Drug Abuse

COSTS & BENEFITS

How can we quantify the cost of drug abuse? Collins and Lapsley argue that by adopting an economic model of the costs, we can best evaluate the impact of different policies

INTRODUCTION

In 1990 the present authors were commissioned by the Commonwealth Department of Community Services and Health to develop a methodology to produce cost estimates for the most recent year possible. This report was presented to the Minister in December 1990 and published in mid-1991 (see Collins and Lapsley, 1991). The report presented estimates of the overall costs of drug abuse (in particular for alcohol, tobacco and illicit drugs), although there were various cost categories for these drugs which it proved impossible to estimate, and 1 the available data proved totally inadequate for any estimation of the costs of abuse of pharmaceuticals.

This paper presents first a brief summary of the results from Collins and Lapsley (1991) and of the methodology used in the cost study. It then considers some policy implications of these cost estimates, particularly in relation to the extent to which it might be possible to reduce such costs by anti-abuse strategies. It concludes with some speculation about the types of drug policies likely to yield high rates of return to public expenditures.

METHODOLOGY OF THE COST ESTIMATES

In estimating drug abuse it is necessary first to consider the concept of abuse. A medical definition might be that abuse occurs when the use of a drug diminishes the health status of the user or of some other person. However, to an economist, this definition appears insufficiently comprehensive in the sense that it fails to include many of the economic costs of drug abuse (for example, crime, accidents, policing, judiciary, research, education, property destruction). Thus we adopted the definition that drug abuse occurs when drug use involves a net social cost additional to the resource costs of the provision of that drug. Any use of illegal drugs is deemed to represent abuse because, as society has deemed them to be illegal, a social cost is incurred whenever there is use.

The above definition raised the problem of the proportion of drug use which represented abuse. By definition, 100% of illegal drug use represented abuse. On the basis of medical evidence that there appears to be no safe level of tobacco consumption, all tobacco use was deemed to be abuse. This is clearly not the case for alco hol, where not only would there appear to be safe levels of consumption but some types of alcohol can, taken in appropriate doses, lessen the probability of certain medical conditions. Following Kreitman (1986), we took abusive alcohol consumption to represent 30% of total consumption. Some unpublished evidence from the Commonwealth Department of Community Services and Health suggests that this estimate may in fact be much too low.

This distinction between the proportions of alcohol and tobacco abuse illustrates the important point that formulation of appropriate harm-minimisation policies for alcohol is much more complex than for tobacco. Although there are a few medical conditions for which tobacco consumption has a minor therapeutic effect, this is almost certainly counterbalanced by the passive smoking effects of the same tobacco consumption. However, there is evidence that modest levels of alcohol consumption might be protective (Hawks,1992).

The present study used a 'prevalence-based' approach in that it calculated the cumulative effects of all past and present-day abuse for a given year. Thus, the cost definition adopted in Collins and Lapsley (1991) was 'the value of the net resources which in a given year are unavailable to the community for consumption or investment purposes as a result of past and present drug abuse, plus the intan3yible cdsts imposed by this abuse' (p.49). The estimated costss are divided into tangible and intangible costs. Tangible costs are defined as costs whose reduction w-ill yield resources available for consumption or investment purposes (for example, health care costs). Intangiblescosts (for example, pain and suffering), when reduced, do not release resources for alternate uses.

In principle, this methodology compares the current drug abuse situation with a hypothetical alternative situation of no past or present abuse. It is not argued that this altemative is feasible because it is clearly not possible to eliminate all current abuse. For this and other reasons the total estimated costs of drug abuse are much higher than the potential benefits available to harmminimisation policies. We return to this topic of avoidable drug abuse costs later.

In looking at drug abuse, it is important to distinguish between real and pecuniary costs. Real costs represent a reduction in the total resources available to the community as a result of the abuse. Pecuniary costs are exactly matched by pecuniary gains - that is, they are merely distributive. For example, consider a person of working age who leaves the workforce as a result of smoking-related disease and so claims sickness benefit.

The real cost is the loss of the production of a production worker. Pension costs are a pecuniary cost in that they represent a transfer of expenditure power from the taxpayer to the smoker. To count both as costs would be to double count. Similarly, the tax revenue from tobacco is a pecuniary benefit - it is merely a redistribution from smoker to government and thence to the rest of the community. It does not create any extra resources for the community as a whole (which includes the smokers).

THE COST ESTIMATES

Estimates of the costs of drug abuse in Australia in 1988 are presented in Tables 1-3. There are, unfortunately, major areas of abuse costs that we were unable to quantify, including passive smoking, pharmaceuticals abuse, AIDS related to drug abuse, reductions in workplace productivity, absenteeism and property damage. Thus these estimates should be taken as representing minimum estimates of drug abuse costs in Australia.

These results have been more fully commented on elsewhere (see Collins and Lapsley, 1991), so we shall confine ourselves to some brief comments relevant to the topic of this particular paper.

Tangible costs are dominated by alcohol because alcohol-related mortality and morbidity tend to occur earlier in the lifecycle than does tobacco-related harm, a very significant proportion of which is borne by people no longer of work-force age. It is interesting to note that over 75% of the tangible costs of illicit drugs (law enforcement costs and the resources devoted to consumption) arise solely from their illegality. In relation to intangible costs, tobacco-related costs predominate because of the higher level of tobacco-related mortality. Overall, alcohol and tobacco costs account for about 90% of total costs, with illicit drug costs representing a relatively insignificant 10%.

THE BENEFITS OF DRUG ABUSE PROGRAMMES

The above drug abuse cost estimates should not be interpreted as representing the benefits available to harm-reduction programmes in a particular year. Clearly, it will not be completely possible to eliminate all drug abuse and so eliminate all harm. Thus, in policy terms we must concentrate on avoidable costs. The benefits to harm-minimisation programmes wlll tend to be cumulative rather than immediately realisable.

Harm-minimisation strategies must be maintained over long periods and the benefits will build up over time. In looking at avoidable abuse costs, the short run benefits of harm-minimisation programmes will in many cases be much lower than the long run benefits. Harmminimisation benefits can only be estimated with reference to the relevant policy time period.

There are serious difficulties in estimating the avoidable costs of drug abuse. Among the information needed in relation to each type of harm resulting from each type of drug are the following:

1. The proportion of drug consumption that can be eliminated in a given time period.

2. The relationship between consumption and harm reduction (expressed in physical terms).

3. The relationship between physical harm reduction and drug abuse costs.

With the above information it would be possible to indicate the total avoidable abuse cost for each drug.

However, in the heirarchy of abuse cost information, there is a further level which in a policy sense may be the most important; this is cost and benefit information on particular harm-minimisation strategies. In other words, information is needed on the cost of programmes and on their benefits so that relative programme rates of return may be calculated.

There are two reasons for the need of rate of return information. First, claims for resources for drug abuse programmes will be in competition with claims from other resource use areas (e.g. roads, education, telecommunications) and the bureaucrats from the Treasury or the Department of Finance will, in making budget recommendations, be looking for all the 'hard' rate of return information which they can find. Secondly, any drug budget will have limited resources to be allocated to competing programmmes. To maximise the benefit accruing from the use of these resources they should be progressively allocated to the projects ranked in decreasing order of rate of return. In practice, there seems to be only limited information available on the costs of harm-minimisation programmes, and even less information on their benefits. Insufficient attention appears to be devoted to the evaluation of harm-min imisation programmes, particularly economic evaluation.

This type of analysis implies some concept of the optimal level of abuse-related harm, where that level is above zero. Where resources are limited, and they are always limited, competition for resources exists between various programmes, so comparisons must be made between rates of return. It should not be sufficient justification for the allocation of resources to a programme simply to demonstrate that it reduces harm, or that its benefits outweigh its costs.

SOME TENTATIVE IDEAS ON HARM-MINIMISATION STRATEGIES

Although we do not attempt to quantify the extent of avoidable drug abuse costs, it would appear extremely probable that they would substantially exceed the current expenditures of public funds on the various programmes to prevent or counter drug abuse. For example, annual expenditures on the National Campaign Against Drug Abuse are currently in the order of A$50 million and it is confidently to be expected that avoidable drug abuse costs are far greater than this. This fact in itself does not prove that all these expenditures are justified, because here we are referring to the relationship between potential benefits and actual costs. Nevertheless, even in the absence of cost/benefit evaluation of current programmes it is possible to speculate on the types of strategies for which the rates of return are likely to be high.

Some legislation may be low cost in that it is difficult to evade and easy to police, or that it is self-enforcing (its deterrent effect means that associated enforcement and judicial costs are low). For example, legislation to ban tobacco advertising would be relatively straightforward to implement, although sponsorship and the use of brand names in association with other products mean that some sort of regulatory public body would be a necessary part of effective enforcement. This is another example of the desirability for national programmes and strategies; much of the media and therefore advertising crosses state boundaries, and cannot realistically be confined. The question of advertising raises issues which are discussed later in this paper.

Another policy which is likely to be very cost effective is the raising of tax rates on abused drugs. A change in an excise tax rate would have virtually zero marginal administrative or compliance costs. A difficulty which might arise here is that price elasticities of demand at higher price levels may be such that rate increases may lead to revenue decreases - an outcome which the revenue authorities may find unpalatable. It must be recognised that the appropriate tax rate to maximise revenue will be lower than the appropriate rate to minimise con sumption. Governments must decide what is the primary function of excises on alcohol and tobacco. One suspects that while the stated objective is often sumptuary (discriminatory, in order to discourage consumption) the true objective is almost always revenue-raising, and governments should be encouraged to acknowledge the primary focus.

Other examples of low cost regulation, which may well yield high levels of benefits, are the reduction of cigarette tar levels (possibly to zero) and the raising of the minimum legal drinking age, a policy which appears to have reduced the incidence of drink-driving in some states of the USA.

The above are examples of strategres which, as they are low cost, are likely to yield satisfactory rates of return. This is not to imply that only low cost strategies should be adopted. It is the rate of return, not merely the cost, which should be the major determinant of the expenditure decision. For example, teenager education may be high cost and yet may be the most cost-effective means of combating drug abuse.

In many cases it is difficult to calculate the rate of return, particularly when the benefits include social benefits that are difficult to value because there is no market in which they are bought and sold. It is a relatively easy process to estimate the production value which can be attributed to loss of1ife because we have market measures of production values. It is an altogether different problem to estimate the psychological value of a loss of life to the deceased and others as no market exists for the purchase and sale of this commodity. It is, however, important to make some attempt to estimate rates of return on drug abuse programmes. To fail to undertake such analysis may be taken by the treasury and department of finance bureaucrats to imply that the rates of return are low or zero.

APPLICATIONS OF ECONOMIC ANALYSIS

Although the present authors, being economists, would not pretend to have medical expertise, there is, nevertheless, a significant contribution that economics can make to the drug policy debate which in itself has broader dimensions than just medical impact. We now consider some areas of drug policy to which standard economic analysis can be applied.

Advertising

There appear to be strong arguments for the banning of all tobacco advertising whether it be direct or indirect (for example, sponsorship). Promotion of the consumption of drugs with proven harmful effects can hardly be in the public interest. Given evidence that if people do not smoke in their teens they are likely to remain nonsmokers throughout their lives, and that continuing smokers tend to increase tobacco consumption ovel their lifecycle, the effect of advertising on the young is potentially particularly damaging. In our view, there is little doubt that advertising is, wherever national legislation permits either explicitly or implicitly, specifically aimed at the young.

The tobacco industry asserts that advertising neither produces, nor is intended to produce, an increase in overall tobacco consumption. It is merely a competitive device to increase market shares. Even i we accepted this claim it would still need to be demon strated that advertising does not increase tobacco consumption in particular age groups - particularly tht young. A redistribution of tobacco consumption fron older to younger age groups will increase consumption over time, even if it has a neutral effect on total consumption in the short run.

It is, incidentally, interesting that the smoking lobby claims that to ban advertising would cost jobs ill the tobacco industry (as opposed to the advertising industry). If advertising does not promote tobacco consumption how would the banning of advertising cause . reduction of jobs in the industry?

It is significant that the industry's economics literature on advertising tends to view its public interest justification as being in the creation of scale economies reductions in unit costs which arise from larger-scale output. These scale economies attributable to advertising will only arise if total market demand is increased. However, there is a great deal of evidence to show that advertising designed to protect or increase market shares is a highly potent anti-competitive technique (the classic study on this topic is Bain, 1956), which is extremely difficult to defend on any public interest criterion. Probably the most important determinant of efficiency in a market is the extent of actual and/or potential competition, and advertising is an extremely potent weapon for the reduction of competition. In asserting that advertising does not promote consumption, the industry lays itself open to the response 'In this case, what public interest justification can there be fol tobacco advertising7'. Tobacco advertising clearly is not informative (except for the statutory health warnings!) and it is quite possibly anti-competitive.

Application of some elementary economic analysis will also demonstrate the naivety (to be charitable) of the industry's assertions about job losses which could result from anti-smoking campaigns. For example, on I the Andrew Olle programme on Sydney ABC radio on 8 November 1991, John Singleton suggested that 68 500 jobs were at risk in the tobacco industry. However, Tobacco Institute of Australia advertisements have placed the figure at 25 344 (consisting of 'growers, manufacturers, shopfloor, wholesalers, retailers, drivers, packers, not to mention the printers, shop-fitters, painters, outdoor advertising companies and their sales staff, Sydney Morning Herald, November 10 1991). We are not able to evaluate these figures at this stage but if, purely for the purposes of argument, we accept that one of these figures actually reflects the number employed in the industry it is unreasonable to expect that job losses of this order could be expected. There are two major reasons for this.

First, there is absolutely no reason to believe that it would be possible to eliminate all tobacco consumption, so that clearly not all jobs would be at risk. Secondly, to argue that reduction of tobacco consumption will cause substantially increased unemployment is to imply that the money no longer spent on tobacco consumption will not be spent on alternative consumption items - that is, it will be saved. A more plausible assumption is that the money will be spent on other consumer goods and services, consumption of which, if their production was more labour-intensive than tobacco, would actually stimulate job opportunities. In practice, the effect of any change on jobs, whether an increase or a decrease, is likely to be marginal. Even if total consumption did fall by the same amount as the fall in tobacco consumption, there could well be countervailing benefits through the interest rate effects of the increase in investable funds.

To repeat, the economic arguments concerning the employment effects of reduced tobacco consumption are difficult to accept. We suspect that the industry" economic arguments are of the same level of sophistica tion as its claims about the links (or lack of them' l between tobacco consumption and health. Incidental Iy, the industry's arguments about the loss of tax rev enue resulting from reduced tobacco consumptioz should also be viewed somewhat critically for the sam two reasons discussed above. In particular, money no spent on cigarettes is likely to be spent on other taxe goods or services (although these latter are unlikely t bear as high a rate of tax as tobacco does).

Competition between jurisdictions

Standard tax analysis indicates that competition between tax jurisdictions will almost inevitably result in a decline in the quality of the taxing performance of these jurisdictions. To take an Australian example, there is no doubt that tax compretitions between Australian States has led to inefficient and inequitable state systems. A similar analysis can be applied to competition in drug policies.

A classic example of competition in this field is the successful campaign of New South Wales for the motor cycle grand prix after Victoria loosened its grip on the staging of this event by its attack on drug sponsorship of sporting events. If individual states are willing to engage in competitive behaviour of this type for their own ends, the effectiveness of anti-drug programmes at the State level will be seriously reduced. Provisions of the Australian Constitution effectively prevent the Federal Government taking complete control of drugs policies even though this would be indicated by the outcome of inter-state competitive policies. Nevertheless, efforts should be made wherever possible to centralise drugs policies at the Federal level. As an example, a clear case exists for maintaining the current status of the National Campaign Against Drug Abuse as part of the federal bureatucracy rather than devolving its functions to the states, who currently provide half the campaign's funding. This is comparable with the situation in the European Community which is attempting to centralise and make consistent drugs policies among member countries.

Potential tax competition restricts the ability of states to use their franchise taxes (which is, in effect, an excise tax implemented under another guise for constitutional reasons) to restrict demand for tobacco or alcohol products. For example, the unwillingness of Queensland in earlier years to implement a franchise tax on tobacco apparently provoked a considerable amount of cross-border smuggling between Queensland and New South Wales and thus limited the ability of NSW to increase the rate of this tax. It also, incidentally, increased the administration costs of this tax in NSW very substantially, because of the need to reduce avoidance and evasion of the tax.

Hypothecated taxes

Drugs campaigners often advocated hypothecated (i.e. earmarked) taxes as a means of ensuring that an

adequate flow of resources is directed to areas of concern. Hypothecation is seen as ensuring a commitment to the provision of resources. The hyupothecation of part of the Victoria tobacco tax revenue to the Victoria Health Foundation is an example of such a procedure. Another, in a different policy area, is the proposed hypothecation of legal casino profits in NSW for hospitals.

8 Legal hypothecation does not necessrily imply effective (de facto) hypothecation. It is perfectly possible that, in the absence of hypothecation, the level of resources allocated to a particular policy area might have been the same. In these circumstances, the hypothecated tax might simply be releasing resources for other uses. To be able to evaluate a particular hypothecation strategy it is necessary to know what the expenditure level would have been in the absence of hypothecation - not a simple task. In many situations it is simply not possible to identify what the counterfactual situation would have been. It is perfectly plausible that in certain circumstances hypothecation could actually reduce the resources devoted to particular expenditure areas, for example, if the hypothecation is not revenue-bouyant (e.g. a non-indexed excise). It is 'lIso true that tax hypothecation is unlikely to lead to optimal resource allocation because it subverts the provx ss of comparative evaluation of proposed public e\penditures. In NSW, racing tax funds are hypotheX .Ited to expenditures on racing clubs and autherities, so tlaat expenditures on racecourse facilities fn NSW tIIldergo far, less rigorous budget scrutiny than say, expenditures on hospitals or drug harm-minimisation rogrammes.

In short, drugs campaigners might be better advised to seek specific future expenditure commitments than telX hypothecation.

CONCLUSION

This paper has reviewed cost estimates of drug abuse in Australia and examined possible implications for drug policies in Australia. It is important to produce estimates of the avoidable costs of drug abuse and of rates of return yielded by harm-minimisation programmes.

It has suggested a number of areas where focused policies may be appropriate, and where the evaluation of potential programmes for harm minimisation could be assessed.

D.J. Collins

School of Economic and Financial Studies, Macquarie University, NSW, Australia

H.M. Lapsley

School of Health Service Management, Unitwersity of New South Wales, NSW, Australia

REFERENCES

Bain, J. ( 1956) Barriers to New Compention: Their Character and Consequences in Manufacturing Industries. Cambridge, MA: Harvard University Press.

Collins, D.J. and Lapsley, H.M. (1991) Estimaung the

_ Economic Costs of Drug Abuse in Australia. (National Campaign Against Drug Abuse, Monograph Series No. 15.) Canberra: Australian Government Publishing Service.

Hawks, D. (1992). The prevention paradox revisited. Centre Lines, March, pp. 3 4.

Kreitmann, N. (1986) Alcohol consumption and the prevention paradox. British Journal of Addiction 81, 353-363.

6 j NOTE

In Vol. 3, No. 2, there was an error on page 95 of the article by Pat Shannon. In paragraph 4, line 7, it should read: 'These authors classified one client as having a serious alcohol problem, and consequently a figure of 25% abstinence would possibly be more appropriate' rather than 'These authors were classified as having a serious...'.

In addition one of the references was omitted. as follows:

Krivanek, J . ( 1988). Heroin and Reality. Australia Pty Ltd: Allen & Unwin.

We apologise for these errors and any inconvenience caused

Table 1: Tangible Economic Costs of Drug Abuse, 1988

	Alcohol ($m)	Tobacco ($m)	Illicit drugs ($m)	Pharmaceuticals ($m)	Non-allocatable	All drugs ($m)	Production loss-morbidity	228.9	186.5	15.2	sna	-	430.5
Production loss-mortality	1820.5	1095.4	416.8	sna	-	3332.7
Total production loss	2049.3	1281.0	431.9	sna	-	3763.2
Less consumption-benefit-mortality	1248.2	2800.5	185.3	sna	-	4233.9
Net production loss	801.2	(1518.6)	246.7	sna	-	(470.7)	- 9.1
Health care-medical	139.9	114.3	6.7	sna	-	260.9	5.0
Health care-hospital bed days	388.2	317.3	18.6	sna	-	724.0	14.0
Health care-nursing home bed days	52.9	178.0	4.6	sna	-	235.5	4.5
Total health care	581.0	609.6	29.9	0.0	-	1220.4	23.6
Consumption	1651.0	1722.2	507.8	sna	-	3880.9	74.9
Accidents	212.2	sna	sna	sna	-	212.2	4.1
Law enforcement	sna	-	258.0	sna	-	258.0	5.0
Abuse campaigns and research	sna	sna	sna	sna	80.3	80.3	1.5
Total tangible costs	3245.3	813.2	1042.4	sna	80.3	5181.2	100.0
Percentage of all drugs (%)	62.2	15.7	20.1	0.0	1.5	100

note:s.n.a. indicates significant but not available -indicates zero or not significant

Table 2: Intangible Economic Costs of Drug Abuse, 1988

	Alcohol ($m)	Tobacco ($M)	Illicit drugs ($m)	Pharmaceuticals ($m)	Non-allocatable ($m)	All drugs ($m)
Mortality-consumption of deceased	1248.2	2800.5	185.3	s.n.a	-	4233.9	46.0
Value of loss of life to deceased	1438.6	3227.8	213.5	s.n.a	-	4880.0	53.0
Morbidity-pain and suffering of road accident victims	95.3		s.n.q.	s.n.q	-	95.3	1.0
Total intangible costs	2782.1	6028.3	398.8	s.n.q	-	9209.2	100
Percentage of all drugs	30.2	65.5	4.3	s.n.q	-	100

note:s.n.a. indicates significant but not available. s.n.q. indicates significant but not quantifiable - indicates zero or not significant

Table 3: Tangible and Intangible Economic Costs of Drug Abuse, 1988

	Alcohol ($m)	Tobacco ($m)	Illicit drugs ($m)	Pharmaceuticals ($m)	Non-allocatble ($m)	All drugs ($m)<
Tangible	3425.3	813.2	1042.4	s.n.a	80.3	5181.2	36.0
Intangible	2782.1	6028.3	398.8	s.n.q	0.0	9209.2	64.0
Total costs	6027.4	6841.5	1441.1	s.n.q	80.3	14390.3	100.0
Percentage of all drugs	41.9	47.5	10.0	s.n.q	0.6	100.0

note:s.n.a. indicates significant but not available. s.n.q. indicates significant but not quantifiable - indicates zero or not significant