Amendment 35 Taxing Tobacco Users to Fund Special Interests

September 6, 2004 by Linda Gorman · Comments Off
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IP-9-2004 (September 2004)
Author: Linda Gorman

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Proponents of the Tobacco Tax initiative claim that increasing taxes on tobacco products will improve health care for children, help smokers by making them quit, and help taxpayers by making smokers pay for the extra health care that their habit makes them consume. These claims are grossly misleading. At bottom, Amendment 35 is a reverse Robin Hood, an attempt to take money from the relatively poor for the benefit of the relatively rich who populate a handful of special interest groups. The Amendment frees spending by these groups from both TABOR and normal legislative oversight, requires that spending levels increase in a fashion reminiscent of Amendment 23, and gives them eternal control of the new tax revenues.

1.1 Amendment 35 will increase waste in anti-tobacco programs. Even though there a huge amount of waste at current levels of spending, Amendment 35 allocates almost $70 million in additional funds to antitobacco research and education. In one recent representative anti tobacco effort, anti-tobacco activists received $1 million in state money to write and publish a new book called the Berenstain Bears and the Sinister Smoke Ring in English and Spanish. It was distributed to every 4th grader in the state in hopes that it would “increase family interaction around anti-tobacco messages.” The project evaluation concluded that the book did nothing to change 4th grade attitudes about smoking. Colorado 4th graders, it turned out, hated cigarettes before they got the book. They also hated cigarettes after they got the book, even though most sensible families apparently threw it out without reading it, let alone interacting around its messages.

1.2 Amendment 35 will take from the relatively poor to give to the relatively rich. Voting more money for such wasteful programs is even more distasteful when one considers that the money funding the people who propose such things will primarily come from people with relatively lower incomes and education. Estimates for Colorado suggest that smokers make up 30 percent of people with less than a high school education. Average annual income for high school dropouts peaks at about $24,000. With the Amendment 35 increase, a pack a day smoker will end up paying about 1% of his income in additional taxes. Most of that money will be wasted on expanding health and anti-tobacco programs that provide nice salaries for those who run them and very few benefits for those who pay the taxes.

Tobacco tax advocates say that robbing the poor to pay the rich is justified because smokers burden taxpayers with higher health care costs. In fact, the consensus of the reputable studies of the costs that smokers impose on taxpayers is that at current tax levels smokers already pay more in taxes than they consume in public services.

1.3 Amendment 35 will increase youth access to tobacco by stimulating black markets. Because Amendment 35 increases state cigarette taxes by 320 percent, it gives smokers at all income levels an incentive to abandon high priced legal cigarettes for cheaper black market ones. Colorado law prohibits the sale of tobacco products to minors, a law that legal cigarette sellers have a good record of observing. People selling illegal cigarettes are disobeying the law already. As the markets for illegal drugs have shown, people in illegal markets have no qualms about selling their product to children. If Amendment 35 passes, there is a real possibility that children will find it easier to obtain tobacco products.

Displaying an astounding lack of common sense, tobacco tax advocates are steadfast in the denial of black market effects. Citizens for a Healthier Colorado, the most visible organization backing Amendment 35, says that “immediately after a substantial increase in the price of tobacco, there may be an initial effort by smokers to go across state borders to buy cigarettes. But those cross-border purchases generally fade as smokers go back to their usual habit of buying cigarettes.” The Campaign for Tobacco-Free Kids, a Robert Wood Johnson Foundation funded backer of Amendment 35 efforts, opines that smokers who stockpile to avoid cigarette tax increases soon “tire of driving across state border [sic] or going to the internet to buy cheaper cigarettes and return to the convenience of normal full-tax purchases in their own state.”1

One wonders just where they think that state is. Britain has the second highest cigarette taxes in the world. It is also an island, a fact that makes driving to other jurisdictions even more inconvenient than in the United States. Contrary to the predictions of tobacco tax advocates, the proportion of untaxed cigarettes consumed in the country has been rising along with its taxes. It is now approaching 30 percent, smuggling is big business, and armed robbers routinely hijack cigarette cargos.

In fact, illicit cigarette trafficking is a global business involving an estimated one third of worldwide cigarette exports. New York City has one of the highest cigarette taxes in the United States. Like Britain, it is awash in illegal cigarettes brought to smokers’ doorsteps by organized crime, terrorist groups, street gangs, and small bootleggers. Untaxed cigarettes can be ordered via the internet from foreign retailers and from Indian reservations located in the U.S. Retailers located outside of state and national jurisdictions have little incentive to monitor youth access tobacco. In one experiment, youths ordering over the internet were successful 90 percent of the time.

1.4 Amendment 35 will do little to stop smoking. Virtually all of the studies on the effect of higher prices on smoking behavior ignore the black market and thus overestimate the effects that higher prices have on smoking behavior. When prices go up, changes in retail tobacco sales are assumed to reflect reduced tobacco consumption. In fact, a number of smokers simply switch to illegal retailers. The few studies that try to take illegal sales into account have concluded that increasing cigarette taxes has a small effect on smoking behavior and virtually no effect on the number of young people who pick up the habit.

1.5 Amendment 35 will gives more money to federally subsidized health care providers already charging more than private physicians. Amendment 35 proponents also claim that taking funds from smokers will pay for medical care for the uninsured. In fact, most of the money will be directed to activities designed to increase state spending on Medicaid without increasing the Medicaid budget. An estimated $80 million is earmarked for increasing enrollment in programs that rely on Medicaid dollars to provide health care for real people. Funding enrollment increases does not
funding actual health care. An estimated $33 million will go to Section 330 Community Health Centers. Community Health Centers are federally subsidized clinics that charge more than cash paying patients pay for private office visits. Under federal law, Colorado Medicaid already has to pay them 5 times more than it pays private physicians for the same service.

None of these problems trouble the special interests funded by Amendment 35. At present, they are on an equal footing with other groups when they petition the Colorado legislature for funds. Amendment 35 would end this. To its credit, the Colorado General Assembly has historically resisted profligate spending on anti-tobacco programs and unreasonable Medicaid and CHIP expansions.

1.6 Amendment 35 will fund special interests Frustrated by the sensible caution of the Colorado legislature, Amendment 35’s authors are seeking to create a stream of tax revenue for their exclusive use that is not controlled by the General Assembly. Rather than going to the legislature, most of the money from the tobacco tax goes directly to select subdivisions of executive branch agencies like the Department of Public Health and the Department of Health Care Policy and Financing. Should they so desire, sympathetic staffers can frame program requirements so that specific agendas are met and the money is directed to specific interest groups.

Defenders of Amendment 35 argue that it is right and just to burden lower income smokers because they impose costs on other people through tax funded health programs. This is not the story that the same anti-tobacco proponents tell government officials when they want more money from the legislative. When budgets are on the line tobacco users are portrayed as helpless sufferers unable to pay for the high priced medical help needed to wrest themselves from the clutches of an addictive scourge more powerful than cocaine or heroin. As the flip-flop on smokers shows, at bottom Amendment 35 is a cynical exercise in taxing an unpopular minority for the benefit of politically powerful special interest groups. Those groups seek to use tax money to free their lobbying efforts both from legislative oversight and the necessity of constantly seeking donated funds. If they succeed, other unpopular minorities should expect similar treatment.

Medicaid Drug Formularies

April 21, 2002 by Linda Gorman · Comments Off
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IP-6-2002 (April 2002)
Author: Dr. Linda Gorman

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Executive Summary

Medicaid spending is projected to exceed $276 billion in 2003. It will be larger than Medicare. Some experts predict that without significant reform it will bankrupt the states by 2020.

Spending on prescription drugs is neither the largest nor the fastest growing category of Medicaid spending. In Colorado, Medicaid spends much more on hospital services, personal health care, nursing homes, and physician services than on prescription drugs.

Because prescription drugs reduce other health care expenses, controlling Medicaid prescription drug expenditures by arbitrarily limiting physicians’ freedom to prescribe risks increasing Medicaid spending in other categories.

  • Using “clot-busters” to treat strokes saves about 4 times the drug price by reducing other health care costs. According to one estimate, using atypical antipsychotics to treat schizophrenia cost about $4,500 a year and saved about $73,000 a year in institutional treatment costs.”
  • A 1993 paper examining formulary restrictions in 47 Medicaid programs found that “a restricted formulary may reduce prescription drug expenditures by approximately 13 percent, on average. Because of service substitution, however, such a policy does not translate into reductions in total program expenditures. Savings in the drug budget appear to be completely offset by increased expenditures elsewhere in the system.”
  • A 1996 survey of 200 physicians in the Tennessee Medicaid managed care program found that two-thirds of those forced to change their patients’ prescriptions reported serious adverse consequences including death, strokes, and adverse drug interactions. In British Columbia, 27% of physicians surveyed reported admitting patients to hospitals as a result of problems created by government mandated prescription drug substitutions.
  • Medicaid populations have a higher proportion of people with fragile health. People in poor health often need the reduced side effects common to newer, more expensive drugs.

The evidence suggests that drug utilization controls typically increase overall spending. The Michigan and Florida formulary programs lack any mechanisms for tracking their effects on overall spending or patient care.

  • In 1992, the Health Care Financing Administration ran demonstration drug utilization review programs in Washington State and Iowa. The programs had no “measurable effects in reducing the frequency of drug problems or on utilization of and expenditures for prescription drugs and other medical services.”
  • According to the Kaiser Commission on Medicaid and the Uninsured, neither the Florida nor the Michigan Medicaid formulary programs include any mechanism to track the overall costs and benefits or their drug formulary programs.
  • An independent evaluation of the Florida program found that drugs with the highest denial rates were agents that “are often appropriate for use by patients with multiple illnesses, and persons who are medically complex and at high risk from adverse effects of drug therapy or inadequate treatment of their disease.

Formulary laws politicize medical care and promote unequal treatment by exempting politically powerful patient groups, primarily those with severe mental illness or AIDS, from their strictures. The poor, and debilitated, those who are ill-equipped to protest treatment, are the most likely to suffer.

  • Michigan formulary advocates promised to forbid prior authorization for branded products with no generic competition. In 2001, the legislature scrapped that protection. Florida formulary advocates eased passage by exempting patients in nursing homes. After passage the nursing home exemption was eliminated.
  • Relative to private plans, Michigan restricts patient access to drugs for cardiac conditions, depression, and diabetes. In Florida in 2001, only generic equivalents, all rated BX by the FDA, were allowed for thyroid replacement agents. BX means that there is inadequate clinical data to establish the highest level of brand-generic equivalency.
  • In Florida, physicians reported that Medicaid patients denied drugs went without medicine until the situation was resolved. Multiple trips to the pharmacy were particularly difficult for recently discharged hospital patients and elderly patients with chronic conditions.

Why Pay More? Simple Insurance Reform Would Save Coloradans Millions

April 1, 2002 by Linda Gorman · Comments Off
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IP-2-2002 (April 2002)
Author: Linda Gorman

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Executive Summary

A simple reform to Colorado’s insurance laws could save Colorado families hundreds of thousands of dollars each in lifelong health care costs.

  • With simple changes to Colorado’s archaic health insurance regulations, state legislators could save an average family of four almost half a million dollars in health care costs.
  • Health insurance policies with higher deductibles offer people the chance to combine relatively inexpensive higher deductible health insurance policies with federally authorized medical savings accounts that would be accepted by preferred provider organizations (MSA PPOs).
  • Medical savings accounts work like IRAs. People make tax-free deposits each year and withdraw funds as needed to pay for medical care not covered by their insurance policy. Excess deposits remain in the account where they compound tax-free for future use. Allowable medical expenses are defined by IRS rules, which are far more liberal than those used by insurers.
  • An average Denver couple with two children that uses an MSA PPO for health insurance could save $500,000 on its cumulative health care costs between the ages of 23 and 65. At age 65, the couple would have more than $140,000 in its medical savings account. Under federal law, this nest egg could be used, tax free,to defray long-term care expenses or other retirement needs.
  • Single men and women could save about $250,000 and retire with more than $150,000.

Treatment Denied: Colorado Health Care “Reform” and the Mentally Ill

April 1, 2001 by Linda Gorman · Comments Off
Filed under: Issue Paper, Publications 

IP-2-2001 (April 2001)
Author: Dr. Linda Gorman

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Executive Summary

Colorado health care “reformers” usually claim that government control of health care raises quality and lowers cost. In fact, government involvement does just the opposite. For proof, one need look no further than the way the state Medicaid programs treat the severely mentally ill.

The severely mentally ill on Colorado Medicaid wait for care and must get their care from a monopoly provider chosen by the state. The Romer administration was so sure that it would save the state money by capitating mental health payments, paying a flat annual fee for each person enrolled in the program regardless of the amount of care needed, that it funded the state mental health care contracts at only 95% of the projected fee-for services costs. It also required that providers offer a number of new services not specifically aimed at the severely mentally ill.

This touching faith in the miraculous powers of government cost control manifested itself again during the legislative budget process in October 2000. Under a proposed pilot project, prescription drug spending for the mentally ill would be included in the annual perperson fee for mental health care and the state and providers would split any savings that materialize. Left unmentioned was the fact that this gives both the provider and the state an incentive to withhold treatment.

As far as is known, the Romer reorganization didn’t save a dime. In October 1998, the Office of the State Auditor concluded that the costs per person served increased at a faster rate than national health care costs under the capitated mental health program, while services declined. For this, the state paid $27 million more under the capitated system of care than it would have paid under the old fee-for-service plan.

In addition to costing more, capitated care systems may be more likely to limit access to important new therapies for people with severe mental illnesses like schizophrenia. People with schizophrenia may hear voices, believe against all evidence that they are being spied upon, have racing thoughts that make thinking disorganized and fragmented, or withdraw from social interaction. Their motor coordination may be impaired, they may be unable to feel or show emotions, and they may suffer severe depression. An estimated 30% attempt suicide.

Though some people recover completely, most don’t. Since schizophrenia typically disrupts normal social functioning, people with the disease are often dependent on public assistance. According to the U.S. Department of Health and Human Services, approximately 90% of U.S. schizophrenia patients are Medicaid recipients. 1

The drugs traditionally used to treat schizophrenia were developed in the 1950s. They are powerful drugs with nasty side effects that include irreversible tremors, permanent facial tics, deterioration in cognitive abilities, numbed senses, and diminished willpower. Patients often hate taking them so much that they refuse to comply with medication schemes. Aside from the high cost of inpatient hospitalization for someone who has a psychotic break, recent evidence suggests that untreated psychotic episodes are associated with slower or less complete recoveries.

The early 1990s saw the introduction of new psychoactive drugs tailored to affect certain receptors in the brain. Called “atypical” antipsychotics, the new drugs had much lower rates of irreversible muscular side effects, gave patients their feelings back, and did not cause the same cognitive losses. They helped patients who had been helped by nothing else. They also cost thousands of dollars a year more than the older ones.

State Medicaid officials, focused on their cost, immediately tried to limit their use. The Kentucky strategy was typical. Kentucky required prior approval, which was withheld until a patient suffered a psychotic break while taking the old medications. To save money, patients were kept on drugs known to cause permanent damage even though safer alternatives were available.

As is usually the case with rapidly adopted new technologies, doctors and patients who wanted the new drugs knew what they were doing. In the long run, the expensive new drugs ended up saving money. Because they made patients better, the cost of hospitalization and institutionalization fell. But declines in the rate of increases in payments for hospitalization or state mental institutions were detailed in other budgets and were, in any case, difficult to isolate.

As a result, officials continue to focus on drug costs and promote schemes designed to limit drug choice. On February 1, 2001, Colorado Access, the state’s largest Medicaid contractor, informed pharmacies that prior approval would be required for more than one pill a day in certain dosages of the atypical antipsychotics Risperdal and Zyprexia. Providers were “asked to put patients on a single daily dose regimen where appropriate.” Closed formularies, even those that approve all FDA-approved drugs when they are used for FDA-approved purposes, are also used to limit access. Twenty-five percent of the standard chemotherapy drugs, for example, lack FDA approval when used to fight cancer.

With government, you almost always get less than you pay for.

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