17.3 The costs of smoking to Australian society

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The most comprehensive estimates of the total cost of tobacco use to Australian society are those contained in studies undertaken by economists David Collins and Helen Lapsley on the request of various Australian governments.1-4, 22 23 24 In line with the World Bank's guidelines for studies of this nature,19 Collins and Lapsley employ a GDP-based social cost analysis (GSCA) which provides an 'all of society' perspective. GSCA defines costs as the flows of economic production that are forgone, as defined by the System of National Accounts, with gross domestic product being the most commonly used measure.19 GDP-based costs of premature death of a smoker would be based on the loss of production resulting from his or her premature death. [3]

Table 17.2 sets out Collins and Lapsley's most recent estimate of social costs in Australia attributable to abuse of tobacco[4] and abuse of alcohol and illicit drugs.

In 2004–05, social costs of tobacco abuse totalled just under $31.5 billion,1 more than 56% of the total estimated social costs of drug abuse in Australia in that year. Of the total estimated social costs of tobacco abuse, 38% were tangible costs and 62% were intangible.

17.3.1 Tangible costs

Tangible costs of tobacco abuse include items such as spending on health care services or subsidies for drugs for people sick because of smoking, or extra spending on staff to replace people away ill from work or who have left the workforce because of a smoking-caused illness. In addition to the costs associated with absenteeism and loss of labour in the paid workforce, Collins and Lapsley's estimates also include costs associated with unpaid labour in the household and community sector. When they are reduced, tangible costs release resources for other uses.1, 2

Collins and Lapsley's estimate of the tangible costs of tobacco includes several components that are affected by population smoking both in 2004–05 and over the previous decades.

The tangible costs of smoking are net costs, calculated taking into account both those costs that are made greater and those that are reduced because of current and past tobacco use. The cost of health services in Australia is higher than it otherwise would be because of past and present smoking due to the higher incidence of smoking-caused diseases in those who are still in the population. However some costs are lower than they otherwise would be because so many people who smoked over the past 40 years have died early and did not live to use a number of the health, medical and nursing home services that they otherwise would have. In households and workplaces, estimates of costs include spending that is made greater by smoking—for instance where householders have to pay for domestic help because a home-maker is ill or has died prematurely. Such estimates also take account of spending where smoking results in savings. Household spending on food, clothing and so on will be lower, for instance, where there are fewer people in the household as a result of smokers dying earlier.

Table 17.3 sets out each component of Collins and Lapsley's estimate of tangible social costs of tobacco use for 2004–05. [5]

As can be seen from Table 17.3, loss of household and workforce labour due to illness and premature death caused by tobacco abuse is the biggest component of the total tangible costs of smoking in Australia. Spending on tobacco products by addicted smokers is also a major component of total costs.

At $12,026.2 million, in 2004–05 tobacco use was responsible for 39% of the total tangible social costs of drug abuse in Australia, compared with 35.1% for alcohol, 22.4% for illicit drugs and 3.4% for alcohol and illicit drugs together.

A summary of estimates of social costs of tobacco use in 1998–99 for New South Wales, Victoria and Western Australia are presented in Table 17.4.

17.3.2 Intangible costs

In contrast to tangible costs, when intangible costs are reduced, there is no release of resources: beneficiaries cannot pass on savings to anyone else. Intangible costs are generally much more difficult to value than tangibles because there is no market in intangibles. While intangible costs of tobacco use such as the loss enjoyment of life and pain and suffering of smokers and their families and friends are not things that can easily be measured, they must nevertheless be considerable, and cannot be ignored by policy-makers.1, 2

Collins and Lapsley include two components in their estimates of the intangible costs of drug abuse: the value of a year of life lost to each person not alive in 2004–05 due to past drug abuse, and estimates of pain and suffering due to accidents.

The average intangible value of the loss of one year's living in 2004–05 prices was calculated at $53,267 per person.

The value of pain and suffering due to road accidents resulting from abuse of alcohol was calculated using data from the Bureau of Transport Economics. Collins and Lapsley hope to be able to quantify the value of pain and suffering due to tobacco-related disease in future studies but have been unable to construct such estimates for reports produced to date.

Total quantifiable intangible costs in 2004–05 due to tobacco abuse and all drug abuse are presented in Table 17.5.

Even despite the absence of an estimate for pain and suffering from illness and premature deaths caused by smoking, intangible costs of tobacco use represent almost 80% of the total quantified intangible costs of drug abuse in Australia in 2004–05.

The total quantified intangible costs for NSW, Victoria and Western Australia for 1998–99 are listed in Table 17.6.

17.3.3 Costs not included in current estimates of social costs

Lack of information prevents economists from assigning values to all of the types of social costs known to be attributable to smoking. Collins and Lapsley point out that their estimates of the social costs of smoking in Australia in 2004–05 for instance do not include the smoking-related costs of

• purchase of over-the-counter and off-the-shelf medicines
• domiciliary care and allied health professional services
• reduced on-the-job productivity
• litter
• pain and suffering experienced by smokers and others.1

Estimates for 1998–99 did not include estimates for costs related to ambulance services.4

They also note that some of the values which they have assigned to social costs are almost certainly underestimates. For example, the figures for expenditure on pharmaceutical products are partial estimates in that they are based only on the highest volume drug categories on the Pharmaceutical Benefits Scheme. Expenditure on drugs in lower-volume categories is not included; neither is expenditure by individuals on drugs not listed on the PBS.

The range of smoking-caused diseases and illnesses used in Collins and Lapsley's estimates is also limited to those to which an attributable fraction may readily be assigned. Attributable fractions have not yet been calculated for a number of conditions only recently linked to smoking. This means that net expenditure on pharmaceuticals, and hospital, medical and nursing home care for people with several conditions known to be caused by or exacerbated by tobacco use is not included in estimates of health care costs attributable to smoking.4

Additionally, the estimates for hospital costs are based on average treatment costs for each condition and do not take account of the fact that health care costs for smokers are likely to be somewhat higher than costs for non-smokers.25 Smoking up to the time of any surgery increases cardiac and pulmonary complications, impairs tissue healing and is associated with more infections, therefore increasing the average length of stay, staff workload, requirements for medicines and so on.26, 27 Medical costs associated with treatment of birth complications among smokers in the US exceed those of non-smokers by 66%.28 Treatment costs for smokers having orthopaedic surgery can be up to 38% higher than those of non-smokers, due to infections resulting in prolonged hospital stay and double the re-admission rate.29

All these factors mean that we can be confident that Collins and Lapsley's estimates of the total cost of tobacco abuse are extremely conservative, and that actual costs are likely to be much higher.

17.3.4 Who bears the social costs of smoking?

The term incidence describes how the burden of smoking costs is split among various sections of the community: government, business and individuals. Table 17.7 details the incidence of the social costs of tobacco in Australia in 2004–05.

Of the total tangible costs of smoking in 2004–05, more than half were borne by households, 42% were borne by business, and only 7.6% were borne by governments.1 By their nature, all intangible costs are borne by individuals.

The following sections explain in more detail the costs falling on each of the three sectors.

17.3.4.1 Costs to households

Individuals affected by smoking include ill-informed or addicted tobacco users, individuals directly affected by exposure to second-hand smoke, and individuals who directly bear financial costs related to illness or early death of smokers.

The largest cost to individuals included in the Collins and Lapsley estimates is for unpaid household labour. Based on Australian Bureau of Statistics (ABS) estimates of the value of unpaid work30 in 2004–05 this was valued at $9843.1 million per annum. A household activity is considered unpaid work if an economic unit other than the household itself could have supplied the latter with an equivalent service.4, 31 Unpaid work includes domestic duties, childcare, purchasing of goods and services and volunteer and community work. In the event of severe sickness or death of the person supplying them, these services would be lost by the community and are therefore counted as a component of social cost.4 Values are assigned according to the cost of hiring the market replacement for each function. These values are then applied to mortality and morbidity data to calculate production losses in the household sector.4

In addition to unpaid household labour, in 2004–05 individual smokers and their families bore an estimated $11.8 million in health care and nursing home costs attributable to smoking, and a further $16.4 million in tangible costs caused by smoking-related fires.

17.3.4.2 Costs to business

The most significant cost to business from smoking is the negative impact on workforce labour, valued at $4517.4 million per year.1 This loss is due to the reduction in the size of the workforce and increased absenteeism. These elements are calculated by comparing the size and levels of absenteeism in the current workforce with that of a hypothetical workforce where there had been no abuse of tobacco.1, 4 The estimate for absenteeism in Collins and Lapsley's report for 1989–90 was based on Australian research which found that after controlling for the effects of other variables, smokers were 1.4 times more likely to be absent, and ex-smokers 1.3 times more likely to be absent, than those who have never smoked.32 For male smokers the probability was 1.7 times greater than those who never smoked and for female smokers 1.2 times greater than those who have never smoked.32[6] Cost estimates for alcohol use in 2004–05 were updated with results of a study by Pidd et al. based on the 2001 National Drug Strategy Household Survey.34 Collins and Lapsley have called for a similar study to be conducted on the absenteeism costs associated with tobacco use.

On-the-job productivity was not included in estimates of the impact of tobacco use on workforce labour as reliable estimates were not available at the time the report was being prepared.1, 4 One study published in 2006, however, estimated that between eight to 30 minutes per day are lost due to smoking. If five minutes are spent daily on smoking outside of normal break times, the employee is 1% less productive: smoking cessation would lead to an immediate recovery of this cost.35

The other major cost to business included in Collins and Lapsley's estimate is the amount (net of all taxes) spent by addicted smokers on tobacco products, spending that smokers do not direct to the purchase of other goods and services. Spending on tobacco products is construed as a cost to businesses outside the tobacco industry rather than as a cost to individual smokers.

17.3.4.3 Costs to government

The most significant cost to government results from a reduction in public sector workforce labour, calculated as per the reduction in workforce labour for business. This was estimated to total $1231.6 million in 2004–05.

The other major cost to government is net health care costs, which are estimated at $249.3 million in 2004–05.1 This comprises those hospital, medical, nursing home and pharmaceutical costs incurred attributable to smoking that were not borne by individual smokers and their families or by private health providers and insurance companies. It also takes into account costs avoided due to smokers dying prematurely.

Also included in the costs to government are costs of $21 million due to fires caused by cigarettes and other smoking-related items.

17.3.5 Changes in social costs between 1998–99 and 2004–05

Despite falls in smoking prevalence, the social costs of tobacco use appear to have risen in the period between 1998–99 and 2004–05. While smoking prevalence has fallen steadily since the mid-1970s and the number of deaths attributable to tobacco use has also recently begun to decline (from 19,429 in 1998–90 to 14,901 in 2004–05), tobacco use over previous decades results in continuing impacts on the health care system and greatly reduced numbers of people able to contribute to the paid and unpaid workforces in 2004–05.

Table 17.8 lists the social costs of tobacco use in the two periods in constant 2004–05 prices.

Collins and Lapsley predict that 'as the lagged effects work their way through the system, and assuming that smoking prevalence continues to decline, real smoking costs (adjusting for the effects of inflation) should eventually fall very significantly.'1 pxii