The correct counter factual is key in cost of smoking

This is the second post looking at the FDAs recent rulemaking around Graphic Warning Labels (GWLs) for cigarettes and applying new regulations to other types of tobacco. The first post is here.

This post addresses confusion about the counter factual used in our book The Price of Smoking (MIT Press, 2004) to identify the life cycle cost of cigarettes, expressed in a NPV of $40/pack in 2000$. Frank Chaloupka and other leading researchers have written a useful critique of the FDA report, that leans heavily on our cost of smoking work. However, Chaloupka et al. have one thing wrong. On page 8  they say:

The FDA’s analysis appropriately accounts for the fact that smokers differ from never‐smokers
in many ways, including income levels, insurance status, race and ethnicity, and participation in
other risky behaviors.  This implies that these differences need to be accounted for when
estimating the health care costs of smoking, something commonly done by estimating costs for
the counterfactual ‘non‐smoking smoker’, with the difference in costs between the smoker and
the non‐smoking smoker reflecting the excess costs caused by smoking.  However, FDA’s
approach, following that used by Sloan and colleagues (2004), compared costs for smokers to
costs for current non‐smoking smokers, comprised of never smokers and former smokers,
rather than comparing costs for smokers to hypothetical never‐smoking smokers.  Given that
the difference in expenditures for current smokers and current non‐smokers will be smaller
than that for current smokers and never smokers, this approach will lead to an underestimate
of the benefits resulting from reductions in smoking in response to FDA regulatory actions (emphasis added)

This is incorrect. We used a non-smoking smoker, statistical counter factual to identify the cost of smoking net of other factors (Ch2excerptMITPressSmokingBook.8.11.14). The previous link is a fairly lengthy excerpt of the second chapter of the book describing the conceptual, life cycle approach we used that is based on the non smoking smoker counter factual. In Chapter 1 (p. 20), we announce our intentions to estimate the cost of smoking using a statistical construct of the “non smoking smoker”:

In estimating smoking-attributable mortality, it is essential to compare mortality experience of actual smokers with what they would have experienced if they did not smoke. We term the latter “nonsmoking smokers.” Such persons are as close to smokers as our data allow us to make them.

There are a series of assumptions and choices we made that are conservative in terms of identifying the cost of smoking, and therefore in the FDAs work, estimating some of the benefits of stopping are also likely conservative. I will get into some of those issues in later posts.

 

 

*The Price of Smoking. Frank A. Sloan, Jan Ostermann, Gabriel Picone, Christopher Conover, and Donald H. Taylor, Jr. MIT Press, 2004.  Note: several has asked me why the book is not titled “The Cost of Smoking”….that is what the manuscript was titled and the MIT Press marketing people wanted (and obviosly got) the titled changed.

How much pleasure does smoking bring?

News of a controversial cost:benefit calculation contained in new federal tobacco regulations subjecting many tobacco products to cigarette-like regulations, and creating new graphic warning label (GWL) regulations for cigarettes. The question at hand is whether the cost:benefit analysis underpinning the regulations is correct.

Most attention has focused on estimates of the benefits (pleasure, etc.) that smokers derive from smoking that were used in the analysis, and which increase the cost of the regulation (lost benefit to smokers = bigger cost of regulation). Frank Chaloupka and several other leading researchers in the economics of smoking have written a useful critique of the economic analysis undertaken to evaluate this rule. They focus on the issue of “lost consumer surplus “–or the pleasure/other benefits that smokers derive from smoking as a cost of the GWL regulation. From page 3:

The most critical concern about FDA’s cost estimation is the agency’s reliance on lost consumer surplus as a cost of smokers’ quitting in response to the GWLs.  We describe in detail why the notion of consumer surplus, predicated on well‐informed rational behavior, does not apply in this instance in which the vast majority of smokers begin smoking, and become addicted, before the age of majority.

This is important because any rule that has an expected cost of over $100 Million (in 1995$) has to undergo a detailed cost:benefit analysis to demonstrate that the benefits of the regulation outweigh the costs. As the estimate of “lost consumer surplus” rises, the net benefit of the regulation decreases, making the case for its promulgation less clear. A book that I co-authored “The Price of Smoking” (5 part series on the book from June, 2011) with Duke colleagues figures heavily in the FDAs cost:benefit analysis, and our top line findings illustrate the stakes. We estimated the net present value of the societal cost of a pack of cigarettes in 2000$ to be $40/pack, allocated as follows:

• $33 private cost: borne by the individual, primarily through a substantially shortened lifespan
• $5.50 quasi-external cost: borne by the smokers’ family through increased health costs, slightly lower wages and other factors
• $1.50 external cost: borne by society, and representing the net effect of things like taxes paid, Medicaid and Medicare payments, and Social Security received

Most of the cost of smoking is borne by smokers via shortened lifespan, so netting out the “lost consumer surplus” or pleasure from smoking greatly changes the calculus of assessing the costs and benefits of a regulation whose predicted impact is smoking cessation. Note that the disagreement about the magnitude of this “lost consumer surplus” is mostly one of theory application (I think). Two polar opposite interpretations of the economic and epidemiological literature are possible: smoking is simply another economic decision, and therefore the benefits of smoking must be similar to the costs expressed in terms of lost years of life. At the other end of the spectrum, the addictive nature of the product and juvenile initiation means smoking is irrational and therefore not given to a calculus based on the economic rationality of decisions. Surely the truth lays somewhere in between.

The most unusual aspect of the economic analysis undertaken by the FDA is to reduce, by around half, the benefits of smoking cessation to account for “lost consumer surplus” or foregone benefits of smoking, which greatly increases the cost of the regulation. While some allowance may seem reasonable, Chaloupka and colleagues argue persuasively (see p. 11-12) that we don’t have enough empirical evidence to determine the size of the impact, and most crucially that there is no reason to expect smokers to quit smoking in response to graphic warning labels if they had undertaken smoking in a fully rational manner. This is persuasive to me that reducing the benefits of cessation that are expected to result from the regulation by half is an over-estimate of this effect, resulting in an under-estimate of the net benefits of the regulation. It does not make clear what the correct estimate might be.

There are many other interesting issues raised by the FDA regulation and the Chaloupka et al response related to the economics of smoking that I will address in several posts over the next few weeks.

The external cost of guns v. smoking

A quick post on the cost of smoking v. cost of guns, given the intuitive notion that second hand smoke and violence might be (conceptually) similar. I am not an expert on guns, and this is a quick post, given as food for thought.

I have done work on the social cost of cigarette smoking, and we estimated the cost per pack in $2000 to be ~$40

• $33/pack was private costs, mostly borne by the smoker through shortened life
• $5.50/pack was quasi-external costs, borne mostly by the spouse through shortened life via second hand smoke (and smaller amounts for children, who are exposed for shorter periods)
• $1.50 of external costs net of excise taxes which is the summation (positive and negative) of many sources: third party health insurance, Social Security, private life insurance markets, etc.

My colleague at Duke Phil Cook (along with Jens Ludwig at Chicago) have done work on the cost of gun ownership, and estimated what they call the social cost of a an additional household acquiring 1 gun to range from

• $100-$1,800/year per gun

Note that they use the term social cost, but I understand what they have done to focus on external costs only. Key to their sensitivity analysis is whether and how you value fear, worry, etc. related to gun violence, which has certainly been heightened this past week. If you include that, you get to the high end, and if not nearer the low end (there are other things going on in the sensitivity analysis, including findings from the literature that the value of life years lost of those most typically killed with guns is lower than the average death, controlling for age).

A few points about Cook and Ludwig’s analysis.

• framed against the smoking work above, Cook and Ludwig focus on external costs as I say. This misses the internal costs associated with suicide, or quasi-external costs if a gun is used by a family member for suicide. As we conceptualized smoking, domestic violence homicide would also be a quasi-external cost, which I don’t think could be teased out from what they did. I am sure there are some complicated factors of attempted v. completed suicide, and the choice of method is endogenous, etc.
• They use percentage of suicides via a gun in a county as a baseline proxy for gun ownership, and look at changes in gun ownership and changes in murder; they are assigning the cost of an additional household becoming a gun owning household
• They find that increased gun prevalence increases murder, but not other violent crimes (more guns add lethality)
• The larger estimates above include gun injuries, which have larger social costs than deaths given how the literature values lost life years due to gun homicide [see Viscusi 1998 on this issue]
• Murders among persons age 15-19 are more sensitive to increased gun supply, which they surmise increases illegal guns (for example, bought by gangs on the streets)

Summing up, the external costs of smoking for a 2 pack per day smoking in $2000 would be ~$1,000, near the midpoint for the estimate of external costs of a marginal gun that Cook and Ludwig identify. In smoking, the private costs overwhelm via the value of shortened life, and in gun deaths lost life is also the major cost. Smoking is the leading preventable cause of death in the U.S., and results in ~ 10 times more death annually than do firearms (435,000 v. 30,000 in year 2000) so the costs of smoking would be expected to be much larger than the cost of guns, with the magnitude of this calculation being sensitive to how one values lost years of life.

You could think about how to convert the cost per pack in smoking and the cost of an additional gun per year, but I am not going to do it now.

***

PJ Cook, J Ludwig. The Social Cost of Gun Ownership. Journal of Public Economics 2006;90:371-390.

Frank A. Sloan, Jan Ostermann, Gabriel Picone, Christopher Conover and Donald H. Taylor, Jr. The Price of Smoking. MIT Press: 2004. The Price of Smoking is available as an ebook.

Viscusi, WK. 1998. Rational Risk Policy. Oxford University Press, New York.

The cost of smoking

A new paper in Health Affairs estimates the impact of smoking cessation on future health care costs among persons covered by TRICARE, taking account of changes in life expectancy.

The last column on the right shows the net impact by gender accounting for the expected increase in weight gain that is associated with cessation (slight reduction in lifetime medical costs for younger women; slight increase for men). The focus of the analysis is health care costs paid by third party insurers and you can follow the calculus of the cross subsidies above (lower costs while alive, higher costs from living longer,with the net depending on gender and age at cessation).

This table focuses only on part of the external cost of smoking (that cost that might be shifted outside of the household). The social, or total cost of smoking includes external costs, but also private ones and quasi-external costs that accrue within the household. I explored a complete assessment of the social cost of smoking (private, quasi-external and external costs) with colleagues in The Price of Smoking (MIT Press, 2004).

In $2000 we found that the cost of a pack of cigarettes was around $40/pack, but that most of the cost was borne by smokers (private cost ~$33/pack) and family members (quasi-external cost ~$5.50/pack) via shortened life span. The purely external costs (including flows like those above, but accounting for many other sources of potential cross subsidy like Social Security and private life insurance) were around $1.50/pack net of excise taxes. The new paper is a nice analysis, but focuses only on one aspect of the true, or societal cost of smoking and in doing so likely greatly underestimates the benefits of cessation.

**

Wenya Yang, Timothy M. Dall, Yiduo Zhang, Shiping Zhang, David R. Arday, Patricia, W. Dorn and Anjali Jain. Simulation Of Quitting Smoking In The Military Shows Higher Lifetime Medical Spending More Than Offset By Productivity Gains. Health Affairs, 31, no.12 (2012):2717-2726.

After Tobacco

Sarah Kliff has a post on a new book After Tobacco: What Would Happen if Americans Stopped Smoking (by Peter Bearman, Kathryn Neckerman and Leslie Wright; Coumbia Univ. Press, 2011). I haven’t read the book but will try and get to it soon. Kliff highlights a few of the outcomes in a post-Tobacco world that may seem counterintuitive to some:

The economic effect on public programs, however, would be more of a mixed bag. States’ Medicaid costs would noticeably decrease: lower-income populations have higher rates of smoking and the negative health outcomes that follow. But states would also lose revenue from cigarette excise taxes, which amounted to $13.75 billion in 2006. If Americans stopped smoking altogether, states could see a 1.4 percent decrease in revenue, according to a chapter from Hunter College’s Howard Chernick.

A similar, spilt-effect would be true for Social Security. With Americans living longer, Social Security would bear the increased cost of supporting people for a longer time. But those costs are slightly offset from an increase in healthy workers, who “tend to earn more and retire later,” leading to higher contributions. On balance, “After Tobacco” estimates the end of smoking means a slight, 1.58 percent increase in Social Security outlays.

We found similar cross subsidies in The Price of Smoking that I have blogged about. I will be most interested in the methods they used and hope to blog about them in the next few weeks.

 

The Cost of Smoking-V

In June I did a four part series on the cost of smoking that showed that the social cost of cigarettes was $40 per pack ($2000):

• $33/pack in private costs borne by the smoker mostly through shortened life span
• $5.50/pack in quasi-external costs borne by the household (spouse and children) primarily via increased morbidity and mortality
• $1.50/pack in pure external costs that represent the net effect of smoking on things like Medicare, Medicaid and Social Security

Yesterday I posted on the substantial life extension benefits that accrue from smoking cessation even as late as age 65. I am going to write more about the methods used in that study, but first wanted to revisit the cost series briefly to amplify on a type of cost that we didn’t include in our estimates of the cost of smoking.

Working on the book The Price of Smoking was great fun, because we had a large project team that discussed and debated many issues. One that was particularly contentious was whether to include intangible costs such as the cost of my son not knowing one of his grandfather’s and the anguish that this fact causes my wife. We decided to not include such intangible costs in order to stick with conservative estimates as well as difficulty in assigning a cost. We did of course provide a dollar estimate of the cost of shortened life span, the primary cost of smoking. This paper by Viscusi and Hersh estimated the private mortality cost (assumed to be borne by the smoker) of $222/pack for men and $96/pack for women (in 2006$). Cutler (2002) $22/pack and Gruber and Koszegi (2001) $30/pack had private mortality costs per pack that were more similar to our estimate ($33/pack in 2000 dollars).

Attaching a dollar value to a statistical life is plenty controversial, but accepted, and there are different methods and approaches that can be compared. In the end, intangible costs such as a child not knowing his grandfather are real, but we thought it better to not provide a dollar value for them and leave that up to the reader, in part because of how many sources of intangible costs we could identify as a project team. If you start including such costs, where do you stop? In any event, our estimate of the social cost of smoking at $40/pack in 2000 dollars is a lower bound estimate and there are harms not accounted for in this figure.

*********

Papers/Works Cited

Frank A. Sloan, Jan Ostermann, Gabriel Picone, Christopher Conover, Donald H. Taylor, Jr. The Price of Smoking. MIT Press, 2004.

W. Kip Viscusi, Joni Hersch. The mortality cost to smokers. Journal of Health Econmomics 2008;27:943-58.

Cutler, D.M., 2002. Health care and the public sector. In: Auerbach, A.J., Feldstein, M. (Eds.), Handbook of Public Economics. Elsevier Science,
North Holland, pp. 2145–2243.

Gruber, J., Koszegi, B., 2001. Is addiction rational? Theory and evidence. Quarterly Journal of Economics 116 (4), 1261–1303.