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Public Finance
Balance of
Smoking in the
Czech Republic
Notice
This report was commissioned by Philip Morris CR a.s.
on terms specifically limiting Arthur D.Little ’s liability.
Our conclusions are the results of the exercise of our
best professional judgement,based in part upon
materials and information provided to us by third parties.
Use of this report by any third party for whatever purpose
should not,and does not,absolve such third party from
using due diligence in verifying the report ’s contents.
Any use which a third party makes of this document,or
any reliance on it,or decisions to be made based on it,
are the responsibility of such third party.Arthur D.Little
International,Inc.CR accepts no duty of care or liability
of any kind whatsoever to any such third party,and no
responsibility for damages,if any,suffered by any third
party as a result of decisions made,or not made,or
actions taken,or not taken,based on this document.
Report to
Philip Morris CR a.s.
November 28,2000
Arthur D.Little International,Inc.
Konviktská 24
110 00 Praha 1
Czech Republic
Telephone +420 2 24 23 19 63
Fax +420 2 24 23 18 29

1
Executive summary
Based on up-to-date reliable data and consideration of all relevant contributing
factors,the effect of smoking on the public finance balance in the Czech Republic in
1999 was positive,estimated at +5 815 mil.CZK.
This report details the findings of a study commissioned by Philip Morris CR a.s.and
undertaken by Arthur D.Little to quantify the effects of smoking on the public finance
balance in the Czech Republic in 1999.The objective was to determine whether costs
imposed on public finance by smokers are offset by tobacco-related tax contributions and
external positive effects of smoking.
The study entailed analysis of data from scientific journals,reports by international and
national health institutions,official statistics published by the Czech Statistical Office,data
provided by the General Health Insurance Company and interviews with experts in health
care,smoking,epidemiology and economics.
The results of the study show that the total public finance balance of smoking in the Czech
Republic in 1999 was positive and amounted to +5 815 mil.CZK.This is a realistic
estimate,which reflects the author ’s best professional opinion.The variety of expert
opinion and input data put this estimate to the range of +1 347 mil.CZK to +13 650 mil.
CZK.Our principal finding is that the negative financial effects of smoking (such as
increased health care costs)are more than offset by positive effects (such as excise tax
and VAT collected on tobacco products).This conclusion would hold even if the indirect
positive effects of smoking were neglected.
Public finance gained between 19 523 mil.CZK and 23 793 mil.CZK,with the realistic
estimate of 20 270 mil.CZK,from smoking-related taxes.Public finance saved between
943 mil.CZK and 1 193 mil.CZK (realistic estimate:1 193 mil.CZK)from reduced health-
care costs,savings on pensions and housing costs for the elderly --all related to the early
mortality of smokers.Among the positive effects,excise tax,VAT and health care cost
savings due to early mortality are the most important.Increased health-care costs,
absenteeism-related social costs,lost income tax related to early mortality,and fire-
induced costs total between 13 849 mil.CZK and 16 605 mil.CZK,with the realistic
estimate totalling 15 647 mil.CZK.Our findings are summarised in Figure 1.
Figure 1:The public finance balance of smoking in the Czech Republic in 1999 is estimated at +5 815 mil.CZK
Results presented in the form of realistic estimates were verif ied by international
comparisons and through the use of alternative methods of quantification.Provided ranges
reflect variety of expert opinion and input data from alternative sources.
Customs duty
354 mil CZK
Health care costs savings
due to early mortality
968 mil CZK
Lost income tax due to higher mortality
1 367 mil CZK
ETS related health care costs
1 142 mil CZK
Savings on housing for elderly
28 mil CZK
Excise tax
15 648 mil CZK
Smoking (first
hand)related
health care
costs
11 422 mil CZK
VAT
3 521 mil CZK
Fire induced costs
49 mil C ZK
Corporate income tax
747 mil CZK
Pension &soc .expenses
savings due to early mortality
196 mil CZK
Net balance
+5 815 mil CZK
Income and positive
external effects
21 463 mil CZK
Smoking related
public finance
costs
15 647 mil CZK
Days out of work related public
finance costs
1 667 mil CZK

1
Introduction
Philip Morris CR a.s.commissioned this study to determine whether smoking
imposes a financial burden on the public finance of the Czech Republic.
Philip Morris is the world ’s largest consumer packaged goods company operating in
nearly 200 countries as a manufacturer of some of the world's top brands in food,
beer and tobacco.Arthur D.Little is the world's oldest and one of the foremost
management consulting firms,helping leading organisations world-wide create
innovative strategies across the full spectrum of their activities.
Philip Morris CR a.s.asked Arthur D.Little to analyse the negative and positive
effects of smoking on public finance in the Czech Republic for 1999.The results will
indicate whether smoking imposes a financial burden on the public finance of the
Czech Republic.Understanding the public finance implications of smoking is
important in determining the fiscal and legislative policy applied to tobacco.
The study estimates only the public finance-related effects of smoking.These are
effects that have traceable and significant impact on public finances.For the purpose
of this study,public finance in the Czech Republic consists primarily of the national
and municipal budgets and the budgets of health insurance companies.The study
does not include private costs of smoking and thus does not consider all social
effects of smoking.Therefore,the results of this study should not be interpreted as
defining,and no judgement can be made as to whether smoking is good or bad from
the standpoint of the individual or the society.
This study considers positive and negative effects of smoking on public finance,and
includes both direct effects,for example,accrued taxes,and indirect effects,such as
health care cost savings.Figure 2 illustrates the relationship among the effects taken
into account in the study.
Figure 2:The public finance balance of smoking comprises positive and negative effects with traceable
and significant impact on public finance.
Public Finance
Balance of Smoking Positive effects Negative effects
Direct positive effects Indirect positive effects
Excise tax
Value-added tax
Corporate income tax
Customs duty
Health care cost savings
Pensions savings
Housing to elderly savings
Increased health care costs
Lost income tax
Absenteeism related costs
Smoke-induced fire costs

2
The impact of smoking on public finance was assessed for 1999 only.The study thus
provides a 1999 ‘snapshot ’ and does not take into account the long-term dynamics of
smoking phenomena,although we are aware that the time lag between smoking and
its effects can be as long as 30 years,that the composition of cigarettes has
changed;and that health care costs have increased significantly over the past
decades.
In order to evaluate the balance,we took into account,on both the cost and benefit
sides,only the portion of costs and benefits attributable to smoking.(Not all the
health-care costs incurred by smokers are attributable to smoking and some of the
smoking related tax income would be raised by comparable taxes on alternative
forms of consumption.)
The overall result of the study is that negative financial effects of smoking are more
than offset by direct and indirect (mainly direct)positive effects.
In the study we use the following assumptions:
1.Smoking poses a serious risk to the health of smokers.
2.Smoking can lead to a reduced life span of smokers.
3.Environmental tobacco smoke (second-hand smoking)may be harmful to the
health of non-smokers.
4.Health-care in the Czech Republic is financed through a public,state-enforced
health insurance system.
5.Taxes collected from tobacco producers and smokers (excise tax,VAT,corporate
income tax,customs duties)contribute to the general-purpose government
budget.
6.
Average wage data is used in this study to calculate foregone income tax.
The remainder of the document is organised as follows.In Chapter 1 we describe the
methodology applied in the study and present the results.In turn we quantify the
positive direct and indirect effects and the negative effects.For each individual effect
we provide a realistic estimate and a range.By realistic estimate we mean our best
judgement,which we base on the most probable input data and on the most
applicable calculation methods.The provided range,within which the estimate may
vary,demonstrates the variability of opinion in the literature and the uncertainty and
inaccuracy of the data.The lower and upper bounds of the range are the results of
a combination of extreme opinions and values of contributing factors.We believe that
it is very unlikely that any defendable approach could lead to a result outside this
range.Chapter 2 discusses the reliability and robustness of our results by reviewing
alternative approaches and verifying collected data by cross-checking.

3
1.Public finance balance of smoking in the Czech Republic –
methodology and results
The realistic estimate of net effect of smoking on public finance in the Czech
Republic in 1999 is +5 815 mil.CZK.The estimate can range between
+1 347 mil.CZK and +13 650 mil.CZK.Tobacco related taxes and increased
health-care costs are the most important contributing factors.
In this chapter we describe and quantify the positive (direct and indirect)and
negative effects of smoking on public finance and provide the methods of their
quantification.Positive direct effects include excise tax,value-added tax,customs
duties and corporate income tax;positive indirect effects are mortality-related health
care,social and public housing costs savings.Negative effects are health-care costs
attributable to smoking,health-care costs attributable to environmental tobacco
smoke,early mortality-related lost income tax,absenteeism-related social benefits
and costs of smoke-induced fires.
Figure 3:Budget income generated by smoking in the Czech Republic in 1999.
Figure 4:Public finance balance of smoking in the Czech Republic in 1999.
The results presented above reflect our realistic estimate.The figure 5 815 mil CZK
would be much higher if the taxes on tobacco products were fully included.
Effect description
Attributable
to smoking -
realistic estimate
Attributable
to smoking -
minimum
Attributable
to smoking -
maximum
(collected 1999)
Excise tax 15 647,9 15 647,9 15 647,9
Custom duties 354,4 354,4 354,4
VAT on excise tax and customs duties (22%of the above)3 520,5 3 520,5 3 520,5
VAT on tobacco bussiness activities 0,0 0,0 2 794,7
Corporate income tax 747,2 0,0 1 476,0
Total budget income 20 269,9 19 522,7 23 793,4
*All values are in million CZK
Effect description
Realistic
estimate Lower bound Upper bound
Positive effects of smoking on public finance 21 462,6 20 465,4 24 986,1
Budget income 20 269,9 19 522,7 23 793,4
Indirect positive effects 1 192,7 942,7 1 192,7
Health care cost savings due to early mortality 968,4 775,3 968,4
Pension and social expense savings due to early mortality 196,3 146,5 196,3
Savings on housing for elderly 28,0 20,9 28,0
Negative effects of smoking on public finance -15 647,2 -19 118,0 -11 335,7
Health care costs attributable to smoking -12 564,1 -13 820,5 -11 307,7
Direct health care costs -11 421,9 -12 564,1 -10 279,7
Health care costs due to ETS -1 142,2 -1 256,4 -1 028,0
Days out of work due to higher morbidity -1 667,0 -2 420,4 0,0
Lost income tax due to early mortality -1 367,0 -2 806,8 0,0
Fire induced costs -49,1 -70,2 -28,0
Total balance of smoking in the Czech Republic in 1999 5 815,4 1 347,4 13 650,4
*All values are in million CZK

4
1.1.Positive effects on the balance of public finance
The realistic estimate of public finance gains is 21 463 mil.CZK,which can
range from 20 465 mil.CZK to 24 986 mil.CZK.These gains consist of direct
contribution of 20 270 mil.CZK from smoking related taxes and from savings
through external effects of 1 193 mil.CZK.
Direct income is generated by collecting value-added tax,excise tax and customs
duties on tobacco products and corporate income tax collected from tobacco
businesses.Indirect positive effects include savings in public health-care costs and
state pensions due to early mortality of smokers,and savings on public costs related
to the support of the elderly.Figure 5 shows the relative contribution in percentages
of all (direct and indirect)positive effects.
Figure 5 :Excise and value-added taxes comprise the majority of smoking-related positive effects on
public finance.
Excise tax
72,9%
Pension and social
expense savings
due to early
mortality
0,9%
Health care cost
savings due to early
mortality
4,5%
VAT
16,4%
Savings on housing
for elderly
0,1%Custom duties 1,7%
Corporate income
tax
3,5%
Excise tax,value-added tax,customs duties and corporate income tax
comprise direct public revenue from tobacco products.
Based on information provided by the Ministry of Finance (Ministry of Finance,2000),
excise tax collected on tobacco products in the Czech Republic in 1999 was
15 648 mil.CZK.Data provided by the Customs Office of the Ministry of Finance
(Customs Office,2000)shows that customs duties collected on finished tobacco
products and imported dried or pre-processed tobacco amounted in 1999 to
354 mil.CZK.Value-added tax collected on tobacco products in 1999 amounted to
5
6 135 mil.CZK 1 .Of this amount we attribute 3 521 mil.to smoking.The remainder
would,in the absence of cigarette smoking,be raised through VAT collection on
alternative ways of consumption.Since VAT is calculated as a percentage of the
value of goods including excise tax and customs duties,the difference –22%of
excise tax and customs duties collected on tobacco products – is our realistic
estimate of tobacco contribution to VAT collected in 1999.
The estimated public finance contribution of attributable corporate income tax
collected from tobacco businesses in the Czech Republic ranges between 0 and
1 476 mil.CZK,with our realistic estimate at 747 mil.CZK.
Tobacco businesses contributed 1 476 mil.CZK in corporate income taxes to the
state budget in 1999 (calculation based on Philip Morris CR a.s.accounting data and
market share).This is upper limit of our range of corporate income tax contribution.
The lower bound of our range is put at zero,reflecting the hypothesis that the labour
and capital,if employed in another industry,would generate a comparable level of
profits and contribute comparable corporate taxes to the state budget.The tobacco
industry in the Czech Republic in 1999 was one of the most prof itable industries in
the country and so paid more income tax than average business.We think that only
the tax paid on above-normal profits should be included.We define above-normal
profits as those that exceed the profits of the average company in the most profitable
industry in the country other than tobacco.Tobacco companies in the Czech
Republic in 1999 had an EBT/asset ratio of 35,42%compared to 18,21%for IT and
office equipment.Nearly half,or 48,59%,of corporate tax paid by tobacco
businesses thus comes from above-normal profits.Including this amount only,our
realistic estimate of the public finance contribution of corporate income tax
constitutes 747 mil.CZK.
Although the negative effects of consumption of tobacco purchased on the black
market are included on the negative side of the balance (e.g.additional health care
costs attributable to smoking)we do not consider the potential income from
smuggled goods on the positive side because it does not directly relate to smoking
but rather to the efficiency of tax collection.
Public finance benefits from smoking indirectly,via mortality-related health
care,pensions,and public housing costs savings.
Mortality-related health-care costs savings r a n g e f r o m 7 7 5 m i l .C Z K t o
968 mil.CZK.The lower bound of this range reflects the average smoker ’s
4,30 years of lost life (as reported by Public Expenditure Balance of Smoking in the
Netherlands,1997).The upper bound reflects 5,23 years lost by an average smoker
based on data provided by (Lippiatt,B.,1990).This is also our realistic estimate.
Our calculations assumed average annual health care cost of 11 064 CZK per
person (The Czech Statistical Office,2000)and uniform distribution of deaths
throughout the year.The present value of saved health-care cost per smoker is then
calculated as half of the average yearly health-care costs for the first year,and
present discounted value of further 4,73 years of average annual health care costs
(reflecting 5,23 years of life lost for the average smoker).We increased health care
costs by 10%each year to account for the general trend of ever increasing health
care costs.
1 This is calculated as 22%(standard VAT rate)of total tobacco revenues (12 703 mil.CZK);
excise tax (15 648 mil.CZK);and customs duties (354 mil.CZK).
6
Mortality-related pensions savings range from 147 mil.CZK to 196 mil.CZK,with
the realistic estimate at 196 mil.CZK.
This estimate is based on data obtained from the Czech Statistical Office and the
Ministry of Labour and Social Affairs of the Czech Republic,as well as on the
following assumptions:
• Average monthly old age pension of 5 724 CZK in the Czech Republic in 1999;
• Monthly insurance payments paid from the state budget for each pensioner of
419 CZK;
• 22 000 deaths due to tobacco smoking in the Czech Republic in 1999 (Peto,R.,
et al.,1994);
• 33%of smokers ’deaths occurred during their productive ages;(this can be as
high as 50%according to some sources)
• 3,1 of years of life are lost by smokers of pension age.
To compute the current value of future savings,we used a discount factor of 6,75%,
which corresponds to the interest rate on state bonds that will mature in 2005.We
calculated pension savings by multiplying the old age pension and insurance paid
from the state budget per pensioner per year by the number of dead smokers of
pension age in 1999.Assuming a uniform distribution of deaths of smokers
throughout the year,we added 6 months of pension savings for the first year and the
discounted value of the savings for the remaining of the 3,1 years (based on study
(Lippiatt,B.,1990)).
The lower bound of the range uses the figure of 50%of smoker deaths occurring in
the productive period (ages 20 to 64 for males and 20 to 59 for females)(Prabhat,J.,
Chaloupka,F.J.,1999).This figure is high compared with other sources (Public
Expenditure Balance of Smoking in the Netherlands,1997)were the figure of
smokers deaths occurring in the productive age was 38%.The upper bound of the
range is based on an estimate of 33%of smoker deaths in the productive period
(Sachlova,2000).This figure is also our realistic estimate.
Mortality-related elderly housing cost savings r ange f r om 21 mi l .CZK t o
28 mil.CZK,with the realistic estimate of 28 mil.CZK.The realistic estimate is based
on data from the Czech Statistical Office,the Institute of Health Information and
Statistic of the Czech Republic,and scientific literature.We assumed that in 1999,
1,7%of pensioners were in elderly housing;the annual subsidy per bed in elderly
housing was 51 700 CZK;22 000 deaths were due to tobacco smoking;33%of
deaths were among people of productive ages;3,1 years of life were lost by smokers
of pension age;and we applied a discount factor of 6,75%.We calculated savings on
housing for the elderly by multiplying cost per bed by number of deaths of pension-
age smokers in 1999 by percentage of pensioners in old peoples ’ homes.This
product was divided by 2 for the first year,to account for uniform distribution of
deaths throughout the year.We then added the discounted value of the savings for
the remaining of the 3,1 years.The lower bound uses the figure 50%of smokers in
productive age (Prabhat,J.,Chaloupka,F.J.,1999).
7
1.2.Negative effects of smoking on the public finance balance
The realistic estimate of public finance losses attributable to smoking is
15 647 mil.CZK.Variety of expert opinion and input data put t his estimate to
the range of 11 336 mil.CZK to 19 118 mil.CZK.Increased health care cost,
absenteeism-related social benefits,lost income tax and fire induced costs,all
related to smoking,are the main contributing factors.
The negative effects of smoking on public finance take the form of increased health
care costs,the effects of early mortality,higher morbidity and smoking-related
accidents.Health care costs attributable to smoking are the result of self-damage by
(primary)smokers or damage caused to non-smokers (environmental tobacco smoke
--ETS).The former includes early mortality of smokers,worse state of health of
smokers than non-smokers and fire damage caused by smokers ’negligence.Fire-
induced costs attributable to smoking are of small significance in the Czech Republic.
Figure 6 shows the relative significance of the individual negative effects.
Figure 6 :Health care costs attributable to smoking and social benefits related to higher morbidity
represent the majority of tobacco-related public finance costs
Health-care costs attributable to smoking – using the disease-based approach --
were 12 564 mil.CZK in 1999,consisting of direct health-care costs of
11 422 mil.CZK and indirect health care costs of 1 142 mil.CZK.Our r eal i st i c
estimate of the impact of smoker absenteeism on public finance,derived from the
data obtained from the Czech Statistical Office and the Institute of Health Information
and Statistic of the Czech Republic,is 1 667 mil.CZK.Our realistic estimate of lost
income tax due to the early mortality of smokers in CR in 1999 is 1 367 mil.CZK.Our
realistic estimate of fire costs attributable to smoking is 49 mil.CZK.
Direct health care
costs
73,0%
Fire induced costs
0,3%
Indirect health care
costs
7,3%
Social benefits
related to higher
morbidity
10,7%
Lost income tax due
to early mortality
8,7%
8
Health-care costs attributable to smoking
We distinguish between direct health-care costs –damage to own health,and
indirect health-care costs –damage caused by ETS.We used the disease-based
approach to calculate direct health care costs.The estimate of the indirect health
care costs is based on the comparison and extrapolation of international data.
The disease-based approach,using detailed country-specific statistics of health care
expenditure,has the potential to provide the most accurate estimate of the total
health care expenditure attributable to smoking.The approach calculates the health
care costs attributable to smoking by multiplying the total cost of treatment of each
disease by the attributable risk factors that are,in turn estimated from relative risk
factors.Relative risk factors quantify how much smoking affects the health of
smokers relative to non-smokers.We do not take into account the fact that the costs
of treatment of common diseases are higher in the case of smokers because of
higher examination costs and longer treatment.We argue that these costs are not
significant.This is supported by the fact that these costs were not quantified in earlier
studies.
Since smoking risk factors for the Czech Republic were not available,we used those
from western countries.
The disease-based approach,the method of choice in this context,was not
applicable to the calculation of indirect health-care costs (the health-care costs
related to ETS).We therefore estimated these costs by international comparisons
and expert estimates.
The realistic estimate of direct health-care costs attributable to smoking in 1999,
using the disease-based approach,is 11 422 mil.CZK,within the range of
10 280 mil.CZK to 12 564 mil.CZK.This range was obtained as +/-10%,which is
reasonable reflection of variance in reported values in the literature.Four subgroups
of diseases were considered:neoplasm,cardiovascular diseases,respiratory
diseases and diseases among children below 1 year of age.Within these categories,
neoplasm of trachea,lung and bronchus;ischemic heart disease;pneumonia and
influenza;and short gestation and low birth weight contributed the most to the total
direct health-care costs of smoking.
The calculation of direct health care costs was based on the following formula.We
used relative risks calculated for the US population from 1990 (JAMA 1993,1994),as
country specific data were not available for the Czech Republic.AR stands for
attributable risk,P stands for proportion of the population by sex exposed to the risk
factor,and RR stands for relative risk.
1 )1 (
)1 (
+••
••= RR P
RR P AR
This formula was also used in previous studies (Raynauld,A.,Vidal,J.P.,1992).The
attributable percentage was then multiplied by the total health care costs per disease,
obtained from the General Health Insurance Company (VZP,2000).While this total
includes only data from VZP,it is representative since the VZP finances the
treatment of 74%of the Czech population.In the following paragraphs the results are
presented for the most important diseases.
The attributable percentages of the total costs of smoking-related diseases are listed
in Figure 7.

9
Figure 7 :Much of the occurrence of diseases such as neoplasm of trachea,lung and bronchus,
ischemic heart disease,pneumonia and influenza;and short gestation and low birth weight can be
attributed to smoking
Neoplasm of trachea,lung and bronchus
In 1999,1 060 mil.CZK of the total 11 422 mil.CZK direct health care costs
associated with the treatment of neoplasm could be attributed to smoking.The
smoking-related costs of treatment of trachea,lung and bronchus amounted to 565
mil.CZK.Neoplasms are most closely associated with smoking,and smokers are
22,4 times more likely to suffer from them than non-smokers (Nelson,D.E.,et al.,
1994).
Ischemic heart disease
The costs of treatment of cardiovascular diseases attributed to smoking were 7 854
mil.CZK in 1999.Of this total,ischemic heart disease costs were 5 027 mil.CZK.
These were the highest smoking-related health care costs,mainly because ischemic
heart disease is common in the Czech Republic,and the treatment is long (i.e.
successful,improving greatly the survival rate of patients)and expensive (e.g.
bypass operations).Smokers are only about 3 times more likely to suffer from this
disease (Nelson,D.E.,et al.,1994),which is not a big risk compared to the rate for
the above mentioned cancer.
Males
%
Females
%
Neoplasms
Lip,oral cavity,pharynx 91 52
Esophagus 72 69
Pancreas 30 23
Larynx 79 80
Trachea,lung,bronchus 89 72
Cervix uteri 21
Urinary bladder 43 27
Kidney,other urinary 44 9
Cardiovascular diseases
Hypertensive diseases 26 14
Ischemic heart disease 42 32
Other heart diseases 26 14
Cerebrovascular diseases,aged 35-65 52 47
Cerebrovascular diseases,aged >65 26 11
Atherosclerosis 55 32
Aortic aneurysm 55 32
Other arterial diseases 55 32
Respiratory diseases
Pneumonia and influenza 28 22
Bronchitis and emphysema 78 69
Chronic airways obstruction 78 69
Other respiratory diseases 28 22
Diseases among infants (<1 year of age)
Short gestation,low birth weight 16 16
Respiratory distress syndrome 16 16
Other respiratory conditions of newborn 16 16
Based on:Cigarette Smoking -Attributable Mortality and Years of Potential Life Lost,USA 1990

10
Pneumonia and influenza
In 1999,2 432 mil.CZK health care costs associated with respiratory diseases were
attributable to smoking.This amount includes 553 mil.CZK for the treatment of
pneumonia and influenza.These diseases are common among smokers and non-
smokers alike,but usually do not require hospitalisation,and therefore the costs of
treating them are not high.Smokers are only about 2 times more likely to suffer from
these ailments,which is not a big risk compared to cancer (Nelson,D.E.,et al.,
1994).It also reflects the fact that there are other environmental factors that
contribute to these diseases (car pollution,air pollution from burning coal,etc.).
Short gestation and low birth weight
77 mil.CZK spent on diseases among children less than 1 year of age can be
attributed to smoking.Short gestation and low birth weight associated with smoking
cost 64 mil.CZK.While these costs are not significant compared to total direct health
care costs,they must be accounted for due to the fact that smoking has an impact on
children born to smoking mothers.The most obvious effect is low birth weight,which
in serious cases leads to expensive treatment.(Nelson,D.E.,et al.,1994).
Indirect health-care costs attributable to smoking (ETS)
Our estimate of health-care costs attributable to ETS in 1999,using international
comparisons is 1 142 mil.CZK.We used an Australian study (Doran,Ch.,Sanson-
Fisher,R.,1996),and Rosa,J.J.1996 in which ETS-related health care costs were
10%of direct smoking-related health care costs,and applied this percentage to our
scenario.We provide a range of 1 028 mil.CZK to 1 256 mil.CZK,which reflects the
spread in direct health care costs.
Days out of work due to higher morbidity of smokers
The impact of absenteeism of smokers due to illness on public finance ranged
between 0 and 2 420 mil.CZK in 1999,with realistic estimate of 1 667 mil.CZK.The
lower bound reflects the findings of an earlier study (Raynauld,A.,Vidal,J.P.,1992)
and the fact that it has not been proven that smokers are more often out of work due
to illness than are non-smokers.The higher bound is based on an estimated 6,5 days
absent from work due to smoking (MacKenzie,T.,et al.,1994),which was the
highest outcome of the studies reviewed.
Our realistic calculation of 1 667 mil.CZK is based on data obtained from the Czech
Statistical Office and the Institute of Health Information and Statistic of the Czech
Republic.This calculation used an average of 4,5 days out of work due to smoking
(Ministry of Labour and Social Affairs,2000);2 237 000 smokers of productive age;a
total of 19 118 553 days out of work due to illness in the Czech Republic in 1999;and
total social benefits of 16 430 mil.CZK paid for illness in the Czech Republic in 1999.
We did not calculate any loss of corporate income tax because there is no consensus
on whether smokers are less productive than non-smokers.It is also not clear
whether such losses,if they exist,would be borne by the employer or whether they
would also indirectly affect the public finance.

11
Lost income tax due to early mortality of smokers
Our realistic estimate of lost income tax due to early mortality of smokers in the
Czech Republic in 1999 is 1 367 mil.CZK.We provide the range of 0 t o
2 807 mil.CZK,based on discounted effects of 1999 smoking-related deaths.
We calculated lost income tax by multiplying average yearly income tax and social
and health payments of 86 800 CZK by 7 260 deaths of smokers in productive ages
in 1999 and divided the total by two,based on our assumption of the uniform
distribution of deaths of smokers throughout the year.
The lower bound of the range is based on the hypothesis that the vacant position
would be filled immediately by an unemployed person.The 8,7%unemployment rate
in 1999 (The Czech Statistical Office,2000)supports this hypotheses.It could be
argued that training will be necessary for the new employee,but in this circumstance,
the state budget still saves money on social benefits paid to the unemployed.
Therefore,it is reasonable to say that these effects cancel each other out,or that
savings would exceed training costs.
We calculated the higher bound figure based on (Prabhat,J.,Chaloupka,F.J.,1999),
where 50%of deaths among smokers before pension age was mentioned and the
loss of productive life was four years.The realistic estimate of lost income tax used
33%of deaths among smokers before pension (Sachlova,2000)and estimated three
years ’average productive life lost.
Fire-induced costs
The fire costs attributable to smoking range from 28 mil.CZK to 70 mil.CZK,with our
realistic estimate at 49 mil.CZK.This estimate is based on data from the
(Headquarters of the National Fire Fighting Service of the Ministry of Interior of the
Czech Republic,2000)on the causes of fires in the Czech Republic in 1999.
The range reflects the fact that 43%of all fire costs in 1999 were not assigned to
a cause.The lower bound reflects only the direct costs of fires attributed to smoking,
and the upper bound includes a share of costs from unassigned fires,based on the
hypotheses that there would be double the incidence of smoking-related fires among
non-assigned fires The realistic estimate was made by taking share of costs of
unassigned cases based on same incidence ratio of smoking related fires among all
assigned cases of fires.
We do not take into account deaths and injuries caused by fires because the financial
costs related to these were not material in the Czech Republic in 1999.

12
2.Reliability
The validity of the results is assured by critical review and assessment of all
possible approaches and use of latest available data.
The accuracy and reliability of an investigation of this type depends on the approach
used for quantification and on the quality of input data.In this chapter we explain the
logic behind our approach and describe our selection of methods of quantification.
We also document the sources of the input data and discuss their accuracy.
Our approach is based on the following:
• Numerous contributing factors (phenomena with relevance to the subject of the
study)were considered and those found to be most pertinent to the problem
under consideration were taken into account and are discussed below.
• Alternative methods of quantification of these factors were analysed and their
relevance and suitability to the Czech-specific situation were evaluated before
selection was made.
• Input data for the calculations were collected from reliable sources and only the
most up-to-date numbers were applied.
• Results were subjected to sanity checks and whenever possible alternative
methods and international comparisons were used for cross-checking.
In this chapter,we first,in Section 2.1.,explore in greater detail the selection of
contributing factors and methods of their quantification,as used in this study.We
document the development of our approach,discuss in detail contributing factors
considered in the process and provide arguments for their inclusion or exclusion from
the calculations.We also discuss alternative methods of quantification of some
important factors,e.g.the health care costs attributable to smoking,justify our
approach and illustrate the process of cross-checking of the results.In addition we
provide an interpretation of the range within which the estimate may vary.In section
2.2 we discuss the sources of input data.
2.1.Our approach,selection of contributing factors and quantification
methods
Our approach is based on methodology widely used in the literature,which we
further enhanced by careful consideration of additional contributing factors
and more adequate methods of their quantification.
We selected Public Expenditure Balance of Smoking in the Netherlands (1997),
Raynauld and Vidal (1992),and Stoddart et al.(1986)as the most comprehensive of
the relevant studies and used these as the basis of our approach to the quantification
of the effects of smoking on public finance.All of these studies calculate health care
costs using the same disease-based approach as is used in this report.The effects
of smoking on the balance of public finance are in principle the same and
independent of specific location.These studies therefore served as a basis for our
approach.In addition,we endeavoured to make sure that the costs,as well as the
revenues,were only included to the extent that they reflect a true comparison
between a smoking and a non-smoking environment.

13
There are differences among the countries (tax system,system of social benefits,
financing of health care,etc.),and the understanding of the health effects of smoking
has developed over the recent years providing clearer and better quantifiable link
between the habit and its effects.Some adaptation was necessary,therefore,to
devise an approach applicable to the Czech Republic in 1999.
Raynauld and Vidal (1992)investigated the smoker ’s burden on society in Canada,
taking into consideration external costs of smoking with emphasis on health care
costs,costs of smokers ’ negligence,reductions in future health care costs and
reduction in residential care facilities for the elderly.These external effects are more
than outweighed by transfers in the form of taxes.This study is very comprehensive
and discusses many possible implications of smoking on public finance.The
conclusion of the study is that there was net transfer from smokers to non-smokers of
4,3 billion CAD in Canada in 1986.
Public Expenditure Balance of Smoking in the Netherlands (1997)analyses the
public expenditure balance of smoking in the Netherlands.This study also provides
a comprehensive review of methodologies employed in earlier studies.The main
categories of costs and benefits for public finance are the same as in Raynauld,A.,
Vidal,J.P.(1992).This study also found the total net balance on public finance in the
Netherlands was positive,2 617 mil.NLG,based on high tax revenues from tobacco
products.
Stoddart et al.,(1986)estimates the publicly financed health care expenditure
attributable to smoking for the Canadian province of Ontario in one year (1978)and
compares this expenditure to the corresponding tobacco tax revenue.In the study
health care expenditure is related to specific diseases or conditions attributable to
smoking.A combination of epidemiological data and expenditures related to the
treatment of these diseases is used to estimate total health care costs attributable to
smoking.
Numerous studies focusing on particular problems (Carleton,R.,et al.,1980),(Bell,
C.,1996),(Nelson,D.E.,et al.,1994),(Kozak,J.T.,1997),(Kukla,L.,et al.,1999),
(Zeise,L.,et al.,1999),(Meltzer,E.O.,1994),(Skodova,Z.,et al.,2000)related to
the effects of smoking were reviewed,and their findings applied where appropriate.
Field research and analysis of the Czech tobacco industry,consumer behaviour,and
other aspects led to further modifications.
When considering additional factors,or alternative methods of quantification,three
criteria were applied to make the include/exclude decision:
• Relevance to the Czech-specific situation;
• Importance in terms of magnitude of contribution to the total balance or in terms
of public perception;
• Method relies on most up-to-date or best quality/most reliable input data available
for the Czech Republic.
In the following paragraphs we will discuss specific contribution factors and
alternative methods of quantification,starting with those related to the quantification
of positive direct and indirect effects and proceeding to those involved in the negative
effects.This respects the order introduced in Chapter 1.
For each contribution factor under discussion we will clearly state whether it was
included in the calculations and provide a logical argument supporting our decision.
We do not limit ourselves to the discussion of the included factors as we seek to
demonstrate that we have considered a variety of factors and went through a careful

14
process of deciding which of them are appropriate and relevant for the subject under
investigation.
Apart from the factors we will also discuss alternative methods of their quantification,
which were considered for the use in our calculations.Again we will indicate the
reasons for selecting any particular method.In some cases alternative methods were
suitable for cross-checking of the results and this is also documented here.
On the positive side the contributions of the excise duty,value added tax and
customs duties on tobacco were quantified based on the government statistics,which
is believed to reflect the real situation relatively accurately.In the following
paragraphs we discuss topics,which may affect the amount of income considered in
the total balance and on which the opinion often differs.
In agreement with the literature (Public Expenditure Balance of Smoki ng i n t he
Netherlands,1997,Raynauld,A.,Vidal,J.P.1992,Stoddart,G.,et al.,1986)we
explore all significant effects,whether direct or indirect.For that reason we take into
account also the indirect effects of the tobacco industry on public finance through the
use of resources that could otherwise be employed by other industries.Similarly,we
take into account the health care savings due to premature death of a smoker by
quantifying only the health care costs in excess of the level typical for non-smokers,
or the forgone income tax by quantifying the amount of tax a smoker would have paid
should his life not be shortened because of smoking (this approach is the norm in the
literature.)Applying this approach we need to consider that the labour and capital
currently employed by tobacco industry could,if employed by other industries,
produce returns taxed by VAT and corporate income tax.Or that the money currently
spent on tobacco products would be taxed by VAT if spent on other goods.
Similarly,we did not include the income tax of employees of the tobacco industry
as a public finance gain,based on the assumption that if not working within the
tobacco industry,the same workers would be employed elsewhere with comparable
salaries,contributing similar amounts of income tax.
There are at least 600 substances other than tobacco included in the cigarette
manufacturing process,for example,vanilla,menthol and sugar (Cervenkova,R.,
2000).Although many of them are imported,the customs duties on cigarette
additives were not included among the contributions.We argue that the amounts of
those substances used by the tobacco industry and covered by customs or excise
duties are so small that revenues are on an order of magnitude below the levels
considered in the study.
All the components of the direct income of public finance are affected by smuggling
of tobacco products .The potential income lost because of smuggling was not
included in this study,however,as it does not directly relate to smoking but to the
efficiency of tax collection.Even though we are aware of the f act that the negative
effects of the consumption of smuggled cigarettes do affect the negative side of the
balance,as increased health care costs and other effects.
Health care cost savings were calculated based on average health care costs in
the Czech Republic in 1999.This is an approach similar to other studies on this
subject,for example Doran,Ch.,Sanson-Fisher,R.,(1996),Public Expenditure
Balance of Smoking in the Netherlands (1997),Rosa,J.J.(1994),Rosa,J.J.(1996).
The health care cost savings are a result of premature death of smokers,based on
the assumption that smokers would consume the same amount of health care as
non-smokers in the years of life they lose because of smoking.In fact this is an

15
underestimation as the typical health care costs of a smoker are higher than the
average costs,as demonstrated in Section 1.2 in this study.In this respect it can also
be argued that the savings are even higher as the shortening of life means
a reduction of the number of old patients,whose treatment is more costly than
average.We,however,did not quantify these additional savings because of the lack
of demographic data related to mortality of smokers.
The values for the other variable involved in the quantification of the health care cost
savings -the number of years lost because of smoking -varies in different studies
Public Expenditure Balance of Smoking in the Netherlands (1997),Lippiatt,B.
(1990),Barendregt,J.J.,et al.(1997).These differences are due to country specifics
and other factors mainly stemming from the selection of the population sample.Due
to the unavailability of any research in the Czech Republic we used the estimates
from study Lippiatt,B.,(1990)and weighted them by population of the Czech
Republic in the respective age groups,which we believe is the best customisation of
the benchmark to the situation in the Czech Republic.
Savings on pensions and housing for elderly were calculated based on the same
principles as used for savings on the health care costs.Inclusion of these indirect
positive effects is supported by most studies in this area,including Public
Expenditure Balance of Smoking in the Netherlands (1997),Raynauld,A.,Vidal,J.P.
(1992),Rosa,J.J.(1994),Rosa,J.J.(1996).
In calculating savings in pensions and housing for the elderly,we considered that the
saving of a smoker dying prematurely arises in the year of death.However,this is
only one part of the positive effect.The other constitutes the years the smoker would
live had she/he not smoked.The smoker ’s life is shortened by several years,and the
savings will therefore influence the public finance balance of smoking in future years.
There are two alternative methods of quantification of these savings.The first
calculates the current year ’s savings as related to the deaths of smokers who died
prematurely in the past and who would have lived in the current year had they not
smoked.The second method takes into account all premature deaths that occurred
in the current year and discounts the effect these premature deaths will have in the
future.
We used the second method because of the availability of data and because the
premature deaths are linked to the year in which they occur and this makes the
calculation easier.However,would one decide to use the alternative method,the
outcome should not significantly depart from our calculation since patterns of
smoking and the health effects do not change significantly over a period of 4 to 6
years (typical period for which we discount future costs and future savings).
Saving on social benefits and compulsory health insurance contributions paid by
the state to the health insurance system on behalf of those without regular income
(pre-or post-productive age groups,i.e.children,youth,elderly,and unemployed)
are part of the unemployment benefits or pensions.We did not include these two
factors as these contributions are included in the pension and social savings due to
early mortality of smokers,and therefore,their repeated inclusion would inflate the
results of our calculations.
Also not included was all the public income for which the relationship to smoking is
not direct.It comprises,among other factors:the taxes generated by tobacco
advertising,the monetary benefits of tobacco retailing (such as corporate and income
tax,additional employment),taxes on drugs used in the treatment of smoking-

16
induced illnesses,monetary benefits of people quitting smoking,or the benefits
related to the therapeutic use of tobacco.
Health care costs attributable to smoking are an important factor on the negative
side of the balance.In the quantification of the health care expenditure we applied a
disease-based approach,similar to (Stoddart,G.,et al.,1986).We argue that this
approach,using detailed country specific statistics of health care expenditure,has a
potential to provide the most accurate estimate of the total health care expenditure
attributable to smoking.Further given the fact that an alternat i ve met hod o f
quantification,presented later in this chapter,provided comparable results we
consider our estimate of the health care costs attributable to smoking as reasonable.
Quantification of health care costs using the disease-based approach depends on
expert medical opinion and epidemiological data.We used our best judgement,
based on extensive review of the relevant medical literature,and discussed the
methods and the input data with experts in epidemiology,internal medicine and other
medical sciences.In addition,we cross-checked the estimate of the health care costs
attributable to smoking using an alternative top-down approach.
An alternative approach is based on the comparison between the total and smoking-
attributable health care costs as reported in several countries (US,Canada,
Netherlands).The results of this top-down approach yield a realistic estimate of the
total health care cost attributable to smoking of 10 240 mil.CZK,within a range of
7 965 mil.CZK to 13 654 mil.CZK.The calculations are based on the results of
7 studies from the US (4),Canada (2)and the Netherlands (1),which give the
fraction of the smoking attributable costs (relative to the total health care costs)in the
range of 6%to 14%.We adjusted these results to the situation in the Czech
Republic,taking into account differences in consumption levels of cigarettes,
prevalence of smokers in Czech society,economic development of t he Czech
Republic compared to developed countries,and other factors that could have impact
on differences between the data provided for other countries (US,Canada,
Netherlands)and the Czech Republic percentages on total health care costs.
We estimated the outcome for the Czech Republic at 9%of total health care costs
based on the average of the benchmark studies of 9,8%lowered,to reflect the lower-
cost health care system in the Czech Republic,and increased to factor i n ETS
impact,which was not accounted for in the studies used as a basis.
Health care expenditure also comprises the effects of passive smoking (ETS).
Recent health research shows that there is a relationship between ETS and several
diseases.The most recent and comprehensive study in this field (Bayard,S.,et al.,
1992)concluded,based on review of recent studies in the field of respiratory
diseases,that ETS causes lung cancer,chronic airways obstruction,aggravation of
asthma in asthmatic children and other respiratory diseases.The studies reviewed in
this report showed however great differences in relative risks for individual diseases.
The whole subject of ETS was also covered in (Environmental Health Perspectives
Supplements 12/1999).We used an estimate to account for signif icant developments
in this area based on (Doran,Ch.,Sanson-Fisher,R.,1996 and Rosa,J.J.,1996).
This study coped with the problem of increasing significance of ETS by using an
estimated percentage of direct health care costs.As our expertise is not in medical
field,we were not able to critically assess the relationship between ETS and specific
diseases.Sufficient data for disease-based calculation of the effects of ETS on
health care costs for the Czech Republic were also not available (e.g.prevalence of
ETS).

17
Several recent studies (Penman,A.,1999),(Kopp,P.,Fenoglio,P.,2000)argue that
smoking-related productivity losses are an important factor on the negative side
of the balance.These studies place an even higher value on productivity losses than
on smoking-related health care costs.We did not include these losses in our
calculations,however,for several reasons.First,even if there were such losses,
these would be borne by employers,and these losses would affect public finance
only indirectly.If such losses were significant,this would reflect in lower demand for
smokers in the job market or in lower wage rates offered to smokers.As no such
signs are evident in the Czech job market,we conclude that such losses are not
significant.
Similar arguments,drawing similar conclusions,are presented in the literature
(Raynauld,A.,Vidal,J.P.,1992).We concede that productivity can be affected by
frequent disruptions,but we hypothesise that smoking is in this context used by some
people as an excuse for taking a break.The same people could easily substitute
another excuse for a break,like having a coffee or a soft drink.Such productivity
losses could not,therefore be attributed to smoking.
Many arguments are also found in the literature on the issue of lost income tax due
to early mortality of smokers.Majority of studies in the field include the effect of lost
income tax due to early mortality:(Doran,Ch.,Sanson-Fisher,R.,1996),(Rosa,J.J.,
1994),(Rosa,J.J.,1996).Lost income tax due to early mortality is not included in
Raynauld,A.,Vidal,J.P.(1992),based on the argument that smokers make an
independent decision whether to smoke or not,and the loss of years of life is their
personal loss.We included this factor in our calculations.We estimated the average
years lost in productive age using data from the Czech Statistical Office and applying
them to the research data from (Lippiatt,B.,1990).Our estimate is comparable to the
values presented in other studies,e.g.Public Expenditure Balance of Smoking in the
Netherlands (1997).We further introduce the argument of unemployed replacing
those who die early.This leads to savings in social benefits paid to the unemployed
and in costs of re-training.We argue that these effects cancel each other out,and
there is no loss of income tax due to early mortality of smokers.
Our review of materials distributed by anti-smoking organisations (Prabhat,J.,
Chaloupka,F.J.,1999)suggested that the additional cost of cleaning public
places from cigarette pollution is perceived by the public as considerable.
Nevertheless,we decided not to include this issue in the calculations.We argue that
the majority of public places,such as public transport waiting areas,need to be
cleaned regularly for reasons other than those related to smoking.It seems that the
visibility of cigarette butts,rather than the other trash (which introduce higher hygiene
risks than do the butts,e.g.dust)and strong anti-smoking feelings of the non-
smoking public,which give the cleaning issue higher perceived importance.This view
was confirmed in an interview with a representative of the Prague municipal
authority,who stated that activities such as building work or of street kiosk vendors
require far more attention and expense than the pollution caused by smokers.
Further,the cleaning of a significant proportion of public areas,such as pavements
adjacent to residential or office buildings,is the responsibility of private owners,who
bear the related costs.This fact was confirmed in an interview with a representative
of Prague City Council responsible for the city cleaning service.The conclusions that
these costs are not real external costs are found in the literature (Raynauld,A.,Vidal,
J.P.,1992).
When considering fire-induced costs,we included in our calculations the damage
related to fires registered in official statistics as caused by smokers and
a proportional share of the fires without an established cause.We did not factor in

18
the loss of life due to fires (19 deaths in 1999 (Headquarters of the National Fire
Fighting Service of the Ministry of Interior of the Czech Republic,2000)),as its effect
on public finance,quantified similarly to losses attributed to higher mortality of
smokers (loss of income tax etc.),is not significant.We also did not include any of
the costs related to the maintenance of fire fighting force because its size is dictated
by the need to cover territory rather than by the total number of fires.Also the
capacity of the fire fighting force incorporates a certain redundancy mandated by the
accidental nature of fires and the need to cope with all kinds of disasters.
We investigated several methods of quantifying the induced losses from smoking-
related absenteeism.Only social security benefits were included in the final
calculations.Loss of income tax was not included,as social security benefits are also
subject to income tax.Although for many people social benefits are lower than their
normal wage,and consequently the income tax they pay while on sick leave is lower,
for other income groups,the benefits exceed their normal pay.The total balance is
difficult to quantify,but it was assumed that the contradictory effects cancel out.
Deaths and material losses arising from car accidents caused by smoking were not
included due to difficulties in attributing them directly to smoking.However,the
negative effect of smokers ’negligence while driving may be outweighed by accidents
prevented from higher concentration induced by nicotine consumption.Doran,Ch.
and Sanson-Fisher,R.(1996)also excluded these costs on grounds of distinct lack
of empirical evidence in quantifying these costs.
Cost of anti-smoking campaigns is not included on the negative side as the
majority of anti-smoking advertising (legally required warnings on billboards or
cigarette packs)is financed by the tobacco producers rather than the state.The cost
of other campaigns is immaterial in the Czech Republic.
Loss of quality of life was not considered in our report,as it is out of scope of the
study.Some studies provided methods for valuation of such losses (Jeanrenaud,C.,
et al.,1997).
Also not included were all factors for which the causal link to smoking is not direct.
One such factor is the loss of purchasing power due to spending on cigarettes.
The results are provided in the form of a range,within which the estimate may vary if
different input expert opinion and data from other sources were considered.The
range demonstrates the variability of opinion in the literature and the uncertainty and
inaccuracy of the data.The lower and upper bounds of the range are the results of
a combination of extreme opinions and values of contributing factors.We believe that
it is very unlikely that any defendable approach could lead to a result outside this
range.The data accounts for 4 998 mil.CZK of the width of the provided range.By
assuming that hypotheses used to compute realistic estimate are valid,the range
reduces to 2 095 mil.CZK to 7 093 mil.CZK.This range stems mainly from the
uncertainty of the estimate of the direct health care costs attributable to smoking and
the uncertainty of the estimated value of lost income tax due to early mortality of
smokers.These are in turn related to the uncertainty of the values of attributable
risks of specific diseases and percentage of smokers who die in productive age.

19
2.2.Data
The input data used in the calculations come from reliable sources and
whenever possible they were verified through comparison or sani ty checks.
We collected data from respected scientific journals;from reports of international and
national institutions;official Czech statistics;and from interviews with local experts.
Our extensive literature search focused on the economic and medical consequences
of smoking.
Articles in prominent medical journals,such as The Lancet ,Journal of American
Medical Association ,The New England Journal of Medicine,Canadian Medical
Association Journal ,served as an important source of information.This was
complemented by articles in the local medical journals and international magazines
such as The Economist .In addition we also worked with specialised reports on the
impact of smoking on human health published by international and national
institutions like the World Health Organisation or the US Surgeon General.The use
of such sources guarantees high standard of data applied in the calculations.
We used extensively demographic and epidemiological data from the official
publications of the Czech Statistical Office,the Institute of Health Information and
Statistics of the Czech Republic.In addition these institutions provided some more
detailed data on our request.Quantification of the health care costs relies heavily on
the information obtained on request from the General Insurance Company
(Vseobecna zdravotni pojistovna),whose records provides the most comprehensive
picture of the health care expenses in the country.Specific information was also
obtained directly from governmental bodies such as the Ministry of Finance or the
Ministry of Interior.
We conducted seven face-to-face and over ten telephone interviews with experts.
These were primarily medical professionals specialising in specific smoking-related
diseases and epidemiologists.This included epidemiologists from Charles University
in Prague and Hradec Kralove,Masaryk University in Brno,National Institute of
Public Health in Prague,internal medicine specialists from leading Czech hospitals,a
toxicology specialist on drug abuse and its prevention,and a psychiatrist specialising
in addiction related diseases.We also interviewed economists with extensive
experience in health care economics and the role of the governmental bodies in the
management of the resources dedicated to the health care system.Among these
there was a former Minister of the Czech government,an economics professor
specialising in problems of externalities,and a number of public officials.These
interviews ensured a good understanding of the general situation,the overall effects
of smoking,clarified local specifics and provided necessary expert opinion.
Discussions with medical specialists confirmed the trends we researched in the
literature and approved the similarity of findings between the Czech Republic and
other countries.
Whenever possible the data were verified by comparing inputs from independent
sources.For example:data on excise tax,VAT,customs duties obtained from the
government statistics were compared with the data provided from accounting records
held by Philip Morris CR a.s.;international benchmarks were used to verify Czech-
specific input data applied in the quantification of the health care costs attributable to
smoking.

20
Where data were not available,informed estimates were made based on thorough
investigation of the literature,international benchmarks and on our professional
judgement.

21
Glossary
Attributable risk – portion of health risk attributable to smoking.It expresses
quantitative relationship between smoking and health risk,given other factors
influencing the occurrence of the disease are the same for smokers and non-
smokers.
Realistic estimate – for the purposes of this report we define realistic estimate as an
outcome of calculations performed by the authors using the most probable set of
data and the most suitable methodology as created or adhered to by the authors.
Discount factor – discount factor introduces the time preference of money,1 CZK
obtained today is more valuable than 1 CZK obtained in future.The discount
factor usually varies between 3 and 10%and represents the time preference of
society.We use the discount factor of 6,75%in our study,which represents
coupon rate of state bond maturing in 2005.We use this rate because the effects
of smoking we consider usually do not last longer than 5 years into the future.
This rate also falls in the generally used interval.
ETS – Environmental Tobacco Smoke – exposure to the tobacco smoke by non-
smokers,mainly in family,public places such as restaurants and in the
workplace.Although environmental tobacco smoke is diluted compared to that
inhaled by active smokers,it is chemically similar,containing many of the same
toxic agents,including carcinogens.
External costs – costs imposed by the smokers on third parties (e.g.part of the
health care costs that fall on the whole society through the public health care
system,environmental tobacco smoke related costs etc.).
Internal costs – private costs (see below).
Morbidity –a measure of how often a person is ill.Morbidity is different for smokers
and non-smokers and is generally higher for smokers.
Mortality –states the number of deaths per certain cause of death.The mortality
differs for non-smokers and smokers and is generally higher for smokers.
Private costs –costs borne by a smoker (price of cigarettes/tobacco,private losses
caused by health problems related to smoking,including the loss of quality of life
or suffering attributable to smoking).
Public expenditure – is used in this report interchangeably with the term ‘public
finance ’.
Public finance –all financial transfers enforced by the state,in particular the
government budget,municipal budgets,and budgets of health insurance
companies.
Relative risk – health risk of smokers relative to the health risk of non-smokers.This
quantifies how much smoking affects the state of health of smokers relative to
non-smokers due to their smoking habit.It excludes all other differences in
behaviour or inherent factors that can lead to a certain disease besides smoking.
Social costs of smoking –total cost of smoking to the whole of society.Comprises
private costs and external costs.

22
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