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Group Sues to Undo National Tobacco Settlement

Posted on: Monday, 20 February 2006, 03:03 CST

By Gardner, Dave

Pennsylvania is receiving an estimated $11.3 billion over 25 years as part of the $206 billion national settlement between the states and the tobacco industry.

The acknowledged goal of this master settlement agreement (MSA), which occurred in 1998, was to deal with the impact smoking had on the citizens of each state. Four major tobacco companies are providing the bulk of the settlement's revenues to 46 states as a group, in addition to four independent state settlements totaling $40 billion.

According to numbers provided by the office of Gov. Ed Rendell, all of Pennsylvania's tobacco money has been spent on healthcare- related initiatives.

These funds, based on tobacco company revenues, are declining at the rate of approximately 2 percent each year.

Nicole Westerman, chief of staff to Pennsylvania's secretary of the budget, explains that the settlement allowed $384 million to be spent on Pennsylvania healthcare initiatives during 2004. For 2005- 2006, the spending will total $359 million.

"More than 51,000 citizens will be directly served during the coming year, with services that include health insurance for those with low incomes, plus the disabled and the elderly," says Westerman. "We are also funding smoking prevention and cessation programs, and placing eight percent of the funds in an endowment fund to guarantee future revenues."

Pennsylvania settlement expenditures

Topping the list of Pennsylvania's tobacco expenditures is partial funding for the Adult Basic program, which is separate from Medicaid.

Utilizing 21 percent of the 2005-2006 settlement revenues, the program will supply $74.7 million to provide healthcare for 20,700 people. To qualify, applicants must prove that their incomes are below the federal poverty line, have low-paying jobs or be unemployed.

The Workers with Disabilities program will receive 5 percent of the total. More than 5,700 people will be served as $19.6 million is distributed to disabled people with incomes over Medicaid eligibility levels.

Nineteen percent of the settlement will benefit health research throughout the state, concentrating on diseases such as arthritis, cancer and diabetes. More than $68 million will be spent during 20052006 with the money awarded to research centers such as Carnegie Mellon and Temple University, plus select independent research centers.

Home community care, allowing seniors to live independently at home, will receive 13 percent of the settlement.

As a segment of Medicaid, $46.7 million will be spent.

Smoking prevention and cessation programs, representing 9 percent and $32.3 million in spending, will be active in all of Pennsylvania's counties. Services include a state "quit line," various support programs, a youth information-gathering campaign and retailer education.

Uncompensated Care, which rewards hospitals for charity care and extraordinary expenses for the uninsured, will receive 10 percent. Also leveraging federal money, the program will utilize $35.9 million.

The expanded PACENET program, which lowers costs for prescriptions to the elderly, will receive $28.7 million, representing eight percent. The endowment fund utilizes another 8 percent.

"These expenditures are closely in line with previous year's percentages," adds Westerman.

Paula Bussard, senior vice president for policy and regulatory services at the Hospital & Healthsystem Association of Pennsylvania (HAP), voices her approval with the way the tobacco settlement has been handled to date.

"Pennsylvania's attorney general's office has been extremely prudent in the ways the money from this tobacco settlement has been spent," says Bussard.

Scientific advancement

The tobacco money is also promoting scientific advancement in Pennsylvania.

One company participating in this initiative is BioAdvance, which seeks to accelerate the growth of the life sciences industry in southeastern Pennsylvania via biomedical research. The organization, founded as part of a $2 billion initiative by the state, helps science companies develop commercial opportunities.

"We are operating one of the three state 'greenhouses' in Pennsylvania devoted to developing the life science industry," says Barbara Schilberg, chief executive officer of Bioadvance. "Other states say this is a model concept, and we receive many calls about how this is done.

Schilberg's firm received $34 million in tobacco settlement money from the state in 2002. The company then allocated $20 million to its "Greenhouse Fund," which provides $5,000 to $500,000 investments. These funds are used to develop new therapeutics, biomedical devices, diagnostics and platform technologies that have the potential to improve human health.

Bioadvance is making seed investments and providing risk capital to scientists and entrepreneurs to help create these new life science companies. A review process must be followed for a company to be awarded money.

Examples of projects now being pursued include research to treat macular degeneration, and the development of technologies that overcome resistant bacteria. Other agencies such as the Ben Franklin Technology Partners are also involved.

"We have awarded $10 million already, and we're working on the next round of applications," says Schilberg. "We now have 200 more current applicants."

Stop sign?

As the tobacco money flows into and out of state treasuries, forces are moving to potentially stop the payments. Christine Hall, director of communications at the Competitive Enterprise Institute (CEI) in Washington, D.C., comments that her organization filed a lawsuit during August against the settlement in a Louisiana court, but it could take years for a ruling to be produced.

Hall points out that the tobacco settlement payments, based on market shares, are to be made over 25 years by the big tobacco companies. The actual revenues are derived from increases in cigarette prices, with the money usually distributed to the states via a broker.

She declares that for every one increment of market share lost, the payments to states decrease three increments. Therefore, the states have an interest in keeping market shares up for these large companies, and could help stop competitors from moving in.

"The CEI has a problem with the whole settlement because, at the end of day, it's all about dollars and a partnership with the states that thwarts competition," says Hall. "Small tobacco companies have gained market share, and this makes the states unhappy.

In the fall of 2003, the attorney general of Vermont wrote a memo to stop market share changes to these smaller companies, also known as non-participating manufacturers."

Hall also points out that Congressional approval for the original tobacco settlement failed in Washington.

This creates a potential legal problem, because the U.S. Constitution declares in Article 1, Section 10 that, "No State shall, without the Consent of Congress ... shall enter into any Agreement or Compact with another State."

"The tobacco settlement was never approved by Congress, and the constitution says no state racketeering is allowed," says Hall. "The CEI lawsuit declares the settlement deal to be illegal because there was no congressional approval, and created a form of state racketeering. This is not an appropriate exercise of state government power that is unaccountable."

The CEI's final goal is to undo the tobacco settlement. The suit's listed plaintiffs are smokers, a tobacco distributor and two small cigarette companies.

"For the CEI, the real issue is not about tobacco, but instead concerns citizen input, court recourse, the abuse of state attorney general powers and the abuse of tax and regulator policies," says Hall. "The settlement created new revenue streams for the states, but our concern is this will not stop with tobacco and there will be subsequent lawsuits involving other companies. The state attorney generals cannot make regulatory and tax policies, and this settlement was a massive transfer of wealth to the government and trial lawyers."

Hall adds that the public's perception is that the big tobacco companies got punished, but this is not true.

"It's the competition within the tobacco industry that were punished and are paying, as well as the smokers who are the actual victims," she says. "Adult smokers make up 20 to 23 percent of the national population, but the vast majority are poor and blue collar."

Susan Hooper, spokesperson for Gov. Ed Rendell, says that a similar lawsuit was dismissed during 2003 with the U.S. Court of Appeals in Pennsylvania. The Louisiana case, if won, would have no direct effect on Pennsylvania's tobacco revenues.

Copyright Northeast Pennsylvania Business Journal Jan 01, 2006

Source: Northeast Pennsylvania Business Journal

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