Cigarettes Should Cost $25 a Pack

Cigarettes Should Cost $25 a Pack

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Henry David Thoreau said, “There are a thousand hacking at the branches of evil to one who is striking at the root.”

We have hacked at healthcare costs for what seems like thousands of times, with very limited success. It is time to strike at the root. Rather than focus on reducing costs after preventable diseases have taken hold, it is time to focus attention on eliminating the disease.

Let us look at two specific examples.

1. The CDC (Center for Disease Control and Prevention) has estimated that the cost of smoking(estimated cost of smoking-related medical expenses and loss of productivity) exceeds $167 billion annually. The CDC has also estimated that 326 billion cigarettes (combustible tobacco, to be more precise) went up in smoke in 2011. In other words, every cigarette consumed costs the nation about 50 cents; every pack, $10.

Put another way, while the smoker paid approximately $5 a pack up front, there was also an additional $10 secret surcharge — the cost of which is born by all of us (such as taxpayers, anyone who buys health insurance, even private companies who suffer from lower productivity as a result). It is as if we are telling the smoker, “I know you can’t afford to pay $15 for a pack. So we will give you $10 so you can afford to smoke.” We are not this generous even with people who don’t have one square meal a day. We spent $78 billion on food stamps, with constant pressure to bring that down further even if some people will be left without food as a result.

Instead of subsidizing smokers, if we were to front-load all these costs on every pack (to $20 a pack, or even $25 a pack, if we also want to include costs associated with cessation programs, training, etc.), we win no matter what:

  • If smokers continue to smoke at the same rate, we have the funds to account for all those extra costs.
  • If smokers drastically change their behavior, even better, as all those costs will get eliminated from the system.

We can’t think of a more lasting legacy that President Obama, who himself quit smoking last year, can leave behind. The millions of smokers who quit because of this steep cost increase (and all their friends and family) will be eternally grateful to the President for forcing the issue and helping them quit. (We personally don’t know of a single smoker who has not attempted to quit at least once).

2. The CDC estimates the cost of diabetes (direct medical costs and indirect work loss) to be $174 billion annually. We could write a multiple regression equation to find the relative weight of all the factors that make up Type 2 diabetes. (Type 1 diabetes, or “juvenile diabetes,” makes up just five percent of cases in America today, so we are focusing on the 95 percent of cases that are Type 2.) For now, let us go with a simple model that takes one factor — sugar consumption.

In 1822, the average American ate the amount of sugar found in one of today’s 12-ounce sodas every five days. Now, we eat that much every seven hours. Our sugar consumption has gone up from about 5 pounds per year per person, to a staggering 100 pounds per year person — a twenty-fold increase. No wonder diabetes is such a rapidly growing disease.

And it is one of those diseases that loves companionship — complications include heart disease and stroke, hypertension, blindness, eye problems, nervous system disease, amputations, and pregnancy complications. Trying to cut costs for the treatment of each of these complications is hacking at the branches. To discourage the sugar habit is to strike at the root.

The US wholesale sugar price is about $0.40 a pound. We consume 22 billion pounds of sugar every year. If you apportion the $174 Billion cost of diabetes across the 22 billion pounds of sugar, it works out to almost $8 per pound. If we were to front-load all these costs, we should be paying $8.40 per pound (more like $10 / pound to keep some money for retraining the people that will be affected by a shift in resources etc.) Far more than the cost is the human toll — not only the person suffering from the disease but their friends, family, colleagues. In the case of Type 2 diabetes, this suffering is preventable.

Healthcare, in our opinion, is a euphemism. It should be renamed “sicknesscare,” because 98%+ of the time, money, resources and attention all go into sicknesscare. When we start tackling the root causes of preventable diseases, have strong incentives to discourage unhealthy habits and encourage healthy habits (rebates for gyms, yoga classes, meditation classes, etc.), and start paying equal time, money, resources and attention to prevention and elimination — the healthcare industry will finally be born. And when a true healthcare industry emerges, there will be far fewer costs to worry about.

Vijay Govindarajan is the Earl C. Daum 1924 Professor of International Business at the Tuck School of Business at Dartmouth. He writes a blog and a newsletter on innovation and execution. His book, The Other Side of Innovation: Solving the Execution Challenge, will be published by Harvard Business Review Press in September 2010. Srikanth Srinivas is a Director of Consulting at River Logic and focuses on effective performance management. This post first appeared at HBR’s blog.

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46 Comments on "Cigarettes Should Cost $25 a Pack"


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Guest
Apr 26, 2013

Many of my friends have managed to successfully quit smoking tobacco using electronic cigarettes. It’s really a smooth way to quit.

Guest
Apr 15, 2013

I suggest switching to a lesser evil. The health risks of electronic cigarettes are still not determined but I personally think that it is a better way to inhale poison. Addiction is a bi**ch

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Cassie Stegeman
Dec 30, 2012

Very interesting article! What do you think about insurance companies increasing rates for overweight and obese individuals?

Guest
Nov 30, 2012

Legacy flyer,

We agree on the core concept.

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legacyflyer
Nov 27, 2012

Mediconomics,

You say:

” those smokers that are left, make up the 10% of medicare/ medicaid patients that use the VAST majority of healthcare dollars”

I would be interested in seeing the data to support the above statement.

“From an epidemiological point of view, they also tend to have co-morbid factors that kick in earlier (diabetes, HTN, etc) that do cost money at an earlier point.”

Doesn’t negate my argument. The years of life they loose save money. Have you included in your argument the cost of long term care or nursing homes?

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legacyflyer
Nov 27, 2012

Bobby G

“Cross subsidy” vs “Re-framing the actuarial envelope to encompass the expected lifetime of risk.”

“Cooking the books” vs. “Creative use of alternative accounting principles for the purpose of synergistic organizational revenue enhancement”

“Drug dealer” vs. “Community based recreational pharmaceutical consultant”

“Hooker” vs. “Horizontally inclined physical satisfaction provider”

Call it whatever euphemism you choose – it amounts to the same thing.

Guest
Nov 29, 2012

That’s crap. You completely miss the point.

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legacyflyer
Nov 29, 2012

Under the ACA, the ratio between the cost of health insurance premiums for old people and young people was artificially held at a maximum of 3:1, and not allowed to reach its true level of approximately 5:1 or higher. This represents a “cross subsidy” which flows from young people to old people. And this is one of the main reasons (along with forbidding exclusion of pre-existing conditions) that penalties had to be put in place to “make” young people buy insurance at above market rates.

You attempt to justify this as “re-framing the actuarial envelope”, which I would characterize as an amusing euphemism for “cross subsidy”

Note that this is not how the actuaries handle either auto insurance (in which young people pay more), or life insurance (in which older people pay more). The government does not step in and attempt to level premiums in these areas.

And your point that I am missing is ……

Guest
Nov 29, 2012

See “The Moral Hazard Myth.”

Guest
legacyflyer
Nov 30, 2012

BobbyG,

Thanks for pointing me to that article.

It says more or less what I was saying. Holding premiums “artificially” low for older people is not standard insurance pricing (“actuarial pricing”) – it is a form of “social insurance”.

In essence, we are trying to cram the square peg of affordable health care into the round hole of an insurance model. By the way, I am in favor of a single payor model which would eliminate most of this nonsense.

But I think it is appropriate to point out that holding premiums artificially low for one segment of the population is a form of “cross subsidy” and is more characteristic of “social insurance” than standard insurance.

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legacyflyer
Nov 29, 2012

Can you point me to it (URL)?

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legacyflyer
Nov 29, 2012

The point I am missing is?

Guest
Nov 29, 2012

Don’t conflate other separate issues like fraud and crime with that of actuarial envelope framing. You’re blowing smoke.

Were we to frame “coverage” as that of the average lifetime, “cross-subsidy” becomes irrelevant. The fact that in any given year 5% of patients account for 50 % of UTIL, etc, is an artifact of the calendar. It has no moral (or economic, for that matter) meaning.

“Cross subsidy” is nothing more than a fallacious appeal to intergenerational hostility.

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legacyflyer
Nov 27, 2012

Determined,

“Choice does not demand other’s to attend to poor choice! That is where your premise falls flat”

Not sure what you mean. Smokers are paying the ultimate penalty for their choice – substantially shorter life spans.

And as I pointed out above, considering all factors (cigarette taxes, Soc Sec, Medicare, Medicaid) smokers are CHEAPER to take care of over their (shortened) life span than non- smokers. How are we “attending” to their choice?

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DeterminedMD
Nov 27, 2012

I will say that spending time looking for sites to support my position equally brought up ones that support your points as well. But, that said, while smokers die sooner and alleged have less health care expenses than those who live longer, I include a link from the American Lung Association that shows that smokers impact on others’ lives and thus have costs, financial as well as societal that do in fact reflect that the 20% who smoke do cost others.

Face it, if you are a non smoker, smokers are at least annoying, at most highly detrimental, and by in large, smokers are selfish, insensitive, foul people. Just because the tobacco lobby has dumbed down the consequences for the rest of the country means we have to continue to accept hearing the lies enough make them truths? Not me!

And, how many honest and candid physicians out there who do not smoke do not have some distain for those patients who come in with recurrent illness and continue to smoke? Also, how many fires have cost others their homes or property for having a smoker in the house or one that throws a lit butt out the window of a car and catches the brush on the side of the road on fire?

Keep rationalizing free choice for this group!

http://www.lung.org/stop-smoking/about-smoking/facts-figures/general-smoking-facts.html