August 6, 2014

Stanton A. Glantz, PhD

Top economists say FDA Dramatically Underestimated the Net Benefits of Graphic Warning Labels on Cigarette Packaging

Today a group of leading economists released a report that is sharply critical of the way that the FDA (and, by implication, the OMB) does cost-benefit analysis of tobacco regulations, in particular saying that the consumer surplus discount the FDA/OMB applies to health benefits of regulation is simply wrong.  It is espcially significant that one of the authors of the analysis if Jonathan Gruber, whose work the FDA cites to justify applying the consumer surplus discount discount.  The economists also take FDA to task for grossly understimating the benefits of reducing tobacco use. 
 
Like the paper Anna Song, Paul Brown and I published a few months ago on the strong evidence that consumer surplus simply does not make sense when dealing with an addictive substance like tobacco, the economists framed their analysis as a critique of the FDA's warning label rule.  As we pointed out in the public comment we submitted on the deeming rule based on this paper, all the same issues apply, however, to the deeming rule.
 
Here is the economists' press release, which includes a link to the actual analysis (which has been submitted to the FDA as a public comment on the deeming rule).  It is followed by a press release from the Campaign for Tobacco Free Kids that provides more on context and implications of the study.
 
FDA Dramatically Underestimated the Net Benefits of Graphic Warning Labels on Cigarette Packaging
Leading economists say FDA’s flawed analysis may misdirect future public health regulation
 
Chicago, August 6, 2014–A paper released today by leading economists concludes that the Food and Drug Administration’s controversial cost-benefit analysis of its graphic warning label (GWL) regulation  grossly underestimated the net benefits associated with implementing its own rule. The authors stress that the FDA’s approach, which counted the lost pleasure from smokers who quit as a cost of the GWLs, is a major flaw that severely undercut the estimated benefits of the proposed rule. The authors urge the FDA to consider their findings in analyses of future proposed tobacco product regulations.
 
“The FDA estimate relies on standard economic models, but those don't apply well to cigarette smoking,” said co-author Frank J. Chaloupka, PhD, director of the Health Policy Center at University of Illinois at Chicago. “For example, if labels effectively move smokers to quit or cut back, the FDA’s analysis actually considers this to be a cost attributed to lost pleasure, rather than a benefit—that’s a serious mistake. Consumers choosing to quit shows that they are deriving more utility from quitting than from continuing to smoke; hence their quitting produces benefits to them that exceed any potential lost consumer surplus.”
 
According to the authors, the FDA’s reliance on lost consumer surplus, “lost pleasure,” that would result from reduced tobacco use is a critical concern. Consumer surplus reflects the difference between people’s willingness to pay for a product and the actual price they pay in the marketplace. According to the authors, for most smokers it’s inappropriate for the FDA to reduce the estimated benefits of its proposed GWL rule due to lost consumer surplus or “lost pleasure” because it’s likely that the vast majority of smokers do not find smoking “pleasurable” and derive little “consumer surplus” from smoking. These findings are explained in part because starting to smoke can be an irrational decision. Most smokers start at a young age and aren’t well-informed rational consumers who understand the addictive power of nicotine or the health and economic consequences of smoking.
 
The evaluation, which was supported by a grant to the University of Michigan from the Robert Wood Johnson Foundation® in Princeton, New Jersey, discusses other concerns about FDA’s cost-benefit analysis of its proposed GWL rule, which also apply more broadly to other tobacco regulation. 
 

  • The FDA’s evaluation of the impact of GWLs on smoking prevalence underestimated the impact by a factor of 30 or more. The FDA estimated that the GWL rule would reduce smoking by 0.4 percent; more recent analysis indicates that the figure should be 12 percent or higher.
     
  • The FDA omitted many potentially important benefits. The FDA failed to consider how GWLs would reduce exposure to second-hand smoke; this reduction could potentially prevent thousands of deaths and save $1.7 billion in lost productivity per year. Reductions in maternal smoking during pregnancy were ignored; the cost of several health care services needed to treat diseases caused by smoking were omitted; and the reduction in the number of cigarettes non-quitters will smoke each day was not considered in the FDA’s analysis.   
     
  • The FDA further underestimated the benefits of its GWL rule by spreading the reduction in all benefits out uniformly over a period of decades. Discounting thereby diminishes the benefits. In fact, several benefits from quitting smoking are realized rapidly. For example, the risk of a heart attack or stroke is immediately reduced after quitting and most excess risk is gone within one to five years.

 
“It’s critical for the FDA to fully understand the substantial health and economic benefits of graphic warning labels and of future tobacco product regulations,” said co-author Kenneth Warner, Professor in the University of Michigan School of Public Health.  “Most of the concerns we raise apply to evaluating the costs and benefits of other tobacco rules, especially the inappropriate handling of lost consumer surplus. We believe the FDA should consider our concerns in future analyses.”  
 
The paper, “An Evaluation of FDA’s Analysis of the Costs and Benefits of the Graphic Warning Label Regulation,” was submitted as a public comment on the FDA’s proposed rule to assert authority over all tobacco products, including e-cigarettes. The comment period for FDA’s proposal closes on Friday, August 8, 2014.
 
The authors of the paper are Frank J. Chaloupka, University of Illinois at Chicago; Kenneth E. Warner, University of Michigan; Daron Acemoglou and Jonathan Gruber, Massachusetts Institute of Technology; Fritz Laux, Northeastern State University; Wendy Max, University of California, San Francisco; Joseph Newhouse, Harvard University; Thomas Schelling, University of Maryland; and Jody Sindelar, Yale University.
 
The paper is available at http://tobacconomics.org/research/evaluation-fda-graphic-warning-label-regulation-benefit-cost-analysis.
 
For more information contact:
Laurie Lennon
[email protected]
704-765-1531
 
Here is the press release on the study that the Campaign for Tobacco Free Kids put out on the study, which provides more on context and implications:
 
Top Economists Tell FDA Its Cost-Benefit Analyses of Tobacco Rules are Badly Flawed and Underestimate Benefits
 
Statement of Matthew L. Myers
President, Campaign for Tobacco-Free Kids
 
WASHINGTON, DC – Nine leading economists have submitted a paper to the Food and Drug Administration that shows how the FDA’s cost-benefit analyses of its proposed tobacco regulations are deeply flawed and vastly underestimate the benefits of these regulations.  The paper was submitted as a public comment on the FDA’s proposed rule to extend its regulatory jurisdiction to all tobacco products, including cigars and electronic cigarettes (the deadline for submitting comments is August 8).
 
Federal agencies are required by Executive Order to conduct cost-benefit analyses of significant regulations to ensure the benefits exceed the costs.  The FDA has now issued two cost-benefit analyses regarding tobacco regulations: The first was part of a 2011 rule requiring graphic cigarette warnings and was one of the reasons a federal court overturned the FDA’s proposed warnings; the second is part of the FDA’s pending rule to regulate all tobacco products.
 
In particular, the economists fault the FDA for slashing the estimated benefits of these regulations to account for the “lost pleasure” consumers would experience if they quit smoking as a result of the FDA’s regulation.  In other words, the FDA’s economists say that the dramatic benefits consumers receive from quitting smoking, such as better health and longer lives, must be drastically reduced by the presumed “lost pleasure” from no longer smoking.  Based on this flawed concept, the FDA reduced the estimated benefits of the pending rule to regulate all tobacco products by 70 percent and of the 2011 warning labels rule by more than 50 percent.
 
The FDA’s analysis creates a truly upside-down world – the more effective a policy is at reducing smoking, the greater the cost attributed to loss of consumer pleasure.
 
The economists’ paper demonstrates the absurdity of applying the concept of “lost pleasure” to tobacco regulations and should lead the FDA to change its approach immediately, beginning with its proposed rule to regulate all tobacco products.  Continued reliance on this deeply flawed approach would undermine the FDA’s ability to issue effective regulations to reduce the death and disease caused by tobacco use.
 
By vastly underestimating the net benefits of tobacco regulations, the FDA’s analysis could lead to rejection of the regulations by the Office of Management and Budget and prevent them from ever seeing the light of day.  It also makes the regulations more vulnerable to inevitable legal challenges by the tobacco industry. The FDA’s underestimation of the impact of its proposed graphic warnings was one of the main reasons a federal appellate court rejected them in 2012.
 
Summary of Economists’ Paper to the FDA
 
The economists explain that the “lost pleasure” concept, technically called lost consumer surplus, is designed for contexts where consumers’ buying decisions are fully informed and rational.  However, they detail why the FDA was wrong to apply this concept uncritically to tobacco products because most decisions to use tobacco products are not fully informed and rational. They point out: 1) The vast majority of smokers begin smoking and become addicted as children and don’t fully understand the power of nicotine addiction when they start smoking.  2) A large majority of smokers regret having started smoking and wish they could quit; in fact, a large percentage tries to quit each year.  Such smokers do not derive pleasure from smoking; they smoke primarily to avoid the effects of withdrawal.
 
“Given these issues, we conclude that nearly all of the ‘lost pleasure’ from tobacco use, as represented by conventionally measured consumer surplus, should not be included as a cost in FDA analyses of the economic impact of its tobacco regulations,” the economists write.  “Indeed, the data strongly suggests that many smokers do not find smoking pleasurable and that they derive little consumer surplus from smoking.  Instead, most are struggling with or avoiding the withdrawal they would experience if they were able to stop smoking and break an addiction they regret having ever started, facing psychological costs from being addicted and lacking the self-control to quit.”
 
The economists’ paper primarily reviews the FDA’s economic analysis of the graphic warning labels rule.  But they note that its analysis is equally applicable to the FDA’s regulation of tobacco products.
 
“Tobacco consumption is the leading cause of preventable premature death in our society, claiming nearly half a million U.S. citizens’ lives annually,” these economists wrote. “FDA is charged with the critical responsibility of regulating the panoply of products that cause this devastation. They should do so in a manner that benefits the public at a reasonable cost. FDA’s properly evaluating the benefits and costs of proposed regulations is essential to ensure this outcome.”
 
The economists who submitted the paper are Frank J. Chaloupka, University of Illinois at Chicago; Kenneth E. Warner, University of Michigan; Daron Acemoglou, Massachusetts Institute of Technology; Jonathan Gruber, Massachusetts Institute of Technology; Fritz Laux, Northeastern State University; Wendy Max, University of California, San Francisco; Joseph Newhouse, Harvard University; Thomas Schelling, University of Maryland; and Jody Sindelar, Yale University.
 
In making its case for the “lost pleasure” reductions, the FDA cited the research of Dr. Gruber.  But Dr. Gruber himself was recently quoted by Reuters as saying the FDA’s approach “is really a misapplication of my work,” which Dr. Gruber has reiterated in a comment filed separately with the FDA on the pending regulation.
 
In addition to their critique of the “lost pleasure” concept, the economists’ paper also cited several other flaws in the FDA’s cost-benefit analysis of the proposed graphic cigarette warnings, most of which could also apply to other tobacco rules.  These include:
 

  • The FDA used a flawed model to estimate the impact that graphic warning labels had on smoking rates in Canada when implemented there. Recent studies have found that the smoking reductions in Canada were 30 to 50 times greater than the FDA estimated.

 

  • The FDA’s analysis omitted several important benefits of reduced smoking, including benefits associated with reduced secondhand smoke exposure, reduced maternal smoking during pregnancy and reductions in smokers’ health care expenditures not considered by the FDA (such as medication costs, home health care and other outpatient care).

 

  • The FDA “further underestimates benefits by inappropriately spreading benefits uniformly over a period of decades.  Thus, the value of health benefits that are realized rapidly, such as reductions in heart disease, is diminished by being discounted heavily over the years.”

 
“The net effect of these limitations to FDA’s analysis is a substantial, even dramatic underestimation of the net benefits of the graphic warning label regulation,” the economists conclude.
 
The economists’ paper was supported by a grant to the University of Michigan from the Robert Wood Johnson Foundation in Princeton, New Jersey.
 
The paper is available at http://tobacconomics.org/research/evaluation-fda-graphic-warning-label-regulation-benefit-cost-analysis.
 

Comments

Comment: 

.. in <em;Tobacco Control</em;.&nbsp; It is available http://tobaccocontrol.bmj.com/content/early/2014/12/30/tobaccocontrol-20... target="_blank";here.
&nbsp;
It is accompanied by commentaries by Anna Song and me ("http://tobaccocontrol.bmj.com/cgi/rapidpdf/tobaccocontrol-2014-052095?ij... " target="_blank";Assessing tobacco regulation: moving beyond economists") and Hanna Ross ("http://tobaccocontrol.bmj.com/content/early/2015/01/06/tobaccocontrol-20... target="_blank";Consumers surplus and cost-benefit analysis of tobacco use in countries in the earlier stages of the tobacco epidemic").&nbsp;

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