Up in Smoke: Nebraska’s Inappropriate Use of Tobacco Settlement Funds

Smoking-related health care costs represent a significant burden on state Medicaid spending. For every $10 spent on health care in the U.S., 90 cents is due to smoking. This means roughly $170 billion a year is paid mainly through Medicare and Medicaid to serve the dire needs of aging smokers. In the 1990s, states responded to this inordinate cost by suing tobacco companies. They reached a settlement known as the Master Settlement Agreement (MSA), which determined that tobacco companies would pay, in perpetuity, funds towards the participating states. In total, approximately $160 billion has been paid out over 20 years in order to compensate states for the externalities of smoking.

But states are not using MSA funds wisely. Instead of funding programs to cut down on the rates of adults and youth who become addicted to tobacco products, they are spending the money to close budget shortfalls, fix roads, and splurge on other shiny objects. To cite one example in North Carolina, $400,000 in tobacco settlement funds were actually used to subsidize water and sewer lines for a tobacco processing plant.

Nebraska has also used most of its tobacco settlement funds in ways that do not relate directly to the public health costs of smoking.

At the root of the issue is that MSA funds make up most of Nebraska’s Health Care Cash Fund (HCCF), which supports many health care-related expenditures. Of the $477 million in the fund currently, $451.9 million comes from the MSA. A one-time source of excess Medicaid funds provides $25.9 million, while cigarette tax receipts added $1.25 million in the most recent year.

The Nebraska Legislature spent $62.9 million from the fund just last year. In 2017 and 2018, the Legislature transferred $10 million to the General Fund to balance the budget.

In 2014, the Centers for Disease Control and Prevention (CDC) created guidelines for effectively utilizing tobacco settlement funds. They showed that states with robust tobacco control programs achieved a $55: $1 return. This was mainly due to health care-related cost savings. Unfortunately, Nebraska has not heeded their advice.

Currently, Nebraska spends only 12.4% of the CDC recommended amount on preventative smoking measures ($2.57 million compared to $20.8 million). The CDC claims that media advertisements, community-based intervention programs, clinical screening for tobacco use, and administrative program coordinators are effective tools for reducing statewide smoking rates.

One difficulty of increasing funding for anti-smoking efforts is that it would likely require cuts to other programs funded by the HCCF. However, changes in the fund’s spending priorities may be necessary regardless, since the HCCF is currently projected to decline to 50% of its current size by 2035. Lawmakers must cap their withdrawals at no more than $54 million annually in order to head off this decline.

Twenty-three different programs receive funding from the HCCF in Nebraska. Some are relevant to the needs of smokers, like the $2.75 million in funds that go towards nine different tobacco prevention and control efforts. Others, while perhaps having merit in their own right, appear to be inappropriate expenditures given the MSA’s purpose of offsetting the state’s tobacco-related health care costs. Most notably, millions of dollars are given to research institutions within the state of Nebraska for programs unrelated to smoking.

The most recent progress report on the Nebraska Tobacco Settlement Biomedical Research Development Fund details some of the research studies and programs funded by the HCCF.

For instance, $4.45 million is used by UNMC, “in strategic recruitment of new research faculty,” and UNL used $1.5 million to, “support research programs and infrastructure development.” To put it plainly, these grants pay for salaries and equipment for medical researchers.

The research of these professionals may be beneficial. However, it is not clear that it is a higher health care priority than programs that help Nebraskans beat addiction, or that their salaries and equipment require support from the HCCF to be appropriately funded. Since 2001, UNMC has been able to secure over $1.02 billion in extramural research support. These research grants come from more than 15 different federal agencies.

Supporters of current HCCF spending say that an increase in the cigarette tax would resolve any concern about the fund’s financial standing or its capacity to fund anti-smoking programs. But unless current program spending is properly prioritized first, it is difficult to know if additional money would be spent more effectively.

Every year the Nebraska Legislature dips into the tobacco settlement is another cut against combatting the deleterious effects of smoking. If the fund runs low in the years ahead, taxpayers will be stuck footing an even larger bill for Medicaid recipients who have tobacco-related health problems.

Photo by Paolo Neo