4 May 2016

Should smokers pay more for their health insurance?

Markéta writes:*

Although, it is well-known that smoking significantly damages individual’s health, there are still approximately 32% people who are smokers in the Czech Republic. Even more alarming is the fact that smoking is nowadays most popular among young people (15 – 24 years). It is estimated that 44.7% of them are regular smokers. Further, on average smoking is the cause of premature death in one of five cases in the Czech Republic. One fifth of total healthcare spending (48.2 bln CZK, in 2011) was allocated for extra treatment of people who suffer from the diseases directly caused by smoking (27 CZK=1€). If the external cost which is imposed on the non-smokers (“society”) is added, it is estimated that the total social cost would increase to 75.3 bln CZK (2011), which was actually equal to 3.8% of the Czech GDP in 2011. Such disturbing numbers often lead to highly discussed question whether smokers should pay more for their heath insurance or not. 

picture taken from: Wikipedia
The conflict of interest has arisen because everyone who gets salary in the Czech Republic is required by law to pay for the health insurance (government pays for children, students and seniors). The amount that the individuals must pay is not however based on individual’s likelihood of using healthcare, but rather on the income level. It is undoubtedly easier to create and run system based on income than based on the likelihood of using healthcare, since it is hard to accurately estimate the individual’s likelihood of using healthcare. On the other hand, the average estimations of using healthcare become quite accurate when there is large sample. Many politicians, economists and doctors argue that it would be more beneficial to have a system in which individuals who damage their health by their own lifestyle (particularly smoking), would have to pay more for the health insurance, because they on average use healthcare more than non-smokers. Simply stated, the smokers should pay more, in order to compensate the “additional” spending in healthcare, since the tax on cigarettes has not helped to fully cover the cost of the treatment of the diseases directly caused by smoking. 

Even though, this is a classic example of market failure which is caused by negative externality, where the demand and supply fail to allocate the right amount and price of smoking that would be accepted by the individuals and the society, it is extremely difficult to come up with an effective solution. Firstly, if smokers were required to pay more for their health insurance, the Constitution as well as Health Act would have to be changed, because they guarantee “free of charge access to healthcare.” Such process could be lengthy, complicated and could not ensure quick fix of the system which is needed. Secondly, large percentage of the smokers are young people who are exempted from paying health insurance anyways, since the government pays the insurance for them. Third of all, it would be hard to come up with the system that would fairly determine how much an individual should pay, mostly because the health effects usually appear in the long run. Lastly, if such system was imposed it would have to be ensured that the additional collected money is used in healthcare spending and not in other areas of government-public spending.

Bottom Line: People who damage their health by their own lifestyle (particularly smoking) should pay more for their health insurance, because they are using health care more than the average citizens of the Czech Republic. However, although morally everyone could say that it is a good suggestion, in reality such decision might be very hard to enforce because of the limitations (stated above).

* Please comment on these posts from my environmental economics students, to help them with unclear analysis, alternative perspectives, better data, etc.


Ed Dolan said...

This is a classic example of market failure which is caused by negative externality--or is it?

Many economists would distinguish between two different situations in which one person's action causes negative consequences for others.

In some cases, the effect is transmitted through some physical effect, such as emissions of CO2 or SO2, discharge of sewage, or, in this case, second-hand smoke in a closed area. Those can be controlled by command-and-control regulations (no smoking in public buildings) or pricing (taxes on cigarettes).

In other cases, the effect is transmitted through prices or costs. Suppose a restaurant decides to build its reputation for hospitality by offering free refills on coffee. People who ask for refills push up costs for others who drink just one cup, or don't even order coffee. Many economists would hesitate to call that an externality.

The effects of smoking on insurance are more like the coffee refills. In deciding whether the policy should be changed, it is necessary to judge whether the benefits of change (charging for refills) outweigh the costs (making the restaurant seem less welcoming). There is no simple right or wrong answer.

In the case of smoking and insurance, the question is whether as a matter of social policy, a country should provide healthcare in all cases, or exclude cases where personal choices contribute to poor health. If there is an extra charge for smoking, should there also be an extra charge for people who don't eat enough fruits and vegetables, or who don't exercise? These are important questions of public policy, but it is not clear how much we gain by describing them as "externalities."

Daniek said...

Hi Markéta, to add on what Mr. Dolan earlier mentioned.

I agree that these numbers allow some necessary thought of action. However, I think there are two mechanisms operating here (and while they are connected.. such as reality.. they are each distinct itself). Furthermore, I would opt for a rather different solution.

First, I would argue that the price of tobacco itself it s form of market failure with negative externalities. This because if we look at the opposite, positive externalities imply the production/consumption of certain goods and services that confer spillover or external benefits on third parties or on the community at large without compensating payment. For example: immunization against diseases which results in direct benefits to the immediate consumer and society as a whole. Therefore, on the other hand, negative externalities then, imply production or consumption costs inflicted on a third party without compensation (people around you that don’t smoke) but also on the direct consumer. Hence, this is a form of market failure and for this reason, the government puts in most countries so much tax on prices to reduce overallocation.

However, I would argue that the problem with insurance then, is rather a different mechanism. Namely, adverse selection whereas asymmetrical information plays a role. Here, buyers have better information about how much benefit they can extract from a service in which case the „bad” customers are more likely to apply for the service.

Therefore, yes they are connected but different at the same time. Furthermore, from previous attempts can be derived that when price increases, whether it will be health insurance or cigarette tax, it is not effective in stopping people from smoking and often drives smokers deeper into debt.
(US for example, prices increased 40% between 1981 and 1988, yet demand stayed level)

Hence, if Czech Republic ever wants to rid of smoking, then we have to stop the problem at the source: the media.

Steven said...

Hi Markéta,

While you are right about the fact that taxes on smoking do not (by far) cover healthcare related costs, taxes on cigarettes do affect consumer behavior. In Australia, the price for a pack of cigarettes (Marlboro, to be more specific) is a whopping 24.50 A$ (equal to 15.80 euros). Not surprisingly, only 16 % of Australians smoke, compared to 32 % in the Czech Republic (where a pack of Marlboro cigarettes costs about 4.60 euros).

This is not just the case in Australia, but also in Sweden, Finland, Norway, Iceland, Canada, New Zealand, Singapore, and, in fact, also here in the Netherlands. Cigarette consumption in all mentioned countries is less than half that of the Czech Republic, and the price of a pack of cigarettes (Marlboro) is about twice as high (up to 4 times as high) as in the Czech Republic.

Furthermore, to build on Daniek's conclusion, the Australian government prohibits cigarette advertisement, and the government introduced a law that requires producers of cigarettes to print pictures of cigarette-caused disformaties on the front of the pack (a.k.a. black lungs and yellow teeth). While this is not a tax, it does discourage people from starting this bad habit.

I think it would be wrong to assume that taxes don't have an effect at all. The Australian government did not only increase taxes on cigarettes to get people to quit smoking, they also did it to prevent young people from starting. Whereas the working man / woman in Australia might think twice before buying that pack of cigarettes (considering the price), an 18 year old (without an income) cannot even afford to start smoking.

If governments want their people to quit smoking for good, it might be an idea to make sure the youth does not get "hooked" to cigarettes in the first place, by making cigarettes too expensive for them to buy.

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