A study on liability and the health costs of smoking DG SANCO (2008/C6/046)

Transcription

1 A study on liability and the health costs of smoking DG SANCO (2008/C6/046) UPDATED FINAL REPORT April 2012

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3 A study on liability and the health costs of smoking DG SANCO (2008/C6/046) UPDATED FINAL REPORT April 2012 A report submitted by GHK In association with the University of Exeter (UK) and the Public Health Advocacy Institute (USA) Andrew Jarvis GHK Clerkenwell House 67 Clerkenwell Road London EC1R 5BL United Kingdom T +44 (0) F +44 (0) consulting@ghkint.com i

4 This is the final report for a study on liability and the health costs of smoking commissioned by DG SANCO of the European Commission under contract ref. SANCO 2008/C6/046. This study was undertaken by the following: Andrew Jarvis (Project Director) Máté Péter Vincze (Project Manager) Beth Falconer (Lead Researcher) Amandine Garde (Lead, Legal Team) Frederic Geber (Researcher, Legal Team) Richard Daynard (Expert advisor, Legal Team) ii

5 Contents Executive Summary... 1 E.1 This study... 1 E.2 Estimating the costs of smoking to EU society (Chapter 2)... 1 E.3 Policy tools for tackling externalities (Chapter 3)... 3 E.4 The role of litigation past experience and future potential (Chapter 4)... 5 E.5 Beyond litigation: alternative ways and means (Chapter 5) E.6 Final remarks (Chapter 6) Introduction The purpose of the project Approach and acknowledgements Structure of this report The external costs of smoking in Europe Introduction Smoking as a negative externality Previous estimates of the cost of smoking The costing method used here Medical conditions caused by smoking Model results for the costs of smoking Chapter summary Policy tools for tackling externalities Introduction Regulation Legal liability Pigouvian taxes The Coase theorem Internalising externalities versus recovering costs The role of litigation past experience and future potential Introduction The potential benefits of tobacco litigation Methodology The development of tobacco litigation from a US to a worldwide phenomenon Trends observed in cases delivered by courts in Europe Procedures likely to facilitate tobacco litigation Beyond litigation: alternative ways and means Introduction Taxation Tradable permits Levies and cost recovery mechanisms Regulation Other issues Concluding remarks Conclusions on the costing of smoking Conclusions on litigation Conclusions on other instruments Other observations Annex 1 Works Cited Annex 2 Method for calculation of the cost of smoking to EU public health care systems Annex 3 Examples of how externalities are addressed in EU policy iii

6 A3.4 Emission Trading Schemes Annex 4 Summary table of tobacco cases in EU Member States iv

7 Executive Summary E.1 This study In its second implementation report on the application of the Tobacco Products Directive the European Commission announced that it would commission a study on the best ways forward to strengthen product liability of tobacco manufacturers and importers in the EU, as well as their liability for financing the health costs arising from tobacco consumption. This is a scoping study set in that context. It examines: The costs of smoking to EU society summarising existing data and estimating the direct and indirect costs incurred by Member States health systems together with the economic and social costs incurred across the EU as a whole; The potential mechanisms and policies either currently or potentially available to recover the external costs that smoking has and continues to impose on Member State healthcare systems and economies; The potential role of litigation summarising liability law suits related to smoking and tobacco consumption in EU, looking at the differences in jurisdiction between the US and the EU law in general and with regard to the liability of the tobacco manufacturer, and outlining the potential areas for change in existing law to increase manufacturer liability in Europe; The potential role of other policy tools to internalise the external costs of smoking or to achieve cost recovery, considering their advantages and disadvantages. The study was commissioned by DG SANCO and completed by a team led by GHK Consulting working with the support of the University of Exeter in the United Kingdom and the Public Health Advocacy Institute in the United States of America. The original final report was submitted in December This is a 2012 update of the report which contains new, more up-to-date figures on the costs that smoking is causing to European healthcare systems. E.2 Estimating the costs of smoking to EU society (Chapter 2) Estimates of various elements of the social cost of smoking in the European Union have been made for this scoping study. The model from which these estimates are derived covers three areas where active smoking, and to a lesser degree passive smoking, have been shown to create external costs: Direct costs to European public healthcare systems, in terms of the estimated amount of public healthcare expenditure attributable to smoking in a given year, covering the six main smoking-related disease categories; Productivity losses to the EU economy due to increased absenteeism and early retirement attributable to smoking; and Premature mortality attributable to smoking in the six main smoking-related disease categories, expressed in monetary terms. Data scarcity, especially in relation to treatment costs, is a significant issue but with the methods and assumptions used: Public healthcare expenditure on treating smoking attributable diseases suffered by smokers is estimated at around 25.3 billion in 2009, which corresponds to about 2.9% of total healthcare spending in the EU27 and 0.22% of its GDP; Public healthcare expenditure on treating illnesses attributable to environmental tobacco smoking (ETS) is estimated at around 0.38 billion, which corresponds to 0.03% of total healthcare spending in the EU27 and 0.003% of GDP; Smoking related productivity losses (absenteeism and economic inactivity due to incapacity) cost the EU economy an estimated 7.3 billion in the year This is the equivalent of about 0.06% of EU 27 GDP; 1

8 Premature mortality attributable to smoking is estimated at 517 billion in 2009 on a willingness-to-pay (WTP) basis, corresponding to 4.4% of the Europe s GDP. All together these estimates suggest a total cost of about 544 billion in 2009, about 4.6% of the EU27 combined GDP. Public healthcare expenditure on treating smoking attributable diseases The costing model developed for this study was informed by a review of the existing literature on the cost of smoking, focusing on work conducted for the EU and in North America. Over 60 studies that estimated the external costs of smoking to society were reviewed. The health costs of smoking were estimated by reference to the impacts of medical conditions with a recognised causal link to smoking, drawing in particular on seminal work by the US Surgeon General and the International Agency for Research on Cancer. The model considers six disease categories: lung cancers; upper aerodigestive cancers; other forms of cancer; cardiovascular diseases; chronic obstructive pulmonary disease; and, acute respiratory illnesses. Whereas a set of other conditions such as problems of vision or dental problems can also be caused or aggravated by smoking according to academic literature, these conditions have not been included in this conservative estimate. The concept of relative risk of a smoker developing a disease associated with smoking as compared to a non-smoker - was used in calculating the proportion of cases in each of the key disease categories that may be associated with smoking, i.e. the smokingattributable fraction (SAF). The SAF is a measure of what proportion and how severely the population was estimated to have been exposed to tobacco smoke. The number of cases of smoking attributable diseases in individual EU Member States was calculated by multiplying the country SAF estimate with the total incidence of each disease for each country. Development of an attributable factor to cover the health effects of environmental tobacco smoke on non-smokers was not possible due to a lack of data on which to base estimates of what proportion, and how severely, the population had been exposed to tobacco smoke. Instead an estimate by the Smoke Free Partnership was used - that approximately 1.5% of the EU mortality for health conditions associated with smoking could be attributed to ETS exposure in the non-smoking population. The different underlying assumptions of the methods used to estimate public healthcare costs of smoking related diseases to smokers and the costs of ETS effects on non-smokers mean that results are not directly comparable. Public healthcare expenditure in 2009 on treating diseases caused by smoking in the six main smoking-related disease categories is estimated at around 25.3 billion, which corresponds to about 2.9% of total healthcare spending in the EU27 and 0.22% of GDP. Public healthcare expenditure on treating environmental tobacco smoke-related diseases among non-smokers is estimated at around 0.38 billion, which corresponds to 0.04% of total healthcare spending in the EU27 and 0.003% of GDP. An exhaustive review of national and international sources on the costs of treating smoking attributable diseases (SADs) produced comparable data only for a small subset of EU member states. Estimates of the costs to public healthcare systems are therefore based on total or per-case cost figures from the UK, Germany and the Netherlands, from between 2007 and The average proportion of expenditure spent on SADs in these countries was extrapolated to national healthcare expenditure statistics from the remaining EU member states. The estimated level of healthcare expenditure used to treat SADs was consequently relatively consistent across Member States, varying between 1.7% and 4.6% of total public healthcare spending. The estimates generated suggest that about 65% of the spending occurred in the four largest Member States, i.e. Germany, France, the UK, and Italy. Countries with high levels of healthcare expenditure relative to GDP such as Denmark, Ireland, the Netherlands or Belgium, as well as some 'new' Member States with a high 2

9 historic prevalence of smoking (e.g. Czech Republic, Slovakia and Hungary) seem to bear a heavier burden. 70% of the estimated treatment costs for cases directly attributable to smoking were for three sets of conditions cardio-vascular disease (36%), chronic obstructive pulmonary disease (CPD) (20%) and lung cancer (14%) cases. The average annual healthcare expenditure per patient for the selected disease categories is estimated to be around on the basis of UK and French treatment costs. Total productivity cost due to smoking Smokers have a higher rate of workplace absenteeism than non-smokers. An estimated 92.7 million days were lost in 2009 by employed adults in the EU27 suffering from the six main disease categories that are associated with smoking. Around 8.5% of these days (7.9 million) may have been lost directly as a result of smoking. Amongst these cases of directly smoking-attributable absenteeism, most days were lost due to cardiovascular diseases (59%), on the basis of detailed Austrian, German and Dutch statistics. Respiratory diseases followed with 21% and malignant neoplasms accounted for 20% of workplace absenteeism. Smoking attributable absenteeism cost the EU economy calculating with labour cost an estimated 1.2 billion in 2009, equivalent of 0.01% of EU 27 GDP. Productivity losses also accrue to the European economy through smokers incapacity. Of the estimated 8 million EU citizens between 40 and 64 years who are inactive due to illness (in early retirement or enjoying incapacity benefits), the incapacity is estimated to be attributable to smoking for around 202,000 persons, leading to an economic loss of 6.1 billion. The estimated costs of smoking-related productivity losses were concentrated in the higher wage Member States. The EU15 accounts for an estimated 61% of persons who are inactive attributable to smoking, but for 85% of the total economic costs. Overall, it is estimated that smoking-attributable productivity losses cost the EU economy 7.3 billion in the year This is the equivalent of 0.06% of EU27 s GDP. Monetised cost of premature mortality Peer-reviewed estimates suggest that around 695,000 of deaths recorded in 2009 in the EU27 (excluding Cyprus) can be attributed to smoking in the six main smoking-related disease categories (out of a total of 17.1 million). Acknowledging the difficulties to attach a price tag to the death of an individual, the study tried to monetise this loss. To value the cost of premature mortality due to smoking, a willingness-to-pay -based methodological approach has been used. Societies are willing to pay considerable amounts to save the life or to save one life year of an unidentified ( statistical ) individual. A value applicable for the EU as a whole was established by ExternE, a Commission research project, at 52,000 per person. It is calculated on the basis of life expectancy data source from Eurostat that in 2009 about 9.9 million years of life were lost due to smoking-attributable premature mortality. Applying the estimate from the ExternE project, this loss amounted to a monetised value of 517 billion for the EU27, which corresponds to about 4.4% of the EU s GDP. 69% of the monetised cost ( 355 billion) is concentrated in the six most populous Member States, i.e. Germany, the UK, France, Italy, Spain and Poland. Individual country estimates on the relative burden of premature death vary from 0.9% of GDP for Luxembourg to up to 15% in Hungary. In general, the burden on the poorer Member States is higher, considering that a uniform value of 52,000 has been applied to all countries, irrespective of their relative wealth. The 9 Member States with the highest estimated cost-to-gdp ratio in the calculations are all from the newly accessed Member States group. E.3 Policy tools for tackling externalities (Chapter 3) There are four principal approaches through which state intervention can tackle the market failures stemming from externalities - regulation, liability, Pigouvian taxes and tradable 3

10 permits. Under the regulatory approach, the state either directly sets the desirable level of production and/or consumption of goods or services, e.g. through quotas, or it exerts an indirect influence on the overall production and/or consumption through the regulation of the contextual factors. Direct regulation aims to eliminate or reduce the characteristics of the externality-causing product that causes the harm, and where that is not possible it sets limits on the level of production and/or consumption of an externality-causing product. For example, EC Directive 70/220/EEC has set limits on vehicles emissions to reduce the externalities they cause in terms of smog and climate change. Indirect regulation limits the exposure of individuals to externalities, rather than limiting the production or consumption of an externality-causing product. For example, congestion charging zones reduce the externalities caused by vehicle emissions, without limiting vehicle emissions at source. Neither form of regulation directly internalises the costs that companies or individuals impose on others; rather they reduce the scale of the externality (though regulation may result in companies and/or consumers incurring costs or experiencing higher prices). In the absence of perfect information, authorities estimate the appropriate level of regulation. This can lead to situations of either too much or too little production or consumption. Direct regulation also limits people s freedom of choice. The liability approach to internalising externalities rests upon the right of companies, individuals or the state to certain property. For example, an individual has the right to expect the products that they purchase to be safe; society has the right to access certain public goods, such as clean air. The party that violates the rights of the other party, and thereby causes damage to him, is required to pay compensation that is usually set by a court or negotiated in an out-of-court settlement. While harm caused to organisations and individuals is usually settled through civil law, public law is needed to define the claim of the state on the ownership of public goods. In civil law, the most prominent example of such settlements is general product liability. Modern environmental liability is an example of the principle being applied in public law. The government - or any other third party with appropriate powers can internalise external costs or benefits by imposing a tax or an extra charge on the activity or specific good which is responsible for the externality. The aim is to set the price that the producer or user faces when consuming the product at a level that includes all the marginal costs imposed on society. Strict application of the Pigouvian approach requires detailed information on how social costs and benefits change at different levels of consumption, and how price, as influenced by tax, will influence supply and demand. This information is in practice rarely available. Nonetheless Member States have introduced many different taxes and charges for environmental purposes. Environment related taxes accounted for 2.56% of the EU27 GDP in Ronald Coase showed trade in the externality is possible when ownership over the assets that are affected by the externalities of a specific action is clearly defined. When there are no transaction costs, bargaining will lead to an efficient outcome regardless of the initial allocation of property rights. Though these conditions are rarely met in practice, tradeable permit policies based on this approach are commonly used to govern the use of environmental resources using production and/or user rights. It is usually the state who claims ownership over the resources affected or the related externalities. The state may then auction or give out permits free of charge to use an established quantity of the resources in question or to produce an established amount of externality-effecting output (e.g. greenhouse gas emissions). These permits are made transferable between actors, creating a market. Tradable permit schemes are increasingly familiar to policy-makers because of their use in environmental policy. The first emission trading schemes were developed in the United States in the 1980s and 1990s, and were applied with success to cost-effectively reduce 4

11 emissions of sulphur dioxide and nitrogen oxides. The use of trading schemes has expanded to include emissions of greenhouse gases including CO 2 and water pollution. The various policy options vary in the way in which they interact with uncertainty. Pigouvian taxes provide price certainty but uncertain quantity outcomes. Tradable permit schemes provide certainty about the maximum quantity of (say) emissions but in the context of uncertainty about the price. Policy instruments designed to achieve recovery of costs ought to be considered separately from those targeted at an externality problem. A user charge may have an incentive effect similar to that of a standard Pigouvian tax (by raising costs and thus influencing consumer behaviour), but the strategic intent and the basis in law may well be different. User charge schemes are normally designed for the purpose of recovering the cost of a service and are set at a level sufficient to achieve that aim. This is not necessarily the same level as is appropriate to a Pigouvian tax. Insurance schemes, which can combine cost recovery objectives with concepts of risk and uncertainty, may be considered in the same way. E.4 The role of litigation past experience and future potential (Chapter 4) The European Community, as a signatory party to the Framework Convention on Tobacco Control, is subject to the commitments contained in the Convention to consider use of criminal and civil liability, including compensation where appropriate, as part of its tobacco control strategy. The Commission specifically requested that this study provide an evaluation of whether revising the Product Liability Directive could be envisaged to hold tobacco manufacturers liable for the financing of health costs arising from tobacco consumption. Tobacco litigation allows smokers, their families or other victims of tobacco consumption to sue tobacco manufacturers in order to be compensated for the harm they have suffered. Potential benefits of lawsuits against tobacco manufacturers include compensation, strengthening regulatory activity, publicity, documents disclosure and changing company behaviour. Tobacco litigation in North America The United States of America have a 50-year history of litigation against the tobacco industry. Tobacco litigation has been a tool in tobacco control strategies aimed at limiting the activities of tobacco companies and providing redress to persons who have been injured as a result of their use of tobacco products. In recent years a movement away from classic assumption of the risk to comparative negligence defences has provided the opportunity for claimants to get to trial and produce evidence of tobacco wrongdoing. The information released to the public during trials triggered new types of tobacco litigation. Personal injury law suits continued, but the claimants lawyers had better evidence and could develop more complex cases. Law suits based on the development of safer cigarettes, environmental tobacco smoke and the marketing of light cigarettes became more common. After several decades of development the US is now in an era of victorious claimant suits for personal injury and wrongful death, with awards of compensatory and punitive damages. The US saw class actions emerge, but also a shift in tobacco litigation from the private to the public sector as state government entities began to file consumer protection suits against the tobacco companies claiming unfair or deceptive commercial strategies, and attempted to recover the health care costs of treating diseases caused by smoking. In 1994 Mississippi sued the tobacco companies to recoup its health costs. A settlement was reached, and then followed by Florida, Texas and Minnesota. In these settlements the tobacco industry agreed to pay USD 35.3 billon over 25 years. In 1998, the remaining 46 states and five territories signed the Master Settlement Agreement with the four largest tobacco companies, which agreed to pay over USD 200 billion over the same period, and to 5

12 restrict outdoor advertising, sponsorship of public events, distribution of promotional merchandising, targeting underage smoking and political lobbying. Millions of industry documents were made public. The US federal government subsequently sued the tobacco industry, accusing the major tobacco companies and its two trade organisations of conspiring to actively defraud the public about tobacco s addictive nature and adverse health effects in addition to the industry s collective practices such as manipulating tobacco levels, misleading the public about light or low tar cigarettes and targeting children. In August 2006, a District Judge ruled that the defendants had engaged in racketeering over the span of decades. The Court rejected the cigarette companies long-standing strategy of stating that everybody knew that their products were dangerous while simultaneously claiming that nobody knows what causes lung cancer and other diseases, The Judge ruled that on a series of remedies, such as the prohibition of brand descriptors such as low tar, light, ultra light, mild, natural and any other words which could reasonably be expected to result in a consumer believing that smoking the cigarette brand using that descriptor may result in a lower risk of disease or be less hazardous to health. The judge s findings and most of the remedies were upheld by the DC Circuit in May Tobacco litigation is now seen in the United States as an important tool in tobacco control strategies aimed at limiting the activities of tobacco companies and providing redress for tobacco-related harm. Litigation has also led to important legislative developments in Canada, as exemplified most strikingly by the Tobacco Damages and Health Care Costs Recovery Act adopted in 2000 by British Columbia. This permits the Province to sue in a single action based on its expenses for all tobacco-related diseases, without permitting defences based on specific facts about individual smokers. It also allows the use of epidemiological evidence to establish damages, and contains provisions facilitating private litigation. Tobacco litigation in Europe Tobacco litigation has had a much shorter history in Europe than in the United States, but there is evidence that it is developing. Cases have been mounted against tobacco manufacturers in several EU Member States. Most of them have exempted the tobacco industry of all liability. Most prominent cases in the Member States have been individual claims - proceedings launched by aggrieved smokers or their families for wrongful death or personal injury suffered as a result of the detrimental effects which smoking has had on their health. Collective claims and claims mounted against tobacco manufacturers by health care bodies are less common and less successful than in the US. Claimants have put forward arguments against tobacco manufacturers relating to: (i) the existence of a defect in cigarettes (product liability); (ii) to the existence of a blameworthy conduct of the defendant (fault-based liability); and (iii) to the failure of tobacco manufacturers to provide sufficient and reliable information to consumers regarding their products (failure to provide adequate information). Product liability Product liability is a specific liability regime derived from the Product Liability Directive (PLD), Directive 85/374 (as amended). This a regime based on the liability without fault on the part of the producer of a defective product: it is the defect in a product that triggers liability rather than the conduct of the defendant. The argument has been made in the context of tobacco litigation that cigarettes and other tobacco products are defective, that is they do not provide the safety which a person is entitled to expect. The definition in the PLD of the notion of defectiveness is therefore founded upon consumer expectations of safety. To date, the argument that cigarettes are defective as such has tended to fail. Member State courts have held that cigarettes could not be considered defective simply because they presented a danger to human health. Courts have accepted the argument that it is reasonable to expect that cigarettes and other tobacco products will be used for smoking and that consumers know that smoking entails certain health risks. 6

13 The role of information in determining whether a product is defective is paramount. Courts have noted that because warnings about the dangers related to smoking must now be printed onto cigarette packages, claimants cannot argue that they do not know that smoking has detrimental consequences on human health. US courts have adopted a similar reasoning. Courts have generally been unwilling to say that cigarettes are inherently dangerous and juries tend to blame the smokers unless given a reason to blame the cigarette companies more. The PLD could be invoked for fire lawsuits. If a tobacco manufacturer designs a cigarette to burn in the absence of puffing and a victim is caught in a fire caused by the cigarette in question, there is a strong argument that the cigarette is defective, as it does not provide the safety which a person is entitled to expect. Beyond such narrowly defined circumstances, however, neither the PLD nor the Product Safety Directive is likely to offer much comfort to aggrieved smokers and other victims of tobacco. Fault-based liability Fault-based liability requires that the defendant has caused damage to the claimant and that the act which has caused the damage in question is blameworthy. The argument has been made that tobacco manufacturers have caused personal injury and/or wrongful death by selling their products to smokers but it has not been very successful in Europe. National courts have not adopted a uniform approach to the question of the blameworthiness of the defendant's conduct. Some have ruled that, insofar as it is not forbidden to manufacture and sell cigarettes containing addictive ingredients, the business of tobacco companies does not amount to a faulty behaviour which would fall short of the requirements of tort law. This is all the more so as the detrimental effects smoking may have on smokers health are well known. There is, to our knowledge, just one exception in the case law of national courts in Europe to the rule that tobacco manufacturers should not be held liable, on the basis of national tort law, for the damage arising from smoking: the 2005 Stalteri judgment of the Court of Appeal of Rome. In this case experts determined that Mr Stalteri s death was attributable to smoking with a probability of over 80%, that no other potential defendants (other than BAT Italia) could have contributed as he had only smoked one brand of cigarettes for 40 years, and that the defendant had not fulfilled its duty of care towards Mario Stalteri, relying heavily on the defendant s level of knowledge of the effects of the product. To conclude that BAT Italia had not fulfilled its duty of care towards Mario Stalteri, the court relied heavily on its level of knowledge: as a tobacco manufacturer, it could not have ignored the scientific studies that tobacco contains toxic substances producing harmful effects on the lungs. The Rome Court of Appeal concluded that "because tobacco, having as its only destination consumption through smoking... contained a potentially harmful charge... the entity was obliged to use every precaution to avoid that the risk became a concrete injury". Article 2050 of the Italian Civil Code deals with the exercise of dangerous activities and reverses the burden of proof by requiring that the defendant should prove that it has adopted all appropriate measures to avoid the damage, which BAT Italia - the court concluded - had failed to do. The court added that the claimant's choice to smoke was irrelevant, since the defendant had not established that they had adopted a "conduct suitable to avoid the harm": Mr Stalteri should have received specific and direct information from BAT Italia. Finally, the court upheld the claimant's contention that there was a causal link between the failure of the defendant to warn Mr Stalteri of the dangers of smoking and his death of a lung cancer. BAT Italia was therefore condemned to pay EUR 200,000 damages (plus costs). This interpretation of the duty of care of tobacco manufacturers stands in stark contrast with the approach adopted by other European courts, especially in Germany and in France, where companies are held to have fulfilled their duty of care once they have complied with the labelling requirements in force. The difference may be explained partly by the fact that French and German civil codes do not contain comparable provisions to Article 2050 of the 7

14 Italian code, but also by the fact that most courts in EU member states have tended to hold smokers responsible for their loss. This is all the more so as the detrimental health consequences of smoking are widely known by smokers and the public at large, not only because of the compulsory warnings affixed on all cigarettes packages but also because of the information made widely available to the public on the media. Lack of sufficient and reliable information The need to provide adequate information to consumers on the products they buy is a recurring theme in tobacco litigation. The amount and the nature of the information provided to consumers shape product liability law and general tort law and are relevant in assessing both whether cigarettes are defective products as well as whether a tobacco manufacturer has failed to act towards its customers with sufficient care. Prevention being better than cure, the "right to information" is central to the model of consumer protection set up at Community level. Requiring that information be both sufficient and reliable places the onus on consumers to decide what is best for them. Several legislative instruments therefore regulate the provision of information to consumers. They include Directive 2005/29 on unfair commercial practices (which introduces the first EU-wide ban on all unfair business-to-consumers commercial practices), Directive 2033/33 on the advertising and sponsorship of tobacco products and Directive 2001/37 on the manufacture, presentation and sale of tobacco products. Sufficient information In the cases based on facts which occurred before health warnings became compulsory, all national courts apart from the Rome Court of Appeal in the Stalteri case have tended to reject arguments based on the failure of tobacco manufacturers to provide information on their products. Now that the Tobacco Products Directive is in force in all the Member States, tobacco manufacturers are under a duty to affix warnings to their products. If they fail to do so, they are in breach of statutory requirements. That does not necessarily mean, however, that causation between the damage and their failure to inform would be established. One could argue that this case law does not take account of the fact that the warnings required are not sufficient to allow consumers to fully grasp the detrimental health consequences of smoking. The standard of care expected of tobacco manufacturers could be redefined by reinforcing the information requirements laid down in the Tobacco Products Directive. One could further argue that the many addictive substances present in cigarettes may not even allow the already addicted smoker much choice and that information is unlikely to address the problems they encounter. Reliable information The question has arisen in many Member States whether tobacco advertisements for "light" cigarettes are misleading, insofar as they wrongly minimise the detrimental effects of tobacco on health. Courts have not adopted a uniform approach to this question: some of them have held that "light" cigarettes entail a smaller risk to health, notwithstanding evidence to the contrary, while others have accepted that smokers are misled by such claims and loose the opportunity to freely choose an alternative - though claims have tended to fail for lack of a causal link between the damage and the use of the word "light". The situation in Europe therefore differs markedly from the situation in the United States. Claims for "light" or "less toxic" cigarettes could be prohibited. The Tobacco Products Directive bans their use on the packaging of tobacco products. The Tobacco Advertising Directive bans all forms of tobacco advertising and sponsorship with cross-border effects. For all other forms of advertising and sponsorship, the Unfair Commercial Practices Directive provides a basis for prohibiting such claims. Causation Even if it was assumed that a tobacco manufacturer had acted in a blameworthy manner or that cigarettes were defective products, the claimant would still need to establish the 8

15 existence of a causal link between the defendant's conduct or the existence of the defect and the damage suffered. Causation has proven an insurmountable hurdle in most tobacco cases. Issues of causation may be extremely complex: several smoking-related diseases may be explained by a variety of factors, smoking being one of them (others include genetic predispositions, living environment, unhealthy diet, lack of exercise). There is no uniform approach to questions of causation in Europe. Some courts have been willing to accept the existence of a causal link, in particular in Finland and in Italy. Nevertheless, many of them have rejected the existence of such a link on the ground that the claimants' conditions could have been triggered by risk factors other than smoking. In the McTear case, the Scottish court even declined to accept epidemiological evidence to prove individual causation. This is in stark contrast with the approach of US courts which treat the efforts by the tobacco industry to deny the relationship between smoking and disease as an example of their pattern of fraudulent conduct. The Canadian Province of British Columbia has gone even further following the adoption of the Tobacco Damages and Health Care Costs Recovery Act in 2000 which exempts the government seeking to recover the cost of health care benefits on an aggregate basis from proving the cause of tobacco-related disease in any particular individual insured person. The existence of causation may be all the more difficult to establish conclusively as courts in Europe have often held that what caused the damage was not so much the defect in the cigarette or the defendant's conduct as the excessive smoking of the claimant. By electing to smoke, smokers have been held to have taken a conscious health risk. Alternatively, some courts have decided that the smoker has contributed to his own loss and that his contributory negligence should lead to the annulment, or the reduction in, the award made. In the United States, juries tend to blame the smokers unless given a reason to blame tobacco manufacturers more. Defence lawyers are generally successful in turning cases into trials of the claimant, unless the claimant has introduced damning evidence of industry misbehaviour. American lawyers experienced in tobacco litigation have drawn two conclusions: it is preferable to avoid going to trial unless, first, it is possible to adduce substantial evidence of industry wrongdoing and, secondly, the jury is permitted to find the claimant partially at fault. Causation is even more difficult to establish in cases of passive smoking. Even though experts all concur that second-hand smoke exposure contributes to a range of diseases, that does not mean that a claimant can adduce conclusive evidence that the disease he suffers from has been caused by exposure to second-hand smoke. Consequently, regulation provides a more promising avenue than tort law, even though litigation (mainly against employers rather than tobacco manufacturers) has had a role to play in prompting regulatory change. Possible changes to the existing Community legislative framework with a view to facilitating tobacco litigation Some changes might facilitate tobacco litigation: Amending the Product Liability Directive: a provision could be inserted in the PLD stating that cigarettes and other similar tobacco products are defective, notwithstanding the information provided to consumers. However, this is unlikely to be productive in light of the fact that cigarettes are lawfully placed on the market and that the existence of a defect does not exempt the claimant from establishing the existence of a causal link between the damage and the defect. Amending the General Product Safety Directive: a provision could be inserted in the GSPD that cigarettes and other similar tobacco products are unsafe and shall therefore not be placed on the market. This would be highly charged politically and very unlikely to be accepted by Member States. Shifting the burden of proof: a less drastic proposal would be to shift the burden of proof and require that the manufacturer rather than the consumer establish that it has fulfilled 9

16 its duty of care towards him, as Italy has done in relation to dangerous activities. The duty of tobacco manufacturers to disclose sufficient and reliable information could also be reinforced and the Tobacco Products Directive amended accordingly. Procedural hurdles Even if claimants manage to overcome hurdles of substantive law, they are still likely to face obstacles of a procedural nature which could limit their chances of success against tobacco manufacturers. The 50-year tobacco litigation history in the United States indicates that cases against tobacco manufacturers tend to be extremely onerous, first because of the costs involved in launching proceedings and, secondly, because of the difficulties involved in gathering the necessary evidence against them. The United States have certain procedural mechanisms in place intended to address these obstacles and ensure a better balance between the parties. They include the use of contingency fees, punitive damages and class actions (to address the issue of costs) and the use of pre-trial information tools such as discovery (to facilitate the gathering of necessary evidence). Even though the Community does not have the required powers to adopt legislation harmonising the laws of the Member States in relation to all these aspects of litigation, it is necessary to bear their importance in mind if tobacco litigation strategies are to be effective. The legality of a Community intervention would have to be assessed in light of the Court's case law on the scope of Community competence. The discussions currently taking place on the introduction of some form of collective redress for consumers could potentially play a part in improving the situation of smokers or their families involved in tobacco litigation. E.5 Beyond litigation: alternative ways and means (Chapter 5) Recognising that this is a scoping report that is intended to inject some innovative thinking into the policy process, consideration is given to how taxation, tradable permits, levies and regulation tools might be used to address the problem of smoking externalities. Some of the options outlined are radical, untested and may not be practically or politically feasible. But starting from a first-principles analysis of the problem, each has a theoretical potential to address some aspect of the problem. Taxation Use of a Pigouvian tax is, in practical terms, the most straightforward policy instrument for internalising the costs of smoking in the EU. The principle (i.e. of taxation of tobacco) is already established. The legislative base and associated systems for collection are already in place. The additional administrative burden on both business and public administration would be minimal. As taxation remains a Member State competency, there is currently a set of national tobacco taxes (at widely different rates) rather than a single, pan-eu instrument. Some may be too low to fully internalise the costs of smoking at a national level. Progressively raising the minimum harmonised rate across the EU would have an impact equivalent to a centrally administered instrument. There is a binding EU legislative structure in place regulating minimum levels of excise duty on tobacco products. Currently excise duties levied on cigarettes must account for at least 57% of price, and must be at least 64 per 1,000 cigarettes. But the level of excise duties still varies extremely widely. In 2008 there was a nearly 600% difference in the excise burden for cigarettes between the lowest and the highest taxing Member States. Tax revenues accrue to central finance ministries for general purpose use and there is only an indirect link between tobacco taxes/duties and the funding of public health care systems. The financing of public health care is particular to individual Member States. Establishing a direct link between health care finance and smoking requires a different kind of policy. However, the infrastructure for application of a Pigouvian tax is already in place. Further increases in excise tax could result in increased black market activities, though 10

17 other policy instruments that raised market prices would provide similar incentive effects. Tradable permits Application of the tradable permit model to the European market for tobacco products would mean creation of tradable permits to either (i) consume, (ii) place on the European market or (iii) manufacture cigarettes (and other tobacco products). Under a hypothetical direct Coasian approach, permits establishing the right to smoke a given amount of cigarettes would be auctioned amongst consumers of tobacco products, as it is the consumer who enjoys the benefit from consumption and inflicts at the same time the damage to himself and his environment. A more plausible option is an indirect, supplier-based, approach to the problem in which the EU or Member States issued permits to companies for the right to place on the market a given amount of cigarettes or other tobacco products. These permits would be auctioned amongst manufacturers and importers. This would in principle provide a mechanism for determining, and reducing, the total number of cigarettes etc. sold (excluding black market trade). The number of permits could be set with a view to reaching a permit price that matched the estimated external cost per cigarette placed on the market, or to achieve a common target for total cigarette consumption, which could change over time (e.g. to meet targets for reducing smoking prevalence by 2% per year as established in the European Strategy for Tobacco Control of WHO Europe). It would require new legislation and significant work would be required to further explore the implications and feasibility of the concept. Its net impact on price (and thus internalisation of externalities) would depend on factors such as the parallel changes in Member States tobacco duty, and the level of scarcity of permits (which influences the price). The net impact on public revenues and incremental revenues available to finance tobacco-related healthcare expenditure would be influenced by permit scarcity and the level of permit auctioning. The efficiency of the system would be affected by the degree of competition in the marketplace. If markets are dominated by a few large companies they may be vulnerable to manipulation. Levies and cost recovery mechanisms An alternative to tax and permit models is to establish a more direct link between consumers of tobacco products and the systems that incur additional costs, such as public health care providers. These links already exist in private insurance and finance markets, where companies factor the impacts of smoking into their risk models, and thus into the prices available to smokers for particular products. Hypothetically it would be possible for public health care providers to achieve a similar outcome by establishing a direct financial link to smokers (or tobacco product manufacturers) via a levy or licence arrangement that was designed to recover the additional costs arising from smoking. This kind of levy/licence model is similar in effect to the tax and tradable permit systems discussed above but differs in that its principal purpose is the recovery of specified healthcare costs, rather than internalisation of a wider set of social costs; and it implies a direct compensating transfer to the health care system, rather than financial flows being mediated via government finance ministries and national budgeting processes. This is thus more in the nature of a charge than a tax. Under the levy model, a fee (levy) would be applied to tobacco products at point of sale or some other point of obligation higher up the supply chain (e.g. whether tobacco duties are currently applied). The levy applied to each unit sold would be set at a level sufficient to ensure that total levy income for the year was sufficient to cover the estimated additional health care costs attributable to smoking in the most recent year for which accounts had been prepared. Under the licence model, licensed vendors of tobacco products would be required to pay a fee for that licence at a level linked to the quantity of products sold. The obligation to hold a licence could be placed at one of a number of points along the supply chain. Placing it 11

18 higher up the supply chain (e.g. where excise duties are payable) would reduce the number of licences to be issued and facilitate auditing. A key challenge for the cost recovery (and for any policy set with explicit reference to observed costs) is attribution of the disease burden and calculation of health care expenses. While there may be a firm statistical relationship between smoking and risk of contracting a particular disease, it is much more difficult, perhaps impossible, to attribute a specific person s disease to their smoking history. And at present, many European public health care systems seem to lack the activity-based costing models required to substantiate estimates of additional cost. The time-lags between smoking and the onset of smoking related disease create further difficulties. So, with both quantity and price open to dispute, the levy could be vulnerable to challenge. The model may also be difficult to reconcile with existing models of public health governance and public finance. There would be issues of how to determine the distribution of funds across the health care system, and the possibility of actors gaming the system to increase income. Regulation A conventional approach elsewhere in the economy is to reduce the scale of harm caused by a product by tightening regulatory controls on aspects of the product which causes damage. Thus vehicles are subject to tighter emissions standards, and chemicals are subject to higher standards of safety testing. Today s tobacco control strategies embody an assumption that prohibition of tobacco on grounds of its health impacts is not a viable option at this point in time and that ultimately consumers have the right to make an informed choice (notwithstanding the addictive nature of the product). As a general case, public policy can be used to reduce the social costs of products or processes by providing implicit or explicit encouragement to manufacturers to innovate and put cleaner, less damaging products onto the market. The discussion of policy options in this chapter has treated tobacco products of a particular kind as uniform goods, i.e. it has assumed that all cigarettes (for example) are equal in terms of their impacts and ultimate costs. However, if there was significant product differentiation in the market, with some cigarettes being less harmful than others, then the preferred policy mix might well be different. The proposition of a healthier cigarette is one that many in public health would struggle with. The historical precedents are not encouraging - in the 1970s and 1980s, the tobacco industry made claims that light and low tar cigarettes were safer but these products were subsequently shown to be as dangerous as conventional cigarettes because of the way in which smokers used them. Proving that a new kind of cigarette is associated with lower levels of harm is problematic, much more so than showing that an industrial product generates lower levels of a pollutant. However, if such products came to market they might stimulate greater differentiation in policy. The issue of how public policy could (passively or actively) support a transition within the market to lower impact tobacco products could be further explored. Justice and equity The tax and tradable permit models are both grounded in the proposition that the polluter should pay, and that by making sure that the prices in the market reflect the full costs to society of consumption of the goods in question then overall efficiency, and social justice, are improved. The time-lags associated with smoking-related disease pose some challenges to this model. The burden on the health care system today is a consequence of decades of smoking history so if the costs (i.e. the tax level or permit price) are set with reference to current health and other costs then, in effect, today s smokers are compensating society for the costs of choices made by smokers in the past. But if the costs are set with reference to projected future health care costs associated with present smoking patterns then the revenues may not match current social costs. 12

19 E.6 Final remarks (Chapter 6) Health costs in a world without smoking The economic analysis presented in this report provides an estimate of the costs incurred by European public health systems when treating smoking-related diseases in a specific year (2000). This information is helpful in considering certain policy questions about, for instance, the relationship between tobacco duty revenues and observed health care costs, or the level of costs that health care providers might seek to recover from manufacturers. But it is not possible to say with certainty whether health service costs would have been higher or lower had European society been free of smoking for the past 50 years with this model. For that, a detailed simulation of a set of hypothetical conditions would be required, including assumptions about longevity and disease prevalence among the people who would be alive today had they not died from smoking-related causes. Forward-looking scenario studies, which combine known historical patterns of smoking with scenarios for future smoking prevalence, are perhaps a more useful line of research in such cases allowing estimation of the future health, pension and other costs under different conditions. This study does not, therefore, provide answers to questions about the lifetime health costs of smokers as compared to non-smokers. Health economics and data for better policy Public domain information on the economics of public health care systems and the economic burden of individual diseases are surprisingly scarce given that the EU spends 7% of its GDP on health care services. The deficit of data on the costs of public health care services in the European Union is a severe impediment to construction of robust estimates of the cost of smoking. Exhaustive searches of the literature, combined with extensive consultations with national and international agencies, yielded very few examples of activitybased costing of the kind needed for this kind of analysis. Demand for health and social care services is projected to rise substantially in the decades ahead as the demographic structure of the EU population changes. The total cost is set to increase substantially too. A better understanding of the economics of treatments and services seems essential. 13

20 1 Introduction 1.1 The purpose of the project This study was commissioned by DG SANCO of the European Commission. It has been completed by a team led by GHK Consulting working with the support of the University of Exeter in the United Kingdom and the Public Health Advocacy Institute in the United States of America. In its Article 19 on product liability, the Framework Convention on Tobacco Control (FCTC) asks all Parties to consider taking legislative action or promoting their existing laws, where necessary, to deal with criminal and civil liability, including compensation where appropriate. The Community is a Party to the FCTC, but has not yet really explored this article so far. In its recent resolution on the Green Paper "Towards a Europe free from tobacco smoke: policy options at EU level" 1, the European Parliament asked the Commission to apply product liability in respect of manufacturers and to introduce manufacturer liability for the financing of all health costs arising from tobacco consumption. In response to both, the Commission announced in its second implementation report on the application of the Tobacco Products Directive that it would commission a study on the best ways forward to strengthen product liability of tobacco manufacturers and importers in the EU, as well as their liability for financing the health costs arising from tobacco consumption. This is a scoping study set in that context. It examines: The costs of smoking to EU society summarising existing data and estimating the direct and indirect costs incurred by national health systems in 27 Member States together with the economic and social costs (lost productivity and premature mortality) incurred across the EU as a whole; The potential mechanisms and policies either currently or potentially available to actors (Member State governments, NGOs or other organisations) to recover the external costs that smoking has and continues to impose on Member State healthcare systems and economies; The potential role of litigation summarised liability law suits related to smoking and tobacco consumption in EU, looking at the differences in jurisdiction between the US and the EU law in general and with regard to the liability of the tobacco manufacturer, and outlining the potential areas for change in existing law to increase manufacturer liability in Europe; and The potential role of other policy tools to internalise the external costs of smoking or to achieve cost recovery, considering their advantages and disadvantages. 1.2 Approach and acknowledgements This report draws on extensive desk-based research and consultations with specialists in law and health economics on both sides of the Atlantic. The economic analysis summarised in Chapter 2 benefited from inputs made by professional health economists in the EU and North America, and from the assistance offered with data and research by staff of a number of public health organisations, non-governmental organisations and government officials. The authors would like to acknowledge in particular the contributions and support received from Dr Jürgen Rehm of the Centre for Addiction and Mental Health, Toronto and the University of Toronto, and Dr Jill Boreham of the Clinical Trial Service Unit (CTSU) at Oxford University, as well as from staff at the OECD, WHO Europe, Action on Smoking and Health (ASH), the Institute of Alcohol Studies, and from the Health Evolution Monitoring (HEM) Closing the Gap project team at the Maria Sklodowska-Curie Memorial Cancer Centre and Institute of Oncology in Warsaw. 1 Adopted 24 October