluded by the f III°: and NI 115 sampling frames, both of which are based on a sample of dwelling units. S. In principle, thia issue could be settled bv a rardnmized experiment on the results of an effective crrcisr prmmpfwn program. 6 We have only arcounted for differential taxes to finance the costs that wr consider, such as heahh insurance and social securily. Appendix A. I.iferature Review of the Costs nf Smoking and Drinking I For more on this idea see Con and Richter (1y78). 2- If 13erry and &dand had included the oisrs of lost production that they estimated were associated with thesr activities, approximately $12 billion would have been added to the $40 billion figure. 3. It is quite clear that there are costs at Ihe margin associated with the crimes that these studies have c hamcteriied as "transfers." For example, nrany of us incur substantial cosls in nur efforts la protect ourselves and our pniperty from burglars. Appendix D. Statistical Methods 1. The data cover the first three years of thr study. In the case of the group enrolled for five years in South Carolina, we used the last three years and ignored attrition during the first two years. Appendix F. Excise la~xes and Demand I'flre neightroring-state price elasticity was estimated by including a vari- able in the model for the minimum real price of cigarettes in any neigh- boring stale. The variable used by Warner in his equation was the percentage of the adult population who resided in stateti that restrict smoking in public pl..ces. Interestingly, he refers to the measure as an index of the success of the nonsmokers' rights movemerrt, masuning that laws and regula- Notes to Pages 190--191 207 tions limiting smoking in public places mav "reflect opinion and coinci- dent behavior change" rather than shape opinion and behavior. Appendix H. A Note on the Alcohol Tax I. We do not mean to imply that other actions that are more selective against problem drinking, such as strunger eenfnrcemenl of drunk-d riving laws, should not be undertakea But we feel that any such actinnv, them- sefves likely to entail collective costs (such na higher taxes for more law enforcement), are unlikely to have the efferI of lowering external cttnls enough to change ourconclusion that the tax nn alcohol should Im raised. 2. In this case, we hrcus only on the losses Irnm incurrecl prices. Iu the case of no alcohol tax, we ignore the burden of exlernal cnsts borne by society at large. 3. Pogue and Sgontz refer to light and heavy drinkers as nonabusers and abusers, respectively. 4. Work by Grossman and his colleagues suggrst.s that beer consumption by young adults, a group prone to drink and drive, is price responsive. Phelps (1c1gg) used their estimates to gauge the impact of a change in beer prices on driving fatalities. Z4606S680Z

APPENDIX F Excise Taxes and Demand I he adverse health effects associated .vith cigarette smoking and excessive alcohol consumption are well known. In addition, smokers and heavy drink- ers may impose costs on society in the form of collectively financed health etpenditures, diminished job pnrductivity financed through employer- covered sick leave, property damage due to cigarette-caused fires, highway accidents and deaths attributable to drunk driving, and even criminal activity caused by drunkenness. As the various health effects and social costs of smoking and drinking have been identilied, federal and state legislators and nlher public officials have considered, and at times enacted, measures aimed at curtailing consumption of these goods. The purpose of this appendix is to examine one promising policy inslru- ment available for reducing smoking and alcohol consumption: an increase in excise laxes. In addition to assessing how excise taxes influence the de- mand for cigarettes and alcohol, we will look at other economic forces that are presenf in the markets for these goods, including tobacco production quotas and price supports. Alternativr policies for reducing cigarette and alcohol consumption such as advertising restrictions, antismoking or anti- drinking publicity campaigns, and smoking and drinking prevention pro- grams may be used in place of or in conjunction with taxation. We will not attempt a detailed exploration of these policies. Historically, excise taxes on cigarettes and alcoholic beverages have served to finance war efforts. As early as 1791 a tax was imposed on distilled spirits to pay Revolutionary War debts. Later repealed by Jefferson, the tax was rrimposed atter the War of IA12- Alcoholic beverage taxes also helped to finance the Civil War and Wurld War 1 a nd were rnised substantially to assist iu covering tlrr costs of World War II anri the Korean conFlict (Musher and tlrae¢hanip, 19N1). Enacted in IRhF, lhe ~igarette excise tax too was an impor- tunt <rrurce of rerenue for covering war debts. Prior lo the advent of the imume tar last before World War 1, excise taxes were Ihr fedrral governmem-s princip.d source of revenue. Clark (19N4) has nnted"At the turn of tlte crnlurv, htkes on alcoholic beverages supplied h_1 perrrnt ot -Ircasurv receipts and Irvirs un tobacco, 20 percenl. But as Excise Taxes and Demand 167 progressivitv became an important objective of the tax system and. more recently, as social insurance payroll taxes assumed an increasingly important role in supplying revenues, excise taxes have diminished in im}rortance." Presently, excise taxes on tobacco and aloohotic beverages account for only 0.4 and 0.8 percent of federal tax revenue~<, .especlively (U.S. Department of Commerce, 1984). While cigarette and alcohol taxes have hr•n an important means of generat- ing revenue for federal and state governments (tobaccu taxes generate 1.2 percent and alcohol taxes 0.82 percent of overall state revenues), several other rationales for taxing these goods haee surfaced. For instance, as the health mnsequences of cigarette smoking nnd heavy drinking hace become apparent, taxes have been viewed as a potential vehicle for limiting con- sumption and improving the public's health by reducing smoking-induced and drinking-induced diseases and premalure deaths. Related to this ap- proach is the notion that there are signi0eant externalities associated with smoking and drinking. Lewit et al. (1981), fnr example, suggesled that the case for government intervention in the cigarette market is derived in part from the presumed existence of both externalitirs in cunsumption (ihe health of some persons enters the utility function of olhers) and externalities of production (smoking by some may hamr the health of others) Similarlv, concerning alcohol, Mnsher and Beauchanip (19ry1) observed that "alcohol taxes are often justified because they help ~untrol the sacial cosR of alcohol use, which are extensive." Ov levying appropriate laxes on these grrrrds, the government can in princi- ple drive consumption of these goods tuwzrd suciallv optimal levels (that is, to Ihe point where the marginal cost to smokers or drinkers equals the mar- ginal social cost). The tax revenues received could polenliallv provide com- pensation to those harmed (financially or ntherwise) by smokers and drink- ers, although the transaction costs asociated with directly comprnsating the "victims" of smokers and heavy drinkers m:rv prove to he prohibitively high. Instead, tax revenues from cigarettes and alrnhnl cordd be used Io finance a social program, the costs of which are partially determined by the amounts of these goods we collectively consume. For example, Munnell (1985) has argued that cigarette and alcohol tax revenues should he used to help finance the Medicare program: Two alternative lines of reasoning can he used to justify increasing the excise taxes on alcohol and tobacco as a means of financing Medicare. On the one hand, consumption of these items affects health and health status and determines the usage of Medij.ne services, The relationship between henvv smoking and increased Inng and hearl disease is well established, as is the relationship between exk essive use of alrnhul and cirrhosis of the liver, certain cancers, aml highway injuries. Increasing excise taxes on alcohol and tobacco could br viewed as advance pavmev hy those who smoke and drink for the higher medical costs that they. Z68068480Z

172 Appendix F ; Excise 1'axes and Demand 173 Baltagi and Levin to conclude that, "as an antismoking tool, cigarette taxation may not be as effective in reducing cigarette consumption as previously thought."'fheir reported income ela,Aicities, which ranged between -o.f%12 and 0.004, were not statistically different from zero. Fujii (19NU), in an effort to circumveut nudlicollinearily problems (ammng the price, income, and advertising variables) that he asserts were present in several previous studies of cigarette demand, used ridge regression tech- niques to estimate demand equations for cigarettes. He used time-series data from the United States from 1929 to 1973, and specified equations in both linear and double-log formv. Independent variables used to explain cigarette consumption per capita included price, real income per capita, advertising expenditures, lagged consumption, and a sel of dummy variables to capture the effects of various "health scares" (Surgeon General and other reports on the health effects of smoking). The linear equations were found to provide better fits than the double-log equations. Price and income elasticities, calcu- lated at the sample means in the linear specification, were -f1.47 and 0.22, respectively. In his attempt to deal with the price-income collinearity problem I Iamilton (1972)--who was primarily interested in examining how cigarette consump- tion has been affected by both advertising and the health scares-used extraneous estimates for the price and income parameters. The price elasticity figure (if -0.51 was taken from Lyon and Simon (1968), who used a quasi- experimental technique which compared changes in consumption in states that experienced a tax increase with adjoining states where there was no such increase. Using the Lyon-Simon price elasticity estimate, Hamilton esti- mated an income elasticity of 0.73. Using Bayesian regression methods, Laughhunn and Lyon (1971) esti- mated per capita cigarette consumption as a function of price, personal con- sumption expenditures (income), and region of the country (West, North Central, Northeast, and South). Whfle they estimated the overall price and income elasticities to be -0.61 and 0.42, they found a substantial amount of variation in their estimates of these elasticities at the regional level. For exam- pte, price elasticities ranged from a quite inelastic -0.40 in the West to an elastic - 1.14 in the Northeast; income elasticities reached a high of 0.79 in the West and a low of 0,21 in the Northeast. Leu (1984), in his study of anlismnking publicity and taxation in Switzer- land, estimated the nominal cigarette price elasticity of demand to be - 1.00 and ca Icula ted the income elasticity m U.93. After noting that the real cigarette price failed to be significant once the nominal cigarette price was included in the estimating equation, l.eu rejerted the explanation that this result can be accounted fur by smokers' money illusion because of the addictive nature of smoking. Rather, he posits that the observed responsiveness of cigarette consumption to nominal price is doe to the indirect effects of antismnking publicity. According to his line of reasoning, tax-related price increases act as a"frnal trigger" for smokers who are displeased with their habit and wish to quit. Lewit et al. (1981) used data from the Health Examination Survey to esti- mate cigarette demand functions for teenagers. The authors examined two measures of smoking behavior: whethar or not the teenager smoked and the quantity smoked per day (not conditioned on smoking)- The estimated elasticities for both the smoking participation erptation (where a dichotomous dependent variable was used to indicah• whether a person smoked or not) and the quantity smoked equation are quite large (-1.19 and -1.44) relative to the other estimates presented in Table F- 3. Lewit et al. suggest that lhese large values may incorporate income as well as substitution effects--for while the study held family income constant and included a proxy measure of a youth's discretionary income, without .r true measrue of his nr her real in- come the estimated price parameter is biased in that it represents more than the pure price effect. Yet this is not a problem from a policy perspective: the total effect is what matters, not the pure price effect. With respect to the quantity smoked equation, the price r.ttdffcient need not even be negative because of selection effects (if light smoFers quit, cigarettes per smoker could rise). Still, the high price elasticity estimates led the authors tn conclude that increasing cigarette excise taxes is a puent way to achieve a reduction in smoking among young people. In their study of the potential of excise taxes as a means to reduce emoking, Lewit and Coate (1982) used data on individuals from the 1976 f tealth Inter- view Survey to estimate the price and income elasticities of demand for cigarettes- The authors offer a cogent , egrmrenl to support their view that utilizing data on individuals is preferable to using states as the units of observation (as was done in most cross-sectional studies of cigarette demand) because the latter approach produces eLtsticily eslimates that are biased up- ward. Sales figures based on taxes paid fail tn adquately reflect actual con- sumption, inasmuch as there is considerable smuggling or bootlegging of cigarettes from low-tax to high-tax states. In a further effort to eliminate the potential for producing biased estimates, individuals were drupped from the sample if they lived in areas where the price of cigarettes in their community was greater than another price within a1wenty-mile hand around their place of residence. The regression estimates obtained from this "restricted sample" indicated an overall price elasticity of -0.42 and an income elasticity of 0.08 when the elasticities were calculated at the samplr means. For the equation in which the dependent variable was smoking partiripatinn, the price elasticity was -0.26; when the dependent variable was quantity of cigarettes consumed, the price elasticity was -0.10. Finally, after estimating demand equations for different age and sex groups, the authors mncluded that prlre has its greatest ef&•cl on young people and that it primarily influences the decision to begin smoking rather 7V8 0V7YSOZ

204 Notes to Pages 96-121 10. 1'here are a substantial number nf nundrinking years. The percentage of former male drinkers increases with age from 2 to 7. We used the data on the percentage of heavy drinkers at each age interval to estimate lifelime consumption. 11. We do not have an estimate of the direct health costs and Inst pnxluctiv- itv (if nnndrinking victims in alrohul-relaed accidenls (either for Ihose who died or those who survived)- 12. Im mntrast, Ihe external costs of smoking are qoite sensitive to the defi- niliun of relevant medical costs, which rai,es a question abnut the causal connection for the broader definition for smoking effects. 13. In our data the association of heavy drinking with early retirement is slrang, but the effect of drinking on retirvment payments is uncertain. 6. The Axternal Costs of Sedentary l,ife-Styles 1. Although exercise levels were more stable among people enrolled for three than for five years, the dilferenms were not great-65 and 61 Imrcent, respectn'ely. 2. In principle, one should allow fnr feedbar'k between health and exercise; lack of exercise reduces health status, and those who arc ill do not exer- ci,e as much as those who are well. Unformnalrly, our data do not allow us to estimate such a model. 3. Specifically, we adjusted the HRA nwdel', predictions so that the relative risk of exercising was set to he the I IRA mnaiel's relative risk to the 0.136 power. Accordingly, the male exercisers were estimated to live 1.5 years longer than the nonexercisers. This figure was the gain in life expectancy reported in Paffenbarger et al., (1986) fr,r thuse exercising more Ihan 2,000 kilocalories per week, compared tu those exercising less after ad- justment for bloeat pressure, cigarette smoking, weight gain, and age of parental death. 4. Rrodl that Ihe cnsls for drinkers indude more Ihan Ihe collectively fi- nanced cnsts for smokers and sedentary people. Orinkrrs also impose cnsts related to drunk driving and olher r rimes. 5. We computed arcording to the HRA model Ihat men whir switch from a cedentarv life-style to exercise will live `I years longer, almost double the comprded effeets of not smoking! 6. Bv contrasl with exercise, dncturs mav advise sick people tu stop smok- nqp which would diminish our estimate of the link between smoking and hcallh. 7. In the Paffenl.argrr study of Harvard alumni, the adjusled relative risk of death nf current smokers was 1.76 as npposed to 1.31 fnr exercisers. tiimdarlv, after adjusting for other factor. Wiley (1981) found exercise about half ac important as zmoking and le•~ important than nondrinking or heacy drinking in Alameda Counlv (Califnrnia) data, 8. If we• were filtin); a logit-type model, the multiplier for the probabilities uf d1'ing at older ages would be quite differrnt from the multiplier at erounger ages. llee difference between 6 and 8 percent (paffenbarger Notes to Pages 121-126 205 et al., 1986) is (1 71 logit. Adding 0.31 logit tn Rll percenl brings us (u only 67 percent, and even doubling risk at 6 percent ((1.69 logil to go from 6 to 12 percent) cmly brings a 60 percent chance nf death to 75 percent. See Breslow et al. (1993) and the Spasoff and McDnwell (1967) study for more discussion of modeling issues. 9. For example, by age 75 the less healthy hah of Ihe sedentary group may have died, but only the least healthy 10 percent (if the exerciser group mav have died. 1f1. Suppose that the risk ratio (if very active to sedentary is 3.0, instead of sedentary's having a heart disease mortalit) nrulliplier of 2.0 (twu times average risk) and very active's having a multiplier uf 0.7. With a change in underlying proportions, the multipliers shnuld he about 1.2 and 0.4, respectively. Because 40 percent of the dealhs of older males are due lu heart disease, doubling this percentage in the current IiRA gelx tr, 140 percent of total risk: (1IXp j2/fi4) 4 0.6). Verv actives at 11.7 end up at 89 perrent of average total risk: (IIA)) )11.7(11.4) + 0.61. (The 0.6 is the fraction of deaths from uther than heart disease.) Theu, the raliu of nrorlality due to all cause< for sedentary as opposed to active persnns is 140188 - 1.59. A multiplier of 1.2 for sedentary persons le.lds In a total mortalitv ratio nf LOB, and a multiplier for very actives of 0.4 Irads to a total mortality ratio of 0.76; the ratio between the two groups is then I.(I6/0.76 -- L42. In fact, Faffenbarger et al. (1986) had an adjwa¢d ralio of 1.31, and Wiley had an adjusted ratio of 1.18. 11. To the extent that present exercise is a pxn' proxy for future ese•rcise, the present gains (Inwer use of services) will not persist. Thus, our esti- mates could overstate the brmefits. To the extent that there is an extra advantage from consistent exercise, ourestimales understate the bcnefits (if exercise. 12. The sedentary group is assumed to be 64 perce,nt wonre.n. We havre compared them to tlre same blend nf exercisin(; mrn and women, tn avoid a confounding of the effects of gender with exereisr. Both seden- tary and exercising groups are shown in the table to cost the rest of society money (at a 5 percent discount rale), hecaosa women as a whole get more payments out of the system than Ihey put in. l'his efferl is mitigated somewhat by our excluding the physically limited frurn the exercise calculations (the sedentary are suppneed to be those whu e nuld exercise but do nnt). 13. Most of these costs occur after retirement, .str Ihat on average on1y.470(I of wage taxes is lost. But surveys have shown Ihat most people are willing to pay many times their expected inerease in earnings for.cafety, and most retired people dn want to live. 9'his component of costs may well be as much as $3,(100 (Howard, 1976). 7. Conclusions, Limitations, and hnplications 1. For a discussion of this issue see Shoven et al. (1989) . 2. There are two main reasons why our results are so murh lower than, for 44606S680Z

194 Appendix F Excise Taxes and f)emand_ _ 185 taxes: the benefits to be realized from diminished consumption. But attempts to realize health and possibly other benrfits through increased taxation may yield highly undesirable results, particnlarly in cases where there is a strong addiction to the taxed good. As O'f-lagan (1983) has written: If misuse of alcohol is but a.symptom and not the cause of the problem, it could be argued that attacking the source (e.g., home background, unemployment) is the more appropriate solution for alcohol abuse. A high tax policy for control purposes could also have alarming distribu- tional effects--resulting simply, perhaps, in a massive transfer of re- sources frorn the families nf heavy drinkers, thereby worsening the problems it was supposed to have cnnnterac ted. In short, although raising cigarette .rrrd alcohol excise taxes may lead to social benefits including health care cost savings (and ultimately improved health--assuming that the tax does not cause people to pursue other un- healthful habits such as illicit drugs), Ilre potential distributional effects uf increasing taxrs cannot be ignored. Conclusions There is nn doubt that public policy toward cigarettes and alcoholic beverages has been confusing and contradictory. Over the last thirty-five years or sn, real federal taxes on these goods have declined sharply, despite mounting evidence that their consumption (cigarettes, in particular) has adverse health effects and imposes substantial external costs on society. As these conse- quences have become increasingly apparent, pressure on federal legislators to curtail consumption and require smokers and drinkers to assume financial responsibility for the social costs of their habits has mounted and will con- tinue to do so. We have already witrvessed examples of such action at the state level; ultimately the federal govo•rnment will be forced to intervene, since the potential for state action is limited (it will simply encourage the growth of illegal activities such as bootlegging). While federal legislative initiatives to reduce cigarette and alcoholic bever- age mnsumption and to compel smokers and drinkers to bear the full costs of these activities may be inevitable, there is a good deal of uncertainty about the relative effectiveness of the means available for achieving these ends. Estimates of the impact on consumption (if the different policy measures ftax-induced price increases, advertising restrictions, antismoking publicity campaigns, arrd the like) vary widely. Several authors of studies on the demand for cigarettes and alcoholic drinks recognize that the quality of their work, and hence the precision of their estimates, is constrained by both a lack of data and the typical problems asociated with using standard analytical techniques. Levy and Sheflin (1985), acknowledging the limitations ot their own research. identify a set of econometric problems that afflict many, if not most, of the studies in this area. These factors include a simultaneity bias in instances where supply is treated as an exogenous variable (as it is in almnst all of the studies reviewed in this appendix), a bias from omitting relevant and possibly important ex- planatory variables, errors in the measurernent of variables (for instance, actual consumption of both cigarettes and alroholic beverages is often under- estimated), and a bias from aggregating over individualx and/or products. The gravity of these problems is such that some observers are extremely skeptical uf the work to date on factors influencing the demand for cigarettes and alcoholic drinks. Ornstein and Levy (1't83), for instance, characterized the studies they reviewed as having produced "a bewildering set of results." Cook (1981) took an even dimmer view:'TAy cnnclusion from reviewing the econometric studies of alcoholic beverages is that there are no reliable esti- mates for the price elasticities of demand based un U.S. data." Similarly, Johnson (1985) wrote, "Our major conclusion from this is that econometric estimation of demand functions is a tricky business and that conclusions drawn from any one study should be cautiously considered before they are used." Although it may not be possible to draw precise quarnftative runclusinns about the individual effects on demand of price, income, advertising, and other variables, it is obvious that at least sorne of these factors can be manipu- lated in order to achieve policy objectives. While price elasticity e.timates for cigarettes and alcoholic beverages vary acrous studies, all of the n•searchers found price effects that are highly significant. And unlike income and, to an even greater extent, different sociological variables (which were found to influence demand in at least one study (of alcoholic drinks), price can be easily increased or decreased through tax changes. The degree to which advertising-perhaps the second-best "policy variable"- affects the demand for cigarettes and alcohol is much less certain and, as indicated by congres- sional hearings on the proposed cigarette advertising ban, a highly rontrover- sial subject. Should policy makers decide to increase excise taxes on cigarettes, alcoholic drinks, or both, for whatever reason (to increase revenues, to covet the social costs of smoking and drinking, and so on), alternative elasticity estimates could be applied to determine the approximate effect of a specific contem- plated tax rate change. Based on the results of this analysis, the tax rate could be adjusted to reflect the effect of the good's prire elast[city on whatever the tax change was designed to achieve (say, raising a certain amount of money to cover the social costs of smoking). Initi.dly ane could use Ornstein and Levy's summary estimates of - 1.5, --1.0, and -- 0-3 for considering potential changes in the spirits, wine, and beer excise taxes, resprctlvely. According to the figures reported in Table F-3, -0.4 might be an appmpriale starting point for analyzing a change in the cigarette axcise tax. tiensitivity analyses mnld then be conducted to determine the ruagnitudes of change in variables of interest if the true elasticity differed from the initial estimate. `_ 1,06068L90Z

" ti 14 IM IMMMMm i IIII I1INII 1 IIYiI IIIIIFl 182 Appendix F mined by conditions within each separate market. Spirits and beer appear to be weak substitutes, but the relations between the spirits and wine markets and the beer and wine markets are highly unstable." Finally, based on their comprehensive review of the literature, Ornstein and Levy (19&3) developed the Fullowing summary estimates of beverage price elasticities: -1.5 (or spirits, -IA for wine, and -0.3 for beer. The authors are quick to point out that these estimates are "cnrde at best, particu- larly for wine, but seem the best available." Distributional Effects of Increasing Excise Taxes Excise taxes on cigarettes and alcoholic beverages have similar, though not identical, distributional effects-mainly because the two goods have in many respects the same nature. Both are consumed by large numbers of people in all income groups. Both are habit fonning, making it difficult to characterize them as being either luxuries or necessities in the usual sense. And both generate significant external costs, a fact that in turn makes consumers of these goods prime candidates for assuming the burden of these costs. The first concern that must be addressed in assessing the distributional effects of cigarette and alcoholic beverage excise taxes is the extent to which such taxes are passed on to consumers of these goods, as opposed to being bome by producers. With respect to cigarettes, Barzel (1976) found that ciga- rette prices increase by more than IW percent of the tax increase. Specifically, for each I cent increase in the tax the retail price is raised by 1.065 cents. His explanation for this rather surprising result was that excise taxes, in contrast to ad valorem taxes, tend to cause firms to upgrade the quality of their products. Commodities as transacted in the market are complex, and the margins with respect to which optimination takes place are numerous. Because commoditv tax statues will not generally cover all of these margins, any tax will induce multiple changes not only in resource allocation away from the taxed commodity and into others but also in the "quality" of the commoditv and how it is transacted, a substitution away from the taxed attributes and into the others. Barrel's empirical work is supported by Johnson (1978) who, after respeci- fying Barzel's model to include a separate dummy variable for each state, found Ihe tax coefficient to be even larger than reported by Barzel (1.101 versus 1.065). Both Barzel's and Johnson's results have been challenged by Sumner and Ward (1981), who argue Ihat tax increases are not solely respon- sible for the larger retail pricr increases found in the Barzel and Johnson analyses. After accounting for changes in the wholesale price of cigarettes, Sumner and Ward concluded that "the diffused sources of price changes represented by general inflation enter both directly and in conjunction with tax changes; and that once allowance is made for the indirect influence of Excise Taxes and Demand 183 tax changes in effecting backlogged price increases, the coefficient on tax change itself becomes significantly less than unity." In other words, in place of Barzel's quality hypothesis, Sumner and Ward hold that tax increases give retailers the opportunity to incorporate in their costs minor increases that had previously accrued but were not large enough to justify a price increase. Disagreement persists over precisely how much of the tax increase is passed along to smokers. But based on the existing body of empirical work that addresses this issue, as well as studies indicating that the demand for cigarettes is relatively inelastic, most If not all of the cigarette excise tax is paid by smokers. Considerably less is known regarding ihe degree to which taxes on alco- holic drinks are passed on to consumers. On the basis of the price elasticity estimates contained in Table F-5, it is possible that a smaller fraction of these taxes are borne by consumers than is the case with cigarettes. Still, if the long-run supply of alcoholic beverages is perfectly elastic-and there is little reason to believe that it is not in the relevanl range--Ihen all excise taxes will be transmitted to consumers. Having established that cigarette and alcoholic beverage taxes are for the most part passed along to consumers, the next issue is the incidence of these taxes. It is generally believed that per unit excise taxea on goods am regres- sive. Toder (1985), using data from the Consumer Expenditurr Survey by the Bureau of Labor Statistics, shows that taxes an cigarettes arrd elcoholic drinks are highly regressive. Households in the lowest-income quintile spend over 2 percent of their incomes on tobacco products, while households in the highest-income quintile spend less than 0 11 5 percent. A similar but somewhat less dramatic pattern emerges rvith alcoholic beverages. People in the loweshincome group devote roughly 3 percent of lheir incomes to alco- hol, while individuals in the highest-incnme group spend approximately 1 percent. (Here a case can be made that income is endogenous--that is, in- come falls for individuals who are alcohulics.) The regressivity issue has prompted a substanlial amount of controversy, especially in the literature on smoking. Ftock (19F19), using a measure of tax progressivity known as the S-Index, found Ihe cigarette excise tax to be among the most regressive of all taxes tvpicall,v imposed on individuals or households. Harris (1982) and Warner (1984), by contrast, discount the re- gressivity of cigarette taxes because (1) thr very poorest groups in the United States have lower smoking rates than middle-Inconie groups; (2) among women there is a positive relationship between smoking rate and income, which does not hold fnr men; (3) many low income smokers are teenagers and young adults who may be only temporarily low-income and who are most likely to respond to a lax-related prik ~F- imrease by either quitting or not starting at all; and (4) there is some evidence that lower-income groups have a greater elasticity of demand than highvrinrnme groups. Proponents of increasing the cigarette and alaoholic beverage taxes cite an additional reason for alleviating concern over the regressive nature of the U06U6S68UZ

Selected RAND Books Aleriev, Alerzndvr R., and S. Bnders W irnhush. ed+ flln»r Mrrrnritlts iu the Red Army Asrl nr LnrlnlilV" Brnddeq Cuto.: Woslvirw Pre..c, 19118, Ruildrr. Carl II. llrr Ma.ks nJ War: Amrrumr Mifilmu Slyks iu Sbalegy and Anal4sis. II,rllinwre. 1')hns Hnl.kins University Press, 19Hn Chassin. Mark R, et al rhe A/qnopriaterrrsn of 5e/ectr-,t MMiinl and .Surgimf Prrcednres Rdnlmnship lo Gtngrupfrirul Va•iatiun.a Ann Arb,,r, Mich.: Health Administration Press, 1989. Ihrr(mnn, RobwL Paul A. Samuelsra, and RoMrt M. 9oluw. Linear Prngramming and 7 iaannur Analysrs. New Ynrk: McGrxw-liill Book Company, 1958. Reprinted New Yark: puver Publiealions, 1987. Fsinsud. Merle. .SrnrrlrnsA under Snniet Rulr. Cambridge, Mass.: Harvard University I'ress, 1958. Reprinted Bostnn: Uvwin Hyman, IrM19. (:zle, David. Thr T Heury rJ Linmr Fmnnmic Ma/els. New York: MaGraw-f iill Bonk Cum- panv, 195R. Reprinted Chicago: University nf Clncago Press, 1989. Gustalson, Thane. Crisis amid Plenty: Tlv Pnlitics nf Ui1 nnd Ga.s and Ihe 6nlutinn o/ Energy Pclny in the wmld Union sinre 1917. Princeton, N.J.: Princetnn University 1'ress, 1989. Hosmrr, Slephen T. Cmrstraints on U.S. Stottry,•y in Thi.d Wnrld Canflirtt. New York: Taylor & Francis, 1987. Kanouve, David F.., et al. Changing Medical Prmfice 16raugh Tnhnnlugy Asa.asment: An £rsdrmliun of the NIH Cnnsrnsua Drrclnpnrenl Pro,Qrurn, Ann Admr, Mich.: Health Adrnioistratiou Press. 1989. Kurbnmski, Andrzej, and Francis Fukuyama, eds. The Srrtad llninn and thrTBird Wnrld: The last ThrerlM'ades. Rhzcz, N.Y.: Cbrnell University 1'ress, 1987. Levine, Robert A. StllllhrAnns 17ebme. Broukheld, Vt., and Uldershvt, England: Cuwer Publishing Cn., 1990. Morrison. I'eter A., ed. A Taste rr/ fhr Gwutry: A Callrrtinn nf Calnin Peale's Wrifings. Universily Park: Pennsylvania State University Press, 1990. Nerlich. Uwe, and James A. Thnmsrm, eds Cmrrnti~•nnl Arms ('ontnd and the ,Sn'rvity of f rrrnlr. BanIdeq Colo.: WesM1'iew Press, 1988. Quade. tdward 5., rev, (::race M. Carter. Analysis Jnr Public Dd-isinns, 3rd ed. New Yurk: Flsevier Science Publishing Company, 1984. Rnss, Randy 1.. Gnrrrmrrrnl and the Miratr Srctar: Who Shnrdd Do ttlhnt? New York: Tavlor & Francis. 1988. Wolf, ('hnrles, Jr. Markets or Grr•trnmertls: Chnuing Aehiren InqrrJttt Alternafirrs. Cam- bridga. Mass.: MIT 1'ress, 1998. 1,Z60671ISOZ

17•1 Appendix F i Excise Taxes and Demand 175 than determining the quantity smoked. They also found that price effects were stronger for males than females. Warner (1981) used aggregate time-series data from 1947 to 1978 to estimate an ordinary least-squares linear regression model of cigarette demand. At the means of price and consumption the estimated price elasticity of demand was -0.37. Warner's analysis also included a measure of laws restricting smoking in public places.2 This measure was strongly correlated with de- rreases in consumption, climbing from 9 cigarettes per capita in 1964 to 606 in 1978. W,isserman (1988) and Wasserman et , I. (1991) estimated a generalized linear model of rigarette demand using daw from National Health Interview Surveys. Separato equations were estimated for adults and teenagers. The adult results indicated that the price elasticity of demand is unstable over time, ranging from 0.06 in 1970 to --0.23 in 1985. The teenage price elasticity of drmand was m,t statistically different from the adult estimates. Further- nwre, regulations restricting smoking in public places had a significant effect in reducing both adult and teenage cigarette demand. tJsing data from the United Kingdom for the period 1955 to 1975, Witt and I'ass (1983) developed a model for explaining cigarette consumption based nn price, income, and alternative specifrcalions for the various health scares that occurred in the United States and the United Kingdom throughout the sixties and early seventies. The estimated price and incr,me elasticities were, rrspactively, -0.32 and 0.13. Young (1983) provided an alternative spc.ificatiun of Fuji's(1980) demand eqnation for cigarettes. Because of the addiclive natu re of smoking, he argued that the cigarette demand curve is kinked in a way that makes the response to a price increase less elastic than the response to a price decrease. The obvious implication is that attempts to reduce smoking through tax increases may be somewhat less successful I han the elasticity estimates in other studies Ivad one to believe. fn order to test his asymmetry hypothesis, Young estimated two ratchet models using ridge regression. He concluded that there is "substantial evi- dence of asymmetry of consumer response to price and income changes," and that the Iwo models resulted in better „verall fits than Fujii's symmetric nuxiel. His estimates of the price and income elasticities of demand for ciga- rettes were -0.33 and 0.15, respectively. The apparent lack of consensus regarding the elasticity of demand for rigzrettes implies that the effects of a tax increase on consumption and gov- crnmvnt revenues are uncertain. In the absence of a precise estimate of the prire elasticitv, we cannot gauge exactly the change in demand that will be eliriled from a given tax increase- In gener:d, the different estimated elastici- lics may be high enough to have a substantial impact on consumption (Lewit and Coate, 1982). For example, the range nf elasticities shown in Table F-3 implies that a tax-induced price increase of, say, 10 percent would reduce adtdt cigarette consumption by 2.2 to 10 percent. Finally, in evaluating the potential of increasing the federal excise tax In order to achieve reductions in cigarette consumption, we need to recognize that a relationship exists between elasticity of demand and the possible trade-off between changes in consumption and changes in government reve- nues. Specifically, as long as the demand for cigarettes remains inelastic, government revenues will continue to increase as the excise tax is raised. If the demand curve for cigarettes is linear (as opposed to, say, log-linear), the elasticity of demand will increase as smokers /vt back on their consumpdon in response to the higher price resulting from the tax increase. Once the quantity of cigarettes demanded falls within tbe elastic portion of the demand curve, tax revenues will decline. These forgone revenues might appropriately be viewed as the cost of discouraging consumption through tax-induced price increases (Laughhunn and Lyon, 1971). QUOTAS, ALLOTMPNTS, AND PRICE SUPPORTS The involvement of the federal government in determining tobaccn produc- tion and prices dates to the passage of the AKricuilural Adjustment Act of 1933. The origin of the current tobacco program, however, can be traced to the second Agricultural Act of 1938 and its arnendments of 1939 and 1940. Essentially, the law created a system of prio' supports and supply controls designed to stabilize the tobacco market. Although the tobacco program is complex (in terms of the institutions involved in its operation, the wavs in which actual quotas and support prices are eatablished, and so on) and has undergone many changes since its inception, its basic shape has endured. As described by Johnsun (1984), until 1992 the program functioned as follows. Once tobacco growers agreed by referendum to have a quota pro- gram, individual allotments were set for each farm. The allotments (initiallv based on acreage, later changed to pounds) wem distributed to growers in accordance with historical production patterns. Fach year the secrelarv of agriculture determines the overall quota, consisteni with the tobacco support price established by a "parity" formula. The national quota for each type of tobacco is set with the intention that on avrrage the market price for that quantity will be slightly above the support price. Additionally, the qrrola is adjusted so that the support price is not atdetiv binding and tobaccn is gener- ally sold to market buyers in the year it Is produced (Sumner and Alston, 1984). Farmers unable to sell their crops on the open market lcraned the excess to one of the two farmer cooperatives, the Bmiey "I"obacco Growers Assnda- fion or the Flue-Cured Tobacco Cooperative Slabilivation Corporation. These cooperatives assumed the role previously Mdd l,y the Commodiiy Credit Corporation (CCC) which in the late 1930s and early 1930s acquired tobacco (and other farm products) through nonrecourse loans. The CCC continues to make loans to the farmer cooperatives, typirally at below-market rates of interest. ' In July of 1982 the Congress, under pressure to reduce the costs of the 96806S680Z

178 Appendix F APPPNDIXTABfEF4. Excise taxes in license atates, by type of lx:renge (aa of May 1985) .Stale Distilled Spirits Tax Rate (S per ga0on) WineTaaRatea (S per gallon) 13eerTaxRate (S per gallon) Alaska 5.60 0.85 0.35 Arizona 3.00 0.84 0.16 Arkanxas 2.50 0.75 0.23 California 2,00 0.01 0.04 Colorado 2.28 0.277 0.08 Connecticut 3.00 0.30 0.097 Delaware 2.25 0.40 0.06 Dist. of Columbia 1.50 0.15 0.07 Florida 6.50 2.25 0.48 Georgia 3.79 1.51 0.48 Illinois 2.00 0.23 0.07 Indiana 2.68 0.47 0.12 Kansas 2.50 0.30 0.18 Kentucky 1.92 0.50 0.08 Louisiana 2.50 0.11 0.32 Maryland 1.50 0.40 0.09 Massachusetts 4.05 0.55 0.11 Minnesota 4.39 0.27 0.13 Missouri 2.00 0.34 0.06 Nebraska 2.75 0.65 0.14 Nevada 2.05 0.40 0.09 Newlersey 2m 0.30 0.03 New Mexico 3.94 0.95 0.18 New York 4.09 0.12 0.055 North Dakota 2.50 0.50 0.16 Oklahoma 5.00 0.63 0.40 Rhode Island 2.50 0.40 0.06 South Camlina 2.72 1.08 0.77 South Dakota 3.80 0.90 0.27 Tennessee 4.00 1.10 0.13 Texas 2.40 0.204 0.198 Wisconsin 3.25 0.25 0.06 SotIRCE D7s41kd Spirib Council of the Uniled Smb, 1985. NOTE: Tooonven the Opvr in Ille table b 6.Ilra Per SWnn oredvnol, divide the Ilpirila, rvinq rable encludea Flawaii, which levirs a 20 wl t>ar4uen by 0.45.0.15, ad OD4, Iespecdyely- Th,0 prrcent ux on spirib. wirc, and tlxr. e. Leas th.n 14 pen.'ent almhol. _ Excise Taxes and Demand 179 APerNnrRT.UIEF.f plwy.Eycpael.ekWycrdmmNLrtlanlolcEarrrye. 9My Nis aWtlclly bcqe V1uYfYy Mellmd M Pyiim~im [qn Cwk U9rq _. - -.. An p{e -I.s Na Mlmaetl Qa.d .:pnlnlemu 9.,e tu .Nnte. cunk.9 Lbd tl T M1 bewern ek10 etl 19)5 l k wc m uasa/ Splrin -L! 013 nm.~Y;ml kw upvn PoNr4 -e,llrml .rn IMe«,k. em'. n s rlpny (1923) spo-in -0r0 b-I W LIII n 193 GM-ry Ie,G quw:,.rv Thrc-erle. Nu'. Il.n. W lik -n W A-0.99 ] 3t p].50 aynl lem a.,rt. Par 0 20 / b 0.u aM b 1.10 n~ay .ne a,aya 9)31 aae. -0.9 0.4 ud,y km wu.m ppkd nnv sxYn41 Ind Ilm<.,ir, n,N. u s. rdN,m .m aua. O9m Spinl, -I.11 ro-I.I4 0.IV b 011 Qdn~,.y kxn m.ay: Tlme+erk..IN.: ('mNllm rmnNrN Inn ,¢uml Pm.lm'o In. .,xm,my w/ne -1111r In -0s9 001 n 0. ave ai.>5 lu 4P -0.0r ro n.nR 1<•Y Ntl SMni. (19ri) A91yprt -0.5 0~ MNPII,{k.,l,.lu.,e. Tlme.m,k,.ln.-.IIS. x4<I.ine. n91101 Allrypn -n1Im-OM Uleron5l U.Mnn>luaymm. TYecvirtd..n:nk Nakmpn f19A2) Sptri -2.0 OA Taln uay I..n ,qu.rt. 9'MS vk. d..u: V 9. w;M 0.7 U se. -0.6 -u 3 nm.4a Nk I-y paxtl sFdu -If Nmnnxm.ind Lirt,.uumrt•m. wlm -L0 sK, -a.y The studies of the demand fnr alcoholic drinks are consistent, however, in that, for the most part, the equations u.sell in the analyses comprise the following independent or explanatory varialdes: nwn-price, prices uf substi- tute goods, personal disposable income, a time-Irend varialrle to accotolt for changes in consumer tastes and other changes correlated with tirne, and in some instances an advertising variable (Orn.tein and Levy, 1983). The ranges of the price elasticity estimnlcs presented in Table F-5 are between -0.811 and -2.0 for spirits; - 0.64 and - 1.0 for wine; -(1.25 and 0.24 for beer) and -0.5 and -1.6 for all types of beverages. The estimales of income elaslicities of alcohulic Ixv«•ragev, shnwn in fable F-5, also cover a broad range. In Ihe studies that eonlpuled separate elastiri- ties for each beverage type, beer was comislentlv found lo br the most income inelastic. In fact, the income elasticilv estimate fnr beer provided by Niskanen (1962) is negative, indicating thal beer is an in/erior g/rod (tha( is, the level of cnnsumption declines as iurome increases). Juhnsnn and g68065480Z

138 Appendix A gives an estimate of $56.6 billion, and the 1985 Office of Technology Assess- menl report on the costs of smoking, which gives an estimate of $65 billion (both amounts converted to 1985 dollars). Dividing the $65 billion figure by the number of packs sold in 1985. the OTA estimates costs per pack to be $2.17. Thus, the three studies produce numbers that are relatively close to each olher. These descriptive studies show that the costs of smoking are enormous and that smoking issues should be taken seriously. The strengths of their methods are simplicity and use of readily available data. The analyses have several flaws, however. First. the lack of grrod data on smoking-related mor- bidilv leads practitioners to apply the fraction of mortality that is smoking relaled to morbidity and medical custs as well. Thr only support for this assumption is iu Ihe Rice et at. (1986) sludy. Second, these studies do not dishnguish between costs to Ihe •mnker and costs imposed on others, nor alu they consider the benefits to the snluker Of smoking. "Ihird, they ignore the timin}; of the cnstc Fourlh, they lypiually use the expectrd loss in future earnings as a measure of lhe indirect costs Of premature mortality. lhis melhud of valuation ("htunan capllal") is simple but bears an uorertain rela- liunahip w the true econoniic cosh Of premalure nlorlality, which in principle are what the families and frirnds iIf lhnsr dying early would pay for longer life; see Srhelling, 1968. and Mish.ln, 1971. (For example, the human capital model assigns a zero value to the liir uf rettred individuals.) Finally, mortality costs are mainly borne by Ihe smnker and should he kept separate for pur- poses ul tnnsl policy analyses. 'Ihese deficiencies mcan that wi cannnl use the estimated "total" costs to quantify the economic consequeni es ul reductions in current smoking, nor to cnnlpute the tax that wurdd lead to nn net subsidv of smnkers by nonsmak- ers. We now elaM+rale on sume of these deficiencies. MFIIILAI I l)5r5 Conlpared to the indirecl mortality costs, the pure medical cost differences between smokers and mmsmnken are small. Assurning that medical cn.st chfferences are proportional to mOrtlalily differences, Stoddart et al. (1986) sshow that smuking-relahd medical costs are a small fraction nf the tobacco taxes paid by Onlariu smokers. Indeed, those who have looked at the (fif- ferences in medical costs Of smo),ers and nonsmokers directly find the as- sumption of Stoddart and colleap;ues is not conservative enough; medical cnsl diffrrences tend to be smalLor than morlalily differences. Vogt and Schweitzer (1985) fnund more use Of hn~pital care, but nol of outpatient rare, fur smokers in an t IMO; children od smukers used fewer outpalienl services, primarilv because they used fewer preventive services. Oakes el al. (1974) hlund higher hospitalization rates nnd fower preventive services for smokers in data hnm another HMO. Literature Review 139 OtHHR COSTS Reports from the Office of the Surgeon General (various dates) and from the National Resource Council (1986) hnve noted health consequenres in addition 1o direct damage to the smokrr. lhese include passive smoking, effects on birth outcomes, a link to othrr drugs, and fires. lhere are few good data lu quantify these costs; researchers have generally eilher tried to guess them or ignored them in cost calrulalinns. Luce and Schweitzer (1978) discuss the costs of cigarette prnduction, but properly exclude them from the costs of ~mokulg effects. For most purposes it seems improper to mention the costs uf pruducing cigarettes without bal- ancing those costs with the benefits; none of the cost studies address the satisfaction of smoking. Other artirles have included the costs ul cigarettes as part Of the costs (if smoking and have been roncerned with the loss of jobs in the tobacco industry, a question more Of political than of economic interest. Kristein (1983) combined I.uce and Srhweilzrr's eslimalec with other data and guesses on the costs of ventilation and absenteeism, to estimate Ihat the average smoking employee r/rols his or hrr rmployer i,etween 43* and $GI)I per year. Ihese estimates are cnnjectrual for veveral reasons' Kristein lacks solid data; the differences other than sInnkiny, between smokers and non- smokers are nat taken into accounl; and the rea<ons why smukers might be cheaper employees (for example, luwer pension costs in a defined benefit plan) are not included. LIPETIME MODELS Forbes and Thompson (1983) and Leu and Srh:mb (1983) used lifetime simu- lation models of smoking to estimate Ihl• marginal health carr costs due to smoking, Forbes and Thompson include effects on birth outcomes but do not adjusl observed cost differences between smokers and nunsmnkers for factors independent of smoking. Leu and Schaub do so, and in addition note that shorter life expectancy may lead to reduced costs for smukers,l and that the costs smokers tmpase on others should he distinguished I rom the costs they hear themselves. Leu and Schaub do nnt discount costs in their 1983 paper, but do so in a more recent paper (1985). Thus, their earlier work neglects the benefits of postponing the medical rrrsls associated with dying. The notion that smoking reduces pennion paymenls is discnssed by Wright (1986) and by Shoven, Sundberg, and hnnker (19RN), who estimate the sub- stantial effects on Medicare's hospital iusuramr fund needs if current smok- ing workers were to quit smoking. Atkinson and'1'ownsend (1977) find that in Great Britain reduced smoking wmdd Iead to lower medical costs, in- creased pensions, and slightly redurcd nel government uullays I.eu and Schaub (1985) show that even with di-eounting, pension effects more than offset the costs of smoking in a cohort Of 35-year-nld Swiss male smokers. Oster (1984) combines a lifetime model t/f costs with an inrid.•nce-based cost model to compute, for example, Ilud a 45 year-old heavv-smuking mate 8L806SL80Z

122 Ehe Costs of I'our I lealth I labils most recent versions uf the tIRA model do not use exercise stalus to compute the probability of dving llr compound the hrohlerns, rrur data un exercise are not as cum- plele as our data on drinking and smukirrg and du out always mesh well with the 1 IRA calrgurics, We hdve no infunnatiun on past exer- ciae. We had to assume that currenl exerrise patterns represent life- Inng palternc, instead if (as in the ea,.e (if smoking) having actual data un the history of the habil. Rec,nlse exerrise is not as stable is drinking or smoking, our a.sulnplinn cntJd Iead to misestimates of the effert, if exercise.u Eurthermore, we did not have information on hnw exercise affecled Ihe prnbabililv of early retirement. If there is a causal effect, Ihe yuantilatito impatt is likely to he large. Pinallv, different measures uf rxercise are used in OUT samples, in the I IRA mudrI, and in the literature on rxerci.e. I lll' yuesliuns are based ,It self repouled inlensitv and frecplencv of exerciae•, as is Ihe 1IRA. By mnlravt, nmsl of the epidemiuloy;ic, d 51ut1ies cumpule kilncalories per week, which decrease sharply with age NI Ilti questions ask ahotrt e5rniac Irlative to Ihe average Inr onrti agc. Wc Ihe•refure decided lo esliinate Ihe rxlernal cewts if exercise in three• vw,nrv. lho middle estimabis uur ohtimale, described above, Of the diffrmnces in rxlernal aists lor sedcntary and artice inaclive peu- plr Pur t nnvenience, column I - rf Tahle 6 12 repeals the results from column I of lahle 6-11 (the e,lern.rl (Osls at a 5 percenl discount rale). (ldumn 2};ives the lowcr bnund on custs, fur which we as- sumed tl)at exercise had no eflrcl whatever on murtalily- We used the standerd Uniled State> life tdMe for be)tlr grnups. Only medicnl costs and sick leave difter in lhiv case, and these are bulh higher for scdentart' people Ihan tl)ev wouId lrc il lhose individunlc were active. lhe last tulumn gives the upper hountl, which is based an the unal- lered HRA results. It shows an nnrmous beneficial effect of exercise on mortality. I'I)e mortality changec slrnngly affect pensions and use of nursing homes. Efven when Jimounfed at S percenl, these lale-lite a+ct, make exerc'ise more exEenvive In others In sum, the external custs of inactivity tlerrease is thl- assmned beneficial effect of ex"rcise on niortalifv increases. We alvu investigated the sensltivitv of our results to nther asvump- tiuns and data fiets, whlle hUldllrg the effet't nn life expectancy at its nriddle value of 1.5 years fur men (1able h- 13). As a base of comFari- nun, the first colmnn repeats column I of "PaMr 6-- 12. firsl, to test the sen.itivity lo data suurce, we nsed paramelers ba<ed entirely (,n N111S data (for the votrng as tvell as the old). Col- Tlte External Coslc of Sedrntary Life-Styles 123 TABLE 412. Sensitivity of external cnsts It nssumplinns on effecrs un monality (5 PereentdisCOUntralc) - - - AllenuniveMnrnlilyAsaumptionc Cost Effect or Hsen-ive 1-5 More Years fur Men No 8ftect on Mortaliry FIRA Mudel Days of life expcclaney at -21 0 -135 age 20 Cnsraa Medical careb 1.6 1.g I.I Sick leave 0A 0.4 04 timup life incurnnce 0.1 0.0 0.4 Nursing hume care -0.1 0.0 -0-3 Retimmcnt pension -0.5 0.0 9.0 Taxes on caminRSa -0.1 0.0 _14 'fotal net cnsrsa,c 1.7 2.2 -- n. Mear ned In nmurande of 19II6 Aollnrx. --- - b. ExcluMv mxremity and welbcxm. I. (Sum nf cmu) minm laxea me exmin;x tfomo=of vmixlin5. cnleamiea iray iwr wm br mN. umn 2 gives the re.sulls. The major cl-,m);e was that eslimaled effects on mediral m.sts were much larger, tahiri) cnusetl the exiernal costs of a sedentary life-style to double. Sick h,.rve and nursing home esti- re°.ull~. mates are rnnsistenl with the I HE Second, In test the.vencitivily tn our esllrnate of lhe henllh uffects of exercise, we cunlrasted sedentary Individunls with ctrrrenl exercicers, rather than with the sedentary people nmde hypnlhelically ae9ive. Column 3 of Table 6- 13 gives the rw-ulls. In general, exe•rcisera have higher external costs than sedenlary penplo. '' this differenope reflects Iwu farts, first, Ihere is a slightly lareer elilference in lifr expeclancy hetween Ihe sedentary and exercisri gruups (27 discepunted dayc) than between the sedentary and tlnactive inatlive gruups (21 dir- cuunled days). Second, sedenlary proplo spend less than eaercisers ,in medical serviceshecause they haa~, olher rhnrerterislir.assuciated with luwer medicat use (h+r instance, Iess education). Allhuu}{h rxer cise would reduce external cnst-s Of iiiarlivr prr,nns, as a Kroup Ihey do not impose external costs on cmlrnl exerrivrrs. In.niive people the sooner, according to the f iRA ruodrl, with Ihree-fuurths of the 0L8065680Z

196 Notes to Pages 10-20 11. As we discuss later, taxation i, one means of making drinkers pay the external costs of their habit, but it is not possible to tax only excess ounces. 12. The time given up to exercise occurs long before the life-extending bene- fits, however. People who can, more about time now than time later may need other benefits to be motivated to exercise (such as enjoyment of the exercise or an inareased s,nse of well-being)- 17. We also assume for this "lower twund" estimate that the particular habit has no effect on early retirerm-nt: that is, the reason people who have retired early drink more is not that drinking caused their retirement but that retirement allows them to drink- Put another way, we assume that if they were to stop excessive drinking, they would still retire early. 14. Although there is general agreement that future costs should be dis- vounled, there is contruversy about the appropriate discount rate. We used the common discount rute of 5 percent. If the rate is lower (say, 2 to 3 percent), then the disconnted costs are approximately zero. The pensiuns, Medicare, and nursing home benefits lust because smokers die earlier largely offset their heavier medical costs. 15. Technically, they should be sel at a level that covers the marginal external srx:ial cost. See Chapler 2. It. Basod on data from Tobarro Institute (1987). The sales tax figures are a weighted average across the states (weighted by dollar volume). Excise taxes account for 32 of the 37 conts. 17 The average excise tax is tak,n across distilled spirits, wine, and beer, where the excise taxes are 25, 1. and 9 cents per ounce of ethanol, respec- tivvly, For state taxes we us,d the weighted average of license stales. Exrise and sales tax figures are from Distilled Spirits Council of the United States (1985). Fxcise laxes compdse about Ihree-quarters of the tax revenue. IS. See foder (1985) and Rock ( 1983). For alternative views of regressivily ser Ilacker (1987), Flarris (19H2), and Warner (1984). 19. Note, however, that thr argurnent is framed in terms of "the poor" as a group. In actuality, the poor who are heavy smokers and drinkers will be worse off (as will the rich who are heav,v smokers and drinkers), but the poor who are not will be better off. 20. Put another way, abstainers, former drinkers, and heavy drinkers consti- tule less than half the population (see Tables 5-1 and 5..3 in Chapter 5). The moderate drinkers, who make up more than half the populatinn, pay only a third of the alcohol lax F.specially because moderate drinkers are disproportionately college graduates, it is likely that they pay more than half of other taxes (inoome, sales, payroll), for which alcohol taxes would substitute. 21. Behveen light and mnderate drinkers, there is no observed differenre in inpatient use; in one of our two data sets there is a U-shaped relationship with outpatient use (consislent with external benefits from moderate drinkicg), but in the ulher data set there is an insignificant inverted Notes to Pages 2124 197 U-shape. Between abclainers and any drinkels. there is increased inpa. tient use arnong abstainers, whirh wouhl Is, cnnsistent with t he• existence of some external benefits from modest rnnsumption. f7ie problem with comparing drinkers to abstainers is that the abstainers are different from- drinkers in many measurable ways (thrv are nutabh• more female, more b(ack, and less educated; see Tables 5-1 and 53), which raises the possi- bility that they differ in important nnnm,,asmahle ways and that the differential hospital utilization that we observe is not causally related to drinking. Moreover, if there were he+illh henefits to moderate use, it seems plausible that moderate drinkers (say, I aAUal ounir per (Jay) would also show some benefit relalivo to light drinkers (sav, I actual ounce per week), but the data just cited give liltle support to that thesis. 22. Increasing cigarette or alcohol taxes is not Ihe only strategy for discnurag- ing the initiation of these prx+r health habiw Banning advertising or promoFng negative advertising (against smoking) or regulating smoking in public places may he complement, rv ahategiec See Warner (1986) and Wasserman (1988) for a discussiou of Ihese issues. 23. We have not tried to eetimate what prnputinn of external costa stem from alcohol consumed in bars and reslaurant+relalive to that cnnsumed in homes. Even an extra bar lax, however, involves rrosssnlrsidies be- cause not everyone who drinks in a bat drives home. 24. U.S. Department of Commerce (1975b). 25. A prrrof gallon is defined as a U.S. atandard gallon containing 50 percxnt ethyl alcohol by volume. 26. Determining state excise taxes on alcuholio I,everages is complicated by the fact that eighteen states have stale-rum monn(adies. This makes it extremely difficult, if not impossil+le, to detennine effective excisp tax rates since in those states the lax refl,•cts ,dfirial excise taxrs as well as commodity prices and rates of profit (Mosher and Beauchamp, 1983). The discussion of taxes here is based on thv thirty-two states that license the sale of alcoholic beverages. 27, For discuszion of cigarette demand, soe Appendix F, as well as Laugh- hunn and l,yon (1(071), Fujii (1980), Lewit and Coale (1982), Leu (1984), and Wasserman (1988). For alcohol, see (uhn.sem and Oksanen (1977), Cook (1981), Cook and Tauchen (1982). Duffy (1983), Ornstein and Levy (1983), and Levy and SheOin (1985). 28. In the 1983 NIi1S survey, 55 percent it the population were current or former smokers; 10 percent were hearv drinkers; and 14 percent were physically inactive for reasons nther tilun their health. Increased health promotion publicity may drive these fiyure. dnwn, l+ut not to near zero. For example, a quarter-century after the Surgeon GeneraPs first report on smoking, during which time there has Ireen massive publicity about the dangers of smoking, more than a quarler of all adults in the United States still smoke, including many individuak in thrir twenties and thir- ties who started smoking after the Surgeon Ceneral's report app•arrd. 29. Economists will already have nnted that one appropriate tax rate (or L06069680Z

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Narrowing the t'lansihle Rangenr•mid fhr Vnluenf Life. Wnshirngton, D.C.: Urban Institute, 1989. Mishan, E. J. "Evaluation of Life and 1-imb: A Thenretical Apprnach." Journal of Politrrai Ecurmmy 79 (1971): fi87-705. ---GKf-lierrefr'f Analycis. 4th ed., Winche+leq Mass.: Unwin I hnran, 19118. Morris, C. N. "A Finite Selection Mndel for Iixperimenla[ De~it;n of the Health Insurance Study." Journal of F,cnuorrrrlnr.a 1I f 1979): 41, 61, Mosher, J. F., and D. E. Ikauchamp, "Juaifying Alcohol Taxes to Public Official.c" Journal of PuMic Health Polie}- ll)eremlrr 1983): 422 419 Munnell, A. H. "Paying for the Medicare PRogr:mt " Jortrnat of lfeal(h Rrlitirs, Pnliry, nnd lnrn IO (1985p. 489-511. Natinnal Research Council. F,nvirnnrnental l nhiruoSrunkeMeasuru(y F.rpnsurrs and Aasrssiwg Hralfh Efjrcts. Washington. I).(.: National Ac'edemy Press, 1986. Newhouse, I. P. "A Design fnr a I Iealth In.urauce F:xperiment." Inquiru 11 (1974)- . 5-d7. - Newhouse, J. P., et al. "Measurement Issucs in Ihc Second Genrratinn of Sucial Experiments: The Health Insurance Sludy." founml uf Lnmonrelrirc 11 (1979): pp. 117-130. Niskanen, W. A. The Derrtnnd /nr Almlmlir Hrrrrngr. Santa Mnnira: RAND Corporation, P-2583, 1962. Oakes, T. W., (;. I). Friedman, C. S. Seltzer, el al. "I heallh Servie v Utilization by Smokers and Non-smokers." Medirr.! (.'arr 12 f1974) . 958 966, Offire of Technology Assessment, U.S. Cont;resc. "Srnokin8-Rrlaled Deaths and f'inancial Costs," OfA Staff Memor,mdum. 19R5. -- Neonatal bnensioe Carr for Lota liirllrroer;{hl Infant •:: Cnsls and C/GrtiP,rnr.s. Washington, D.C.:OfA, IiCS-3R, 1987 O'Ifagan, J. W. "fhe Rationale for Special Iaxrrs nn AlruhoP A() itirlae." Rritish Tax Reviera fi(19x1): 370 -}R(1. Ornsteiq S. I., and D. Ixvy. "Price and fnrornr fLislicilios of I)i•mand for MOMSO7.

222 Index Index 223 hlentrl health statua. 5657 Morlalily rc+mpnnent if IIRA rnodel. 74-.tn; nnpacl of exeraa•, IAI Motor vehh Ie arcidents, and ahohnl ahu•'• I/1, 142 MrdII1Jengresainn anafycla, 1.12; of hea. c dnnkinµ. 91-94; d sedentery life-~Ivh'. 114--116: of smoking, 69-75 Natian.d Iicilth Inlervicw Survey (NHlti), :-b;,-nalrnhnlahuu•,RX N9, R3-ua, wmpa.ahilitv of I1IF, data, 5N-5u, In1-16s; explan.rlory vadahlec, 5H: h-nhh care (or ~adentary Irrsons, 116, 122 123; hnspitafiaatiuns, 73, out- tmm, measures, 57--59; Irassive smak- ing. 75, prrvalenvr ef exerei.e in sam- ple•. /f1H 111, on smoking palterns, fi6, 73 ; nrk-Irrsc day., 74 Natinrual Medical ( are Uliliralion and E.pendilnrr Survrv INMlL1E5), Sri Negabvr hmamial rrgresninn mtxlek 61/, I57; runvnlutinn pralxrtV, 158, 10; and poor healtlr habils, 163164 NIfIS. Srr Naliunzl Flealth Inters•iew Surcev No-Nel ( o=t Toharro Program, 176 Nursiog hunm coat<, as cumpnnenl nl cuet an.dvsis, 39 Omnlbua Iludgel Reeunciliatinn Act ((lfiliA), IH, 22 Outeome measums, in NfliS, 57_S4 Outpaneul rare: fnr zlcohol abuse, 12, 91 -ul; ,uod pa,sive smoking, 69; and sedentan' Ille-atyl,•. IIb116; for smuk,•rs, 6871 Passirc .moking: effexln. 111; external msts. 4. 14; in IIIF. dala, 71-73; inler- nal 2H-29; link hr lung rancrr mnrLduy, 81; rn Nt115, 75; and oulpa- Nentran',69 Prnsinu pavmrnls, imparl nf smnking, 139 P,naiom:, a. cnmpunent u/ rost znalvsis, 39 411 Physirnl nr iole IinrilMionc, % Fipe anmking. Srr Snmking Puisson n'gre.csiun, N1, 157-15N 1'uur Loallh habils: rnmparahility nf I IIF. and NI IIS dala, 163-164; etlernal aas, 7 5, S 11, inlernal coale, 3; lim- il.uion• nl analyses, 132 1.14; multiple re•f;resrdun analysis, 132; and pnliry, impliohuns, 1,39; InniNve currelatiun, n.7; pi„rnlemr, 161-162; sensilivity analysn, 1.12; taxahun as sofution, IN 23[ nudorrepnrling, 33-34 Rar.- cnlr. 'latiun with sinuking, fxl; and .enia, . II1X, III RANI) Hralth Insurmrre Experimenf. Sn• He.dth In.ruance Experiment Retiremenl plan., as exlernal custx, 29 Revcrsc• •.rnselily, irt »edenlary lifr-slyle, 111 Ri.k calaulatiun, 15 Rnutine , hrunir treahnenl, deflnlcion, 48 &'eundary' ef6•rtn, of Isxes on cersis, 4? 45 Sedentary life-aylea: h,ise-n.ve analyas, 54 55; diagnncea relaled tn, 51-53; eftecls nn beal/h eare and work luss, II I-lin; external rnals, 11, 13, 15-16, 23 24, 1117-126, 131-132, 133-134: growth uf, l; and life expectancy, I I, 1117; Iifrlime exlernal rosls, 107; mr•di- cal coals, 3. $rvalsn kxercisr S•nsilivllt' analvaia: if afcuhuI-rrlaleri nsts, lu2_II15; if data un sedentary life-styb•, 115116, 1211-126;of smukin/;-relaled cosls, 79- 93 5-Index, 183 Sin tzxess zrgumenls fur, 18-21; differ- enrea in rates, 21 21; and life-atylex, 24- 25. 5ir nLm Facise ta xea Smnkingk havcase anfysic, 53-54; bmnd% in cost analysis, 32-33; mm- ponenn: nf external costs, 31; cn•t analyar n•sulte, 7S_R4; dedine in, I, 17; dial•nnaes relaled In, 4H-49; edel- rating 1'oblio un efferts, 17: eRert nn heafth , ere and work lo:x, 68-75; and xuse L,xes, IfiA-17fi; external r,eta, 8 9, 14 15, 213-d9. 62-H5, 127-128, 133; and fire-related rusts, 76. 84; IIIF data, 6+ fi6; impact tin pensiun pay- menla, I19; and inpatient care, 71; internal msts, N, 14, 26, 28-29; and life expetancy, 8, 27, 62; and life- lime cnsla, 30-31, 75-76; literature review un c9sts, 07-1441; and Inw- birlhwvight babies, H3--R4; medical cnsls, 3, 11-12, 96-37, h1R-139; NI IIS panern.c, 66; and outpatient care, 6g 71; prevalence, 62 fi6; and public Iwlicy, 1@/-18F; and semndary effects nf taxen, 43-45; wrcial Totata, 26; and transfer payments, 27; rmderre- porling, 33; and work Lxss, 37 Srrial mnrern, aherut beallh hahitn, I-2 Statistical methcxla, 59; analysis nf ru- veriance techniquev, fA/, 157p analyaia of variance techniques, .59-60, 157; currelalion in errnr terms, 160; correfa- lion in reapnnse•s, 61; un inpatienl and nulpatient use, I59-INI; fur wurkLwp dayc,.5:1, 159-1(A Survival parameters: in cast model, IR6-189; in HRA meriel, 143--145 Taxalinn, and cuntrnlling prror health haMls, IR-23 'Faxes on oaats, sernndnry effects, 42-45 Taxes on eamings, 19frn9: aa component uf crMt malysis, 41/-42: as external rnst of poor health hahils, 3-4; for smnkera, 12 Tax policy 1:15 Tranrder paymvnts, 27, 195n9 Treatmenl epl.ande, defrnitiun, 48 Undern•pi„ting. if Ir,ror he•alth 33 ,34 YentiLrtion, eovls fnr aI 11" Wage gmwth, sensilivilV nl r•xb•mal rrrala to, N2-F3 Wald tert, lur rquality nl habit cneffi- rients, 144 Well-rare "Iriw-dea, de6nilion, 44 Widow'a I"mus, as t umponen t uf . nat analYSis. 38- 19 Women: aml aL.uhnl abuse. 87-NN:.rver age Iifeiime t-xternal cnsls fur s,-d••n- lary hfe=lyle, 117 IlR Work Inw: and alruhul abuve, 89 . v4; cnmparehililv if NIFE and NNI9 d.Ja, 162-163; ns runrpnnent if cust an.Jy- siv, 17; In llll( data, 71; in NHF:, 74; and sedeutary IifastYlr, 116; mul smaking. 27, tb -75, 1.17, 139; slat/sti<al methnd. Inr analyzing, 53, 159 16(1 UZ6OV51,OUZ

21R Bibliugraphy - ---Sellin,qSmoke:CigaretteAdtrrtisingamiPuGlirHealfh.Washington,D.C.: American Public Health Assrx'iatiun, 1986. Wasserman, J. Excisr Taxes. Regulation, aml the Demand for Cigarettes. Santa Monica: RAND Corporation, P-74971-RGS, 1988. WWasserman, J., W. G. Manning, J. 1'. Newhouse, and /. D. Winkler. "The Effects of Excise Taxes and Regtdntions on Cigarette Smoking." Jrrurrml of Henlth Economics 10 (1991): 43-(rl. W ilry, J. A. '"predictive Risk Factors lhr Predict life Events." In L. A. Miller, ed., Prnreedings of the Sixteenth Annual Aleeting of the ,9rciefU of Prospeetiue Medicine. pp- 75-79. Bethesda, Md., 1981. Williams, A. W., /. E. Ware, and C. A. Donald. "A Model of Mental Health, Life Events, and Social Supports Applicable to General Populations." lurnad of Healfh and Social Behemmr 22 (1981): 324-3.76. W'itt, S. F., and C. L. Pass. "Forecasting Cil;arette Cnnsunrptinn: The Causal Model Appma<h."" lnternatiimal Jounral of &x'iN Ernnornirs 10 (1983): 18-33. Wri{{hl, V. B. "Will Quitting Smoking Help Medicare Solve Its Financial Problems?" Inquiry 23 (19(i6): 76-82. Young, T. "The Demand for Cigarettes: Alternative Specifications of Fujii s Model-" Apphed Eronnmics 19 (t98:4): 201 211. Arute episodes, definition, 413 Adverse effects nn drinking, 10-11; of lack of exervire, I11-112; of smoking, R!t Advertising hanr as cnntrtdling strat- egy, 166, 197n22;legalissues, 17 Age, and exerciae. 1OB. 111 Agrirultural Act (1938), 175 Agricultural Adjustment Act (1933). 175 Alcohol abuse: average lifetime external costs, 94-98; base-caxe analysis, 54; cust analysis resrdls, 44-105; and (rirne, 4, 97, 98, 142; deBnition of morlerate and heavy, 10; diagnoses trlafed to, 51; difference helwern heavy and controlled drinkera, 9B-lfq; and early retiremenL 196nl3; effects on health care and work ktes, B9-94; exciw• taxes on, 13f/-131, 135, 176-IR2. 190-193, 197n26; extemal costs, 9-I1, 12, 15, (16-Itlfi, 128 -111; and fire- rrlaled cosls, 97, 98, grnwlh of, I; HBF data, 87fIR, 91 -93; indirect nxts, 141-142; inpatient care (ar, 92-93, 19Bn21; internal costs, 10; and life ex- pertancy, I1/, Fb; literature review on rvrots, 140-142; and lost prnduc lion, 141; mediral cnsts, 3; NHIS data. R8-R9, 93-94; outpatient care for, 12, 9I-92; and prevalenreof drinking, Rh-R9, 196n21L public pnlicy toward, IR4-185; and secondary effects of taxes, 45. $tealen 1)runk drivtng Alcoholic beveragrsrxc7se taxeu and demand, 130-131, 135, 176-1R2. 190- 193; underrepnrting uf consumption, 33-34, 129 Analysis of cnvarian<e (ANOCOVA) teclmiques, Nl, 157 Index Analysis of varianre (ANOVA) tech- ntq.lf:9, 59 60, 157 Appr:used risk, 143 Averayr lifrtime external cost.: for alm- hnl.chuse. 94 98; /or lifelong sedrn- tary people, 1117, 117-11R; lur xmrrk- erc, :5-71. Babic•: Inw hu/hweight, (li-&/ Behavior. influrnre nf gnvernmrnQ 1-2, 167 - 168 Blacks and alcuhol abuse, BR BIIfIeV InbaCrn Grnwera Aaarn"i.urnn, 175 Czlifaun, Joseph, 2 Chrouv diG•am•s and romplaintv, 5r. ('igan•ne smoking. Srr Smoking Cigar •:mnking. tire Smoking Collernvely linznced crnts: henrBt cnn- aumption by cedentary peipplr, 107; aa r nmpnnvnt uf extemal msta, 34, 6; elfects nf ahxihol abuse, 89 Commedity ( irdit C'orporation (CC'C), 175 Cnmpovile risk mulliplier (CRM), 143 Cmvnlnlion prupertv, of negative hino- mial model, 1.58, 163 Cxl analysis: cnmp. .nrms, 34 42; atn=section used as mhorp .i2; dis- muntinB. 3n-}1; extemal cu<IS, 25-79; inBnOnn..i4; tret external rvets, 31-32; undrrrepurtiny„ 33 34 Cust analy,ia recults for almhol abu+e: aver.ry,e Iifetime extrrnzl nrms, 94-98; diffrn•ncv, brlween heavy and cnu. tmllad he•avy drinkers, 9R-ItMt; exlernnl - o,l Ixr e.crsa ounce. 11N1-107; senn,bvitY annlysie, In2- 1115 6Y6067~SQZ

; IP' ~~fl~"~~IYtM~rrill.~l~ nrr1.~I111rWliiftrfrnl..~wlrrw a ~F 18U Appendix F Oksanen (1977) also had a negative incnme ela icity estimate for beer, but it was not statistically significant- Cook (1981) eslimaled the price elaslicily of emand for distilled spirits using a quasi-experimental technique which wa Ipplied to data on state tax changes that occurred between 1960 nnd 1975. is analysis yielded a point estimate of - 1.6 for the price elasticitv of dema 1; no attempt was made to estimate the income elasticity. Cook and Tauchen (1982), in their ntudy of cF mic drinkers' consumption in response to liquor price changes, fuund mea ired liquor consumption to be quite responsive to changes in statr liquor tax . Since state tax rather than price was included in their model, the eslimatec ~rice elasticity of demand of -1.R had to be inferred from their mgression rsults. The authors believe that this point estimate probably exaggerates tf true responsiveness of per capita liquor consumption to changrs in state xcise taxes; measured con- sumption is held to be below actual consump m owing to moonshining, possible underreporting of sales by dealers, and out-of-state purchases by consumers. fhtffy (1983) investigated consumption of spirits, wine, and beer in the United Kingdom using quarterly data from 1963 to 1978, To account for possible feedback of sales on adverlising, he estimated a simultaneous- equalion model, in addition to his ordinary least-squares model. The results obtained from these two approaches, with respect to price and income elastic- ities for each beverage type, were roughly equivalent. the demands for spir- its and wine were fairly responsive to price changes, whereas the beer price coefficients were not statistically different from zero trnder both approaches (and in facl had the "wrong" sign). Hogarty and Elzinga (1972) estimated annual beer consumption per adult as a function of price, per capita income, and percent of each state's popula- lion that was foreign born. This lasl variable, which was statistically signifi- cant, was included "on the presumption that immigrants were more prone to beer drinking than native Anglo-Saxons." The authors offer no empirical evidence tn support this assertion, or even an explanation of why they be- lieve it is so. The obtained price and income elasticity estimates of -0.9 and 0.4 resulted from applying ordinary least squares to data from forty-eight statec and the District of Columbia for the period 1956 to 1959. Johnson a nd Oksanen (1977) employed a basic linear model to explain the quantities of spirits, wine, and lI consumed in Canada, using province- level data over a fifteen-year period. The model included price, personal disposable income, lagged consumption, and vectors of ethnic, religion, and education vnriables as regressors. Different estimation procedures (ordinary least squarrs, generalized least squares, and least-squares dummy variables) produced remarkably similar results with respect to the price and income elasticities for all three beverages. f7ieir findings suggest that direct price effects arc highly significant in explaining consumption of the three bever- ages. Income had a significant effect only on the demand for distilled spirits. Excise Taxes aud Demand 181 The Johnson and Oksanen analysis is regarded by Cook (1981), Ornstefn and Levy (1983), and others as the beat of the studies that have been cnm- pleted in this area. While the applicabilitv of their results to the United States may be problematic, one could argue persuasively that the Iwo cultures are sufficiently similar to allow use of the Juhnsun and Oksanen results to de- velop at least a first approximation of the impact that n tax-induced price increase would have on consumption in this country. Levy and Sheflin (19A5) studied the total demand for alcoholic beverages in the United States. "Che overall estimated price elasticity uf demand was -0.5, and the income elasticity was 0.4-'I'hey estimated their model, which included only price and income as regressorc, using two measures of cnn- sumption. In the first instance quantity of pure alcohol consumed served as the dependent variable, while the second equatinn uaed real ecpenditures. The two approachesyielded similar estimates of the price and income elastic- ities. By choosing to estimate the total demand for alcoholic beverages, rather than estimating the demand for spirits, wme, artd beer separalely, Levy and ShiBin avoided the problems encountered in earlier attempts to estimate cross-price effects-which, as they accurately noted, "have pnxhiced inenn- sistent and improbable cross-elasticity esiimate.c" (that is, in several stndies, the different beverages were found to b• complements of one another). The main limitatinn of this approach, apart from the aggregation problems posed by different state and hxal tax rates, is that the results are only useful for assessing the effects of applying a unifm m percentage tax increase acnxs all beverages, a policy option that may prove politically infeasible. Md7uinness (1980) examined the demnnd for alcoholic drinks in the United Kingdom, using data from 1956 to 1975 and ordinary least squares, I'rice and income elasticities, estimated at 1975 values for price and income, ranged from -0.22 to -0.26 and from 0.18 to 451, respectively. McC:uinness also found a strong positive relationship between alcohol consumption and the number of licensed premises. Although he acknowledged that more must be learned about the nature of the relationship, he concluded that "the observed relationship is so strong, compared to that between demand and other vari- ables, that any policy designed to crrrb alcohol consumption would be ad- vised to give high priority to further investigation of its nalure." In an early study of the demand for alcoholic beverages, Niskanen (1962) used three-stage least squares to estimate price and income claslicities of demand for spirits, wine, and beer from a sample of annual observations from the periods 1934 to 1941 and 1947 tn 1960 (the years 1942 through 1946 were excluded because of government controls on production, consnmptinn, and prices throughout the period). The author found the price elasticities for spirits, wine, and beer to be approximately -2.0, -0.7, and - 0.6, respeo- tively. Income elasticities for the three Irverages were on the order of 0.4 for spirits, 1.0 for wine, and - 0.3 for beei. With respect to cross-prire effects, Niskanen concluded: "Consumption of each beverage is prinmrily deter- ssaosMoz i "-- . - ;..:. .. s~..r...

220 Index Index 221 Cost analysis results for sedentary life- stylr avrrage lifetime external costs, 117- I la; cost differences for active life-style, 118-120; sensitivity analysis, 120-126 Cost analysis result, for smoking: aver- age Irfelime external costs, 75-76, bnm. d., 72-3.3; tusts to smakels huusehold, 32; externalrnsts per pzd. 77--79; and fire mortality, fM; and low-birlhweight babies, 8.1-R4: and passive smuking, Al; sensiNvity of cusm lo assumption.- 79-82; sensi- tivity of costs to medical prices and wage gruwth, 82-83; smukers versus nun.mokers, 29-30; smokers versus nnnamoking smokers, 76-77 Cost mndel. parameters, I86-189 Crime, alcohol related, 4, 97, 98, 142 Excess ounce, definition, 86 Excise taxos: romplications in detennin- ing, 197n26; correlation with external cnsts, 1R-19, 30-31, 190-193; and demand for alcoholic beverages- 1A1-131, 135, 176-182. 1911-t93; and demand for cigaretles, 16R-176; distribulional effects of increasing. 1N2-1EL: as negative external cost, 29; rale diherences, 21-23, 1fiBp regressive nature, IR3--IR4 Exercise: educating public on beneffts, 17, 23; and education level, 108, 111; life-saving benefits, 11; motivation for, 196n12 prevalence in HIE sample, 107-10u, prevalence in NHIS sample, 108-111 See nlw Sedentary life-styles Exercise industry, growth, 17 External , asts: of alcohol abuse, 9-11, 12, 86 1f16, 128-131; collectively R- nanc'ett programs as source, 3-4; correlalion with excise taxes, 18-19, 311-31, 190-193; in cosl analysis, 26-29; of dmnk driving, 4- 15, 96-97, 105, euimaling for pnor health habits, 5-11; Imporlance, 2-5; lifetime, 94-98; literahue review, 137-142; net, 31-32; of passive smoking, 4, 14: reasonable- ness of estimates, 13-16; of sedentary life-st/iea, 11, 13, 107-126, 131-132, 133-134; sensitivity tn medical prices and wage growth, 82-83; of smoking, 8,9, 28 29, 62-R5, 127-I2R, 133; prrs- sible sululiuns, 16-25, 197n22 Health care; comparzbilily of HIE and NHIS data, 162-163; effect of alcohol abuse, NY-94; effect nf sedenlary life- style, 1I1-116: effect of amnking. 66-75; as outcome measure. 47-48: and pa?sive smoking, 7673 Iivallh cara crwts, 2: in alcohol abuse. 14(1-141; as compnnrnl in HRA model. 36-37; estimzling. 6; sensitiv- ity of external eewls lu prices, 82-R1; of smoking, 3, 11 12, 3h-37, 138--139 Health cnnsciuusness, 1 ~2 Health habits: diagnrses related to, 48-53; and life expectanry- 2: social concerns about, I 2. Srr also Poor health habits lieallh Insurance Experimenl (tiIE) data, 5-6: on alcohol abuse, 87-88, 91-93; and classificaliun of diagno.e.., 48-53; mmparabilily with NHIS, 5R-59, 161-165; explanatury variables, 53-57; habit bztteries, 147-156; health care for sedentary pvrcons. 114-116, 122; inpatient care fnr drinkers, 92 93; inpatient care for smnker.n, 71; and in- .curanre plan varizbles, 55; and mea- sures ol Irealth hahits. 53-55; and measurvs of health status, 55-57; na- ture of, 46-47; nther covarialrs, 57; nulrnme measures. 47-53; nulpalient care for drinkew, 91 92; outpatirnt care for smokers. 69 71; on passive smoking, 71-73; prevalrnce of exer- cise in sample, 107-I118; sample, 47; on smoking, 63 66, and use of inedi- ral care services, 47-48; and work Inss of smokers and drinkers, 53, 73, 93 Health insurance premiums, 3 Health news, I Health Rixk Appraisal (HRA) model, 34-36, n2; mrrelatinn between aging and sedentary life-slyle, 121-122; rnr relatinn between exercise and life experlancy. 130; exerrise as risk factnr for heart disease. 111-112; mortality, 34-36; multipliers far smoking, 121; Ilealth stahus, measures uf, 55-57 Heart disea.e, exercise as risk faoluq 111-112 Heavy drinking. brc Alcnhulabuse HIF...Srr Ilralth Insurance lixperiment data I1MO, eno•kar um-.rf, 13N Hnepitalizahun Sre Inpatient care IIRA. 9cr f leallh Itisk Appraisal model Ihoman calnlal mod.d- fur assassinip smoking osls, I3R Damaged grxds. Rres and cleaning of, 42 Data and statistical methods, 46; 1IIE, 46-s7; NHIS, 57- 59 Defined benefit pension plans, 29 Defined contribution pension plans, 29 Demand, correlation of excise laxes wilh, I6h-1R.5 Dental care, exclusion of, 201n3 Diagnuses. classification related to hab- its, 48 - 53 Direct costs, as component of external cnsts, 6 Discounting, in cost analysis.30-31 fTstridmlional effects of increasing excise taxe.. I82-184 Drunk dricmg: tosta associated with, 133, educating public on effects. 17; exlernal costs, 4, 15, 96-97, 105; inter- nal cask, 4, 15. Sre a15n Alcohol abuse Early retirement, and alcohol abuse, 196n13 Educaliun: and alcahol abuse, 88; corre- lation wuh smoking, 63, 65-66; in ccwntering exlzmal cnsts, 16-17, 166; and exercise, 108, lll F.mpluvee health insurame, and grxd heallh hnbits. 23 Fpisnrie of treatmrnt, drfiniNon, 48 pthannl, 10 Fetal alarhol syndrome, 130 Fetal dea Ihs, from smoking during preg- nancy, 94 Fire: alcohol related, 97, 98; costs as cumponent of cost analysis, 42; smok- ing relzted, 76- 84 Fluo-Cur, d Tobaccn Cooperative Stahili- zation e-orfroration, 175 Cender, and exercise, 108, 111 Ceneral I lealth Index, % General health perceptions, in assessing health taius, 56 GovemmenC influence on behavior, 1-2, 167-168 Incidence-6ased analysis, uf smukinti costs, 13't J4(I Indirect cods, of alcnhol abuse, 141 142 InFlation, end lilelinrv mnl analysis. 34 Inpalient r.o'e: fur alcohol abuse. u; 93; in If1E dala, 71: in NIIIS data, 71; and sedrulary lifeslyle. 112-116: lor smokers. 12, 1,9, 71; stztistiral mefh- nds, 158- 159 Insurance pizn cariables. 55 Inlernal rnac ul alwhul A huse, Ifl, d drunk diiving. 4; nf pacsive smuking, 28; of pnnr heallh habiL, 3; of srnnk- ing, 8, 11. 26, 2ri~29 Intradustei rnrreLitinm mndel, 61, ba] Iack of exrrri- . Srr Sedentary lifr-ntylez Leasbsquares mudef 61, IMI I.ife expec/aory: aud akohnl abnv-. Ill, 86; and Lrallh hahit+. 2: reason Inr disr'uunlmg, 198.7; of e•dentary peo- ple, 11, 1117; nf .muker., 8, 27, 62 Life insurznee, as <nmpument of cnsl analysia, 17-1R Life-stvles. and ~in taxes, 24-25 I.ifetime cneta, rumulalive net, 31 Lifetime simulatiun mrwielc, of smuking. 139-140 Lilerature n. view, on exM1anal cna, if alcohol abuse, 1411-147. in extvni.d cusls uf •anuking, 137- 140 Luwbirthe,eighl habiec, ~nrrelafiun with meoking R3-N4 and nonsmoking smuker.e' survival Mrdfoal anns. }rr Iiralth rare rnstv rates, 3.1; risk fac'tnrs and probability Men: and.riroh.d ahrnne, X7-RS; and sad- of dying, 121; sensitivity analysis, entary lilrsttir, 118 1211126; survival parameters, 143- Menlal Ileuhh Inv..ulory for adult.. 145; value of exercise, 112, 119 96 57 66606S480Z

i Wru ii iwwu rlrrr Niorrlrrwiwrrt rullu~wr I muuri, 216 Bibliography and Supply Contruls for Tobacco in the United States." Research in Do- rnestir and International Agribusiness Management 5(1964): 107-164. Sumner, M. T., and R- Ward. "I'ax Changes and Cigarette Prices." journal of Political Economy 89 (1981): 1261-65. Taylor, 1.. D. "The Demand for Electricity: A Survey." Bell Journal of Economics 6 (1975): 74-110. Tubacco Instilute. The Tax Burden on Toheco, vol. 22, Washington, D.C.: Tubacco Institute, 1987, Trxler, F. J. "Issues in the "1'axation of Cigarettes." In Institute for the Study e+f Smoking Behavior and Pnlicy, Tlre Cigarette Excise Tax, pp. 65-87. ("ambridge, Mass.: Harvard University. 1985. U. S. Department of Commerce. Histori rd Stetist irs of the United States, Colonial f rmes fa 1970. Bicentennial ed., pl. 1. Washington, D.C.: Bureau of the Census, 1975a. -"Ifi<lorirnt Statisfirs of the UnifeJ Slate;. 197.5. Series Y567-589. 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MI~~IMMII~~oMiiu~i 214 Ribiingraphv Alcoholic fMverages." In M. Galanler, ed., Rrrcnf CL•reln)nnenfs in Alrnlrnl- ism, vol. I, pp. 303-345. New York: Plenunr Press, 1983. U,ter, C., G. A. Culditz, and N. 1.. Kelly. 1Lr f.mnnwir Costs of SrrrrrAiqQ and Rrrteftls if Omlltng. Lexington, Mass.: 1).C. Ilealh, 1984. 1'.rfL•ubargvr, R. S., and R. T. I lvde. 'Ixerci:e in the I'rc•ventinn of Coronary I ieart Uiaeaar " Prenrrrtire Mrdicinr 13 ( 1484): 3-22. -- LeOer Nrvr F]r,elmrd journal if Alydirim• 325 (1986): 41M3--4BI. 1'nfL•nhargeq R. S., R. 'i'. Hyde, A. I.. Wing, and C. C. Hsirh. "Physical Attivily. AII-( ause Mortality, and Longevity of College Alunmi." Nrm I'n,qland lnernnl of Medirine 314 (19R6): 609 613. 1'.rulv, M. V. "Thv Fcrnwrnics uf Mural H.vard." Arm•riran f]unarrrir Renirw 99 (191,8): 231 237. - Mediud Carr, at Pnhhr l;'lpruar. New 1'ork: I'rzrger, 1971. 1'. rhman, I. A. lydrrnfTnz 1'nliry, 7rd rd. W,.hinlpim, I).C.: Bruokings Insli- hrGan,1477. 1'rrnanen, K. 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RAND Curpnration, Santa Monica, 1983. RibliographY 215 Rogers, W. H., and J. P. Newhouse. "Measuring Unfiled Claims in the Health Insurance Experiment.•" In L. Burstein, H. F.. Freeman, and P. H. Rossi, eds., Collecting Eralnatiarr f rntar fhahlema and Snhdions, pp. 121-133. Beverly Hills: Sage, 1985. Rosen, S. "The Value of Changes in Life f4pectancy." lanrrraf n/ Risd and flncerMinly 1 (1988): 2R5_3(µ, Schelling, I'. C. ""I'he Life You Save May Be Your Own," In S. R. Chase, ed., PnrFlrrns in Public &ry>Prrdihrre Analysis Washington, O.C.: Brtx>kings Inslihrtion, 1968. Schoenbach, V. J., E. H. Wagner, arrd J. M. Karun ""I'he Use of lipidemio- Iogic Data for Persunal Risk Assessmenl in lieallh I Iazard/Health Risk Appraisal Programs." luurnal (iJ (hrnnic I riceacev 16 (1983): 625.lx38. Schuenborn, C. A., and B. H. Cbhen. "Trrnds in Smoking, Alrahol Cun- sumptiun, and Other Heallh f'raclices amnng U.S. Adults, 1977 and 1983." Adrrrner Data, USUHHS nn. 118, 198n. Searle, S. R. 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42 The Costs of Poor Ifealth Habits In sum, we consider taxes only insofar as those taxes are used to finance the costs we account for, such as medical care and pensions. If a smoker dies early and ceases to pay taxes, we account for the consequence that nonsmokers will thereby pay a greater share of taxes for Social Security. We do not account for nonsmokers paying a greater sharo of garbage collection iosts, for example, because there wdl br less garbage to collect. Fires mui C"lenrting uf Dmnaged Goods We made no independent estimate uf these costs. t towever, we show the effects of including estimates of these costs by others (Harwoud ct al., 1984; ILuce and Schweitzer, 1't7R). Secondary Effects of Taxes on Costs (lur working assumption is that all increase in cigarette ur alcohol taxes will be fully passed on to consumers in the form of higher prices per pack or per drink. Some economists may he concerned about the secondary elfect of taxes on costs. 'I'his discussion is intended pri- marily for them and for others who share their concerns that a major change in taxes might itself alter the external costs of smoking. Except for the external effects we are examining, our estimates of cconomicalhY efficient taxes rely on two simplifying assumptions: (t) any change in taxes will not cause a change in the unit costs uf producing cigarettes, alcohol, or medical care; (2) there are no other serious problems or distortions in the cigarette, alcohol, or medical markets. In other words, the price nf these gonds and services reflects both the value of a unit of each to the consumer and society's oppor- tunity cost in diverting resources from elsewhere to produce that unit. On the first point, we assume that any tax-related changes in the prevalence of the poor health habits will not affect the incremental costs of providing those goods and services. Increased excise taxes, by reducing the demand fnr cigarettes and alcohol, could lead to improved health. That change, in turn, could reduce demand for medical services. If so, the marginal cost of medical services could fall. In that case our cost estimates would overstate the external costs of smoking in a world with fewer smokers. This seems unlikely: our Conceptual Framework 43 analysis shows that smoking raises medical costs, but the effect is small relative to total use of medical cure. 'fhus, a drop in smoking and concomitant decrease in medical demand should nutcause medi- cal care costs to fall." In the same vein, we assume that a change in taxes would not have an_v spillover effect on the underlying cost nf cigarette,a and alcohol. In principle, an increase in the cigarette tax could reduce the demand for cigarettes, which could reduce the demand for the production factors of raising tobacco or making cigarettes. That reduction, in turn, cordd cause a fall in the price of tobacco and of those production factors. '1'hese changes would then em imrage smoking because the cost of cigarettes would fall. On the second point, we assume that the prices correspond to society's incremental cost of providing these gaxls and services. This assumption wnuld not be valid if any nl'the following circumstances held:" (I) If the government artificially resiri<ts production (or subsidizes it), then the market price is already two high (ur too low). Uur taxes have to be adjusted downward (or upwaraf) su that the price per pack to the smoker is the opportunity cost if producing a cigarette plus the external cost per pack. (2) If the incremental costs of producing a pack of cigarettes fall as the level (if production increases (incre,)sing returns to scale), then a change in demand could alter the pri,e of cigarettes and our tax would have to be adjusted accordingly. (3) If the market for cigarettes is not perfertly competitive, then we would expect that the firms in the induMry ,ue charging prices higher than cost. If so, as for point (1), we riced lu increase the tax by a smaller amount because we want the price to equal the incremental costs of production plus external cnsts. If any of these factors apply or if rhanges in demand lead lo changes in the price per pack of cigarettes, then our calculations are biased. The direction and magnitude nf the bias will depend on the particular dmumstances Let us Innk in detail at cignrettes and alcohol with regard to these concerns. Ci,qnrettes It is our npiniun that none of these three conditions is an inrpnrtant problem for cigarettes. Although there are government rentrictions 0£8065680Z

52 the Costs of Poor Health Habits TABLE 3-4. Diagnostic categories possibly related lo lack of exercise or to exercise Codea Condition Related to exerciso 810-817 Frecturea of upper limb 82l -829 Fractures nl Lower limb 830-839 Dislocatimrs 840-g48 Other muxuloskeletal injuries Related to lack of exercise 001-136 Infective and parasitic diseases 14U-209 Malignant neoplasms 250 Diabetes mcllitus 272 Hyperchotc.sterolemia 273.0 Cystic fibmsis 277 OhC91ty 4p1 Hypeueru:irm 410-414 lachemic hran disease 415-416 Disordera nf heart rhythm 430-438 Cercbrovarcular disease 443 Olher petipheral vasculsrdisease, including peripheral 460-470 ancrial disease Acute respiratory infections 480-486 pneumonia 490-092, 496 Bronchitis, emphysema, COLD 712 Rheumatoid arthritis 723.0 Osteoponscis 789.1 Lqwcr bavk pain s. DWgnos6c codes are basctl on Commiuion on Rofesslonal and Hospiul Autivides t 1973) Elh rerision H-1CDAi conditions can be aggravated by lack of exercise. Or increased exer- cise can provide effective management for some conditions, decreas- ing the need for outpatient and hospital care. Kottke et al. (1984) discuss the benefits of physical activity in the treatment of coronary artery disease, peripheral vascular disease, chronic obstructive pulmonary disease, cystic fibrosis, rheumatoid arthritis, and osteoporosis. Although they suggest that these condi- tions may be improved by exercise, they caution that the results are preliminary and must be validated through well-designed clinical tri- als. paffenbarger and Hyde (1984, 1956) and Paffenbarger et al. (1986) concluded that exercise lowers the risk of developing coronary heart disease and events associated with it. A review by Siscovick et al. (1985) suggests that increased physical activity is associated with Data and Statistical Methods 53 lower blood pressure. The reduced prevalence of hypertension should, therefore, reduce the incidenct• of cerebrovascular di.sease. In addition, research has indicated that exercise may reduce blood glucose levels, increase insulin receptorc, and raise the effectiveness of insulin (Richter et al., 1981) and thus may have a positive effect on diabetic patients. Physical exercise i!: frequently recommended in weight-reduction regimens (Berkow, 1"R2), and obesity seems to be associated with sedentary habits. Clinical recommendations in the treatment of hyperlipidemia often include a regimen of physical activ- ity (Haskell, 1984). 1f habitual exercise protects against infection, as some suppose, diseases responding to an impaired immmme stale may he associated wilh lack of exercise (Simon, 1984). Given this possibility, we have included several conditions, including infective diseases and malig- nant neoplasms, in Table 3-4. Work L.o,9,c We based the work-loss measure on responses to a health diary that filE participants filled out biweekly. Work loss included lime lost from work because of illness (the indivrdual's or someone else's) and visiting a physician. A half-day or more away from work was counted as a work-loss day. We summed workioss days on an annual basis up to two years for each participant "Because the data do not include reasons for work loss, we could not moasure specifically Ihuse sick days that might relate to poor health habits. We simply estimated the difference in total work-loss days between persons with and without the habit, controlling for other habits and covariates. Data on Exp/anatonl Variables The base-case analysis for each habit amtrolled for the other poor health habits, sex, age, health insurance coverage, health status, and sociodemographic and economic measitres. HEALTH HAnIrS MEASURES Smoking. fn the HIE sample smoking status was based on responses to a questionnaire filled out when the families enrolled. For everyone aged 14 years or older, the HIE used a ten-question battery on current and past smoking to obtain a smoking history (see Appendix C). Each person responded individually. Our study placed everyone 20 M06CJ MZ

44 The Costs of poor Health Habits on tobacco acreage and subsidies to tobacco farmers, we do not be- lieve that they affect the price of cigarettes. Because tobacco is traded in world markets, its price is set there, not domestically. We were initially concerned that tobacco prices might be artificially high in the United States, because tobacco allotments in this country restrict the acreage allowed for growing tobacco. With all other things equal, the lower the allowed acreage, the less domestic production Ihere will be. In the absence of an international market, the lower the production, the higher the price of tobacco, and hence cigarettes, svuuld be. Because there is an international market that sets the price tor tobacco, the allotment program affects only farmers' incomes. For a particular farmer, the size of the allotment is small enough so that his marginal rrop is not tobacco. The market for allotments merely rapitalizes the value of the allntment. Given the technology for growing and harvesting tobacco, there is ml reason to expect economies of srale at the farm level. At the level ot the intermediate market for tobacc o, or the factor markets for labor, I.md, and related supplies, we do not expect to see any spillover eftecl on prices because of shifts in world demand that might be cauced by changes in the American excise tax rates. Our estimates could be too high if lack of competition in the domes- tic cigarette market allows cigarette producers to charge prices higher than the incremental cost of producing cigarettes. Not much of the domestic demand for cigarettes is met from abroad, except for some specialty items. To whatever extent domestic cigarette prices are too high because of imperfect competition, the corrective tax should be smaller. The tax should equal the incremental cost of production, plus the external costs, minus the price per pack. If the market is competitive, the price and incremental production costs are equal and cancel out, leaving the tax equal to the external cost. If the market is not perfectly competitive, then the price exceeds the incremental production costs. In that case the tax should be reduced by the differ- ence, and it will be less than the external costs zi This concern about imperfect competition for cigarettes does not appear to be a practical concern. Although there are only a few sell- ers, the studies discussed in the next paragraph suggest that we can rule out monopolistic pric.ing. if pricing is not monopolistic for cigarettes, then an increase in the excise tax will be fully passed nn in higher prices to the smoker.2' Estimates bV Barzel (1976) and Johnson (1978) show that cigarette prices increase by 107 and 110 percent of the tax increase, respec- Conceptual Framework 45 tively." Sumner and Ward (1981) found a 93 percent increase, with a standard error of 3.6 percent; however, their results were somewhat sensitive to data and methods. Thus, empirical estimates support full shifting and implicitly rule out the three reasons for concern. Alc i irol The case of alcohol is more ambiguous. Many of the inputs into brewing and distilling are traded internationally. It seems highly un- likely that shifts in U.S- demand for alcohol will have an appreciable effect on the world price of grains, potatoes, and so on, or on the international demand for labor. It also seems unlikely that shifts in American demand for wine caused by an increase in excise tax will have much effect on the world wine market. We do not expect the price of alcohol to be artificially high because of monopolistic behavior. Beer, wine, and liquor are traded interna- tionally, which makes cartel or monopoly behavior more difficult. Indeed, given the recent entry of new wineries and micro breweries, it appears that any attempt by existing producers to raise prices would be frustrated by new firms entering the industry, increasing supply, and driving prices down. Still, we cannot rule out prices greater than marginal cost that result from imperfect competition at home or abroad. We are not aware of any empirical stuJies on tax chifting of alcohol prices; however, we expect little movernent. For example, U.S. con- sumption of alcoholic beverages is less than 10 percent of world con- sumption. Doubling the tax on alcohol (as is suggested in Chapter 5) would lead to a! most a 2 percent shift in world demand. If the supply of alcohol or the factors of production were perfectly inelastic (an extreme assumption), the price of alcohol would fall by at most 2 percent, much less than the change in price to the U.S. consumer. Despite the lack of empirical evidence that the price of alcohol is cbse to marginal cost, we believe our qualitative conclusion that alcohol prices will increase by nearly the amount of the tax to be robust. 4£8065480Z

The Costs of Poor I iealth Habits cially smoking status). Gruup life insurance provided by employers usually does not. In addition, most group life benefits after retirement fall to a nominal amount or do not continue at all; hence we assume group life insurance goes to zero at retirement (that is, we assume term life insrvance). Using the Bureau of Labor Statistics (f3LS) survey of employee ben- efits, we estimated that the average life insurance benefit per male worker is $21,(NNl and per female worker is $15,600. Our estimates were derived as follows. For the 60 percent of workers with earnings- related insurance benefits, we multiplied the annual salary by 1.5; we used an average salary uf $211,000 for males and $14,000 for fe- males. For the 30 percent of emploeees with benefits not based on earnings, we assumed a$10,(AA) benefit. Aalditionally, we multiplied by 0.95 for men aged 20-64, and bv 0.05 for women of the same ages, to reflect labor force participati.m. Our estimates were in good agreement with national data, which indicate that group coverage per worker is about $19,3011." Widotds Nonns When an aged male pensioner dies, his wife's Social Security pension will be increased if she never wnrked. From the incidence and preva- lence of Social Security widow's benefits, we estimated that the aver- age widowed beneficiary stays in thal status for nine years. The death of the husband will alter a surviving wife's payments only if she is nut eligible for Social Security through her own work experience. In that case the award is raised from that for a "wife" to that for a "widow," which is an increase from 50 to 100 percent of the man's benefit. In 1986 this increase averaged about $2,400 a year.t' Thus, the estimated bonus is the probability of a never-working wife x $2,400 x 9 years. Because of secular changes, we acsumeai that today the probability of a never-working wife is about 0.25, although historically it has been somewhat higher. Discounting reduces the effect of the bonus somewhat, but not as much as if the wife lived exactly nine years. We estimated $5,400 for a(1 percent discount rate, falling to $5,000 for a 5 percent discount rate, and $4,5(H) for a 10 percent discount rate. (If all wives lived exactly nine vears, the figures would be $4,800 and $4,050, respectively.) If a man dies when young, his wife will probably work or remarry. If a man dies when very old, his wife will Conceptual Framework 39 TABLE 2-2. Nursing home and nther coau for the aged Per Capita Annual Cost (dollars) Age Group Peroent in Nursing Homes 1977 Home Health Care 1984 Other Care 1984 Total 1986a 65-69 1.0 10 200 326 70-74 2.0 20 200 437 75-79 4.6 30 200 707 80-84 10.9 40 200 1,348 85+ 22.0 50 200 2,467 a. ToW = 1.088 (% in homee • $9,247+ Mher coep ). probably not survive him for long. We Ihcrefore included Ihis cost only for men dying between 60 and 79 vears of age. Nursing Nonres Owing to lack of data on how habits aff,ct dependency, we assumed that nursing home costs depend onlv on age and not on habit status. Diagnoses considered to he caused by habits are rare among nursing home residents; for example, emphysema occurs among only 0.6 per- cent of residents and alcoholism among 0.5 percent of residents (Van Nostrand et al., 1979). The aveiage annual insurance-plus- government payment per resident is estimated to be $9,247 (1984 dollars).t" Combining information on the nnmbers of nursing home residents with 1978 population data, we obtained percentages at given ages living in nursing homes (Table 2-2). The other medical costs of the elderly covered by insurance were assumed not to vary with age-they are mainly dental and eye care, and pharmaceuticals. We inflated 1984 costs by 1.088 to get Ihe third-party cosls in 1986 dollars shown in Table 2-2. The amomu of covered nursing home use for people younger than 65 was sm,dl enough to ignore. pensions Average pension benefits and other social welfare program amounts received (including Social Security payments, Supplemental Security Income or SSI, public assistance, veterans' compensation, and pen- 8Z806MOZ