Wednesday, August 8, 2012

The Surprising Economic Effects of Smoking & Quitting

Anti-tobacco forces often argue that smokers are a burden on the American economy.  When Congress debated FDA tobacco regulation in 2009, the White House advised that tobacco use “accounts for over a $100 billion annually in financial costs to the economy” (here).  In 2011, the CDC estimated smoking costs at $193 billion (here).

New data from a highly credible source reinforce a very different perspective on the issue.

In June, the non-partisan Congressional Budget Office (CBO) produced a financial analysis of a hypothetical federal cigarette tax increase (available here).  It reveals that quitting smoking is a money-saver for the government in some respects, and a money-loser in others.

Using standard methodology, the CBO studied the effects on the federal budget of “a hypothetical increase of 50 cents per pack in the federal excise tax on cigarettes and small cigars (adjusted each year to keep pace with inflation)…”  The analysis focuses mainly on the period 2013 to 2021, with long-term projections to 2085.

The CBO estimates that the tax increase would produce a gain of $41 billion through 2021.  Most of the gain ($38 billion) would come from increased tax revenues.  Another $3 billion would come from income tax receipts related to increased productivity among former smokers.

With respect to federal health care, “Medicaid would see the largest savings over the 2013-2021 period—about $560 million,” while “Medicare would have the next-largest savings in the near term—about $250 million.” 

But the CBO also reported some expenses related to cessation: “By contrast, Social Security’s Old-Age and Survivors Insurance program, which pays retirement benefits, would experience the largest net increase in costs because of the policy. On net, outlays for Social Security would rise by about $150 million over the 2013-2021 period.”

Medicaid/Medicare savings would exceed increased Social Security payments until 2025.  After that, Social Security increases due to increased longevity would exceed Medicaid/Medicare savings.

Not smoking is associated with increased longevity, which is associated with increased net costs for the health care system, rather than savings. 

A 2008 study from the National Institute for Public Health and the Environment, Tilburg University and Erasmus University in The Netherlands (access here) concluded that the average 20-year-old smoker would consume $270,000 in health care in their remaining lifetime, while the average “healthy-living” person would consume $345,000 (assuming the current euro/dollar conversion).  As the researchers explained, “…smoking is in particular related to lethal (and relatively inexpensive) diseases… Unfortunately, these life-years gained [by healthy living] are not lived in full health and come at a price: people suffer from other diseases, which increases health-care costs.”

Another study from The Netherlands (available here) in 1998 came to a similar conclusion: “From a humanitarian point of view, life is preferable to death and health to illness.  The aim of health care is not to save money but to save people from preventable suffering and death… There is no evidence that healthcare costs are increasing because citizens live unhealthier lives. In fact, quite the contrary would seem to be the case.”

Despite the research, the CDC refuses to consider smoking-related health care costs and savings.  This narrow perspective has been criticized by Vanderbilt economist Kip Viscusi: “It looks unpleasant or ghoulish to look at the cost savings as well as the cost increases and it's not a good thing that smoking kills people.  But if you're going to follow this health-cost train all the way, you have to take into account all the effects, not just the ones you like…” (quoted here). 


Jonathan Bagley said...

The UK government has never admitted this in public. It goes along with the Anti Tobacco Industry's fraudulent claims about the "cost to the NHS". Good to see it explained.

Brad Rodu said...

On November 29 CBO staff published a commentary based on their study in the New England Journal of Medicine, which can be found here: