Differential Taxes for Differential Risks — Toward Reduced Harm from Nicotine-Yielding Products

n engl j med 373;7 nejm.org august 13, 2015 594 home with a blood-pressure cuff and texted daily, the majority sent readings during the critical first postpartum week. Similarly, an orthopedics practice manager, believing access to care could be improved, advertised same-day scheduling on the practice’s website, providing his personal cell-phone number so that he became a one-person fake call center. In 3 days, he validated that such a system was both operationally and financially viable and also learned that when people seek same-day scheduling (which is hard to provide), they find scheduling within a few days acceptable (which is easier). These two projects also illustrate a technique called minipilots: experiments integrated with operations, which may not support the small P values necessary for scholarly publication but which also don’t take months or years to conduct. A typical clinical trial fixes the intervention at the start, follows it through its course, and isn’t translated into new knowledge until the unblinding at the end.4 In contrast, successful new innovators ask, “What must be true for this idea to succeed?” and rapidly test critical assumptions in context. Only days were required to learn that patients would text back their blood-pressure readings or would seek same-day scheduling and could be accommodated. That information didn’t prove the programs would work, but it permitted early decisions about whether to keep moving forward, abandon the idea, or pivot the approach because of new insights or identified barriers. In less than 2 months, we ran half a dozen postpartumhypertension mini-pilots sequentially, each addressing a question the previous pilot had raised. Aiming to get sedentary people walking, we launched a walking contest using smartphone pedometers and a fake back end for data collection. A mini-pilot revealed that our design inadvertently motivated active people to walk even more — but demotivated the target population, who felt defeated when they lagged on leaderboards. But observation of potent social dynamics permitted identification of new kinds of social comparisons that could get people moving. A few days of testing yielded compelling insights that justified investing in larger, more definitive trials. With these techniques, we can test ideas faster and at lower cost to determine which ones work. Some organizations have already improved health care by using these methods to identify the intersection of human needs, business viability, and technical feasibility.5 Collectively, rapid validation techniques make us optimistic about the enduring contribution of health care innovation. They support a culture of experimentation, in which front-line clinicians and employees can turn insights into initial data, with snippets of time and small budgets. Other industries have advanced these techniques, but health care can adapt them to do much more than just build the next app. Disclosure forms provided by the authors are available with the full text of this article at NEJM.org.

home with a blood-pressure cuff and texted daily, the majority sent readings during the critical first postpartum week.
Similarly, an orthopedics practice manager, believing access to care could be improved, advertised same-day scheduling on the practice's website, providing his personal cell-phone number so that he became a one-person fake call center.In 3 days, he validated that such a system was both operationally and financially viable and also learned that when people seek same-day scheduling (which is hard to provide), they find scheduling within a few days acceptable (which is easier).
These two projects also illustrate a technique called minipilots: experiments integrated with operations, which may not support the small P values necessary for scholarly publication but which also don't take months or years to conduct.A typical clinical trial fixes the intervention at the start, follows it through its course, and isn't translated into new knowledge until the unblinding at the end. 4In contrast, successful new innovators ask, "What must be true for this idea to succeed?" and rapidly test critical assumptions in context.
Only days were required to learn that patients would text back their blood-pressure readings or would seek same-day scheduling and could be accommodated.That information didn't prove the programs would work, but it permitted early decisions about whether to keep moving forward, abandon the idea, or pivot the approach because of new insights or identified barriers.In less than 2 months, we ran half a dozen postpartumhypertension mini-pilots sequentially, each addressing a question the previous pilot had raised.
Aiming to get sedentary people walking, we launched a walking contest using smartphone pedometers and a fake back end for data collection.A mini-pilot revealed that our design inadvertently motivated active people to walk even more -but demotivated the target population, who felt defeated when they lagged on leaderboards.But observation of potent social dynamics permitted identification of new kinds of social comparisons that could get people moving.A few days of testing yielded compelling insights that justified investing in larger, more definitive trials.
With these techniques, we can test ideas faster and at lower cost to determine which ones work.Some organizations have already improved health care by using these methods to identify the intersection of human needs, business viability, and technical feasibility. 5Collectively, rapid validation techniques make us optimistic about the enduring contribution of health care innovation.They support a culture of experimentation, in which front-line clinicians and employees can turn insights into initial data, with snippets of time and small budgets.Other industries have advanced these techniques, but health care can adapt them to do much more than just build the next app.
I n a January 2014 report that marked the 50th anniversary of the first Surgeon General's Report on Smoking and Health, acting U.S. Surgeon General Boris Lushniak concluded that the enormous toll of tobaccoinduced disease and death is overwhelmingly the result of combustible tobacco use, specifically cigarette smoking.He called for a rapid reduction in the use of combustible products to reduce the related burden of illness. 1 We believe this goal could be achieved by imposing differential taxes on nicotine products -including sharply increased taxes on combustible products.
Today's nicotine consumer has a remarkable array of options, ranging from extremely low-risk products (nicotine-replacement products approved by the Food and Drug Administration [FDA]) to extraordinarily risky ones (cigarettes, which kill half of long-term users).Elsewhere on the spectrum are other lower-risk products, including low-nitrosamine smokeless tobacco products and electronic nicotine-delivery systems (ENDS, which include e-cigarettes), and higher-risk products, including combustible tobacco products other than cigarettes (such as cigars, cigarillos, and hookah tobacco).Although no one has precisely characterized the relative risk associated with each of these products, research suggests that low-nitrosamine smokeless tobacco products pose no more than one tenth the risk of cigarettes, whereas the risk associated with other combustible-tobacco products may approach that of cigarettes. 1 Because ENDS products are so new and varied, the risk associated with them remains to be established, although early evidence suggests they are substantially less harmful than combustibles. 2xtensive research demonstrates that higher tobacco taxes can help promote quitting among current users, deter initiation among potential users, and reduce tobacco use among continuing users. 3Studies have also shown that changes in the relative prices of tobacco products lead some tobacco users to switch to less expensive products. 3Given the belief that all tobacco products are seriously deleterious to health, conventional wisdom in the tobacco-control world has long been that all products should be taxed similarly.For example, the World Health Organization states that adopting "comparable taxes and tax increases on all tobacco products" is a best practice for tobacco taxation. 4o some extent, the 2009 U.S. federal tobacco-tax increases reflected this strategy: taxes on historically lower-taxed products were increased by much more than taxes on products that had previously been taxed at higher rates (see graph).Whereas the cigarette tax rose from $0.39 to $1.0067 per pack (a 158% increase), taxes on roll-your-own tobacco rose from $1.0969 to $24.78 per pound (a 2159% increase) and taxes on small cigars rose from $1.828 to $50.33 per 1000 (a 2653% increase).The snuff tax rose by the same 158% as the cigarette tax.Many states have taken a similar approach, increasing taxes on noncigarette tobacco products by a greater amount than taxes on cigarettes in order to achieve greater parity between products.
As sales of ENDS have skyrocketed, interest in taxing them has grown as well.As of early 2015, Minnesota and North Carolina were the only states that had adopted taxes on ENDS.Minnesota taxes ENDS as tobacco products, levying the same tax of 95% of wholesale price that it applies to snuff and chewing and smoking tobacco.In contrast, North Carolina created a new, very low, ENDS-specific tax of $0.05 per milliliter of consumable solution.Several other states, counties, and cities are considering legislation to impose a tax on ENDS.
The rapid evolution of the nicotine-product marketplace suggests that it's time to rethink the idea that similar taxes are best practice.We believe that national, state, and local policymakers should consider an approach that differentially taxes nicotine products in order to maximize incentives for tobacco users to switch from the most harmful products to the least harmful ones.Sizable public health benefits could derive from current cigarette smokers' switching to ENDS and other noncombustible products, includ- ing nicotine-replacement therapies (as the one type of nicotine product demonstrated to be safe, nicotine-replacement therapy should not be subject to any excise tax). 1 Sweden, which has Europe's lowest tobacco-attributable mortality among men, provides a good example of how this approach can succeed.There, lower taxes on snus -a form of smokeless tobacco -contributed to many male cigarette smokers switching to snus.Women, however, did not switch to the same extent, which illustrates that price differentials alone are not always sufficient to achieve public health goals. 5e manner in which a differential taxation system is implemented will determine how well it works as a harm-reduction strategy.To alleviate concerns that low prices on ENDS and lower-risk tobacco products might encourage uptake among young people, taxes on such products could be set high enough to discourage initiation.At the same time, taxes on combustible products could be further increased in order to raise their prices relative to less harmful noncombustible products.Such a strategy would maximize the likelihood of current smokers switching to lower-risk products while deterring users of lower-risk products from switching to more harmful ones.Higher prices for combustible products would have the added benefit of further reducing the likelihood that young people would take up smoking.
The current approach of imposing taxes on ENDS or raising taxes on cigarettes and other combustible products by the same amount as taxes on snus and other smokeless products has the opposite effect: it discourages tobacco users from switching to reduced-risk products, encourages dual use, and increases the likelihood that young people who initiate nicotine use will start with the most dangerous products.
A differential taxation strategy is not without potential problems.Decades ago, proposals were floated to tax cigarettes at different rates on the basis of tar and nicotine content.The United Kingdom and New York City adopted this approach, briefly levying special taxes on high-tar cigarettes.As evidence grew that cigarettes with lower tar and nicotine levels were no less dangerous, however, public health authorities realized that a differential taxation strategy was undesirable.Yet today the science supporting a difference in risk between combustible and noncombustible tobacco products is well established.
Given the FDA's regulatory authority over the manufacture, distribution, and marketing of tobacco products, a differential taxation strategy could be complemented by other policies, such as restrictions on ENDS marketing and strong product standards, to maximize public health benefit.Perhaps most important, as proposed in the FDA's recent "deeming" rule, the agency's authority over tobacco products could be extended to cover additional products including ENDS, opening up such items to new regulation.Policymakers could then make a product's eligibility for a lower tax rate dependent on the FDA's determination that it poses substantially reduced risk.
We believe that implementing differential taxes on nicotineyielding products on the basis of degree of risk could substantially expedite the move away from cigarette smoking that has occurred during the past half-century, especially now that there are nicotine-yielding products that pose dramatically less danger than combustible tobacco products.Nearly a fifth of U.S. adults are cigarette smokers, and smoking accounts for one of every five deaths in the United States.Failure to seriously entertain a differential taxation approach may contribute to the prolongation of the epidemic of disease and death caused by smoking.
Disclosure forms provided by the authors are available with the full text of this article at NEJM.org.
From the University of Illinois at Chicago, Chicago (F.J.C.); the University of Ottawa, Ottawa (D.S.); the University of Notting-

Policymakers should consider an approach that differentially taxes nicotine products in order to maximize incentives for tobacco users to switch from the most harmful products to the least harmful ones.
n engl j med 373;7 nejm.orgaugust

J. Scott Moody, Chief Executive Officer and Chief Economist
lectronic cigarettes (e-cigs) have only been around since 2006, yet their potential to dramatically reduce the damaging health impacts of traditional cigarettes has garnered significant attention and credibility.Numerous scientific studies show that e-cigs not only reduce the harm from smoking, but can also be a part of the successful path to smoking cessation.
The term "e-cig" is misleading because there is no tobacco in an e-cig, unlike a traditional, combustible cigarette.The e-cig uses a batterypowered vaporizer to deliver nicotine via a propylene-glycol solution-which is why "smoking" an e-cig is called "vaping."The vapor is inhaled like a smoke from a cigarette, but does not contain the carcinogens found in tobacco smoke.
Unlike traditional nicotine replacement therapy (NRT), such as gum or patches, e-cigs mimic the physical routine of smoking a cigarette.As such, e-cigs fulfill both the chemical need for nicotine and physical stimuli of smoking.This powerful combination has led to the increasing demand for e-cigs-8.2%use among nondaily smokers and 6.2% use among daily smokers in 2011. 1 The game-changing potential for dramatic harm reduction by current smokers using e-cigs will flow directly into lower healthcare costs dealing with the morbidity and mortality stemming from smoking combustible cigarettes.These benefits will particularly impact the Medicaid system where the prevalence of cigarette smoking is twice that of the general public (51% versus 21%, respectively).
Based on the findings of a rigorous and comprehensive study on the impact of cigarette smoking on Medicaid spending, the potential savings of e-cig adoption, and the resulting tobacco smoking cessation and harm reduction, could have been up to $48 billion in Fiscal Year (FY) 2012. 2 This savings is 87% higher than all state cigarette tax collections and tobacco settlement collections ($24.4 billion) collected in that same year.
Unfortunately, the tantalizing benefits stemming from e-cigs may not come to fruition if artificial barriers slow their adoption among current smokers.These threats range from the Food and Drug Administration regulating e-cigs as a pharmaceutical to states extending their cigarette tax to e-cigs.To be sure, e-cigs are still a new product and should be closely monitored for longterm health effects.However, given the longterm fiscal challenges facing Medicaid, the prospect of large e-cigs cost savings is worth a noninterventionist approach until hard evidence proves otherwise.

Prevalence of Smoking in the Medicaid Population
According to the Centers for Disease Control and Prevention, in 2011, 21.2% of Americans smoked combustible cigarettes.However, as shown in Table 1, the smoking rate varies considerably across states with the top three states being Kentucky (29%), West Virginia (28.6%), and Arkansas (27%) and the three lowest states being Utah (11.8%),California (13.7%), and New Jersey (16.8%). 3ditionally, the smoking rate varies dramatically by income level.Nearly 28% of people living below the poverty line smoke while 17% of people living at or above the poverty line smoke. 4 a consequence, the level of smoking prevalence among Medicaid recipients is more than twice that of the general public, 51% versus 21%, respectively.However, this too varies considerably across states with the top three states being New Hampshire (80%), Montana (70%), and Pennsylvania (70%) and the three lowest states being Mississippi (35%), New Jersey (36%), and South Carolina (41%). 5 absolute terms, the U.S. Medicaid system includes 36 million smokers out of a total Medicaid enrollment of over 68 million.As such, this places much of the health burden and related financial cost of smoking on the Medicaid system which strains the system and takes away scarce resources from the truly needy.

Economic Benefit of Smoking Cessation and Harm Reduction
Smoking creates large negative externalities due to adverse health impacts.Table 2 shows the results of a comprehensive study that quantified the two major costs of smoking in 2009lost productivity and healthcare costs. 6st productivity occurs when a person dies prematurely due to smoking or misses time from work due to smoking.This cost the economy $185 billion in lost output in 2009.showing that e-cigs not only reduce the harm from smoking, but is also a successful path to smoking cessation.
In perhaps the most comprehensive e-cig literature review to date, Neil Benowitz et al. (2014) identified eighty-one studies with original data and evidence from which to judge e-cig effectiveness for harm reduction. 7They concluded: "Allowing EC (electronic cigarettes) to compete with cigarettes in the market-place might decrease smoking-related morbidity and mortality.Regulating EC as strictly as cigarettes, or even more strictly as some regulators propose, is not warranted on current evidence.Health professionals may consider advising smokers unable or unwilling to quit through other routes to switch to EC as a safer alternative to smoking and a possible pathway to complete cessation of nicotine use." There are two ways that e-cigs benefit current smokers.First, there is harm reduction for the smoker by removing exposure to the toxicity  In the last few years the academic literature has exploded with articles on these two topics.The following is a selection of some of the most recent studies and their conclusions.

Potential E-cig Medicaid Cost Savings
To date, the academic literature strongly suggests that e-cigs hold the promise of dramatic harm reduction for smokers simply by switching from combustible tobacco cigarettes to ecigs.This harm reduction is due to both its positive impact on smoking cessation and reduced exposure to toxic compounds in cigarette smoke.
As a result, we can expect the healthcare costs of smoking to decline over time as the adoption of e-cigs by smokers continues to grow.Additionally, we can expect greater rates of adoption as e-cigs continue to evolve and improve based on market feedback-a dynamic that has never existed with other nicotine replacement therapies.
As discussed earlier, the potential savings to the economy are very large.In terms of healthcare alone, most of that cost is currently borne by the Medicaid system where the prevalence of cigarette smoking is twice that of the general public, 51% The study concluded that 11% of all Medicaid expenditures can be attributed to smoking.Additionally, among the states these costs ranged from a high of 18% (Arizona and Washington) to a low of 6% (New Jersey).
This study uses their percentage of Medicaid spending due to smoking and applies it to the latest year of available state-by-state Medicaid spending.As shown in Table 3, in FY 2012, smoking cost the Medicaid system $45.7 billion.Of course, the largest states bear the brunt of these costs such as New York ($5.9 billion), California ($5.5 billion), and Texas ($3.1 billion).
To put this potential savings to Medicaid into perspective, in FY 2012, state governments and the District of Columbia combined collected $24.4 billion in cigarette excise taxes and tobacco settlement payments.As shown in Table 4, the potential Medicaid savings exceeds cigarette excise tax collections and tobacco settlement payments by 87%.
Note that many of the five states with negative ratios are distorted because excise tax collections are based on where the initial sale occurred and not where the cigarettes were ultimately consumed.This can vary greatly because of cigarette smuggling and cross-border shopping created by state-level differentials in cigarette excise taxes. 16r instance, New Hampshire has long been a source for out-of-state cigarette purchase from shoppers living in Massachusetts, Maine, and Vermont because of its lower cigarette excise  Hawaii is an exception due to its physical isolation which creates monopoly rents.Rhode Island levies a very high cigarette excise tax, but not relatively high enough compared to neighboring Connecticut and Massachusetts to drive a lot of cross-border shopping.

Other Potential E-cig Cost Savings
Another area of cost savings from greater e-cig adoption is the reduction in smoke and fire dangers in subsidized and public housing.According to a recent study, smoking imposes three major costs: 1. Increased healthcare costs from exposure to second hand smoke within and between housing units.
2. Increased renovation costs of smokingpermitted housing units.

Fires attributed to cigarettes.
As shown in Table 5, the study estimates that smoking imposes a nationwide cost of nearly $500 million. 17The top three states facing the greatest expenses are New York ($125 million), California ($72 million), and Texas ($24 million) while the top three states with the lowest expenses are Wyoming ($0.6 million), Idaho ($0.8 million), and Montana ($1 million).

Applying Cigarette Taxes to E-cigs?
Many policymakers around the country have suggested applying the existing cigarette tax, wholly or in part, to e-cigs.This is bad public policy and is based on a fundamental misunderstanding of the cigarette tax.negative externalities of certain actions.Cigarette smoking creates many negative externalities such as harmful health consequences to the user or to those in near proximity (second-hand smoke).
As detailed in this study, the negative externalities associated with traditional smoking are all but eliminated by e-cigs.Without evidence of actual negative externalities, applying the existing cigarette tax to e-cigs is simply bad public policy.

Conclusion
Policymakers have long sought to reduce the economic damage due to the negative health impact of smoking.They have used tactics ranging from cigarette excise taxes to subsidizing nicotine replacement therapies.To be sure, smoking prevalence has fallen over time, but there is more that can be done, especially given the fact that so much of the healthcare burden of smoking falls on the already strained Medicaid system.
As with any innovation, no one could have predicted the sudden arrival into the marketplace of the e-cig in 2006.Since e-cigs fulfill both the chemical need for nicotine and physical stimuli of smoking the demand for e-cigs has grown dramatically.The promise of a relatively safe way to smoke has the potential to yield enormous healthcare savings.The most current academic research verifies the harm reduction potential of e-cigs.
As shown in this study, the potential savings to Medicaid significantly exceeds the state revenue raised from the cigarette excise tax and tobacco settlement payments by 87%.As such, the rational policy decision is to adopt a noninterventionist stance toward the evolution and adoption of the e-cig until hard evidence proves otherwise.While cigarette tax collections will fall as a result, Medicaid spending will fall even faster.This is a win-win for policymakers and taxpayers. FIGURE:ARTIST:

An audio interview with Dr. Asch is available at NEJM.org
n engl j med 373;7 nejm.orgaugust 13, 2015 PERSPECTIVE 595 Differential Taxes for Differential Risks 13, 2015 PERSPECTIVE 597 ham, Nottingham, United Kingdom (D.S.); and the University of Michigan, Ann Arbor (K.E.W.). 1.The health consequences of smoking -50 years of progress: a report of the Surgeon General.Atlanta: Department of Health and Human Services, Centers for Disease Control and Prevention, National Center for Chronic Disease Prevention and Health Pro-motion, Office on Smoking and Health, 2014.2. Nutt DJ, Phillips LD, Balfour D, et al.Estimating the harms of nicotine-containing products using the MCDA approach.Eur Addict Res 2014;20:218-25.3. Effectiveness of tax and price policies for tobacco control: IARC handbook of cancer prevention.Vol.14. Lyon, France: International Agency for Research on Cancer, 2011.4. WHO technical manual on tobacco tax administration.Geneva: World Health Organization, 2011. 5. Ramström L, Wikmans T. Mortality attributable to tobacco among men in Sweden and other European countries: an analysis of data in a WHO report.Tob Induc Dis 2014;12:14.

Table 1 Smokers Represent Significantly Larger Proportion of Medicaid Recipients than General Population
Source: Centers for Disease Control and Prevention, Centers for Medicare and Medicaid Services, and State Budget Solutions

Table 2 Comprehensive Costs of Smoking 2009
Source: See Endnote 6 and State Budget Solutions(

Year 2012 (Millions of Dollars) Smoking Costs on Medicaid by StateTable 3
versus 21%, respectively.So what are the potential healthcare savings to Medicaid?Brian S. Armour et al. (2009) created an impressive economic model to estimate how much smoking costs Medicaid based on data from the Medical Expenditure Panel Survey and the Behavioral Risk Factor Surveillance System.States do not sum to Total due to rounding.Source: See Endnote 15 and State Budget Solutions adult, noninstitutionalized Medicaid population." 15Overall, their model ". . .included 16,201 adults with weighting variables that allowed us to generate state representative estimates of the

Table 4 Smoking Costs on Medicaid Exceeds State Cigarette Tax Collections and Tobacco Settlement Payments (Millions of Dollars) Fiscal Year 2012
. As such, is too high for Massachusetts, Maine, and Vermont and too low for New Hampshire.The same applies to New Jersey and Connecticut vis-à-vis New York and, more specifically, New York City, which levies its own cigarette tax on top of the state tax.
(b) Includes Master Settlement Agreement and individual state payments.tax