On July 16, 1997, we released a detailed analysis of the analysis of the proposed resolution to the tobacco litigation without citations or bibliography and requested comments and criticisms. Several people provided technical comments, and many people asked that we "repackage" our analysis in to a series of 2-3 page "briefing papers" on different issues related to the tobacco deal. We are now releasing these draft "briefing papers" to again solicit comments. We anticipate finalizing both these briefing papers and the detailed analysis in early September and would appreciate any comments you have to offer. (We will publish the final report in two volumes.) If you would like to provide us with comments, please send them to Stanton A. Glantz, PhD, Box 0124, University of California, San Francisco, CA 94143 or email glantz@cardio.ucsf.edu, with copies to Brion Fox (email fox@cardio.ucsf.edu) and Jim Lightwood (email lightwo@itsa.ucsf.edu).
On June 20, 1997 a group of attorneys general presented to the public
a proposed resolution, which would resolve their lawsuits against the
tobacco industry and establish a national tobacco policy for the
United States. This deal, which had been negotiated with the tobacco
industry, was widely anticipated. It became possible as a result of
the intense pressures the tobacco industry has faced in the past few
years from regulatory authorities and from the threat posed by civil
litigation against it.
Because of these pressures, the tobacco industry was willing to come
to the negotiating table and develop a deal acceptable to it and to a
group of attorneys general who had sued it. As conditions for
settlement the tobacco industry wanted protection from the threat of
lawsuits and restrictions on regulatory control. In return the
attorneys general wanted concessions which would provide the states
reimbursement for the excess medical expenditures and would improve
the public's health.
In the months leading up to the publication of the deal, many
commentators discussed the relative merits of entering into a
negotiated resolution. The advocates of the deal pointed to the
ability to obtain specific relief, the advantages of having a
national tobacco policy, and the elimination of the risks to
continuing the litigation. Critics of the deal making process were
concerned about making a deal which would guarantee tobacco industry
profitability, would require Congressional action because of the
influence the tobacco lobby in national politics, would preempt
stronger state, local and regulatory efforts to control tobacco and
would preclude broad based public health efforts to control tobacco
in the future.
With the publication of the deal it is possible to analyze its merits
directly. Within the Preamble to the document are many strongly
worded claims that the deal will strengthen the federal and state
government's regulatory arsenal, reaffirm individual's right of
access to the courts, ensure FDA and state regulatory flexibility to
affect youth access, hazardous components of tobacco products, and
other tobacco related issues, and fund various programs to compensate
those who have suffered loss due to tobacco products. When the terms
of the deal are analyzed directly, it is clear that the deal does not
measure up to the promises made.
An analysis of the individual terms of the deal discloses three
facts.
First, the deal is far from complete. In many parts terms are left
undefined, there are ambiguities and inconsistencies. The legislation
that is drafted with this as a basis will need to make assumptions
which may or may not be consistent with the drafters' intent. In most
cases the ambiguities are in areas emphasizing the public health
implications of the deal, whereas the portions of the deal which
provide protection to the tobacco industry are more well-defined.
Second, the deal fails to live up to its billing. Close scrutiny of
the likely policy implications of the individual terms of the deal
disclose that the disadvantages outweigh the advantages.
The advantages purported in the deal could be obtained without the
necessity of incurring the disadvantages attendant with giving the
tobacco industry special treatment.
As a result, we conclude that the deal fails as a public health
tool.
The money in the deal is large in absolute terms but small when
compared against the damage done by tobacco products. Therefore, with
a careful analysis it becomes clear that there will be insufficient
funds to satisfy all claims. The amount of medical damages against
the industry for the settled claims are out of proportion to the
actual money that will be available resulting in a great
under-funding. Moreover, the financial portions of the deal are
structured in such a manner that they will guarantee industry profits
and will be insufficient to cause a dramatic drop in demand or create
incentives for industry reform.
All payments by the tobacco industry, including those made "in lieu
of" punitive damages, are tax deductible which results in a decrease
in incentives to the industry and a cost shifting to American
taxpayers. Taxpayers will absorb 30-40% of the cost of the deal.
The civil liability protections will strongly protect the tobacco
industry. They will increase the barriers to litigation and provide
perfect security to the industry in the way of capping exposure. The
limitations on litigation may deprive injured smokers from receiving
just compensation. The caps will eliminate the incentives civil
justice system by reducing any threat for failing to act in a
responsible manner.
Specifically, the claims of that the deal results in new regulatory
authority are exaggerated. The FDA already has jurisdiction over
tobacco products and is executing its regulatory authority pursuant
to its jurisdiction. The few provisions in the deal which are not
currently a part of FDA regulations could become so, or like the
advertising restrictions, be regulated by another agency.
Furthermore, the claims regarding the benefits attendant with many of
the regulatory changes are exaggerated. Even with the advertising
restrictions in place, the tobacco industry will still find
successful ways to market their products, and tobacco imagery will be
ubiquitous. Similarly, the proposed regulations regarding tobacco
warnings, and restrictions on youth access add little new
authority.
The deal also adds intensive rollbacks to the FDA authority that
currently exists. The Agency will face additional regulatory hurdles
before it can regulate tobacco constituents and will have specific
restriction on how and when it can regulate nicotine. These hurdles
will preclude much of the potential for reform towards safer
products.
Similarly, the environmental tobacco smoke provisions represent a
rollback of the current ability to regulate broadly. The ETS
provisions within the deal would exclude a large number workplaces
such as in the hospitality industry. These restrictions are not a
part of the proposed OSHA regulations currently under review.
There are provisions in the deal designed to hold the industry
accountable for not implementing programs to decrease youth smoking,
by exacting penalties for not meeting specific targeted reductions.
These targets, however, are based upon faulty analysis of youth
prevalence rates, and the penalties imposed are not sufficient to
create industry incentives to eliminate youth smoking.
Throughout the deal there are a number of provisions which increase
barriers to market entry and preserve the current profit structure.
These provisions will encourage anti-competitive behavior and
eliminate any incentive to innovate towards safer products.
Furthermore, by closing the market new companies will find it more
difficult to compete. This situation will further guarantee excess
profits for the industry.
If one assumes that there are beneficial aspects to this
deal, but one is nevertheless concerned with the negative aspects of
the deal, much of the same legislation could be, and arguably should
be passed independently. For example, the public health measures
could be funded by an increase in the tobacco excise tax. The
Congress could give the FDA and OSHA more direct authority over
tobacco products, and could ensure full funding for the programs. The
States could enter into individual legal settlements with the tobacco
industry in the same way that Mississippi did. The absence of such
political will may be indicative of how the Congress is still a
pro-tobacco institution and also how the deal will fare in Congress.
When weighing the advantages with the disadvantages of the deal it
becomes clear that the costs far outweigh the benefits, and that it
is unnecessary to view the deal as a whole. The deal removes all
incentive for the tobacco industry to change its behavior by limiting
regulatory, civil liability and market controls. As a result, we
conclude that the public health would be better served if the deal is
rejected on its merits.
The original premise for the deal was that, while public
health advocates had rarely been able to overcome opposition from the
tobacco industry in Congress for tobacco control legislation, the
unprecedented pressure that the state and private lawsuits were
placing on the tobacco industry created a unique opportunity for a
negotiated settlement in which the tobacco industry was willing to
accept (and support in Congress) legislation that it had previously
opposed. Under this scenario, the public health community, together with the attorneys general, would go to Congress as partners,1 to secure passage of a legislative package that would include tobacco control measures and protection of the industry from legal liability.
When questioned by skeptics, the deal¹s primary architects, Mississippi Attorney General Mike Moore and Dick Scruggs (one of the leading private attorneys involved in the negotiations) assured people that they had private assurances from President Clinton and Senate Majority Leader Trent Lott (Scruggs¹ brother-in-law) that if the attorneys general, public health groups, and tobacco companies could come to an agreement, that they would see that the deal went through Congress unchanged. As a result, the deal was presented as a take it or leave it proposition, with various proponents arguing that it is both necessary to do everything in the deal, and that it is impossible to separate out the individual provisions of the deal.
The Boards of Directors of Philip Morris and Lorillard tobacco have endorsed the deal as it is written.
In contrast, no public health organization has embraced the deal as written.2 Therefore, the public health groups have abandoned the original premise of the deal, namely that they will go to Congress in partnership with the tobacco industry so as to avoid the likelihood that the tobacco industry will dominate the Congressional decision making process. In order to implement the changes that these organizations have said are necessary, they will need to go to Congress as opponents of the tobacco industry, the very situation that the deal was supposed to avoid. Moreover, President Clinton and many members of Congress have already called for revisions to the deal as written.
While there is a wide belief within the public health community that there is strong public opposition to the tobacco industry, there is no evidence that public health groups can translate this public opinion into a defeat for the tobacco industry in Congress. The tobacco industry remains among the largest sources of campaign contributions to Congress, particularly to the Republican Party, which controls Congress. The industry¹s power was manifest recently when Congress gave (and President Clinton signed) a tax provision granting the industry a $50 billion credit against the costs of the deal based on the fact that the tobacco excise tax (paid by smokers) was increased by 15¢.
1. One wonders if this was ever a realistic expectation. It is hard to imagine the image of John Seffrin (CEO of the American Cancer Society), Dudley Hafner (CEO of the American Heart Association), Geoffrey Bible (CEO of Philip Morris), and Steven Goldstone (CEO of RJ Reynolds) appearing at a witness table together, stating under oath that they all supported any piece of legislation.
2. The American Cancer Society, American Heart Association, and American Medical Association, the three highest profile public health groups that have been supporting the principle of a negotiated settlement with the tobacco industry, have all published extensive critiques of the deal that would require fundamental changes in its structure. The American Lung Association and many tobacco control groups have opposed the deal.
The continued support of some public health groups for the process of
a negotiated settlement with the tobacco industry has been based on
the assumption that some sort of Congressional action is necessary to
advance the public health agenda. This is untrue. Many of the terms
of the deal would be better left to percolate through the current
system at the state or local level or under existing Federal law
without involvement of the Congress. Moreover, if the public health
community is to go to Congress as opponents of the tobacco industry,
it should be to implement the positive aspects of the deal
legislatively independent of the concessions that had been made to
the tobacco industry regarding liability and regulatory relief.
The FDA currently has the authority to regulate tobacco products. It
is not necessary to pass a law to give them authority. Alternatively,
if it is deemed good public policy to do so, this law can be passed
independently of the comprehensive deal. It is not a bargaining chip
for the tobacco industry to agree to abide by the terms of the law as
written. Without the terms of the deal, most of the FDA regulatory
provisions can be implemented by the FDA. Should the FDA lose the
authority through court challenges this could be remedied through be
a minor repair of the enabling act.
OSHA is developing a rule which would restrict secondhand smoke
throughout workplaces across the country. The deal is not required
for OSHA action.
Mississippi entered into a separate settlement of its litigation
against the tobacco companies. Under the terms of this settlement it
recovered more of its damages than it would recover under the terms
of the deal. It is believed that many of the other states and private
litigants could achieve more favorable terms by settling
independently with the tobacco companies than by supporting the
deal.
Several states (California, Massachusetts, Arizona and Oregon) have
large tobacco control efforts. Massachusetts and Minnesota have laws
requiring ingredient disclosure.
Even if it were a valid policy gesture to settle the Medicaid
lawsuits, there is no reason that other private litigants should have
their rights restricted.
The primary effect of the deal on tobacco consumption has been
assumed to be through the price increase associated with the
passthrough provision. As constructed, this situation essentially
taxes smokers to pay for the tobacco industry's legal liability (just
as Congress' recent action to give the industry a $50 billion credit
against the cost of the deal did). It would be simpler and more just
to simply increase the tobacco tax.
Prepared by:
Brion Fox, James Lightwood, Stanton Glantz
University of California Institute for Health Policy Studies
August 20, 1997 DRAFT
There are three parts to the settlement funding: an initial lump sum
Up Front Payment, an annual Base Payment which extends into
perpetuity, and an eight year Public Health Trust Fund. The annual
payments will be adjusted for inflation using the consumer price
index or 3%, whichever is greater. The Up Front Payment is equal to
$10 billion with no allocation provided for in the deal is not
incorporated into the analysis. This payment is presumably to
compensate for past damages. There are also adjustments to annual
payments which depend on industry tobacco sales volume. The primary
disadvantages with the payment allocation is that it fails to provide
enough money to adequately compensate those injured.
The Base Payments are to be divided in the following manner (Table
1): First, is the Civil Liability Fund. This Fund is one third of the
Annual Base Payments to be reserved for any individual civil
judgments against the tobacco industry. If judgments against the
industry exceed the annual fund allotment, then the remainder is paid
out of the next annual fund allotment. If the fund is not exhausted
each year, a Presidential Commission will determine the use of the
funds, which can include public health expenditures, compensation to
claimants not otherwise entitled to compensation, or other purposes.
Second, other moneys from Base Payment are to be used for public
health programs (called the Public Health Funds), which consist of
smoking education, smoking cessation programs, community anti-tobacco
programs, and replacement funds for lost tobacco company arts and
sports sponsorships. Third, is the disposition of the Base Payments.
The deal does not specify any use for these funds. Presumably they
will be used to offset societal costs of smoking to governmental
health programs such as Medicaid and Medicare, and to compensate
individuals and entities precluded from suing the industry. Most
believe that because the states who sued the industry were among the
main negotiators of the deal, that Medicaid programs will have high
priority in recovering costs from these unallocated funds.
|
Table 1. Allocation of Funds (in billions of dollars) |
|
|
|
|
|
|
Year |
Public Health Trust Fund |
Base Payment |
Allocation of Base Payment |
|
|
|
|
|
|
Civil Liability Fund |
Public Health Funds |
Unallocated (Presumably Medicaid/Medicarereimbursement) |
|
1 |
2.5 |
6.0 |
2.000 |
2.100 |
1.900 |
|
2 |
2.5 |
7.0 |
2.330 |
2.175 |
2.500 |
|
3 |
3.5 |
8.0 |
2.670 |
2.200 |
3.130 |
|
4 |
4.0 |
10.0 |
3.330 |
2.325 |
4.345 |
|
5 |
5.0 |
10.0 |
3.330 |
2.825 |
3.875 |
|
6 |
2.5 |
12.5 |
4.167 |
2.825 |
5.508 |
|
7 |
2.5 |
12.5 |
4.167 |
2.825 |
5.508 |
|
8 |
2.5 |
12.5 |
4.167 |
2.825 |
5.508 |
|
9 |
0.0 |
15.0 |
5.000 |
2.825 |
7.825 |
|
10 |
0.0 |
15.0 |
5.000 |
2.825 |
7.825 |
|
11+ |
0.0 |
15.0 |
5.000 |
2.825 |
7.825 |
The civil liability fund is inadequate. According to some
estimates as much as $70 billion dollars worth of recoverable damages
are incurred by potential private plaintiffs every year. At its
maximum the civil liability fund will only provide $5 billion, or 7%,
of the total amount recoverable. This figure does not include
punitive or other consequential damages nor does it include civil
fines. These additions will make the civil liability fund even more
inadequate.
The unallocated funds will be inadequate to compensate those
plaintiffs whose cases are legislatively settled, including all suits
brought on behalf of governmental entities, all class actions, all
parens patriae actions, and all nicotine addiction actions. (It is
not clear whether class actions will be settled or decertified as
classes. Reading the deal literally, the cases would be settled and
the plaintiff classes would be entitled to reimbursement from the
settled cases fund.) This creates a logjam of plaintiffs seeking
reimbursement from an inadequate fund. For example, if we assume that
the state governments are the only ones being reimbursed and that all
other parties are shut out of the process, including the federal
government, territories, cities and counties as well as the private
class actions there is insufficient money to reimburse the states for
current Medicaid losses. When it is recognized that the amount of
money expended by the Federal government on tobacco-related health
costs in the Medicare program alone is roughly double that which is
expended under the Medicaid program, and that other governmental
programs are likely to double that figure again, it is apparent that
the money to reimburse plaintiffs is woefully insufficient even
before the class actions are considered.
This under-funding is magnified further when it is realized that the
wrong inflation adjustment is used to account for the increases in
medical expenditures over time. Medical inflation rises at a rate
faster than the rate of inflation and is usually measured by a rate
known as the medical CPI. If the medical cost inflation continues to
grow at the annual rate of the last ten years, less than 80 per cent
of the Medicaid can be financed out of the annual payments over the
first 25 years of the settlement. Similarly, the amount of damages
incurred by the other plaintiffs will be reduced.
A volume adjustment clause changes the payments in proportion with
changes in tobacco product sales volume. If the volume adjustment
results in decreased payments while industry profits increase, a
profit penalty will be triggered. The profit penalty offsets the
decrease in payments (that is, makes the decrease in payments
smaller) by 25 per cent of the increase in profits. The compensation
numbers get worse with future decrease in consumption because the
adjustment to damage payments related to volume decreases in
cigarette sales is too generous. The damages incurred by the states
and individuals, however, are unlikely to drop in a similar fashion.
For example, there is a 20-30 year lag in the development of smoking
related diseases after smoking initiation. Thus, the tobacco
companies would be able to reduce its payments immediately even
though health care costs won't drop for twenty years.
Looking specifically at the test case where only Medicaid is
reimbursed from the unallocated funds it is clear that the amount of
money is insufficient. We do not assume that medical costs increase
at the rate of general inflation. We consider two cases. The first is
a low cost case in which real Medicaid costs grow only because of
increases in enrollment. We assume enrollment growth continues at the
average rate of the most recent ten years (omitting 1990-1995 when
legislation greatly expanded eligibility. Enrollment growth is
assumed to incease by 1.7 per cent per year. The second is a high
cost cases which assumes that expenditures also increase at the rate
of medical care inflation. This is assumed to continue at the rate of
the most recent ten years. During this time medical inflation was 3
per cent per year greater than general inflation. The high cost case
results in an annual increase in Medicaid expenditures of a little
over 4% above general inflation, for a total nominal increase of
about 7% per year. Excluding 1990-1995, nominal Medicaid expenditures
have increased at an average rate of about 8% per year over the last
ten years.
The problem of fully funding Medicaid costs increases after the first
ten years if the medical inflation rate exceeds general inflation
significantly because Medicaid costs will increase faster than the
inflation adjustment. Assuming that the level of smoking and the
fraction of costs due to tobacco does not change, funds will be
adequate if medical inflation matches the CPI. For the low cost case,
the undiscounted sum of the budgets for years 11 to 25 is $223
billion, for the high cost it is $306 billion. With annual real
settlement payments of $15 billion, this totals $225 billion over the
same period. So 100% of the budgets can be funded in the low cost
case but only 74 per cent in the high cost case. Medicaid costs are
by far the largest budgeted items after year ten, and these costs
alone exhaust the Base Payments less the Civil Liability Fund
starting around year 14 of the settlement in the high cost case, and
Medicaid alone will exhaust the total $15 billion annual payment in
year 22.
All told, about one third of the Medicaid claims are paid in the
first year. This rises gradually to over 100 per cent of the claims
in the low cost case, and around 80 per cent in the high cost case by
year ten. However, even in the low cost case, excess funding in the
later years does not compensate for the initial shortfall (Table 2).
The adequacy of the funding of the settlement, assuming current
levels of cigarette sales is questionable. The effects of the sales
volume adjustment would reduce payments as much 10 to 15 per cent
within 10 years and make any shortfalls more severe.
Similarly, if there is a significant market shift to a reduced risk
or nicotine free product, which is determined to be not a tobacco
product, there would be a decrease in the sale of tobacco products
and therefore of funds available under the deal. As a result, the
funds available under the deal could drop much more precipitously
than the health risks and the costs to the states.
The inadequacy of funds is problematic for two reasons. First, by not
fully compensating those injured and preventing those parties from
suing in the future, the deal is unjust. Although there is always a
risk associated with litigation, and settlements rarely compensate
plaintiffs at 100%, the proportion of the damages for which the
parties are actually receiving compensation is pennies on the dollar
- greatly out of proportion to the litigation risks involved. Second,
the failure to fully compensate the governmental agencies will
necessitate a continued cost shifting of the damages associated with
tobacco related diseases to the tax-payers. The deal will allow the
tobacco companies to continue to externalize the true costs of their
products and will maintain the market failure and artificial price
structure which guarantees their profitability. Effectively, the deal
creates a subsidy in perpetuity for the true costs of tobacco
products.
The funding inadequacy problem is also not necessary. Because of the
relatively inelastic demand for cigarettes, tobacco companies can
elevate their profits to as much as $30 billion domestically. If the
funds from international sales and companies related to the tobacco
companies are made available, the available funding is magnified.
Therefore, the shortfalls negotiated in the deal are not a result of
industry inability to pay and maintain profitability, but instead
represent a giveaway to the tobacco industry.
|
Table 2. Inadequacy of funds in settlement , assuming Medicaid priority on unallocated funds(Years 1-10) (Percent of budget met by settlement) |
|
|
|
|
low medical inflation |
high medical inflation |
|
Average Medicaid reimbursement |
76% |
64% |
|
Average Civil liability reimbursement |
<5% |
<5% |
|
Average Medicare reimbursement |
0% |
0% |
|
City/County reimbursement |
0% |
0% |
|
Other Federal health reimbursement |
0% |
0% |
|
Other State health reimbursement |
0% |
0% |
|
Other governmental reimbursement |
0% |
0% |
|
Legislatively settled class actions |
0% |
0% |
|
Legislatively settled addiction actions |
0% |
0% |
Prepared by:
Brion Fox, James Lightwood, Stanton Glantz
University of California Institute for Health Policy Studies
August 20, 1997 DRAFT
|
Year |
1 |
2 |
3 |
4 |
5 |
6 |
7 |
8 |
9 |
|
Public Health Trust Fund (Medical Research) |
2.5 |
2.5 |
3.5 |
4.0 |
5.0 |
2.5 |
2.5 |
2.5 |
0.0 |
|
Public HealthŸ Funds (Tobacco Control |
2.100 |
2.175 |
2.200 |
2.325 |
2.825 |
2.825 |
2.825 |
2.825 |
2.825 |
Subparagraph D to Title VI of the deal deems that all of the moneys
paid pursuant to the deal will be deemed ordinary and necessary
business expenses for the purposes of tax treatment. The present
discounted value of the tax deduction over the first 25 years of the
settlement is $97.6 billion dollars at a 2.5% real discount rate and
35% tax rate. As a result, taxpayers will absorb 30-40% of the cost
of the deal.
All payments by the tobacco industry, including those made "in lieu
of" punitive damages (which, in many cases, are not tax deductible),
are tax deductible which results in a decrease in incentives to the
industry and a cost shifting to American taxpayers. Although there
has been much rhetoric that the goal of the deal is to compensate
victims and not to penalize the industry, this greatly oversimplifies
the issue. The claim that the deal is not intended to penalize the
industry is also contrary to the preamble which implies that a
fraction of the moneys collected in the deal is to offset the
prevention of punitive damages for cases involving past conduct. Yet
under many circumstances punitive damages, as with fines and
penalties, are not tax deductible. Thus, this makes clear the
artifice of "resolving" past punitive damages.
Other than as a necessary concession to the industry for the sake of
getting its approval for the deal, there appears to be no public
health benefit to this provision. The disadvantage is that this
provision substantially changes the financial impact of the
settlement for the industry. Tax deductibility will reduce the
financial pressures on the industry and consumers. For example, the
lookback provisions are based upon a disgorgement of the profits of
the addicted youth smokers. Because the payments would be tax
deductible, this would allow the industry to, in effect, keep some of
the profit it was supposed to disgorge.
In addition, the deal envisions benefits as a result of the
"passthrough" of industry costs to the consumer, to increase the
price of tobacco products and decrease demand. This demand decrease
will be blunted because of the costs incurred by the industry will be
reduced by the tax deductibility. The before tax cost per pack is
between 36 and 59 cents (an 18-30% price increase) over the first ten
years, the tax deduction reduces this to between 23 and 39 cents (an
11-19% price increase). Alternatively, if the industry passes through
the entire before tax cost of the deal, the tobacco companies will
have a profit windfall.
This provision is sufficiently broad that an argument could be made
that any fines resulting from the enforcement of any violation of the
regulations or laws would also be deemed a payment under this deal
and therefore tax deductible. This argument is even more persuasive
when the deal establishes special treatment for the tobacco industry,
such as the $10 million fine for violating the FDA disclosure
requirements (Title III.A). Furthermore, this provision could weaken
the enforcement of other state and federal laws by allowing the
tobacco industry to deduct the cost of any civil fine levied against
it.
This provision also gives rise to large collateral effects. First, a
deal which implicates the tax system could restrict future efforts to
increase the tax on tobacco products. (Indeed, the recent decision by
Congress to give the tobacco industry a "credit" against the cost of
the deal equal to the increase in the cigarette excise tax shows that
this tradeoff already has been made.) Similarly, a settlement fund
would not provide the flexibility to account for future understanding
of the economic toll tobacco has on society. As a result, restricting
future economic flexibility by entering into a global settlement
would limit our ability in the future to apply economic incentives to
modify the tobacco companies' behavior. Second, all of the money paid
by the tobacco industry is accounted for in payouts, this deal could
be internally revenue neutral. The industry will, however, be able to
deduct the payments, so that there will be a net loss in general tax
revenues. This shortfall, which could rise to as much as 40% of the
annual payments (i.e. between $3.4 billion and $6 billion annually)
is approximately twice the amount of the Public Health Funds. This
money will need to be made up by either reducing spending for other
public programs or by raising revenues on other taxpayers. This cost
shifting is another way the industry will be able to externalize the
costs related to its product to others.
It would be cheaper for the Congress to simply appropriate funds for
the public health programs from general revenues or a dedicated
tobacco tax.
Prepared by:
Brion Fox, James Lightwood, Stanton Glantz
University of California Institute for Health Policy Studies
August 20, 1997 DRAFT
The passthrough provision says that legislation will specify that the
annual payments will be "reflected" in the price charged for tobacco
products. It does not say whether costs imposed by other provisions
of the settlement can be included in the passthrough, or whether
future price changes are going to be tightly linked to the annual
total payments. It does not say whether before or after tax costs are
relevant. There are two main effects of the passthrough. The first is
that the resulting price increases will reduce consumption. Most
analyses of the settlement assume that the passthrough price
increases are one of the principle means of reducing youth smoking.
The second effect is on industry pricing structure. Presumably the
passthrough will result in some mandated price increases. It would be
redundant for the settlement to stipulate that any net costs of the
settlement to the industry will be passed on to consumers. Elementary
economics indicates the industry would attempt to do this anyway. If
the before tax annual payments are mandated to be passed through to
the consumers, this results in a mandated price increase. This will
remove the problem of how the individual firms in an oligopolistic
industry should change their pricing strategy to account for the
costs of the settlement. This may reinforce the current market and
pricing structure and limit competition.
This brief will focus on the demand effects of the passthrough price
increases. The effect on adult consumption will be relatively
straightforward. Almost all adult smokers are addicted, so the
relatively modest price increases alone will not change the
prevalence of smoking. There is general agreement that the adult
price elasticity of demand is about 0.4. This analyses assumes that a
one per cent change in the price of cigarettes will change adult
consumption by 0.4 per cent, keeping prevalence constant.
Depending on the assumptions on what costs are subject to a
pass-through, the price per pack of cigarettes will increase from
between 15 to 25 per cent on average over the first 10 years of the
settlement. This will reduce volume of adult sales by an average of 6
to 10 per cent. Revenue will increase as result of this by 4 to 6 per
cent on average. It must be remembered, however, that because of the
volume adjustment provisions the tobacco companies will reduce their
total payments under the deal with this reduction in consumption.
This reduction in payments could range as high as 10%, depending on
the cost conditions of the industry and the application of the volume
adjustment provisions.
The effects of the pass-through provision on youth consumption and
uptake is controversial because estimates of youth price elasticity
of demand are very uncertain. Some studies indicate that it is one or
even higher, others that it is close to zero. The measurement is
difficult because youth smoking is illegal, youth themselves purchase
only one half to two-thirds of the tobacco they consume, and new
smokers often consume sporadically. Secondly, how the youth
elasticity of demand is relevant to the target reductions of the
settlement is unclear. The target reductions are in terms of
prevalence of daily smoking. This is not directly comparable to
consumption. Apparently it is assumed that a given price increase
will decrease consumption, the decreased consumption will result in
decreased uptake of daily smoking. This analysis will look at the
case of a 0.6 price elasticity, which is applied to both youth
consumption and youth uptake. So a one per cent increase in price
will decrease consumption by 0.6 per cent, and also decrease the rate
of new youth daily smokers by 0.6 per cent. Then the passthrough
price increases can have a significant impact on youth consumption,
and significantly reduce the surcharges paid under the lookback
provision. (The lower pass-through price increase would be sufficient
to meet one third of the initial 30% youth daily smoking reduction
and about 15% of the final 60% reduction. The higher increase would
meet about half of the initial 30% reduction, and about a third of
the final 60% target.) Finally, it is unclear what effect, if any,
price increases have on the uptake of youth smoking. In short, the
price elasticity many only reflect total numbers of cigarettes smoked
by youth and not the number of youth smokers.
Prepared by:
Brion Fox, James Lightwood, Stanton Glantz
University of California Institute for Health Policy Studies
August 20, 1997 DRAFT
The lookback provision attempts to deny tobacco companies any
incentive to sell to underage consumers (youth). It sets target
reduction levels for tobacco consumption by youth aged 13 to 17. For
cigarettes, the initial target reduction is 30% in year 5 and 6 after
the beginning of the settlement, 40% in years 7 to 9, and 60%
thereafter. The reductions for smokeless tobacco are slightly
smaller. The idea of the provision is to remove the incentive to sell
to youth by confiscating the value of the lifetime profit stream of
any tobacco product sold to youth above the target reduction. The
manufacturer is denied not only the profits from current sales, but
any that will occur on average in the future. If the incentive works
as planned, tobacco companies would avoid selling product to youth
above the targeted reduction, because all prospective profits from
selling to anyone in that portion of the market will be lost
forever.
Current sales to youth is indexed by the prevalence of daily youth
smoking measured using the weighted average of age specific
prevalence of daily smoking for ages 13 to 17. The base year average
is calculated using data up to 1996. The average daily smoking
prevalence is calculated in the relevant settlement year, and the two
are compared to determine if the target reduction is met. The
industry will pay a surcharge of $80 million for each percentage
point that the current prevalence exceeds the targeted reduction set
for that year. ($80 million is the estimated value of the lifetime
profit stream for one percentage point of the annual cohort of new
youth smokers.) There is a cap of $2 billion on the surcharge for any
year. There is also a rebate provision. Each firm can recover up to
75% of its portion of the surcharge if it can show it acted in
compliance with the deal, had taken "all reasonable" measures to
reach the target, or deserved a rebate because of "other relevant
evidence."
The lookback provision is unlikely to be a significant deterrent to
the tobacco industry recruiting youth. The cost of complete
noncompliance will be less than 10 per pack. It will be trivial if
firms receive a large portion of the 75% abatement for good faith
effort. The provision uses inappropriate measures of youth
consumption which underestimate actual youth consumption, will
probably overestimate reductions in consumption, are liable to
manipulation by the tobacco industry.
The Level of Surcharge is Too Low. If youth sales do not
decline at all and current sales volume is maintained, the $2 billion
cap will limit the impact of the provision. Since the industry cannot
track the sales of individual cigarettes, they will amortize the cost
over all current sales. Then noncompliance can be measured as cost
per pack. Current sales are 23.7 billion packs per year. The cost of
no change in youth daily smoking would only be 8.5 per pack before
tax and 5.5 after tax. If firms receive the full 75% "good faith"
rebate the costs will be reduced to 2.1 before tax, and 1.4 after
tax. These costs could easily be absorbed by the tobacco companies as
a cost of doing business. If youth demand elasticity is 0.6, then the
total sales volume will eventually decline and the cost per pack will
eventually increase slightly until the before tax cost is 10 per
pack.
The Surcharge Level is Frozen. Another potential problem
is that the surcharge is fixed for perpetuity. Adjustments are only
made for the general level of inflation and changes in the size of
the 13 to 17 year old cohort. However, reasonable variations in
assumptions can alter the actual value of a new youth smoker by up to
30%. Changing economic conditions, industry marketing, distribution
and production costs may change the value of lifetime profits
substantially. An increase in the value of the profit stream of a new
smoker may not be reflected in any adjustments in the surcharge, and
the incentive effect of the lookback will be weakened. An alternative
surcharge could be based on a proportion of total revenue from youth
sales. This could be adjusted using a moving average of historical
financial ratios, and would be more reliable in the long run.
Rebate for Good Behavior. If companies receive a
significant portion of the 75% abatement for good faith compliance,
then the lookback provision loses all force since the cost of
noncompliance becomes trivial. The surcharge is paid out of a common
fund, and each firm pays into the fund according to its share of the
market. Each firm applies for the rebate individually. The individual
companies will have more incentive to attempt to get a rebate than
reduce youth smoking. Brand preference of the youth market can be
observed, so each firm could be penalized for its individual sales to
youth. It is also not clear how the industry's "good faith
compliance" could be assessed, particularly since the industry is
well practiced in developing "anti-smoking" programs that subtly
promote smoking.
Daily Smoking Prevalence is the Wrong Measure. The
settlement language indicates that the goal is to reduce youth
smoking. However, the measure used is the prevalence of daily
smoking, and this is only a portion of youth consumption. By the age
of eighteen, only 75% of adult smokers have started daily smoking,
but around 90% have already initiated some smoking. The
gap between daily smoking and first use is larger for 13 to 16 year
olds. Therefore, this measure misses 25% of youth smoking that leads
to an adult habit. In addition, the measured daily smoking prevalence
may fall while less intense youth consumption remains about the same,
so changes in daily smoking will overestimate the actual reduction.
Almost as many frequent smokers have symptoms of addiction as daily
smokers. If the industry can keep frequent smoking rates relatively
high while delaying daily smoking for just a year or two, they will
evade the surcharges completely, with little change in the overall
number of people who initiate smoking as youth and go on to become
addicted smokers.
Prepared by:
Brion Fox, James Lightwood, Stanton Glantz
University of California Institute for Health Policy Studies
August 20, 1997 DRAFT
The tobacco industry desired complete protection from all
lawsuits; public health advocates wished to protect the right of
individuals to sue the tobacco industry. The deal tries to tread a
middle-ground in which limitations are placed on the right to sue,
but plaintiffs would still retain the right to sue the industry. The
deal also provides predictability for the tobacco industry and
plaintiffs by requiring a fund to be set aside from the industry
payments to pay for damages in future cases. The size of the fund,
begins at $2 billion in year one and rises to $5 billion in year
nine. In addition, Subparagraph B to Title VIII of the deal provides
a series of restrictions on lawsuits for the recovery of damages due
to the past conduct of the tobacco companies, including:
Few people would disagree that there is some form of market
failure at work in the tobacco market. Consumer prices are not
directly related to costs, there is evidence of conspiratorial
behavior on the part of the tobacco companies, and there are
significant market barriers to entry. As an oligopoly the current
tobacco companies enjoy large profits.
The deal would memorialize many of the market failures and would
erect additional barriers to entry for new or foreign market
entrants. Subparagraph C to Title III of the deal tries to address
the problem of tobacco companies, new market entrants or foreign
market entrants from subverting the intent of the deal. It provides
mechanisms by which non-participating manufacturers would be subject
to the same regulatory authority as the other tobacco companies, and
would be required to pay "user fees" to account for some of
additional moneys paid to the states, and they and their agents would
not be exempt from liability.
But these non-participating company provisions erect even more
barriers to market entry further protecting the current industry's
oligopoly. The new entrants would be forced to pay a user fee equal
to the payments already made, they would have to pay an amount equal
to 150% of their share for liability expenses, yet they would not be
given civil liability protections and their distributors and
retailers would be subject to future liability. Even under the deal,
it is not clear that participating manufacturers are responsible for
the actions of the retailers. This specific exemption will make it
more difficult for a new market entrant to develop a distribution
pattern.
Ultimately, it may not be bad to eliminate new market entrants, but
there are problems with this structure. First, it is such a blatant
power grab by the tobacco companies, one is skeptical of its benefits
other than to preserve the profitability of the those tobacco
industries we know are culpable. Second, the restrictions are so
broad that they may implicate Constitutional issues. For example, the
specific application of the user fee if a new entrant does not
voluntarily forfeit its rights to a trial before a jury or its First
Amendment rights, raises multiple due process issues (takings,
separate application of the laws, etc.), and many First Amendment
issues. Third, much of the consideration for the deal is based upon
relieving the tobacco companies for past bad acts such as fraud and
conspiracy. As a matter of justice, it may not be reasonable to hold
new market entrants responsible for these activities.
Thus, other than trying to preserve an oligopoly market structure, it
is not clear what is gained by this provision. Much of the issues
could be resolved by simply allowing the normal course of regulatory
development, and shifting the payment schedule to a tax payable by
all market participants.
In addition, there are other provisions within the deal which will
protect the current tobacco company's oligopoly. The provision that
requires all costs of the deal to be passed through will simply
memorialize the market failure. First, the passed through costs are
sufficiently small, that the effect on demand will be small. Second,
the passthrough results in eliminating the incentive to innovate,
perhaps to a safer product, because the cost will be equally shared
among all market participants. Third, it is unclear how closely the
passthrough will reflect the true costs of the deal. If on the one
hand, the passthrough results in a regulated pricing structure with
annual increases, it will be possible to game the market and the
result would be mandated price fixing. If on the other hand, the
industry is responsible for calculating the passthrough this could
lead to conspiratorial price fixing. In either case, it will
difficult to determine the true price effect of the passthrough due
to market fluctuations, and the inherent market failure. As a result,
the passthrough provision will be difficult if not impossible to
measure and will encourage anti-competitive behavior.
Similarly, the joint liability provisions and the industry cap on
civil liability damages provides an additional opportunity to share
information among the tobacco companies.
The tobacco companies will be guaranteed excess profits and will have
no incentive to modify their behavior or to innovate. Instead of
requiring a passthrough, the market failure should be repaired by
eliminating anti-competitive behavior and the cost of the deal will
more closely be reflected in the market price. Additionally, this
would likely free up substantially more room to negotiate for more
money under the deal.
In addition, despite the possible benefits to allowing the tobacco
companies coordinate youth reduction strategies, the anti-trust
exemption granted the companies in Appendix IV for this purpose will
invite future conspiratorial behavior on the part of the tobacco
companies. The tobacco industry, through its past practices, has
given no indication that it is entitled to any protection from the
antitrust laws, no matter how small. This formal ability can be
embodied within a trade group or other entity which would enable
future conspiratorial behavior.
The document disclosure requirements will also preserve the market
failure. The disclosure requirements are incomplete which will result
in a continuation of the information inequities within the
market.
Another provision which has the potential to be anti-competitive is
section E(1) of Title I of the deal which enables the cross-licensing
of reduced risk products among the tobacco companies who are
signatories to the deal. This is anti-competitive in that it provides
an opportunity for these tobacco companies to conspire in the
production and marketing of reduced risk products. Furthermore it
erects market barriers for new market entrants by restricting the
cross-licensing requirement of new technologies to these
entities.
Competition is a mechanism by which innovation is forced. By
competing with other market participants a company will be forced to
develop better and more affordable products. Such innovation is a
vital component to economic growth. This deal removes all incentive
to compete among the market participants. The market failure is
memorialized by preserving the oligopoly pricing structure and
failing to remove the information inequities within the market. In
addition, it provides opportunities for further conspiring. Finally,
the deal provides for increased market barriers to prevent new or
foreign market entrants to provide economic competition to the
tobacco companies. Therefore, those economic incentives which would
force innovation are eliminated or greatly limited by the deal.
Prepared by:
Brion Fox, James Lightwood, Stanton Glantz
University of California Institute for Health Policy Studies
August 20, 1997 DRAFT
The deal the tobacco companies would be required to disclose to the
federal government all ingredients added to cigarettes, disclose the
pertinent ingredients to the public and prove the safety of all of
the additives to cigarettes within a five year period. Section F of
Title I to the deal requires manufacturers to provide to the FDA a
list of all ingredients added to cigarettes, other than tobacco or
water. It would require the manufacturers disclose ingredient
information to consumers in a manner similar to what must be reported
for food products. Manufacturers would, after five years, be required
to submit a safety assessment for each additive. Within a 90 day
review period, the FDA would either approve or disapprove an additive
as safe. If the FDA takes no action within 90 days, the additive is
deemed safe. A similar process would be in place for the introduction
of a new additive or a different use of an already accepted additive.
This section of the deal is weighted overwhelmingly in the favor of
the tobacco industry, and will actually slow the process of
ingredient disclosure under existing state laws.
Two states -- Massachusetts and Minnesota -- have enacted ingredient
disclosure laws. While the industry is challenging these laws in
court, it is likely that these states will be able to force
ingredient disclosure through simpler procedures than those proposed
in the deal. The deal would preempt these laws for five years and
then establish cumbersome procedures for enforcing them.
The industry has five years during which it can provide information
that a product is safe within the "intended conditions of use." The
ambiguity of intended conditions of use versus actual use could be an
area of great dispute, and will likely be an area of contention
during the mandated FDA rule-making process of the first year. Some
of the issues to be addressed will include amount smoked, burn
temperatures, oxygenation, and filters. Ultimately the question may
come down to whom should the regulations protect? Should they be for
the casual smoker, who does not block filter vents, who does not
inhale quickly and deeply, and who smokes less than a pack a day, or
for the more chronically addicted smoker? The tobacco companies have
been arguing that heavy smokers are not using the product as intended
without ever giving an analysis for what a "safe" amount of smoking
would be. These safety tests could fall into the same traps, leaving
heavily addicted smokers subjected to risks from additives, which the
industry could now claim that they are simply meeting the federal
requirements. Past experience has shown that the tobacco companies
will take advantage of any opportunity to slow the regulatory
process. This provisions gives them a sizeable opportunity.
Even if these rules are promulgated in an appropriate manner the FDA
will only have 90 days in which to review the data against the
applicable standard and approve or disapprove of the additive's
safety. If the FDA does not act, the additive will be approved. This
overwhelming inequity -- five years for the industry and 90 days for
the FDA -- will limit the effectiveness of FDA review, while the
industry will be able to fully garner all of the support it needs.
Another way to look at the inequity is that the risk is borne by the
consumer. If there is an additive that is harmful, the industry has
five years in which to develop a scientific trail to try to create a
semblance of safety. If it fails to meet the five year deadline,
there is no provision for the additive to automatically be deemed
unsafe (although the company would presumably be subject to the Title
III Section a $10,000,000 civil penalty for failing to disclose to
the FDA.) If the FDA deems it unsafe after the 90 day period there is
no procedure to eliminate it from the tobacco products except in
accord with Title I Section E above. Meanwhile, during this entire
time this harmful additive has been on the market.
The incentives should be reversed. The tobacco industry should have a
much shorter time frame in which to prove that the additives when
used in a reasonably expected manner are safe. If the tobacco
industry fails to meets this time deadline the additive is
automatically deemed unsafe. At any time the FDA deems the evidence
incomplete or insufficient it can then, 1) require more testing yet
allow the additive to remain on the market, or 2) require the
industry to remove the additive from the market until such evidence
can be produced. Furthermore, at no time should the tobacco companies
be immune from liability for the hazardous nature for any of its
additives, and FDA rulings that an additive is harmful should be able
to be used as evidence in any law suit against the tobacco industry.
Besides providing increased safety to the consumers, it places the
burdens on the industry, which already has (or should have) the
scientific data on the safety of it additives.
Second, the definitions of what needs to be listed and tested for the
safety of cigarettes is incomplete. Many, and probably most, of the
hazards related to tobacco use arises from the constituents of the
tobacco plant itself, e.g. nicotine, nitrosamines. To the extent that
hazardous elements of the tobacco products can be discovered and
tested for, they too should be included in the testing and safety
requirements. (Although the obvious dilemma is that tobacco is
inherently dangerous, therefore no testing can ever prove it to be
safe. Nevertheless, this loophole should not protect the industry
from using genetically engineered tobacco, or other techniques, which
may result in higher exposures to naturally occurring toxic
ingredients.) Furthermore, the requirement only extends to the
manufacturing process. It should be extended to all processes
associated with the production process. For example, pesticides and
herbicides added in the growing process should be analyzed for at the
production stage, as well as any substances which may added during
the curing process. The requirements should also include testing for
interaction effects among the constituents.
Third, the public disclosure requirements are inadequate. Linking the
regulations to the food requirements may prove to be insufficient
given the unique usage of tobacco products as opposed to foodstuffs.
Dry weight measures, and percentage of products may prove to be
irrelevant measures of certain additives. The burning process of
cigarettes, also creates unique hazards. When some additives are
ingested they may prove to be safe, but those same additives could
themselves prove hazardous when burned, or could create by-products
which are hazardous. The by-products may also prove to be a function
of burn temperature. The FDA, and the states, should have the
flexibility to design a disclosure requirement which can take into
account the unique status of tobacco products. Consumers should have
full disclosure so that they can better understand the risks.
Prepared by:
Brion Fox, James Lightwood, Stanton Glantz
University of California Institute for Health Policy Studies
August 20, 1997 DRAFT
During the past few years, many people have embraced FDA jurisdiction
over tobacco as an important regulatory mechanism to reduce the
impact of tobacco in society. The deal embraces this model by
legislatively investing in the FDA the authority to regulate tobacco
products. Section E to Title I of the deal describes the regulatory
regime under which cigarettes and smokeless tobacco products would be
governed. Rather than strengthening FDA jurisdiction, the deal
restricts FDA regulatory authority over nicotine and other harmful
constituents of tobacco.
By rewriting the Food Drug and Cosmetic Act to specifically deal with
tobacco products, special protections would be given to the tobacco
industry which are not shared by other drug or medical device
companies. These special protections would ultimately limit the FDA's
ability to adequately regulate tobacco products. Jurisdiction over
cigarettes has been granted to the FDA by a Federal Judge in North
Carolina and the regulatory process is moving forward. Although there
is a risk that the decision may be overturned, this is no reason to
restrict FDA authority. If the Congress is going to codify FDA
regulatory authority, it should give the FDA full authority.
Under Section E(1) to Title I of the deal tobacco products are
defined as they are in the current FDA rule. The disadvantages of
this definition are that it specifically is geared towards cigarettes
and smokeless tobacco. Presumably under the current
scheme, the FDA could develop new regulations to address those other
forms of tobacco. Should the narrow definition of tobacco products be
codified into law, this could preclude FDA authority over other forms
of tobacco (e.g., pipe tobacco cigars).
Section E(2) of Title I identifies that tobacco will be regulated as
both a drug and as a medical device, classified in a new subcategory
of Class II medical devices. The current FDA regulations were issued
pursuant to the general authority of the FDA to regulate restricted
medical devices. The FDA had already assumed jurisdiction over
tobacco as both a drug and a medical device. It chose, pursuant to
its own authority over combination products which are both drugs and
devices, to regulate the product as a device. The FDA has not yet
classified tobacco products as a particular form of medical device.
Although a Class II classification may prove reasonable treating
tobacco products with special controls, this decision should be left
in the hands of the FDA.
Section E(3) of Title I identifies that the FDA will be able to
require product modification including the regulation of nicotine,
and shall be able to establish "Performance Standards" for tobacco
products. The authority under this section is intended for medical
devices for which the FDA can, pursuant to 21 U.S.C. Section
360d(a)(2)(a), "provide reasonable assurance of its safe and
effective performance." Tobacco products cannot be made safe, so this
authority is at best ambiguous. Trying to regulate a hazardous
product in scheme that is designed to regulate safe products will
create conflicts and ambiguities. How these ambiguities are resolved
are vital to the continued effectiveness of the FDA as a regulatory
authority. No restrictions should be placed on FDA regulatory
authority in the deal, and the FDA should be left to resolve the
ambiguities created by having to regulate a hazardous product in a
scheme designed to regulate safe products.
Section E(5) of Title I outlines the authority of the FDA to regulate
the performance standards of tobacco products pursuant to its
authority under 21 U.S.C. 360d. The FDA is prohibited from banning
traditional tobacco products in their basic form. Sub-subparagraph A
holds that for the first twelve years after the deal is in place the
Agency showing "substantial evidence" and after satisfying other
procedural safeguards, can adopt performance standards which would
modify existing tobacco products (including the reduction of but not
the elimination of nicotine) a) will result in the significant
reduction of health risks to consumers, b) is technologically
feasible and c) will not result in the creation of a significant
market for contraband. Sub-Subparagraph A also requires the
appointment of a Scientific Advisory Committee to look at the effects
of nicotine levels, and within three years the "tar" levels of
cigarettes must be below 12 mg. Sub-Subparagraph B, establishes the
regulatory standards for the time after the initial 12 year period.
It keeps the same required findings of fact and establishes that the
review standard for the findings would be governed by a
"preponderance of the evidence" standard. It adds further procedural
rights to the tobacco companies to challenge FDA actions and provides
a 2 year phase in period for the elimination of nicotine.
A close reading of this section reveals that the tobacco companies
are gaining special treatment by having restrictions placed on the
FDA's authority. First, the FDA cannot prohibit the
sale of the cigarette in its basic form. This restriction will
prevent the FDA from ever requiring the replacement of current
technology with the use of new technological advancements such as,
slow burn cigarettes, smokeless cigarettes, low burn temperature
cigarettes, and non-tobacco based cigarettes, which could otherwise
be considered suitable and safe alternatives for consumers. This
language could also be used as a shield by the tobacco industry to
challenge any type of modification it opposes. The breadth of this
clause cannot be exaggerated. It is sufficiently broad that the
drafters of the agreement felt it necessary to clarify in
Sub-Subparagraph B that the elimination of nicotine or other harmful
constituent of tobacco will not violate this clause. This ambiguity
can only serve to restrict FDA authority. It also implies, that
during the initial twelve year period an effort to ban a harmful
constituent of tobacco which would result in a reduction of consumer
use would violate this provision.
Moreover, the intent behind the provision is misplaced. The tobacco
companies are supporting the impression that prohibition is a likely
outcome of unfettered agency control over tobacco. This is not
correct. At this time, no major health group supports the concept of
prohibition. It is axiomatic that our culture is not prepared at this
time to surrender its addiction to tobacco. Society, however, is not
static. It is conceivable that within a generation there may be
adequate market substitutes such that smokers and society would be
welcoming a prohibition on the use of some of the hazardous products
currently on the market. (For an analogous example one can look to
market replacements which facilitated the banning of environmental
toxicants such as PCBs and DDT.) To prohibit the FDA from meeting
such a challenge is unnecessarily restrictive and will prevent
regulatory actions which benefit consumers.
Second, the implication that the additional language will ensure
effective FDA regulation of tobacco products is inaccurate. The
agreement does not mandate that the FDA act in any particular manner,
it simply reiterates that the FDA has a given authority. This
discretionary power will inevitably subject the position of FDA
Commissioner to intense political scrutiny. By politicizing the
office, it could weaken or immobilize the agency. Although this may
not be unique under this regulatory scheme, there are no protections
against, and no requirements for, any particular agency actions.
Third, the procedural barriers placed on the Agency are
extraordinary. Most of Section E(5) contains additional barriers
which will at best slow agency action and worst stop agency action.
For example, the appointment of a Scientific Commission to analyze
the addictiveness of nicotine is a redundant activity that can only
slow the process. Similarly, the mandated delays in the FDA
procedures to allow for Congressional action, the mandatory phase in
period for nicotine removal and the burdensome administrative and
judicial review procedures will provide the tobacco industry
opportunities to harass the Agency and prohibit the effective
regulation of the industry.
Fourth, the deal would change the standards for judicial review of
agency action to give special treatment to the tobacco industry.
Federal Courts are highly deferential to Agency expertise. If an
action is adequately supported by evidence in the record and not
arbitrary or capricious, the action will be upheld. Under the deal
the Agency will have to use greatly heightened standards of proof. In
the first 12 years this will be "substantial evidence," an extremely
burdensome requirement. Even after the 12 year period the standard
will be "preponderance of the evidence" standard which is still over
and above what is necessary in other regulatory contexts and will
prove to be a hindrance to agency action. These heightened burden
will make it more difficult for the Agency to take action to protect
consumers.
Fifth, the specific restriction on nicotine reduction ties the FDA's
hands dramatically. Under the best scenario, the FDA would not be
able to remove nicotine from tobacco for more than 14 years. This is
sufficient time for the tobacco industry to addict another generation
of smokers. Moreover, there is no provision to allow the FDA to
regulate more quickly to account for changes in technologies, such as
nicotine analogues or nicotine replacement therapies. This is a bold
guarantee of continued profitability for the tobacco industry and an
unreasonable retrenchment of current FDA authority. It is also based
upon an incorrect assumption that the gradual reduction of nicotine
will benefit smokers. It is unclear whether there is a threshold
below which nicotine loses its addictive properties. Until that
threshold is met, smokers will compensate for nicotine reductions by
inhaling more deeply, covering cigarette vent holes or smoking more
frequently. As a result, a gradual reduction of nicotine could result
in the increase in health risks at least over the short term. This
creates a dilemma which could possibly prohibit the regulation of
nicotine. If it is true that the gradual reduction of nicotine will
make it easier to eliminate nicotine entirely, then this will be
tradeoff of short term health losses for long term gains. Because the
Agreement requires the FDA to account for significant reduction of
risks (in particular for nicotine reducing the drug dependency by
reducing numbers of smokers and frequency of smokers) this may be an
unobtainable short term goal for a moderate reduction in
nicotine.
Sixth, the additional findings the FDA will need to make before it
can eliminate harmful constituents from tobacco products are
burdensome and unreasonable, and each of the three findings is
counter to the interests of the public health. (a) To find that a
specific action will result in a significant reduction in health
risks may prove difficult. A specific toxic agent may prove to be
harmful, but it may not be possible to identify the specific health
improvement that arises from the removal of a single constituent.
Moreover, to prove the reduction in health risks is "significant"
could require extensive epidemiological testing, and even then prove
difficult to separate out from the other effects of tobacco usage.
Then there is the definition of the term "significant". Would a drop
in morbidity of .5%, approximately 2000 lives/year, be significant?
To protect the public health, a constituent once deemed harmful
should be eliminated from the product until the tobacco industry can
prove it does not negatively affect the health of consumers. (There
is also the problem that if the constituent is a significant part of
the tobacco leaf, this FDA action may violate the restriction that it
cannot prohibit tobacco products in their basic form.) In the second
twelve years in order to reduce the nicotine the FDA will also need
to evaluate the reduction in consumption and moderated use patterns
as a result of a non-addictive product. Such research would be highly
speculative at best. (b) To prove that a modification is
technologically feasible may also prove to be difficult. There is no
base of feasibility against which to compare a particular action. It
is feasible to stop making the product but would an additional
processing step that increases development costs by 10% be deemed
feasible? If not, does that give the tobacco industry impunity to
sell a known hazardous substance to protect profit margins? (c)
Finally, it will be nearly impossible for the FDA to prove that a
given action will not result in a demand for contraband. This demand
could be due to increased price of the safer product, it could be due
to brand affiliation, it could be due to some other factor. Because
the agreement does not extend to overseas markets, the tobacco
companies will be able to market their wares near U.S. borders.
Product availability will ensure that a demand could be satisfied.
(This can be seen when adjoining states or countries have greatly
dissimilar taxing structures.) The tobacco companies, would even have
an incentive to feed that demand. To prove the negative, that an
action by the FDA will not increase demand, is a faulty logical
construct to begin with. It is made worse when the incentives are in
the hands of the tobacco industry to maintain a black market product.
The result is that a small market penetration of illegal products
could result in a health benefit being denied to millions of
smokers.
Overall, the restrictions placed on FDA oversight of tobacco products
will place consumers at risk.
Prepared by:
Brion Fox, James Lightwood, Stanton Glantz
University of California Institute for Health Policy Studies
August 20, 1997 DRAFT
The Food and Drug Administration has assumed regulatory control over
tobacco products as a drug delivery device and as a drug (nicotine).
One of the first uses of the regulatory authority by the FDA was to
pass a series of advertising and marketing restrictions. The FDA
found itself under immediate attack and has been defending its
actions against the tobacco industry in Court. Although the FDA won
the first round in that it is able to regulate tobacco, the ruling is
under appeal. In addition, the Court did not uphold the FDA's ability
to regulate advertising.
Section A of Title I of the deal would confirm FDA authority and
codify much of the restrictions on advertisement contained in the FDA
rule as promulgated, 61 Fed. Reg. 44396 (August 28, 1996). The deal
would also expand on the FDA provisions by banning outdoor
advertisement, limiting the content of advertisements, banning
Internet advertisement, restricting tobacco sponsorships, eliminating
product placement, and requiring disclaimers on products identified
as "light" or "low tar".
To the extent that tobacco use is encouraged by the pervasiveness of
tobacco imagery, many view the advertising restrictions in the deal
as an improvement over the status quo. In addition, the First
Amendment to the Constitution (and similar free speech protections in
State Constitutions) can act as a barrier to restrictions on speech.
These protections are irrelevant if the tobacco companies voluntarily
accept the speech restrictions.
While the North Carolina opinion disallowed the current FDA
advertising restrictions, this is clearly not the final say on this
matter. First, that ruling is on appeal and may be overturned.
Second, the Judge in the North Carolina case gave indications as to
what measures could be taken to "fix" or otherwise promulgate the
regulations so that they will survive a challenge by the tobacco
companies. Among the alternatives are ceding authority to the Federal
Trade Commission, or regulating advertising under a different portion
of the Food Drug and Cosmetic Act.
As for the First Amendment concerns, those are ubiquitous no matter
whether the deal is passed. Any Congressional Act or FDA or FTC
regulation will be subject to a First Amendment challenge. The deal
does not present a serious advantage. Simply because the tobacco
companies agreed to the restrictions in the deal does not provide
assurances that the restrictions will be enforceable. First, the
tobacco companies may prove to be only as good as their word. If they
decide to break or bend the terms of the deal, a State or the Federal
government would be hard-pressed to enforce the terms of the deal
because a federal court would likely defer to enforcing the terms of
the First Amendment. Second, even if the deal is enforceable as to
the tobacco companies, it will not be enforceable to industries that
may prove sympathetic to the tobacco companies interests. For
example, farmers, retailers, and advertisers all may have a vested
interest in promoting cigarettes and will not be bound by the terms
of the deal and will not be bound by an unconstitutional law.
The advertising restrictions are also unlikely to significantly
reduce the pervasiveness of tobacco imagery in society. Many
countries throughout the world have more restrictive advertising
polices than are proposed in the deal and find tobacco imagery
pervasive. For example, in other countries we have seen that the
tobacco companies adapt to whatever advertising restrictions are in
place to develop advertisements which are just as effective as those
outlawed. For example, Marlboro will often use images of the wild
west with running horses and deep sunsets to paint a picture that is
just as appealing as the "Marlboro man" when it cannot use human
figures. Other companies have developed similar advertisement styles,
for example, Benson and Hedges anthropomorphizes cigarettes. These
attractive advertisements eliminate the need for cartoon characters
or human images.
There are also separate techniques of promotion which are not
prohibited by the deal which have proven to be useful tobacco
industry tools in other countries. One needs only to look at
advertising in the UK or South Africa to see how successful the
industry can be. For example, in Australia (where advertising is
nearly totally prohibited), the industry is now hosting "Brand X
nights" at local bars. These events appear to have a strong impact on
teens, even though they are not allowed in the bars.
Additional advertising and promotion techniques would also be
available under the deal. For example, marketing tools such as direct
marketing and establishing distributorship structures which place the
responsibility of marketing on intermediary distributors, could prove
to be creative avenues to market tobacco products. Similarly, the
Internet is an international medium, and placing domestic
restrictions on tobacco imagery will have little effect on the
availability of reaching tobacco Internet sites. The tobacco
companies will also be able to use the packaging of cigarettes as a
marketing tool.
Moreover, tobacco imagery is ingrained into our culture. It is not
possible to eliminate the romanticized images of smoking from old
Hollywood movies. Because of that, any claims that children will be
protected from all tobacco imagery will be false. Whatever advantages
the advertising restrictions have in the deal, they represent only a
partial solution.
Finally, because the deal restricts the FDA's ability to modify the
terms of the advertising restrictions for five years (except under
extraordinary circumstances), the deal prevents the federal
government from taking any action to address these creative
promotional methods. The current situation, with the FDA acting under
existing law, in the long run, is at least as likely to accomplish
the goals of restricting tobacco advertising as the terms of the
deal.
Prepared by:
Brion Fox, James Lightwood, Stanton Glantz
University of California Institute for Health Policy Studies
August 20, 1997 DRAFT
The Food and Drug Administration has assumed regulatory control over
tobacco products as a drug delivery device and as a drug (nicotine).
This authority has been the subject of much debate and concern. One
of the first uses of the regulatory authority by the FDA was to pass
a series of regulations to restrict access to cigarettes to adults.
The FDA found itself under immediate attack and has been defending
its actions against the tobacco industry in Court. Although the FDA
won the first round in that it is able to regulate tobacco, the
ruling is under appeal.
Youth Access. Sections C and D of Title I of the deal
would confirm FDA authority and codify much of the purchase
restrictions contained in the FDA rule as promulgated, 61 Fed. Reg.
44396 (August 28, 1996). The deal would also expand on the FDA
regulations by requiring states adopt a licensing scheme for
retailers of tobacco products.
Section C of Title I codifies much of the FDA rules intended to
restrict youth access to tobacco products. In addition, the deal
would go beyond the current FDA rule by banning all vending machine
sales and restricting self-service displays of cigarettes to adults
only locations. These provisions would clarify the FDA's ability to
regulate in this area and would expand on the current FDA
regulations. Some believe these provisions are valuable because it is
necessary to create supply-side controls for tobacco; others state
that, while there is good evidence that such programs are effective
in reducing sell rates, there is little evidence that this translates
into lower youth tobacco prevalence or consumption.
As with the provisions under Section A of Title I, the deal only
embraces the current state of the law. The restrictions put forward
are already a part of the FDA program or readily could be. In short,
there is no need for the deal to accomplish these objectives.
In addition, there is the concern that these programs have a limited
effectiveness. First, there is not good evidence that youth access
programs reduce teen smoking prevalence or consumption, with the
evidence that does exist speculative at best. While many of the
provisions are a good idea, it is important to remember that teens
only buy about half their cigarettes and other tobacco products; they
are equally likely to "bum" or steal cigarettes than to purchase them
themselves. There is also the theory that such laws actually increase
youth desire to smoke. Whether this is under a scarcity theory or
"forbidden fruit" analysis, there is some support that smoking may
become more attractive as a rebellious activity for some youth with
increased enforcement. One only needs to look at the high teenage
drug and alcohol rates to understand that supply side laws are not a
complete solution to youth consumption. Therefore, the advantages
claimed by advocates of the deal are exaggerated, and need to be
tempered. Effective anti-smoking campaigns must be aimed at all age
groups.
Licensing. Section D of Title I would mandate minimum
standards by which states would institute licensing schemes for
tobacco retailers with specific penalties for violations. There would
be comparable licensing schemes for entities under federal
jurisdiction and Indian lands. By requiring a licensing scheme it is
believed that it will be easier to control and supervise those with
the direct control over the distribution of cigarettes. By having
certain and guaranteed penalties the retailers will know the risks to
violating the laws and will be given the necessary inducements to
enforce the laws.
The idea for a licensing scheme meets little resistance from public
health advocates. Most of the complaints which arise with regard to
Section D are specific to the terms of this scheme. First, although
the deal identifies that it would promote a national "minimum
standard" it is not clear whether this would preempt state licensing
schemes which currently exist, or whether it would prevent more
strict licensing schemes. It appears that the civil sanction scheme
in particular will be mandatory and not allow for stronger local
sanctions. Any preemption of stronger local regulations is inherently
suspect. Moreover, the federal sanctions are weak, and may be
insufficient to promote responsible behavior in retailers and other
distributors.
Finally, the licensing scheme is unlikely to accomplish one of its
objectives, that of requiring distributors to comply with the terms
of the deal. One of the requirements for obtaining a license would be
to comply with the terms of the Act. But there are some terms of the
Act, to which compliance may not be compelled. For example, if there
is a First Amendment right to advertise cigarettes as a legal
product, then this right goes to not simply the manufacturers of the
products, but also the distributors and retailers. Retailers, who
have a large financial interest in promoting cigarette sales may fill
the gap left when cigarette manufacturers reduce their advertising.
The First Amendment restrictions which the authors of the deal argue
could only be accomplished by the consent of the tobacco
manufacturers cannot be thrust upon retailers without their consent.
To condition obtaining a license on the forfeiture of a
constitutional right may violate the retailers right to due process
under the U.S. Constitution. Thus, the efforts to force compliance
through a licensing scheme could fail, and the advantages to the
public health of this provision are exaggerated.
In any event, there is little in the deal beyond current FDA
regulations.
Prepared by:
Brion Fox, James Lightwood, Stanton Glantz
University of California Institute for Health Policy Studies
August 20, 1997 DRAFT
END OF DOCUMENT