Excess Public Health System Costs associated with Smoking

Status - Methods1
This paper gives an overview of two methods that can and have been used, internal to
the Ministry of Health (MOH), to calculate the direct excess health system costs2
associated with smoking status.

At this stage, analyses have been undertaken and the results of these have become
familiar to some MOH staff, however no formal report detailing the methods and
results has been produced. This report serves to fill that gap and bring coherence to
understanding of the range of results.

Two different methods have been used to estimate the direct public health system
costs associated with smoking in a year. Over the last 18 months these methods have
been used to produce estimates between $0.775 and $1.5 billion depending on the
method, specification and assumptions involved. These figures may already be
familiar to some MOH staff but, as they were derived under different assumptions,
they may be used in a misleading fashion without a clearer explanation.

Both rely on the same initial assumption if you take two groups of people who are
distinguished only by the fact they currently smoke or they have never smoked, the
difference in average health costs for these two groups will be reflective of the cost to
the health system of the first groups tobacco use. That is, the excess cost for the
smokers group is due to smoking.

Readers should note that if everyone stopped smoking today the health system would
not immediately accrue these cost benefits. In particular, the reduction of risk of
premature death and other poor health outcomes due to smoking would probably take
at least five years to be realised to a significant extent.

That said, part of this work identifies that people who stopped smoking more than five
years ago have nearly the same average costs as non-smokers (the excess cost is
reduced by 85% compared to non-smokers) after adjusting for age, gender, ethnic
group and deprivation score. One particularly encouraging result of these analyses is
that people who have stopped smoking within the five years appear to have much
lower costs as well (the excess cost is reduced by 66% compared to non-smokers).

This analysis does not account for length of time since the individual started smoking
so some caution should be taken in how quickly the expected cost benefits will start to
accrue to health system spending. It maybe that those people who stopped more
recently are predominantly those that have been smoking for a short period of time
and hence, have found it easier to quite and have suffered less from the affects of the
1
This paper, released under the Official Information Act in June 2010, is an internal report on work
undertaken over the latter part of 2009 in the Health and Disability Intelligence Unit within the Health
and Disability System Strategy Directorate of the Ministry of Health.
2
We have chosen to use the word cost throughout this report in the context the word price might
have been more appropriate because in some of the health service utilisation collections an average
contracted value was all that was available. An example is Emergency Department (ED) services,
which are contracted at a fixed cost for each triage level even though actual costs in the ED will vary
within a triage category.

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exposure over the shorter period. The period the individual has been smoking is
available so future analyses could test this hypothesis and provide potential estimates
around the time until one would see most of the cost benefit in prevalence reduction
accruing.

Background information about the two methods

Figure 1 illustrates visually the excess cost attribution based on the comparison of
mean costs for two groups distinguished only by their smoking status. The scale is
indicative of relative cost difference but we do not provide actual dollar values at this
stage.

Figure 1 Example of method output

Mean public health cost ($/year/capita)

Smoker Non-smoker

Cost Excess Cost

An extension of this idea is the assignment of people not to two groups but to three or
four. For example, the non-smokers can be divided into ex-smokers and people who
have never smoked. In addition the ex-smokers can be separated into recent quitters or
not so recent quitters (e.g. more than 5 years or fewer than five years since quitting).
Here again the assumption has been that non-smokers and more particularly never-
smokers will have the lowest average health costs (if the groups are sufficiently
similar in other respects).

Stratification (adjusting for confounders)

The two methods used the same methodology for adjusting for the socio-demographic
variables of gender, NZDEP, age and ethnic group, in other words the control of
confounding factors. Both methods rely on the stratification of people into socio-

2
demographically equivalent groups using 5-year age group, prioritised ethnic group
(Maori, Pacific or Other/European), Gender and the New Zealand Deprivation 2006
Quintile (NZDEP06 Quintile) for the domicile of the individual. In testing the
stratification process we controlled first for one socio-demographic variable and then
added others in turn. As we added confounders we saw a reduction in the estimates of
total excess cost associated with smoking. The size of this reduction deceased with the
inclusion of each additional confounder. The implication is that as we control for
more confounders, the differences between the smokers and non-smokers will be due
less to factors other than smoking status or the two groups will become more
comparable.

To illustrate this effect of controlling for confounding and its implications we will use
the interrelation of cost, ethnicity and tobacco use. On the basis that the New Zealand
population is predominantly European with a lower prevalence of smoking than other
ethnic groups, the mean cost for a non-smoker, in a model not controlling for
ethnicity, is essentially the mean cost for a non-smoking European. In the same model
the cost for a smoker would be driven by Maori and Pacific smokers and if those
ethnic groups have a higher burden of chronic disease, as we know they do, the mean
cost of smokers would be inflated by the higher costs associated with co-morbidities
and consequently the cost excess would be inflated. Calculating the mean cost excess
by each socio-economic group controls for this, hopefully, the majority of this
inflation.

Where the two methods diverge is on the basis and quality of smoking status
identification, the target population and size of the cohort use to estimate the cost
excess associated with smoking status of New Zealanders.

Method 1: Health Service Utilisation population

The first method relies on the cohort of New Zealanders registered with an NHI and
deemed to be live and resident during the period 1 July 2007 to 30 June 2008. This
cohort (4,264,867 persons) amounts to 99.9% of Statistics New Zealands estimated
resident population at 30 June 2008 (4,268,900 persons) and while 0.1% of the
population is significant in absolute terms (4,033 persons) these are not people
accessing public health services.

The method also relies on the recording of smoking status (current or ex-smoker) with
ICD-10 codes in the hospital discharge data (NMDS) or dispensing of NRT to
individuals (Pharmhouse). We note that smokers, ex-smokers and never-smokers will
be misclassified and recording of smoking status is demonstrably and significantly
incomplete.

Firstly, based on the assumption that smokers on average cost more and non-smokers
less and that misclassification is random the bias should be to the null, i.e. lower
excess cost estimates.

Secondly, we must admit that generally identification of smoking status will be on the
basis of correlation with a health condition and poorer health, consequently we will
over estimate cost excess between generally sicker smokers and a mix of healthier
smokers and non-smokers. A way to deal with this problem (not implemented thus

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far) is to estimate excess cost based on the number of smokers identified in the
inpatient and dispensing data and not from the census this will in turn under
estimate costs.

We present these biases to illustrate the potential problems with the method but at this
stage give no indications of the possible size of each of these effects as due to time
constraints this work has not been done.

Method 2: Linked New Zealand Health Survey 2006/07 cohort

The second method relies on the subset of New Zealanders responding to the 2006/07
NZHS (third quarter interim dataset provided by the contracted survey organisation
as at the time of the linkage the complete dataset was not available) whom we could
link anonymously and deterministically to National Health Index (NHI) and hence
Vote Health spending on that individual during the period 1 July 2007 to 30 June
2008. This cohort is 74% of adults responding to the 2006/07 NZHS (as at the third
quarter) or amounts to 7,676 respondents. The survey did not sample from the general
population, but from private dwellings (i.e. no institutions, prisons or hospitals) and
will miss out on some high smoking prevalence populations with high costs or
potentially poorer states of health.

The method also relies on self-reported smoking status from the survey and allows for
four groups: current smokers, ex-smokers more than 5-years, ex-smokers less than 5
years and people who have never smoked.

The final point about the second method relates to re-weighting the estimated mean
excess costs associated with smoking for each socio-demographic group back to the
entire New Zealand population. As this method uses a subset of the population one
has to assume that people in each group are representative of the same but much
larger group of individuals in the population. There is no absolute certainty that this
process will yield a total health system budget cost equal to that of the original cost
frame. Another way to state this is that while absolute whole of system costs from the
re-weighted estimates may not be the same as the actual Vote health budget for the
year, we can with some certainty rely on the relativities.

Results

Table 1 provides a high level summary of the results of the two methods. Method 1
was applied on the 2006/07 linked cost dataset and method 2 on the 2007/08 linked
cost dataset. These datasets included 32.2% and 63.3% of Vote Health in their
respective years. The percentage of Vote Health costs linked to NHIs was dependent
on the availability of cost data from different sources at the time of the analysis. For
example, when the analysis using method 1 was carried out, ED and outpatient
volumes and pricing data were not available. When we undertook the method 2
analysis more data was available but only for the more recent year, hence the different
years for the costs datasets.

In method 1 $3.35 billion (Public Hospital Discharge, Laboratory Testing Claims and
Community Pharmacy Dispensing Claims) was linked to the individuals in the NHI
population frame, $2.07 billion of which was for people 15 years or older. The same

4
method estimated the excess cost associated with smoking at $0.755 billion or 22.5%
of the total linked cost.

In method 2 $7.6 billion (Public Hospital Discharge, Laboratory Testing Claims and
Community Pharmacy Dispensing Claims, Outpatient Attendances, Emergency
Department Services, Section 88 Maternal Claims, MOH Disability Support Services,
PHO Primary Care Capitation Payments and DHB Health of Older People and Mental
Health Services) was linked to the individuals in the NHI population frame. The
population weighted analysis estimated values of $4.44 billion for the total cost for
people 15 years and older and the excess population weighted cost associated with
smoking of $0.902 billion. The proportion of spending across all age groups was
estimated by scaling the cost attributable to smoking status from the analysis by the
ratio of the population weighted and actual total linked costs. From table 1 we took
the actual total linked costs for those 15 years and older of $6.95 billion and divided
by the population weighted total costs of $4.44 billion resulting in a scale factor of
1.42. Consequently method 2 estimated the excess cost associated with smoking at
18.7% (0.902 * 1.42 / 7.6) of the total linked cost.

Table 1 Summary of results

Proportion Proportion Excess Total cost Total Vote

of of cost linked to cost Health
spending spending attributed 15+ years linked Budget3
associated associated to analysis to
with with smoking analysis
smoking smoking status
status (15+ status (all (15+
years) ages) years)

Method 1: 36.5% 22.5% $0.755 $2.07 $3.35 $10.4

Health billion billion billion billion
Service (actual) (actual) (2006/07)
Utilisation
population
Method 2: 20.3% 18.7% $0.902 $4.44 $7.6 $12.0
Linked (estimated billion billion billion billion
New by (population (population (2007/08)
Zealand weighting) weighted) weighted) -
Health $ 6.95
Survey billion
2006/07 (actual)
cohort

Given that our analyses havent linked all Vote Health spending to the population
frames for analysis, and a significant proportion of this spending will be on
operational, capital and training expenditure, we can only estimate how costs related

3
Treasury Reports of Vote Health Budgets (http://www.treasury.govt.nz/budget/votehistory/health)

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to smoking will be distributed amongst the Vote Health expenditure we have not
linked.

We assume, in the absence of other information, that spending on health care services
that have not been linked in the costs datasets will be distributed in the same way in
relation to smoking status as the linked spending.

We note the similar estimates of excess costs even though the second method linked
almost double the costs of the first. The first method estimates 22.5% of excess costs
and the second method 18.7% of excess costs (a 3.8 percentage point difference). This
is obviously not conclusive evidence of the appropriateness of our assumption about
the distribution of unlinked costs, but suggests that it is not a completely insensible
one.

Future analyses will aim to address the appropriateness of applying these proportions
to the unlinked component of costs. One approach will be to estimate the proportion
of costs related to smoking for each source of funding (e.g. Hospital Discharge,
Pharmaceutical Dispensing, and Laboratory Testing etc). In this way we can observe
the range of proportions and potentially will be able to apply the more appropriate one
to each of the unlinked sources of costs. For example, we can estimate the proportion
of DHB Health of Older Person and Mental Health Services funding (as we have
linked costs for these events) and potentially apply this proportion to the Inpatient and
Outpatient Mental Health budget, for which we do not at present have linked costs.

An additional point to note relates to the effect of some of the funding mechanisms
with, for example, the PHO primary care capitation payments. The basis for the
payments in this case is a collection of formulas adjusting for age, ethnicity and
NZDep Quintile among other things. We assume that there will be a net excess cost
(proportion) associated with the capitation payments due to the fact the formulas use
factors that will be highly positively correlated with smoking prevalence. So in this
case if we calculate the proportion of excess cost it will be an estimate of excess cost
associated with the funding formula and not directly with cost of providing primary
care services. Our expectation is that the proportions affected in this way will be an
underestimate of those we would calculate if we had actual costs.

We take two relatively simple approaches to calculate the overall excess cost of
smoking to Vote Health and the results of these are presented in Table 2. The first is
to simply apply the proportion of spending associated with smoking to Vote Health to
estimate total excess spending associated with smoking. The second is to exclude the
Ministry of Health Operational, National Health Services and Training and Capital
Expenditure from Vote Health Budget and then apply the proportion to the remaining
expenditure.

Our choice of an estimate with the Operational, Capital and Training Expenditure
excluded was based around an assumption that these would be fixed costs in any year
least affected or associated with poorer health status and hence higher costs relating to
smoking status.

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The first method estimates total excess spending associated with smoking status
between $2.03-$2.34 billion dollars in 2006/07 and the second method $1.91-$2.24
billion in 2007/08.

Table 2 Estimates for each method of total excess cost associated with smoking

Proportion Vote Vote Estimate of Estimate of

of spending Health Health total Vote total Vote
associated Budget Budget Health Health
with (excl. (excl. associated
smoking OP./TRAI OP./TRAI with
status (all N/CAP.) N/CAP.) smoking
ages) associated
with
smoking

Method 1: 22.5% $10.4 $9.0 billion $2.03 $2.34

Health billion billion billion
Service (2006/07)
Utilisation
population
Method 2: 18.7% $12.0 $10.2 $1.91 $2.24
Linked New (estimated billion billion billion billion
Zealand by weighted (2007/08)
Health survey data)
Survey
2006/07
cohort

Conclusion

We have used two different methods to derive direct excess health system costs
attributable to smoking status in New Zealand in 2006/07 and 2007/08. They both
estimate similar amounts of excess costs attributable to smoking.

Method 1 has the advantage of looking at all resident New Zealanders irrespective of
living circumstances or health status but suffers from incomplete capture of smoking
status.

Method 2 has the advantage of using a complete capture of self-reported smoking

status, a significantly higher proportion of Vote health costs linked to the analysis but
the disadvantages of a much smaller sample size and an exclusion of people in
institutions. This method also relies on the assumption that the survey respondents
and their responses are representative of the New Zealand population this may not
be true in terms of people living in institutions but for the remaining population we
feel the robust survey methodology and re-weighting of survey results to the Statistics

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New Zealand usually resident census population for 2006 means on the whole the
results will be representative.

When we applied the estimated percentages of excess linked costs associated with
smoking status from the two methods to two levels of Vote Health we get figures
ranging from $1.91 - $2.34 billion.

In conclusion, on the basis of the proceeding analyses, we suggest that the figure of
$1.91 billion of the $12.0 billion 2007/08 Vote Health budget is the most reliable
estimate of the direct excess health system costs attributable to smoking status in New
Zealand. Firstly, on the basis of a preference for method 2 as the more robust analysis
and secondly for the reason that the upper limit includes expenditure relating to
categories that will not be affected in the short term by changes in excess costs
associated with smoking status.