Big Tobacco vs Vaping: Behind The True Political Agenda

Big Tobacco vs Vaping: Behind The True Political Agenda

The History Behind Tobacco Merchant Service Agreement

Over the course of 40 years, between the mid-1950s and 1990s, over 800 private lawsuits were filed against tobacco companies for damages related to the effects of smoking. However, tobacco companies always prevailed in these private lawsuits.

This led to the federal government drafting legislation for a settlement agreement with the major tobacco companies. However, the Senate rejected all proposed legislation.

In the meantime, the States started forming litigation against tobacco companies. In the mid-1990s, over 40 state lawsuits were filed against tobacco companies for retribution of smoking-related health problems and Medicaid reimbursements.

The notion from the States was ‘You cause the health crisis, you pay for it’. This time, the approach was effective because big tobacco couldn’t rely on personal responsibility as its defense. Instead, it was fighting a cause of action with health issues.

Four States settled with Big Tobacco, and then the remaining 46 States agreed to the Tobacco Merchant Service Agreement in 1998.

 

About the Tobacco Merchant Service Agreement

The Tobacco MSA was primarily between the 46 States (and the four that previously settled) and the top four manufacturers at the time—Philip Morris USA, R. J. Reynolds Tobacco Company, Brown & Williamson Tobacco Corp., and Lorillard Tobacco Company. These four manufacturers represented 97% of the market share at the time.

The Tobacco MSA had several provisions, most notably were the restrictions on youth targeting in advertising or marketing. This resulted in a ban on outdoor placements like billboards and transit signage, along with restrictions on sports advertising and event sponsorships.

One key provision in the Tobacco MSA was the Annual Payments allotted to States. Beginning in 2000, $183 billion was to be paid annually to the States by the big four tobacco companies. This number was reduced to $9 billion per year into perpetuity.

After the big four settled the agreement, other cigarette manufacturers followed. 41 manufacturers have signed the agreement since it was established.

Key Takeaway: The MSA was structured in a way that it would behoove the big four and the States to include as many manufacturers in the MSA as possible.

 

Tobacco MSA Payment Structure

All annual payments to the States are primarily based on the number of cigarettes sold.

For the big four tobacco companies, the payment amounts are determined based on their relative market share compared to 1997. The “Volume Adjustment” – which affects the payment amount for a particular company – compares the number of cigarettes sold in the payment year with the amount sold in 1997.

So for example, if the number of cigarettes sold in a given year is less than the number that the company sold in 1997, the Volume Adjustment allows for a reduced payment.

Furthermore, the MSA includes an adjustment for participating manufacturers outside of the big four companies, called the “NPM Adjustment.” The NPM Adjustment allows for manufacturers who have lost market share as a result of the MSA to have reduced payments to account for the loss. This continues to give incentives to states to protect the market dominance for manufacturers.

Key Takeaway: Reductions in the number of cigarettes sold by the big four tobacco companies results in the States receiving less money.

 

What Happened Post-Tobacco MSA

The Tobacco MSA did not limit how the States could use their funds.

Over the next ten years following the Tobacco MSA, state and local governments sold Tobacco Bonds. These were bonds issued by the States that were securitized from the Tobacco MSA payments. The Tobacco Bonds were backed by state or local revenues. This created an incentive from both the government and public for tobacco and cigarettes companies to thrive so the bond payments could be made to bondholders.

Recently, the situation has escalated as tobacco and cigarette sales and revenues are falling faster than expected. The number of cigarettes sold has decreased over the past few years, and the trend accelerated as year-over-year declines rose to 8.8% in March 2019. This equates to 597 million fewer cigarette packs sold per year.

This has led to $97 billion in outstanding bonds, led by New York and California. Analysts are now projecting all Tobacco Bonds outstanding are at risk of default, and long-term tobacco bonds have been downgraded to junk rating.

Key Takeaway: The escalating decline in the number of cigarettes sold puts the States at risk of missing bond payments and defaulting on outstanding Tobacco Bonds.

 

Smoking vs Vaping Health Concerns

Much has been made of the recent ‘vaping crisis’ that has led to 2,051 injuries and 39 deaths. Many States have threatened to tax or ban e-cigarettes and flavored vaping products as a result. This is intriguing as the health concerns seem to pale in comparison to the current situation surrounding cigarettes.

More than 480,000 deaths per year in the U.S. are attributed to cigarette smoking, along with 41,000 deaths from secondhand smoke exposure. On top of that, more than 16 million Americans are living with a disease caused by smoking cigarettes. On average, cigarette smokers die 10 years earlier than non-smokers.

This equates to more than $300 billion in costs each year due to smoking-related illnesses in the U.S.—including more than $170 billion for direct medical care costs.

Key Takeaway: Cigarettes are the leading cause of preventable death in the U.S., but we are focused on the ‘crisis’ around several vaping injuries.



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