Why Tobacco Companies Should Hate Obamacare

Obamacare turns up the heat on health-care payers like Medicaid to cut costs, pitting private Medicaid insurers United Healthcare (UNH) and Aetna (AET) against tobacco heavyweights Altria (MO) and Reynold's (RAI).

May 3, 2014 at 10:00AM

May 31st is the World Health Organization's World No-Tobacco Day, an annual day dedicated to reminding tobacco users of the health risks of tobacco, and the costs associated with caring for the millions of smokers who develop disease associated with using it. This year, World No-Tobacco Day tackles tobacco marketing, a critical multi-billion dollar cog in the tobacco industry's efforts to maintain sales and win new tobacco users.

According to the Centers for Disease Control, tobacco companies, including Philip Morris (NYSE:MO)and Reynolds (NYSE:RAI) spend $900,000 per hour marketing their products. That puts those tobacco companies at odds with health-care payers like Medicaid, and private Medicaid insurers UnitedHealth Group (NYSE:UNH) and Aetna (NYSE:AET), which are already bending under the weight of caring for patients with tobacco-related disease.

Given that Medicaid expansion under Obamacare has increased Medicaid enrollment by more than 3 million since launching last fall, Medicaid is more focused than ever on helping smokers quit.

A staggering cost of care
According to the Surgeon General's 1,000 page annual report outlining the dangers of tobacco use and the reasons smokers should quit, smoking causes 87% of all lung cancers in the U.S., and accounts for nearly one-third of all cancer deaths every year.

According to the American Journal of Preventative Medicine, Medicaid enrollees are 68% more likely to smoke than others, and they're less likely to use products developed to help smokers quit, including nicotine patches and gum. Prior to Medicaid expansion, tobacco users enrolled in Medicaid accounted for 11% of all Medicaid spending, totaling $22 billion a year in 2009.But it's not just cancer that can be caused by smoking; smoking is also a major cause of heart disease, stroke, and diabetes. HHS estimates that the economic costs due to tobacco are nearly $290 billion a year, with the direct medical cost of care topping $130 billion this year. A significant amount of the spending associated with caring for tobacco users is being paid for by government programs like Medicaid and Medicare that are taxpayer supported.

Because a relatively high proportion of people in the program have a history of smoking, the cost to care for Medicaid members is higher than it is for others. United Healthcare, which provides care to nearly 4.3 million Medicaid members, spent just 77% of the premiums it collected from people enrolled in commercial insurance plans on care during the first quarter.

But once you roll in the costs associated with caring for Medicare and Medicaid patients, the amount the company spent to care for its 44 million members climbs to more than 82% of the premiums collected. In part, that difference in premiums paid for care is due to the higher cost of care for Medicaid patients.

Similarly, Aetna, which insurers nearly 2 million people on Medicaid, spent nearly 85% of its premiums to care for Medicare and Medicaid patients, and only 77% of its premiums to care for people enrolled in commercial plans.

Given that the Affordable Care Act significantly expands Medicaid in the 27 states embracing it --  resulting in more than 3 million new enrollees -- and that the Act mandates insurance for all Americans, resulting in more than 7 million people enrolling in private insurance plans since October, tobacco companies should be nervous. After all, the incentive for payers to eliminate costs tied to tobacco-related disease has never been higher.

Medicaid's tobacco war
When the Affordable Care Act was passed, it included tobacco dependence treatment, or TDT, coverage for Medicaid enrollees. That coverage provides tobacco users with support in the form of counseling and better access to smoking cessation products.

Do those programs work? Apparently, the answer is yes. A study conducted by Medicaid in 2013 showed that Medicaid enrollees in states with the most generous TDT coverage had a higher success rate in quitting. According to that 3,000-person study, 8.3% of those attempting to stop smoking succeeded in states that provide both free counseling and coverage for pharmacotherapy, while as few as 4% were able to successfully quit in states that didn't offer such coverage.

That suggests that Obamacare-driven Medicaid expansion could result in tobacco companies losing more customers per year than previously. That would be bad news for Altria, the maker of Marlboro brand cigarettes, and Reynolds, the maker of Camel and Pall Mall cigarettes. Altria has already seen the volume of its cigarettes sold in the U.S. fall 2.5% in the past year. And Reynolds volume has similarly dropped 3.8%.

Fool-worthy final thoughts
Since 1965, the number of people who smoke has fallen from 42% of American adults to 18% of adults. That's an impressive decline, but 42 million people in the U.S. still smoke cigarettes, and the cost to care for those smokers is likely to remain high for years.

That means that Medicaid, and the insurers like UnitedHealth and Aetna that administer state Medicaid plans, will continue to battle back against tobacco giants Altria and Reynolds. It also suggests that Obamacare's public funding for smoking cessation may pose a bigger long term threat to those tobacco companies than some people may think.

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Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may or may not have positions in the companies mentioned. Todd owns Gundalow Advisors, LLC. Gundalow's clients do not have positions in the companies mentioned. The Motley Fool recommends UnitedHealth Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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