Cigarettes Should Cost $25 a Pack

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.

45 replies »

  1. The bottom line is that regardless of whether or not the D-O cycles are triggered by the Sun, the timing is clearly not right for this cycle to be responsible for the current warming. Particularly since solar output has not increased in approximately 60 years, and has only increased a fraction of a percent in the past 300 years, as discussed above.

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

  3. 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

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

  5. Smokers do pay more on the health insurance that I have. Eventually insurance companies will make you pay more if you are overweight. Which majority of Americans are overweight if not obese.

  6. 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.

  7. 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.

  8. 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 ……

  9. 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!


  10. 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?

  11. 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.

  12. 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?

  13. The problem with your argument is that A. healthcare costs are risen astronomically over the past 10 years and B. those smokers that are left, make up the 10% of medicare/ medicaid patients that use the VAST majority of healthcare dollars.

    From an epidemiological point of view, they also tend to have co-mormid factors that kick in earlier (diabetes, HTN, etc) that do cost money at an earlier point. It’s not like they drop dead of lung cancer at 65 and save us all that money.

  14. It is funny in a sad way when people so voraciously support poor choice under this false umbrella of free will, and when such supporters are disrupted and profoundly inconvenienced by the people the supporters back, then, what? Keep on selling false hope!

    Have you all looked at your hands walking away from that proverbial stove these past few decades!?

  15. Choice does not demand other’s to attend to poor choice! That is where your premise falls flat. People can have the choice to smoke, but, WHEN there are consequences, and there will be consequences, why is it society is beholden to bail out smokers? And PPACA conveniently sells that failed premise. Sorry, if people chose to overdose on narcotics regularly and then be rushed to the ER to be resuscitated and then they go back and repeat, why is it resources, time, and energy has to be expected to reinforce very poor choice.

    Why is it overtolerance is so acceptable these days? Oh yeah, people and history, contraindicated, eh?

  16. Agreed. But,

    “What about the cross subsidies between young and old?”

    You can call it “cross subsidy” or you could call it re-framing the actuarial envelope to encompass the expected lifetime of risk.

  17. BobbyG,

    Finally something we can agree upon – except

    – Do we charge women more than men?
    – What about pre-existing conditions?
    – What about the cross subsidies between young and old?
    -What about rebates on Social Security and Medicare for smokers?

    All of these are actuarially justified but legally prohibited/restricted. HealthCare pricing has a little to do with actuarial pricing and a lot to do with other things.

  18. “On what basis do we force people to stop doing something they want to?”

    Tangentially, via actuarial pricing, historically — if unevenly and inadequately applied.

  19. DeterminedMD,

    You and I couldn’t disagree more.

    To quote “The Animals”, a British group from the 60’s that you may have heard of: “Its my life and I’ll do what I want”.

    On what basis do we force people to stop doing something they want to, even if it is bad for their health, if it doesn’t affect ours. It is their life they are cutting short.

    The new rationale that is raised is that their actions are costing the rest of us money, therefore we have a voice in their personal choices. This is selectively applied to seat belts and many wish to apply it to other things as well; cigarettes, sugary drinks, etc. (No matter that the cost savings from decreased smoking are an illusion).

    I am a private pilot of an experimental airplane, a scuba diver and I used to commute by bicycle in the city. These choices all have some dangers – as does driving to work every day.

    Where do we draw the line?
    – Should urban cycling be prohibited? (Two of my partners have had serious accidents on bicycles)
    -Should motorcycles be prohibited? (Where will we get good kidneys for transplant from)
    – Should scuba diving be prohibited?
    – Should mountain climbing be prohibited?
    -Should restaurants not be allowed to give cheesecake to fat people?
    – Etc.

    Or do we educate people and let them choose for themselves – let them enjoy “life, liberty and the pursuit of happiness”.

  20. Um, why? I said in the next sentence I don’t care how insensitive the comment was, because let’s have a moment of candor, the majority of smokers are selfish, indignant, and careless people. The fact that only 20% of our population uses tobacco products shows the majority of Americans are more responsible and realistic, so why should 20% who use what, conservatively, 35% of health care expenses be given what is basically a free pass?

    I am biased and unobjective when it comes to tobacco use. It is time to make the product so reprehensible and abhorrent, people will HAVE to either quit or never think about trying the product. And, it is the height of hypocrisy for the government to pass PPACA and not address tobacco use to try to limit expenses. You all focus on illegal drugs and their consequences, well, are you in the tobacco lobby pockets or not!?

  21. @DeteminedMD: “Frankly, the entrenched smokers can’t die fast enough.”

    Good grief. Take it down a notch, please.

  22. Oh, and all you smokers who throw your NON biodegradable butts out your car windows or on the sidewalks before walking into buildings, as I witnessed during my errands this evening, I hope one day someone with major kahunas picks up and throws that still smoking butt back in your face!

  23. Sorry, too close to home to not comment. You want PPACA, and want to keep health care costs down, time to eliminate smoking. You want to smoke or chew tobacco products, then pay more to access the carcinogen, and pay more for the health care complications. It is that simple, I am tired of 20% of the population screwing 80% of the rest of us! The needs of the many outweigh the needs of the few. Frankly, the entrenched smokers can’t die fast enough. Don’t care how insensitive that comment comes across!

  24. My health insurance DOES have a smoking surcharge. I think many do. I also earn discounts on my premium for healthy behaviors.

  25. The idea is good, govt would fubar it making sick care more expensive. At the intersect of politics and econ, pol wins we lose.

  26. Bobby,

    Either you didn’t read what I said or you missed the point.

    The point is that smoking cessation doesn’t save money. It is worth doing for other reasons – just don’t look for that pot of gold under the rainbow.

  27. It’d also be “cheaper” if we just killed everyone suspected of crimes, or summarily executed prisoners of war, or repealed child labor laws, or…

  28. The authors of this article get the relationship between smoking and cost wrong, as have so many others have before them. One notable exception was an article in the NYTimes Magazine about 10 years ago that got it right. (sorry can’t put my hands on the reference)

    Although smokers may cost more per year for health care, over the course of their (shorter) life, they costless. On average, smokers cost the government less in Social Security, Medicare, and Medicaid than non-smokers. In addition, they pay higher taxes (because of the cigarette tax) during their lives. And they are also under represented in nursing homes, the costs of which are a large and growing portion of Medicaid.

    The common reaction to the above statement is raised eyebrows and a look that says: “You cruel bastard – don’t you care about patients”. People sometimes confuse an accurate analysis of the costs with being in favor of smoking – which I am not.

    As a physician, I have counseled many patients to stop smoking. There is no doubt that smoking is bad for an individuals health. But there is also no doubt that it is a financial “good deal” for the government.

    In fact, if I get around to it I am going to print up some pins that say: “SAVING MEDICARE, MEDICAID AND SOCIAL SECURITY – ONE
    PUFF AT A TIME” and hand them out to smokers I meet while I thank them for “taking a bullet for me”.

  29. I suggest that health insurance premiums for smokers be increased to reflect the risk of adverse health consequences.

    Same/same for other avoidable lifestyle choices.

    This should also be reflected in Medicare and supplemental coverage premiums.

  30. I recall hearing a Republican once arguing that widespread smoking cessation initiatives would worsen the Social Security sustainability program. Don’t guess I have to repeat what his rationale was, ‘eh?

    You could extend that “logic” to the panoply of health and safety regulation.