Tobacco Documents Online

Volume 64 Numhcr 1 1986 THEMILBANK ~UARTERLY rnrc (:usts ol thc tlcalth E/lccts ttl Smoking, I')}{ri 481) P. IZI(-ti, THOMAS A. I'IOIX,tit)N, hPTIiR SINtiNHIMLR, iROWNI:R, and ANI)RISA N. (t01'tif1i1N iiMO Care: Issues and Options in Setting Capitation 548 '. ANI)I:RtiUN, ISARI. P. STI:INBIiR(:, JAMIiti IIOI.LOWAY, C. CANTOR tinl; for Liiascd S<It:ction in Ilr:altlt losurante 566 ;. LUIT yuity: Swedish Iicalth Policy and the Private Seuur 592 J M. {KOS(iNT11At. t ul Malingrring: Why Individuals Wincdraw linln Work csr:ncc of Illness 622 Yt:1.1N '.ty in Unsalr Jobs: Thcury, IiviJcnce, and 1'uli(y uns (i5v }.~ . K()IiINti()N ( AMRRIIH,1 UNIVI Rtilll' I'RI'+1 i! l-asr 5,01 5tnm, New Yntk, NY 11102., U S A Thr Prtt BuilJinK, TrumpmKtun Street, (:atnhrydge (.132 2RU, F.nKland Itl Surnlurd RuaJ, Uakletgh, Mellwurnc flG(i, Ausrraha Prtnted m the (Inned Stnes of Amenta I

Beyond Equity: Swedish Health Policy and the Private Sector 592 MARILYNN M. ROSENTHAL The rapid development of private medicine in Sweden poses a chal- lenge to that nation's traditional commitment to equity and a pub- lic system of health care. Economic constraints in public-sector spending, physician intent in private practice, popular interest in individual choice, and criticism of the public system have been the stimulus. The dominant Social Democrats will likely accept those elements of the private sector that are ideologically compatible, but resist others. The Myth of Malingering: Why Individuals Withdraw from Work in the Presence of Illness EDWARD YELIN Federal policy to provide income to workers disabled by chronic illness has been under attack. Data from the Social Security Ad- ministration Survey of Disability and Work reveal that anticipation of higher levels of disability income does not correlate with cessa- tion of work; the nature of illness and the structure of work do. Policies predicated on the myth of malingering will hurt millions of the disabled chronically ill. 622 Hazard Pay in Unsafe Jobs: Theory, Evi- dence, and Policy Implications 65o JAMES C. ROBINSON Critics of OSHA argue that an unregulated labor market gives firms incentives to improve working conditions. Analysis of the relation between wages and hazardous working conditions confirms that workers in hazardous jobs are paid marginally more than com- parable workers in safe jobs. But hazardous occupations are concen- trated in low-skill and low-pay strata. The empirical findings have important implications for "right-to-know" and related occupa- tional health strategies. The Economic Costs of the Health Effects of Smoking, 1984 DOROTHY P. RICE,' THOMAS A. HODGSON,2 PETER SINSHEIMER,3 WARREN EROWNER,' and ANDREA N. KOPSTEINZ ' Univerrity of Catifornia, San Francisco; Z Nationa! Center for Health Stati.rtjcs; 3 San Diego State University, San Diego C IGARETTE SMOKING IS A MAJOR CAUSE OF MORBIDITY and mortality in the United States today. It has been linked to a variety of illnesses, including heart disease, cancer, and respiratory disease. Increasing public awareness of the health risks associated with smoking has led to a decline in the proportion of adults who smoke. Yet, as of 1985, 33 percent of men and 28 percent of women smoked. Although there has been a decline in smoking in recent years, the proportion of adult male smokers who smoke 25 cigarettes or more a day has increased from 24 percent in 1965 to 30 percent in 1985; for women, the proportion increased from 13 percent to 21 percent (National Center for Health Statistics 1985, 73; 1986). The health hazards of cigarette smoking have been well documented. More than twenty years ago, the Report of the Advisory Committee to the Surgeon General of the Public Health Service was published (U.S. Public Health Service 1964). That report and a series of subsequent reports The Milbank Quarterly, Vol. 64, No. 4, 1986 ® 1986 Milbank Memorial Fund 489 I

490 1). P. Kiie et al, The Etononrii (:ortr of rhe Health i ffedt of Smokin,q, 1984 491 of the surgeon general reviewed the major prospective epidemiologic studies in the United States and abroad that established the relation between smoking and various illnesses. Recently, annual authoritative reports have been released by the surgeon general on The Health ConJeqaencu of Smoking in which cigarette smoking and its relation to cancer (1982), cardiovascular diseases (1983), and chronic obstructive lung disease (1984) were extensively reviewed. The 1985 report presented a comprehensive review of the relation between cigarette smoking and cancer and chronic lung disease in the work place (U.S. Public Health Service, 1982, 1983, 1984, 1985). In addition to the health risks of smoking, there are important economic consequences. A complete assessment of the economics of smoking requires evaluation of various health, economic, and intangible parameters, including benefits as well as costs of both the production and consumption of tobacco. In many respects the purchase and con- sumption of tobacco is similar to most other commodities and services purchased in the market place. Expenditures for purchasing tobacco cover the cost of resources used in the production process, profit, and taxes. In return, smokers obtain a certain amount of enjoyment. Thus, to a certain extent, smokers get their money's worth and the cost of resources going into the production of tobacco is offset by the benefits of tobacco consumption to smokers. On the other hand, smokers may not have complete knowledge of the harmful health effects of smoking (Warner 1985); although they know smoking is hazardous they are addicted and unable to quit, and may not consider external effects such as annoyance to nonsmokers or the cost of medical care paid `py others. In this situation, costs of smoking other than the purchase price are not fully reflected in the decision process, and benefits to smokers may be less than the combined costs to smokers and nonsmokers. In this article we focus on costs resulting from the health effects of smoking: expenditures for medical care and the value of productive output lost to morbidity, disability, and premature mortality among smokers. These are important components of an analysis of the economics of smoking. Among smokers who know smoking is hazardous to health, the prospect of quitting may be painful, and continued smoking may have become a means of avoiding the physical and psychological discomforts of withdrawal. The costs of purchasing this tobacco is not offset by the benefits of enjoyment from smoking; these costs can be considered in addition to the health effects of smoking, but they art nor quantified in this article. This article reviews alternative perspectives and studies of the economic costs of the health effects of smoking, quantifies the magnitude of the costs to the economy by employing a prevalence-based analysis, and compares our findings with those of other researchers. The appendix describes the methodology of attributable risk used in the cost estimates. Alternative Perspectives of Costs of Smoking Two distinct methodologies exist for evaluating illness and disease in economic terms, the human capital and willingness-to-pay approaches. The former method, used in this study, is called the human capital approach because an employed person is seen as producing a stream of output over the years that is valued at the individual's earnings (Rice, Hodgson, and Kopstein 19R5). The willingness-to-pay method values human life according to the amount people are willing to spend to obtain reductions in the probability of death (Schelling 1968; Acton 1975). The relative merits of these two models is a subject of continuing debate (Robinson 1986). Even within the context of human capital methods employed in this article, there are alternative perspectives from which to view the costs of smoking. Two essential characteristics that distinguish perspectives involve different views on the answer to the question "costs to whom?" and the temporal relation between smoking and costs. Costs to Whom? A prevailing view is that the costs of illness to all of society, smokers as well as nonsmokers, and the indirect costs of morbidity and mortality are the value of an individual's total output, without deductions for consumption (Mishan 1971). In accord with this view, cost-of-illness estimates measure the value of resources used (direct costs) and lost (indirect costs) and the total output lost as a result of illness or death is the value forgone. T.C. Schelling (personal communication, February 15, 1984) suggests, on the other hand, that "costs to whom?" requires two different answers: (1) costs to those afflicted by illness and disease, and (2) costs to everyone else, with the monetary impact on others being important because of the welfare gains and losses they entail for the parties to the transactions. Studies may differ in their analyses I

492 D.P. Rice et al. The Economic Co.rtl of the Health Gffects of Smoking, 1984 4493 of who gains and loses and the amount of benefits and costs to various parties. • The essential distinction between these two views is that the former counts only the value of resources used resulting in forgone alternatives, and resources lost in terms of unemployed labor, while the latter also investigates transfers of resources from one segment of society to another. We are concerned in this article with certain economic costs of the health effects of smoking, including the value of resources used to provide medical c-are and the value of labor forgone due to morbidity, disability, and premature mortality. The costs estimated are in accord with the first of the two perspectives outlined above. The distribution of a given level of output between consumption and savings and the amount of reallocation of one's output to other members of society is a function of social welfare, fiscal and monetary policy, and other means available to policy makers. The relative shares going to the ill or deceased individuals versus the rest of society are determined by the current economic policies and incentives and are a separate issue. We should keep in mind, however, that tobacco consumption and accompanying health effects, in concert with the institutional framework of the society, confer monetary benefits on one group through the imposition of monetary costs on another. On average, current and former smokers use more medical care, experience more work-loss days, and have higher mortality rates than persons who have never smoked. Although a smoker may suffer from smoking-induced illness and require medical care, the cost of the treatment may be borne, at least in part, by others. This occurs, for example, when medical care for smoking-related diseases is paid by health insurance funded by premiums collected from both other smokers and nonsmokers, or by public expenditures such as Medicare and Medicaid. Similar considerations apply to indirect costs. If a smoker loses time from work due to sickness, the real cost is the value of labor not productively employed. The monetary cost of the day lost from work may be borne in whole or in part by the sick worker and dependents, other employees, the employer, or the rest of society. The worker and dependents bear the cost of absences not covered by paid sick leave, other employees may incur costs in the form of lower wages in order to fund sick leave benefits, employers face higher costs for sick leave and additional labor costs or reduced output, and the society as a whole may have to pay higher prices to cover higher costs E of production and lose tax revenues on income lost by the sick worker. Premature mortality presents a similar situation, although the time horizon is years instead of days. Output lost is a real economic cost. There are also pecuniary transfers, including taxes forgone on income lost by the deceased, Social Security and pension benefits paid to survivors, and Social Security and pension payments forgone by the deceased to the benefit of surviving smokers and nonsmokers. The deleterious health effects of smoking generate a variety of financial flows in addition to economic costs. These financial flows have distributional effects, transferring control over the use of resources from one group to another, affecting behavior, and changing the relative well-being of individuals. Although outside the scope.of this article, which is confined to estimates of resource costs and losses, transfers such as health insurance premiums and payments, Social Security, pension, si4kness payments and benefits are important economic values in the social decision-making process. Knowledge of who benefits and who pays and the magnitudes of benefits and costs to various parties can assist in determining the societal response to smoking activities. It might be important to know, for example, the impact of smoking on Scx ial Security, Medicare payments, etc. (Office of Technology Assessment 1985). Some additional aspects of transfer payments are discussed in the section on types of costs. Finally, it is important not to view the issues in terms of smokers versus nonsmokers. Most deleterious health effects of smoking are self-inflicted on smokers by their consumption of tobacco, although there are possible health effects of passive smoking. On the other hand, economic costs and transfer payments occasioned by smoking- induced disease are shared in varying amounts by ill smokers, nonill smokers, and nonsmokers. For example, although the ill smoker receives medical care covered by health insurance, it is financed by premiums paid by ill smokers, nonill smokers, and nonsmokers. Temporal Relation between Smoking and Costs A second essential characteristic that distinguishes perspectives is the temporal relation between smoking and measured costs. Smoking presents a dynamic, time-dependent phenomenon. Some costs of smoking, such as the annoyance caused nonsmokers and property damage from smoking-related fires, are coincident in time with the I

494 D.I'. Rue el al. purchase and consumption of tobacco. The most important costs of smoking in terms of magnitude of their impact are smoking-related diseases and the attendant morbidity, mortality, medical care costs, indirect losses, and intangible losses from pain, suffering, and other quality-of-life changes. These effects result from cumulative exposure over many years and are far removed and distant in time from the tobacco use that helps cause them. In this article we present an example of a prevalence-based cost- of-illness analysis in which the current toll of direct and indirect economic costs resulting from prior smoking is estimated. That is, the health care expenditures incurred and value of economic output lost in 1980 as a result of past smoking over many years are calculated. Prevalence-based cost-of smoking estimates measure the amounts spent during a year and the value of lost economic output for deleterious health effects manifest during the year, but caused by exposure to tobacco over many previous years. In addition to knowing the current annual burden of past smoking (prevalence costs), it is important to know the future costs likely to result from current levels of smoking (incidence costs) and the reductions in costs to be expected from reductions in smoking. Prevalence costs indicate the maximum annual value of resources that could be gained for other uses as levels of smoking decrease. Even with complete and immediate cessation of all smoking, it would be a number of years before morbidity and mortality rates of former smokers returned to levels comparable to those of persons who never smoked. The total amount saved would be the sum of a series of annual reductions which rise over time to a maximum level. Examples of prevalence- and incidence-based studies of the health effects of smoking are described in a later section. . A related issue is the possible tradeoff between higher than average annual medical care use by and expenditures for smokers and longer life expectancy and additional years of medical care for nonsmokers (Leu and Schaub 1983). To the extent that smokers die prematurely, higher medical care expenditures for smoking-induced disease during the smoker's lifetime are offset to a certain degree by expenditures that would be incurred in future years if the smoker did not smoke and enjoyed longer life (Institute of Medicine 1981). The quantitative nature of total versus net direct costs of smoking, however, remains to be rigorously analyzed, and the conceptual validity of net direct The Eronomic Corr.r o j the Healeh Effecl.r of Smoking, 1984 495 costs in certain applications has been questioned (Russell 1986; Warner and Luce 1982). Types of Cost The different types of smoking costs are briefly described below. Direct Cart.r Direct costs of medical care (hospital and nursing home care, services of health practitioners, drugs, etc.) to treat diseases related to smoking result largely from illness self-inflicted on smokers by their consumption of tobacco. The costs of care of nonsmokers exposed to and ill from tobacco smoke are also included. Other direct costs of smoking include costs of cleaning clothes and air of smoke, repairing and replacing articles damaged by cigarette burns, attempts to quit smoking, fires caused by smoking, activities related to smoking and health by private and government groups, and costs to business to hire and train re- placements for ill smokers. Additional direct costs of disease borne by patients and other in- dividuals include costs of transportation to health providers, certain household expenditures, and costs of relocating (such as moving expenses). Transportation costs could be incurred not only for local transportation to hospitals, clinics, physicians, etc., but also for transportation out of state, and out-of-area living costs. lllness can force a family to incur expenses in caring and providing for the sick member of the family. Thece include extra expenditures for household help for cleaning, laundering, cooking, and babysitting; special diets; special clothing; items for rehabilitation and comfort such as exercycles, vaporizers, humidifiers, and dehumidifiers; alterations of property, such as elevators for invalids and other special housing facilities; and vocational, social, and family counseling services. Other costs originating in disease or illness are expenditures for retraining or reeducation, and care provided by family and friends. Limitations of data have hindered development of estimates of direct costs other than health expenditures, with existing information being mostly anecdotal. Luce and Schweitzer (1978) included the health care and property costs of fires caused by smoking, but these amounted

496 D.P. Rice el a!. to less than 3 percent of the total direct costs. Nonhealth direct costs have been estimated infrequently, usually for a specific disease (cancer, for example), and for relatively small samples. Although not concerned with health effects of smoking, several studies indicate the potential importance of nonhealth direct costs. Lansky et al. (1979) found mean weekly expenditures for 70 families of pediatric cancer patients totaled $56 for transportation, food, clothing, family care, and lodging. Patients receiving out-patient chemotherapy reported similar nonmedical expenses resulting from their diseases of $37 during treatment weeks and $17 during riontreatment weeks (Houts et al. 1984). Although these expenditures seem relatively high, neither study indicates how many weeks they were incurred, their relation to medical care ex- penditures, or the year of data collection. In their study of costs of caring for children with cancer, Bloom, Knorr, and Evans (1985) found nonmedical direct expenses for a six-month period in 1981 for 569 children with cancer at the Children's Hospital of Philadelphia averaged about ;4,000 annually and were almost 20 percent of the medical expenditures incurred during this same period and 15 percent of gross annual family income. One of the few studies, if not the only one, to attempt to estimate nonhealth-sector costs for the nation for all medical conditions was by Mushkin and Landefeld (1978). They estimated nonhealth direct costs between $23 billion (low estimate) and $29 billion (high estimate) in 1975, adding 19 to 23 percent to direct health care expenditures. These additional expenditures were incurred by consumers for trans- portation to providers, property losses to fire, and automobile accidents; by government for special education, vocational rehabilitation, coun- seling, added fire protection, and extra costs to the criminal justice system; and by industry for environmental and safety investments. These were the only nonhealth direct expenditures Mushkin and Iandefeld were able to estimate with existing data, and represent only a fraction of the potentially measurable costs. Although these nonmeasured costs are potentially large, their relative importance compared to health care expenditures is'uncertain. I ndirect Cott.r Indirect costs of smoking are the value of lost productivity, output, or forgone manpower resources when persons lose time from work The Economic Co.rr.r nf the Health Effect.r of Smoking, 1984 497 and other productive activities due to morbidity, disability, or premature mortality caused by smoking-induced illnesses. In this article, we estimate these indirect costs of smoking. Illness may also adversely affect productivity in addition to causing time lost from work by lessening the productivity of persons while on the job. Absenteeism also may increase costs of production with the end result that the value of output per unit of input declines. Additional indirect costs include the time a patient and/or family members spend visiting physicians, other health professionals, and hospitalized persons, and time lost from work by family members when someone in the family is ill. As for nonhealth direct costs, data for estimating indirect costs associated with lessened on-the-job productivity and time lost to various persons besides the patient are sparse. Mushkin and Landefeld (1978) estimated the cost of time spent visiting physicians, dentists, and hospitals, and days lost from work due to another person's illness at about $4 to $6 billion in 1975. This adds 5 percent to the commonly estimated indirect costs resulting from the patient's morbidity and premature mortality. The study by Lansky et al. (1979) of families of pediatric cancer patients found an average loss of pay from accom- panying the child to the hospital equal to 14 percent of family income. In the study by Bloom, Knorr, and Evans (1985), families of children with cancer lost wages amounting to 18 percent of family income. Indirect costs such as these, which have not usually been measured in cost-of-illness studies due to lack of data, very likely vary by disease and certain other parameters. These few studies indicate, however, that as for nonhealth direct costs, nonmeasured indirect costs may be a substantial portion of the economic burden of illness. Intangible Costs Direct and indirect costs are losses because they represent reduced consumption possihilities; costs result from the consumption of resources that are thus forgone to other uses. In addition to economic, that is, monetary, costs, smoking causes intangible costs. These include in- tangible costs inflicted on others in the vicinity such as the irritating effects of smoke on the visual and olfactory senses and the respiratory system, and the annoyance these cause, and also noneconomic effects of illness and disease suffered by smokers and their families, friends, coworkers, and care-givers.

498 D.P. Rice et al. f The Economic Cn.rt.r of the Health Effect.r of Smoking, 1984 499 Illness and disease are responsible for a wide variety of deteriorations in the quality of life and personal catastrophes that are not reflected in direct and indirect economic costs. Victims may suffer loss of a body part or speech, disfigurement, disability, the pain and grief of impending death. They, and those around them, may be forced into economic dependence and social isolation, unwanted job changes, discrimination in obtaining employment and health and life insurance, loss of opportunities for promotion and education, relocation of living quarters, and other undesired changes in life plans. The environment created by illness'oken induces anxiety, reduced self-esteem and feeling of well-being, resentment, and emotional problems that often require psychotherapy. Problems of living may develop, leading to family conflict, antisocial behavior, and suicide. The victims and others may experience marked personality changes and reduced sexual function. Premature mortality has direct consequences for the family, affecting, for example, duration of marriage and age at widowhood. Disrupted , development and delinquency may occur among children. The quality of life may be reduced beyond the restorative capability of current rehabilitation efforts. The combination of financial strain and psychosocial problems can be especially devastating. Psychosocial problems have been documented in numerous studies and appear to be widespread. A few examples are studies by Blanchard, Blanchard, and Becker (1976) (depression among widows), Campbell and Campbell (1978) (invasion of privacy, high insurance and interest rates, termination of employment), Cassileth et al. (1984) (mental health status), Derogatis et al. (1983) (psychiatric disorders), Goldberg (1981) (depression), Marinelli and Dell Orto (1977) (self-esteem, sexuality and sexual dysfunction). Intangibles are not easily quantified, and not easily accounted for explicitly in economic models. Consequently, it is not possible to compare the relative importance of economic and intangible costs in a common unit of measurement such as money. It is conceivable, however, that intangible costs are at least commensurate with, and may well exceed, economic costs in terms of their impact on both individual and societal welfare. Transfer Payments Smoking generates federal, state and local income and excise taxes (Harvard University lnstitute for the Study of Smoking Behavior and Policy 1985; Warner 1986). Taxes are neither benefits nor costs to the society as a whole. Rather, taxes are a form of transfer payment or reallocation of income from one segment of society to another. Although taxes are a cost to the payer and a benefit to the ultimate payee, the monetary value of the gains and losses offset each other (except for the costs which may be incurred in pperating the system for collection and disbursement). Taxes, however, undoubtedly have an impact on the welfare of payers who lose and payees who gain. Health insurance premiums paid by nonsmokers to cover the cost of medical care for smoking-related diseases incurred by smokers are transfer benefits to smokers, which are offset in monetary value by the transfer costs to nonsmokers. They occur when health insurance premiums do not reflect differential risks of disease to smokers and nonsmokers. The cost of smoking-induced disease is the value of resources devoted to medical care, whether or not paid entirely by smokers who become ill, or subsidized in part or in whole by nonsmokers. These are already counted among costs in terms of medical care expenditures. Health care premiums and out-of-pocket costs for treatment can be summed to obtain (approximately) the value of medical care resources devoted to treating smoking-caused disease, but it is important to avoid double counting. Nevertheless, it may be important to society to know the amount of subsidies involved and the extent to which nonsmokers subsidize medical care of smokers in order to decide consciously whether the society wants these to take place. Real, but as yet unexplored, benefits and costs of these subsidies are the welfare gains to smokers and the welfare losses to nonsmokers. Social Security, pension, and disability and sickness payments to ill smokers subsidized by nonsmokers (and smokers who do not suffer ill health effects), and payments forgone to smokers who die prematurely to the benefit of nonsmokers are also payments which transfer control over the use of resources from one segment of society to another. They do not represent the monetary value of resource losses caused by smoking and are not benefits or costs to society as a whole. Social Security and disability payments do result in a redistribution of income and welfare gains and losses and are important economic values. These transfer payments can be important economic values in the social decision-making process and assist in determining the societal response to smoking activities.

500 D. P. Rice ct a!. Studies of Economic Costs of the Health Effects of Smoking There are a number of studies of the costs of smoking, but no one study has addressed all aspects (Shultz 1985). Alternative perspectives of the costs of smoking differ in the focus of their concern, including: (1) aggregate costs (e.g., medical care expenditures) due to past smoking, i.e., prevalence-based costs; (2) lifetime medical care expenditures of smokers versus nonsmokers for all conditions and for specific conditions, including lung cancer, coronary heart disease, chronic obstructive pulmonary disease, i.e., incidence-based costs; (3) tradeoffs between higher than average annual medical care use and expenditures of smokers and longer life expectancy and additional years of medical care for nonsmokers; and (4) long-run reductions in smoking and its effect upon the economy, including the future impact of changes in smoking patterns on certain government receipts and expenditures, government deficit or surplus, and employment. Prevalence-based Social Costs The majority of cost-of-smoking studies have been prevalence-based analyses of social costs. They have examined costs to the society rather than private costs (accruing to participants in market transactions, such as smokers, for example) or external costs (falling on others such as nonsmokers and business and government organizations). And they have been concerned with the economic costs incurred in a period of time (most often a year) as a result of the prevalence of smoking- induced disease during this same period. Prevalence-based costs measure the value of resources used (direct costs) or lost (indirect costs) during a specified period of time (the base period), regardless of the time of disease onset. The costs of the base-year manifestations or sequelae of smoking-related disease, which may have had its onset in the base year or any time prior to the base year, are included. Prevalence-based costs assess the current costs of smoking. Current morbidity, mortality, and economic costs result from many past years of tobacco consumption, and current consumption will affect the future The Economic Cacts of the llealth lif%ctt of Smoking, 1984 5501 health of smokers. Therefore, prevalence-based, or current, costs of smoking represent the maximum annual value of resources that could gradually be shifted out of care of smoking-induced illness and into other social priorities if levels of smoking were to decrease. The impact of changes in smoking patterns would take place over a period of years, and the total amount saved would be the sum of a series of annual reductions. Alternatively, if cessation of smoking produced a larger, older population, the health care costs of smoking are resources that could in whole or in part, depending on population dynamics, provide care to an older population with longer lifetimes and lower average annual per capita health care costs. Simon (1968), Hedrich (1971), Williams and Justus (1974), Freeman et al. (1976), Kristein (1977), Luce and Schweitzer (1978), Forbes and Thompson (1983), Office of Technology Assessment (1985), and Vogt and Schweitzer (1985) have all evaluated social costs of smoking. The results of these studies cannot be compared, however, since the types of costs, diseases, and categories of smokers included, and the methodology employed vary among the studies. The study reported in this article is prevalence-based and the results will be compared with the studies by Luce and Schweitzer and the Office of Technology Assessment after the presentation of our findings. 1 ncidence-ba.red Costs In contrast to prevalence-based costs, which are the costs manifested during a period of time, usually over a year, as a result of smoking- induced disease, incidence-based costs are the lifetime costs expected to occur in a group of smokers as a result of smoking-related disease. An incidence-hased study by Oster, Colditz, and Kelly (1984a, 1984b) estimates the direct (medical care expenditures) and indirect (lost wages, salaries, and housekeeping services) economic costs of smoking and benefits of quitting among persons who smoked in 1980 for three smoking-related diseases: lung cancer, coronary heart disease, and emphysema. The economic costs of smoking are the average additional costs per smoker that will be incurred over the smoker's lifetime due to these diseases if he/she continues to smoke throughout life at the same level. Most of the total cost results from indirect losses rather than medical care at younger ages, but direct costs increase dramatically relative to indirect costs at older ages. This general pattern holds true

502 D.P. Rice et al. I The Economic Cau.r of the Health 1•ffectr of Smokink, 1984 503 for women as well as men and for each of the three smoking-related diseases. Oster, Colditz, and Kelly conclude that a smoker, over his or her lifetime, will require higher medical care expenditures for the three smoking-related diseases than will nonsmokers. Costs increase with the amount smoked, and are higher for men than women due to the higher risks of disease experienced by men (except for chronic obstructive pulmonary disease among heavy smokers 50 years of age and over). Combining Oster, Colditz, and Kelly's projections of cost per smoker and the prevalence of smoking, we estimate $500 billion as the present value of lifetime costs of smoking by current smokers in 1980 for the three diseases. The benefits of quitting are equal to the expected costs of smoking-related diseases, adjusted to take into account that ex-smokers' risks of disease slowly decline over a number of years compared with the risks faced by nonsmokers. Using a somewhat different model, Lewit (1983) analyzed the re- duction in health care costs and savings in indirect costs that would result from a gradual reduction in smoking-related disease in the United States beginning in 1980. During the first 25 years, the sum of health care costs saved was projected to be about $200 billion and the gains in indirect costs were equally substantial although realized more gradually. Lifetime Medical Care Expenditures of Smokers versus Nonsmokers 1.e4 and Schaub (1983) examine the impact of smoking on lifetime medical care expenditures of Swiss males. They estimate that although smokers have higher than average annual expenditures for medical care, the longer expected lifetime of nonsmokers means that expected lifetime medical care expenditures for males at age 35 who do not smoke will be 7 percent higher than expenditures for 35-year-old male smokers. - Comparing the methods of Leu and Schaub and Oster, Colditz, and Kelly to estimate lifetime medical care expenditures for smokers, the former includes all medical conditions, while the latter considers only the three smoking-related diseases. Leu and Schaub find lifetime medical care expenditures of 35-year-old male Swiss smokers less than expenditures for nonsmokers. Oster, Colditz, and Kelly report average lifetime costs among smokers who quit are substantially reduced. Although it appears that these two studies offer contradictory results, closer examination of the assumptions, data, and methods indicate that they may be logically consistent. On the one hand, nonsmokers, because of their longer lifetimes, might have somewhat higher or negligibly different lifetime health care expenditures over all diseases than smokers who have higher annual per capita expenditures while alive, but die earlier (Leu and Schaub 1983). On the other hand, smokers have higher expected lifetime expenditures for lung cancer, coronary heart disease, and emphysema because they are at higher risk of developing those diseases than nonsmokers (Oster, Colditz, and Kelly 1984a, 1984b). The conclusion reached by Leu and Schaub, however, that lifetime medical care expenditures of smokers are not higher, and possibly are even lower than those of nonsmokers, may be premature for at least two reasons. First, expenditures are not discounted. The effect of not discounting is to overstate expenditures of nonsmokers since a con- siderable portion of a nonsmoker's lifetime expenditures are incurred in those extra years of life granted the nonsmoker, after the age at which the smoker would die and cease to incur expenditures. This can be a considerable period of time. For example, in 1977 a male in the United States who died of cancer of the trachea, bronchus, or lung, which is typically related to smoking, on the average died at an age with an expected remaining lifetime of 14 years (Rice and Hodgson 1981). Furthermore, these expenditures will be highly concentrated in the more distant years just before the time of death. Lubitz and Prihoda (1984) have shown that, in 1978, Medicare decedents 67 years of age or older represented only 6 percent of beneficiaries but received 27 percent of reimbursements for medical care. These reimbursements were highly concentrated just before death, with one-fourth of reim- bursements in the two years preceding death for care received in the last month of life. Assuming a relatively modest discount rate of 3 percent, a dollar of medical care expenditures incurred by a nonsmoker 14 years in the future has a discounted value compared to a dollar of expenditure during the last year of the smoker of only $.66. In other words, a nonsmoker would have to incur $1.52 (52 percent more) in medical care expenditures fourteen years after the expected age of death of the smoker to offset a dollar of medical care in the I

504 D.P. Rice et al. i The Economic Coru of the Health EJfectt of Smoking, 1984 505 smoker's last year of life. Medical care expenditures of nonsmokers are deferred to the future and the appropriate comparison is between the present discounted values of the respective streams of expected annual medical care expenditures. Second, Leu and Schaub assume relatively low rates of excess medical care use and average annual medical care expenditures for smokers versus nonsmokers. We found actual excess utilization of physicians' services by smokers compared to nonsmokers 2.6 times that calculated by Leu and Schaub and excess use of hospital care 7.7 times higher. Lack of discounting and the possible underestimation of the amount by which average annual use of medical care by smokers exceeds use by nonsmokers means that l.eu and Schaub may have underestimated lifetime medical expenditures of smokers relative to nonsmokers. The amount of understatement is uncertain without further analysis, but could be substantial. Nevertheless, the concept of a tradeoff between higher than average annual medical care use and expenditures of smokers and longer life expectancy and additional years of medical care for nonsmokers is valid and an important aspect of analysis of costs of smoking. The analysis begun by Leu and Schaub should be continued in order to ascertain this relationship with greater certainty. Impact of Long-run Reductions in Smoking on the Economy Studies have examined the future impact of changes tn smoking patterns on certain economic variables, including government receipts and expenditures, government deficit or surplus, and employment. Atkinson and Townsend (1977) examined the long-run impact in Great Britain of an increase in cigarette taxes and a reduction in smoking on government tax receipts and certain transfer payments and revenues. They found that a 40 percent reduction in the number of cigarettes smoked, achieved by phasing in from 1977 to 1980 an increase in the cigarette tax, restrictions on advertising, gift coupons and sport sponsorship, and a health education program, would mean a net increase in population of 250,000 persons in 1998, with marginal change in National Health Service usage. By the year 2000, they project a substantial increase in annual tax revenues and a small net annual reduction in government spending, with savings in sickness benefits and widows' pensions more than offsetting extra costs of retirement programs and health education efforts. Gori and Richter (1978) use the Wharton long-cerm econonietric model to forecast certain economic effects of elimination of the minimum preventable portion of major causes of death, starting in 1975. Population changes resulting from reductions in mortality are introduced into the Wharton long-term model, and their effects on various economic indicators are forecast every five years from 19$Q to 2000, as mortality from preventable diseases is gradually eliminated between 1975 and 2000. Gori and Richter estimate reductions in mortality races resulting from a policy of disease prevention based on the difference between United States rates and the next-to-the-lowest rates observed in in- dustrialized countries for five major causes of death, including car- diovascular renal diseases, cancer, accidents, diseases of the respiratory system, and diabetes. The next-to-the-lowest rates were used in order to give conservative estimates. Smoking is only one of the factors responsible for observed differences in mortality; others include diet, alcohol and drug abuse, occupational hazards, air and water pollution. The relevant aspect of this analysis for our purposes is the modeling employed, which could be applied to estimate effects of reductions in mortality from smoking. A key assumption which greatly affects the projections is their restriction of the labor force to persons 16 to 65 years of age. The impact of this by the year 2000 is to increase government transfer payments by about 9 percent over what the Wharton model forecasts in the absence of disease prevention. Furthermore, under this scenario the federal deficit is more than 50 percent larger, and there are relatively minor increases in the gross national product (GNP), civilian labor force, and unemployment. Although the proportion of elderly in the labor force has been gradually declining in recent years, this assumption of no labor-force participation by persons over 65 years of age can be questioned since 23 percent of this age group had income from earnings in 1980 (Upp 1983). Current thinking leans toward raising the retirement age; starting in 2000 the age at which full Social Security retirement benefits are payable will gradually rise until it reaches 67. Reduced benefits will still be payable at age 62, but the reduction will be larger than it is now. If private pension systems follow the lead of Social Security and raise the age of eligibility for full benefits, incentives will be in place for more workers to work past age 65. The net effect on age at retirement of higher ages for full benefits and the desire of large numbers of workers to retire early is uncertain. I