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The Economic Costs of the Health Effects of Smoking, 1984 499 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 operating 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. i3ealth 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. TIMS 0016377

500 D.P. Rice et al. 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 ' i 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 rime 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 cime 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 TIMS 0016378

The Economic Costs of the Health Effects of Smoking, 1984 501 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 (197 1), 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 che 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. Incidence-based 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-based 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 TIMS 0016379

502 D.P. Rice et al. 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 Leu and Schaub (1983) examine the impact of smoking on lifetime medical care expenditures of Swiss males. They estimate thar 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 TIMS 0016380

The Economic Costs of the Health Effects of Smoking, 1984 503 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 capica expenditures while alive, but die earlier (Leu and Schaub 1983). On the ocher 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 d:s'counting 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 TIMS 0016381

504 D.P. Rice et al. 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 Leu 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 in 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. TIMS 0016382

The Economic Costs of the Health Effects of Smoking, 1984 505 Gori and Richter (1978) use the Wharton long-term econometric 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 1980 to 2000, as mortality from preventable diseases is gradually eliminated between 1975 and 2000. Gori and Richter estimate reductions in mortality rates 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 anaivsis 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. -VIMs ®016383

506 D.P. Rice et al. Removing this constraint, Gori and Richter find quite different results for some variables in 2000. With disease prevention, the Wharton model predicts a federal surplus compared to a projected deficit in the absence of disease prevention, with a 65 percent difference in the two estimates. More modest increases in the GNP and government receipts and a much smaller increase in transfer payments are predicted. But with this latter assumption about labor-force participation, much larger increases in unemployment and unemployment benefits result. Gori and Richter rightly caution that the trends shown and not the numbers are important. In any case, for the purpose of our concern with longer-run reductions in smoking and their impact upon the economy, it is important to note that the direction of change in important economic variables is uncertain. The various models can be quite sensitive to assumptions about key parameters, and a good deal more analysis is required before we can be confident about long- run effects of changes in smoking patterns. Estimated Economic Costs of the Health Effects of Smoking Previous studies of the economic costs of smoking, employing the prevalence-based approach, applied global proportions attributable to smoking to illness costs (Hedrick 1971; Luce and Schweitzer 1978). For example, Luce and Schweitzer applied the following smoking percentages to updated cost-of-illness estimates originally published by Cooper and Rice in 1976: neoplasms-20 percent, circulatory system-25 percent, and respiratory system-40 percent. For this article, we have refined the estimates by using the epidemiologic methodology of "attributable risk" to calculate the direct (personal health care expenditures) and indirect (morbidity and mortality) costs associated with cigarette smoking. Attributable risk is "the maximum proportion of a disease that can be attributed to a characteristic or etiologic factor" (Lilienfeld and Lilienfeld 1980) and assumes that other factors influencing the occurrence of smoking-related diseases are equally distributed among smokers and nonsmokers. But smokers differ from nonsmokers in certain genetic, social, and economic characteristics which may contribute to disease. The prevalence of smoking varies by race (more blacks smoke than TIIVIS 0016384

The Economic Costs of the Health Effects of Smoking, 1984 507 whites), education (fewer college graduates smoke than persons with only some high school), income (males with lower income smoke more, while the opposite holds for women), and occupation (blue- collar workers smoke more than professional or technical workers) (Vogt 1983; Warner 1983). If factors known to be related to health status and smoking habits are not controlled, the impact of smoking on health and the costs of smoking may be overstated. An interesting attempt to overcome this problem by Leu and Schaub (1983) analyzed smoking and medical care expenditures using three types of persons: smokers, nonsmokers, and nonsmoking smokers. The latter is a statistical construction having the smoking habits of a nonsmoker but like a smoker in other respects. Leu and Schaub assumed that 65 percent of smokers' excess mortality was due to smoking and 35 percent to other characteristics of smokers. Although it would be important to account for differences in mortality and morbidity between smokers and nonsmokers not due to smoking, the empirical basis for doing so is not readily apparent, and the Leu and Schaub assumption is arbitrary. The detailed methodology and sources of data for estimating the attributable risks for medical care utilization, morbidity, and mortality and their application to the direct and indirect costs of illness are detailed in the methodology appendix at the end of this article. Summary results are presented below. Disability and Medical Care Utilization Differentials Smokers are sicker and require more medical care than those who do not smoke. Table 1 records a comparison of the disability and medical care utilization rates for persons 17 years and over who ever smoked (current and former smokers) and those who never smoked, by age and sex; the data are from the Smoking Supplement of the 1979 National Health Interview Survey (NHIS). Higher rates in all the measures are reported for smokers compared with nonsmokers, ranging from 6 percent for physician visits to 72 percent for persons unable to work or keep house. The differentials between male smokers and nonsmokers are especially high. For example, the number of men reporting that they are unable to work is 88 percent higher for smokers compared with nonsmokers. For male smokers, hospital days are 63 percent higher, restricted-activity days are 55 percent higher, and TIMS 0016385

TABLE I Disability and Medical Care Utilization by Cigarette Smoking Status, Sex and Age: United States, 1979 Both sexes Males Females Aged Aged Aged Smoking 17 years 17-44 45-64 65 years 17 years 17-44 45-64 65 years 17 years 17-44 45-64 65 years status and over years years and over and over years years and over and over years years and over RESTRICTED-ACTIVITY DAYS PER PERSON PER YEAR All persons' 22.3 15.1 26.3 42.8 20.0 13.7 24.4 39.4 24.4 16.5 28.2 45.2 Ever smoked2 24.2 17.9 28.8 41.4 22.9 15.8 27.5 39.8 25.8 20.4 30.7 44.2 Never smoked 20.3 12.1 22.6 43.9 14.8 10.7 14.3 39.5 23.4 13.1 25.9 45.3 BED-DISABILITY DAYS PER PERSON PER YEAR All persons' 7.5 5.7 8.1 13.8 6.1 4.3 7.1 12.1 8.9 6.9 9.1 15.0 Ever smoked2 7.8 6.5 8.8 11.7 6.7 4.8 8.1 11.1 9.3 8.4 9.8 12.7 Never smoked 7.2 4.7 7.1 15.4 4.8 3.5 3.6 14.5 8.6 5.7 8.5 15.7 WORK-LOSS DAYS PER CURRENTLY EMPLOYED PERSON PER YEAR All persons' 4.9 5.0 4.7 - 4.5 4.5 4.3 - 5.5 5.6 5.4 Ever smoked2 5.4 5.8 4.6 - 5.0 5.2 4.6 - 6.2 6.9 4.6 Never smoked 4.3 4.0 5.1 - 3.6 3.4 3.3 - 5.0 4.5 6.3 NUMBER OF PERSONS UNABLE TO WORK OR KEEP HOUSE; PER 100 PERSONS4 All persons' 5.0 1.1 6.8 17.2 7.9 1.7 11.4 28.6 2.5 0.5 2.6 9.1 Ever smoked2 6.2 1.3 9.0 22.1 9.4 2.0 12.7 30.6 2.0 0.5 3.5 7.2 Never smoked 3.6 0.8 3.2 13.3 5.0 1.2 6.8 24.7 2.9 0.5 1.8 9.8