Permanent Subsidy of the Tobacco Industry Through the Medical System

Wednesday, January 19, 2000
submitted by Stanton A. Glantz

Most people disapprove of the tobacco subsidy, meaning the tobacco price support program for farmers. This program costs tens to hundreds of millions of dollars and is not the most important or largest subsidy that the tobacco industry receives.

The REAL subsidy of the tobacco industry operates through the medical system, with the general public (either as taxpayers or through their private health insurance) to underwrite the excess medical costs tobacco use imposes on society. These costs -- which amount to about $50-$60 billion a year -- should fairly be borne by the tobacco industry. Doing so would be reflected in higher prices for cigarettes or lower profits for cigarette companies. By externalizing these costs, the industry keeps prices artificially low and consumption (and profits) artificially high.

This fact was at the core of the law suits that the states filed to recover smoking-induced Medicaid costs.

The industry settled these cases for a nominal payment of $206 billion over twenty-five years (and continuing in perputity after that). $206 billion sounds like a lot of money, but it is not. Indeed, because it only returns a small fraction of the costs that the tobacco industry imposes on society, the settlement locks in a substantial subsidy for the tobacco industry through the medical system.

To illustrate this point, consider the situation here in California.

  • The MSA provides California about $1 billion a year.
  • Smoking costs MediCal (Medicad in California) over $2.4 billion a year [1].
  • By only reimbursing the state for part of the costs that smoking imposes on MediCal, the MSA ensures a perminant $1.4 billion subsidy for the tobacco industry from the people on California.

The only way to end this subsidy is to reduce tobacco consumption.

Allocating a substantial fraction of settlement funds to an effective tobacco control program directed at reducing consumption as quickly as possible will rapidly reduce the subsidy.

A program simply directed at kids and primary prevention (even if it would work in isolation) will do nothing to reduce the subsidy of the tobacco industry through the medical system during our lifetime since most tobacco-related costs come in middle age.

Note: The subsidy of the industry through the medical system including other public and private payers is much larger. In California smoking-induced medical costs exceed $11 billion a year, yet the MSA only returns $1 billion. The comparable national numbers are about $50-60 billion and $8 billion).

Politicans who want to protect the public purse from the real tobacco subsidy should be using settlement funds to reduce tobacco consumption not just fill potholes.

[1] Zhang, et al., "Cost of Smoking to the Medicare Program, 1993," Health Care Financing Review 20 (4) 179-196, 1997 updated to 1998 numbers using the medical inflation index.

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