Constant effect

In doing economic analysis, the policy question we seek to answer dictates which definition of the cost of smoking to employ, and the perspective from which these costs are counted. For example, the perspective could be that of a government department, the healthcare sector of the economy, or all of society. Consistency in defining costs and in perspective is particularly important to avoid both double counting and erroneous identification of transfers of funds in the economy as costs.

1. Methods

We employed the widely used prevalence-based approach to estimating the cost of smoking. This approach is based on the estimated prevalence of smoking-related illnesses in a given year and on the costs associated with those illnesses. Because of the long time lag between smoking initiation and the onset of most smoking-related illnesses, these estimates reflect historical trends in smoking, and tend to mask the magnitude of future  costs, which depend on current smoking prevalence.

2. Economic burden of smoking

The European region is disproportionately negatively affected by tobacco mortality and morbidity18. These premature deaths represent a loss of human capital, since the skills and talents of those who die prematurely are lost to society.

Apart from the loss of human capital attributable to smoking, there are also other direct and indirect costs of smoking that impose economic burdens on both smokers and non-smokers. The direct costs are usually associated with healthcare for smoking-related diseases among smokers and second-hand smoke (SHS) victimsg,. The indirect costs are mostly linked to productivity losses, and to foregone income taxes and contributions to social security among patient-smokers, patient-SHS victims, and the people who care for them, who would otherwise be in paid employment (“informal care”).

There is very little information about the direct and indirect costs of smoking in Europe. Some estimates are available for individual countries like the Netherlands, Germany, Sweden, Iceland, and the UK, but they employ different methods, making the resulting figures incomparable. There are no peer-reviewed studies estimating the costs of smoking in the new EU Member Statesh. This lack of knowledge creates an urgent need for acomprehensive study estimating the costs of smoking. At the moment it is only possible to make provisional estimates of smoking-attributable costs. We have applied two methods to generate such provisional estimates.

The first method is based on the notion that there are two major categories of diseases associated with smoking: respiratory diseases and heart diseases. The European Respiratory Society (ERS) estimates21 that the annual economic burden of respiratory diseases (including lung cancer) in all of Europe in 2000 was approximately €102 billion, or €118 per capita.The study included some indirect costs related to workday losses due to morbidity (€48.3 billion or 47.4% of the total) and due to premature mortality and rehabilitation (€20.0 billion or 19.6%), and some direct costs associated with inpatient and outpatient care (€17.8 billion or 17.5%, and €9.1 billion or 8.9%, respectively) and costs of prescription drugs including VAT (€6.7 billion or 6.6%).

However, the costs of informal care, the cost of treating reproduction problems, and SHS are not included. According to the World Health Report 2002, the smoking-attributable fraction for chronic respiratory disease among industrialised countries falls into the range of 56-80%. Therefore, it is possible to attribute between €57.12 billion and €81.6 billion of these costs to the burden of smoking in Europe. About 2/3 (67%) of these costs, or €38.27 billion to €54.67 billion belong to the category of indirect costs. These are conservative estimates due to the omission of some costs categories.

Each year, approximately €74 billion is spent on treating cardiovascular diseases (CVD) in the EU15. In addition, another €106 billion a year represents indirect costs due to productivity losses of premature death and disability23. Again, the costs of informal care, the cost of treating reproduction problems and costs of SHS are not included. According to the World Health Report 2002, the smoking-attributable fraction for CVD among industrialised countries is 22%.Therefore, it is possible to attribute about €16.28 billion of the direct costs, and about €23.32 billion of the indirect costs of treatment of CVD to smoking in EU15. Extrapolating per capita costs in the EU to the population of EU25/EFTA will result in  €48.71 billion a year of the total cost of smoking due to CVD.

Smoking-attributable costs for these two categories of diseases provide a conservative cost of smoking estimate for Europe, which ranges between €105.83 billion and €130.31 billion, or between €228 and €281 per capita. The indirect costs represent about 2/3 of the total costs of smoking, and are between €70.55 billion and €86.87 billion.

There are several reasons to expect that the true costs are larger. Only major diseases associated with smoking (respiratory diseases and CVD) are included in these estimates, and even for these diseases, not all costs are considered (e.g. the costs of informal care, the costs linked to the treatment of reproduction problems, the costs related to SHS and budgetary costs related to social services are not included). On the other hand, the costs of respiratory diseases covers all European countries, thereby overestimating the amount attributable to countries covered by this report. However, it is reasonable to expect that the majority of costs associated with smoking is disproportionately carried by EU/EFTA countries, due to their more developed healthcare and social security systems and the relative higher value of workdays lost due to smoking-related morbidity.

To verify the magnitude of the estimates of smoking-related costs calculated by applying the first method, we used a second method based on extrapolation of a 1996 estimate of costs of smoking from Germany alone.The economic burden of direct and indirect smoking-related costs in that year was €16.56 billion for selected diseases associated with smoking.These diseases included Chronic Obstructive Pulmonary Disease (COPD), lung cancer, stroke, coronary artery disease, cancer of the mouth and larynx, and atherosclerotic occlusive disease.

Again, these costs did not include the costs of informal care, costs related to reproduction diseases, and costs of SHS.The direct costs represent 51% of the total, or €8.48 billion. The indirect costs accounted for 49% of the total, or €8.08 billion. Calculating per capita costs, extrapolating them to the EU/EFTA populationi and adjusting them for inflation between 1996 and 2000 will result in a 2000 estimate of costs of smoking making this figure comparable with the estimate based on the first method. On this basis, the projected estimate of direct and indirect costs of smoking for EU/EFTA countries is €97.70 billion, of which the direct costs of smoking are €49.83 billion, and the indirect costs of smoking are €47.87 billion. This estimate of smoking-related costs falls in the lower bound of estimates based on the first method.

To conclude, the estimates of costs of smoking in the region of interest ranged from €97.70 billion to €130.31 billion in 2000, with the indirect costs representing at least half of the amount. This amounts to between €211 and €281 per capita (for both smokers and non-smokers), or between 1.04% to 1.39% of the region’s Gross Domestic Product (GDP) in 2000k.The cost of smoking as the share of the GDP is comparable to estimates from other developed countries.

A 1986 study estimated that the total social cost of smoking represented 1.4% of GDP in the USA, and a 1999 study, also for the USA, found that the 1993 costs of smoking were 0.84% of GDP. Smoking-related costs in Canada range between 1.39% and 2.2% of its GDP. Two studies from Finland found that smoking cost the society 1.2-1.3% of GDP in 1987, and 0.8% of GDP in 1995.

A recent study from Hungary32 concluded that the total cost of smoking (including the direct and indirect costs) was HUF 230 thousand million (about 1,146 million ECUl) in 1996 and HUF 270 thousand million (about €1,072 million) in 1998.This represents a loss of 2.7% and 3.2% of GDP in 1996 and 1998, respectively. An updated estimate for 2002 indicates that the costs of smoking represent up to 4% of Hungarian GDP. This estimate indicates that the relative economic burden of smoking may be larger among the new EU countries.

It is important to realise that the estimate for the European region of interest is rather conservative, because it does not take into account the costs of informal care, costs related to SHS, the costs of reproduction diseases, and the social costs of unwanted nicotine addiction, which can be quite substantial. In addition, the intangible costs such as costs of pain and suffering have not been included in these estimates.The much more comprehensive estimates of net social costs that included the social costs of unwanted nicotine addiction for Australia, range between 2.1% and 3.4% of GDP.

3. Who bears the costs?

Substantial portion of costs of smoking are borne by smokers themselves. They are true opportunity costs, because the money spent on tobacco and medical care related to smoking could be either spent on other products or be saved and invested. The economic theory calls these expenditures internal costs, because they are supposed to be offset by the utility a smoker derives from smoking. External costs are imposed by smokers on others  and they constitute a rationale for government interventions. However, the addictive nature of cigarettes leads in some cases to inefficient consumers’ decision, which also calls for a government intervention in these private decisions. Estimates from the USA suggest that these internal costs are more than 100 times larger than external costs.

Non-smokers also pay for costs of smoking, primarily in the form of higher health insurance premium, medical costs related to SHS, higher taxes and higher prices for products and services. Government incurs many smoking-related costs. The size of these costs depends on the extent to which healthcare, prevention and public health services are covered by public funds. The burden on the government appears in the form of larger disability and social benefits paymentsm, lost income tax and lost contributions to social benefits funds.

The private sector of the economy is affected by higher insurance costs for smokers (including insurance for health, fire, accident, life insurance), cost related to lower productivity among smoking workers and workers exposed to SHS (time used for smoking breaks, absenteeism), hiring costs to replace labour lost due to tobacco-related morbidity and mortality, and cost related to compounding effect of smoking on workers exposed to other toxins in the workplace. A USA study that considered most of these costs estimated that each smoker costs an employer an additional $336-$601 per year in 1980. A study from Scotland estimated that smoking in the workplace cost all Scottish employers between €380 million and €595 million due to lost productivity, €52 million due to higher rates of absenteeism, and €5 million due to fire damage in 1997 figures. This represents 0.51% to 0.77% of Scottish 1997 GDP.

A different study from Ireland showed that the costs of smoking incurred in the workplace were €819 million, or 0.7% of Irish GDP in 2002. In the USA, the average annual loss of output arising from smoking-related mortality over the 1995-1999 period was $81.9 billion which represented 0.98% of GDP for the relevant period. There are also higher cleaning costs and costs associated with providing smoking areas, and additional costs for those employers that provide sick leave benefits. Some businesses may suffer from opportunity costs due to missed opportunities to carry on business with nonsmokers (e.g. restaurant, hotel and entertainment business).

Empirical evidence shows that good health has a positive, sizable, and statistically significant effect on aggregate output.Tobacco consumption, through its negative effect on public health, has a long-term negative effect on the economic growth and prosperity of all countries.