Tobacco Documents Online

The Economic Costs of the Health Effects of Smoking, 1984 DOROTHY P. RICE, I , THOMAS A. HODGSON,2 PETER SINSHEIMER,3 WARREN BROWNER,' and ANDREA N. KOPSTEINz ' University of California. San Francisco; 2 National Center for Health Statistics; 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 0 TIMS 0016367

490 D.P. Rice et al. 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 Consequences 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 oy 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 are not quantified in this article. TIMS 0016368

The Economic Costs of the Health Effects of Smoking, 1984 491 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 1985). The willingness-co-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 197 1). 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 TIMS 0016369

492 D.P. Rice et al. 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 latcer 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 care 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 shou'r 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 bornt, 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 ocher 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 noc 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 TI~s 0016370

The Economic Costs of the Health Effects of Smoking, 1984 493 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 finaricial flows have distributional effects, transferring control over the use of resources from one group to another, affecting behavior, and changing the relacive 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, sickness 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 Social 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 TIMS 0016371

0 494 D. P. Rice et 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. I In this article we present an example of a prevalence-based cost- of-illness analysis in which the current coll 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 k:,ow 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 TtNIS 0016372

The Economic Costs of the Health Effects of Smoking, 1984 495 r 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 Costs 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. Illness can force a family to incur expenses in caring and providing for the sick member of the family. These 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 TIMS 0016373

496 D. P. Rice er al. 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 nontreatment weeks (Houts er 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 Landefeld 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. Indirect Costs Indirect costs of smoking are the value of lost productivity, output, or forgone manpower resources when persons lose time from work TIMS 0016374

The Economic Costs of the Health Effens 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 possibilities; 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. TIMS 0016375

498 D. P. Rice et al. 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 opponunities for promotion and education, relocation of living quarters, and other undesired changes in life plans. The environment created by illness often 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 races, termination of employment), Cassileth et al. (1984) (mental health status), Derogatis et al. (1983) (psychiatric disorders), Goldberg (198 1) (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 Institute for the Study of Smoking Behavior and TIMS 0016376