The value of Health Economics perspectives to assess THR

October 6, 2022

The session discussed how health economics can contribute to policies and whether government policies may use taxation or other financial tools to modify consumers behaviours and encourage the substitution of recognized highly harmful products.

Should governments be more proactive in trying to seek a harm reduction policy? Is there a need for tax harmonization in tobacco products? Are traditional and innovative products economic substitutes for the tax officer? Could we use taxation to drive behavioural change? Can tax and pricing tools promote the transition from traditional cigarettes to THR products? How is the economical balance when people are directed to switching versus not quitting? Could switching to non-combustible tobacco products reduce the expenditures on health?

Professor Andrzej Fal, as the moderator, initiated the discussion with pointing out that there is a conflict of interest in tobacco related health economy–health expenditures due to tobacco-related illnesses are 7-8 billion PLN/year in Poland (before the pandemic) and the income due to excise tax and VAT from tobacco products is about 23 billion. Prof. Emanuele Bracco agreed that there are two kinds of conflicts of interest, between the revenues coming from excise duties and the cost of negative outcomes in health; and a contrast between short-term and long-term effects –if people quit smoking or replace cigarettes with less harmful habits, there will be an immediate loss of revenues while the benefits from health will be coming within the next decades. In Italy, government put tax on innovative products exactly on the level to protect the revenues, which is an example of neutral approach to the issue.

Tobacco smoke is the second biggest risk factor for NCDs, which kill around 40 million people worldwide every year, A. Fal said. The key NCDs are cardiovascular disease, cancer, and respiratory diseases including COPD and diabetes. Reducing harm in this respect, not only can lower the mortality but also the costs of healthcare. Very important aspect is the work loss due to tobacco-related diseases. Global economic analysis shows that there are over 13 million years lost due to disability related with smoking. Two million workers die every year due to smoking causing great loss for industry. Almost 2% of global GDP is lost due to smoking related diseases. If the decision makers knew that most of the costs of the smoking related diseases are the indirect costs, they would understand that any way of harm reduction in smokers would be beneficial, Prof. Fal underlined. If we calculate the potential influence of reduced harm, 10% or 20% of harm reduction already brings substantial savings in cardiovascular or respiratory diseases costs of care. Yikai Wang agreed with Prof. Fal’s statement that we have not only harm reduction in health but also harm reduction in economy, especially when taking into account indirect health costs which are much higher than direct costs (that include medications, hospitalization etc.).

A. Fal explained that the impact of novel nicotine delivery products on health in terms of cancer potency is already known –all novel products show lower potency to generate cancer. Also, when comparing the number of toxic substances delivered by one cigarette to any other reduced harm product, they are 100 times less toxic. We need to remember that two-decade delay is needed to observe the effect of smoking cessation (one generation prevention gap) on lung cancer prevalence, for instance.

Professor Fal then raised the question whether price sensitivity of the tobacco retail market really matters. In Bulgaria, Arkadi Sharkov said, tobacco market is average price-sensitive but increasing prices (taxes) for cigarettes can drive smokers to switch to preferably taxed alternative products.

Global economic cost of smoking comprises 1.8% of GDP worldwide, Prof. Fal said, and commented that low-income countries suffer the most due to smoking which is one of the reasons to introduce harm reduction not only in Europe but also in these countries.

Over 60% of the price of cigarettes in Poland is the excise tax and this tax could be lower for products of reduced harm, Professor Fal said, and quoted ETHRA: “People switching from high-risk deadly combustible products to very low risk SNP (safer nicotine products) should be incentivized, not punished. It is imperative that consumers are consulted throughout the evaluation of the Tobacco Tax Directive.” All panelists agreed that the less harmful the product is, the less taxed it should be. A. Sharkov pointed out that lower taxes for lower risk products should encourage people to switch to them instead of smoking. E. Bracco mentioned that such approach is applied in many other markets like alcohol or carbon certificates. Dr Wang added that at the same time taxes for more harmful products should be raised to maintain the revenue.

Prof. Fal stated that taxes are not the only driver of consumption, and A. Sharkov pointed out that new products need incentives other than taxes, i.e., regulatory, and support from MoE and MoH. Education is strongly needed in parallel to taxation, he added. “Taxation can be used as a fiscal tool in health policy. The harm reduction techniques can and should be taxed preferably after they’re proven safe and efficacious,” Prof. Fal summarized.

A. Sharkov quoted several studies on innovative taxation strategies, one of them from Germany: “significant tax wedge between combustibles and novel products is needed for substituting. A well-designed tax on non-combustible products should be at low rates to encourage switching from combustibles to alternative products and preventing relapse.” The expert explained what happens when you increase the tax too much (the so-called Laffer Curve). In the case of cigarettes, if taxes are too high, people will buy contraband, in duty-free shops, in a different country. Mr Sharkov presented the study results showing what we can achieve when switching from combustible to non-combustible products assuming 3 different scenarios: 1%, 15% or 50% of smokers changing their habits and how this would probably result in reduction of DALY by disease years. In the case of 50% of smokers switching, around 107,000 DALY (42% reduction) would be saved.

Prof. E. Bracco talked about tax harmonization. “Sin taxes” have been used for a long time to discourage consumption of harmful/immoral goods. He emphasized that optimal tax rate should be related to elasticities of production and consumption. Therefore, policy should be set not only to raise revenues but also (or even mainly) to affect behavior. The bottom line is that whenever there is a harmful product, a well-designed tax does help, and tax policies often differentiate among harmful products for a variety of reasons. Energy Tax Directive is one diversified approach (taxation depending on emission level). Referring to Hagedorn and Wang (2021), Prof. Bracco said that if there is substitutability among different harmful products, tax policy should take it into account (also as an incentive to innovation). Non-combustible nicotine and tobacco products (NNTP) are substantially less harmful than traditional tobacco products. There is strong evidence that they are economic substitutes (having strong negative price elasticity).

The speaker described how currently taxes look like in the EU and that Tobacco Tax Directive is to be updated in the near future. It is important to be aware that tax policies may have unintended or unanticipated consequences―he added―like in France where very high taxation on factory-made cigarettes (FMC) caused high smuggling, counterfeit, and cross-border shopping; moreover, it did not drive any reduction in smoking prevalence among low educated, poorer people. On the other hand, large increase in taxation on FMC in New Zealand led to lower smoking prevalence (less so in minority groups) and additionally, since 2018, a harm reduction approach has been implemented there resulting in important reduction in smoking prevalence also among minorities. Dr Bracco, concluding his intervention, presented predicted smoking prevalence in three different taxation scenarios in the EU27, showing that full equalization would imply large relative increase in taxes on NNTP as opposed to FMC and that would push consumers (back) to more harmful products, having worse smoking prevalence outcomes.

Dr Wang presented an economic model to evaluate impacts of different tax reforms on health and revenue, and to design an optimal tax reform that achieve both health and revenue goals. Optimal tax reform would support minimizing tobacco harm, thus reducing cigarettes by replacing them with new products as much as possible, by zero tax on new products and tax increase on FMC and Fine-Cut (with price elasticities of FMC and FC lower than 1). In such approach we would see fast decreasing quantities of FMC, stable quantities of FC and increasing quantities of NP, which is what we want. In such scenario the total tax revenue would stay stable.

In conclusion, Prof. Fal said that taxation is a macroeconomic tool to drive all the innovations but looking at the tobacco market we need to follow a new reform of taxation, which should be more allowing for new products. The taxation is not the only tool, is just one of the tools and if we forget the awareness, education, and social work we will not reach the goal.