Ifs, Ands, or Butts of Tobacco Settlement
Will $300 billion and less advertising mollify critics of the industry?
NEW YORK — How much money should the Marlboro man fork over? And, what about that camel - what's his fair share?
These questions would have seemed ludicrous even two weeks ago. But faced with assaults on all sides, the nation's biggest tobacco firms have made a stunning about-face from their decades-long don't-give-an-inch strategy and agreed to bargain - if only to protect their corporate assets.
As the companies and their adversaries headed back to the bargaining table yesterday, they are trying to decide what constitutes a "fair" settlement - for the tobacco companies, the states suing them, and public health groups.
The discussions signal a major turning point in the battle against cigarettes and may have far-reaching impact - from the way every gas station and convenience store in the US sells cigarettes to whether other countries will consider public-health assaults on the tobacco firms.
As of yesterday, executives of Philip Morris, RJR Nabisco, Lorillard, and Brown & Williamson were in initial talks with the attorneys general of eight states. A deal is being sought with 23 states suing the firms for the cost of medical care to smokers.
There is no shortage of opinions as to what constitutes a fair settlement: Congress wants to have its say since it will need to pass legislation; Wall Street analysts are weighing in on what is "practical" for the industry to pay; and nonprofit health groups are whipping out press releases on their positions. "There are a lot of agendas," says William Novelli of the Washington-based Center for Tobacco Free Kids, one of the negotiators.
Here are the main elements to be decided:
Money: At stake is mega billions - by some reports as much as $300 billion over 25 years to finance health-care costs. To try to estimate how much money should be set aside, non-tobacco negotiators have hired an actuarial firm. "There are people we don't even know about who might need money ... in 25 years," says Sen. Richard Durbin (D) of Illinois.
Unlike an asbestos case, where there is a known number of workers with serious exposure, it's hard to estimate the number of Americans who might want cigarette-related payments. "It's trying to figure out how seriously the tobacco addiction will hurt them and what their claims might be," says Senator Durbin, a critic of the industry.
To try to fathom what the potential liability is, Rep. Marty Meehan (D) of Massachusetts says the industry must totally open up its research and documents. "We need full discovery for culpability," says Representative Meehan, who is co-chairman of the Congressional Task Force on Tobacco and Health, a bipartisan group of 75 congressmen. Apparently, the tobacco companies have agreed. But reviewing these documents could take years. "We will view any settlement skeptically," warns Meehan.
The additional research from the tobacco companies could help, says actuary William Cutlip, who has his own firm in Madison, Wis. He believes, however, that the industry can get the job done based on available information. Insurance companies discount policies for nonsmokers and have data on how much more it will cost for a smoker's health coverage. "The body of information continues to grow as we get more health information," he says.
Securities analyst Gary Black of Sanford C. Bernstein & Co., Inc. estimates the tobacco industry will agree to pay $10 billion per year over 25 years. This would mean an increase of 50 cents a pack on the 24 billion packs sold a year.
Such an increase, Mr. Black estimates, would reduce cigarette demand by 11 percent. He figures it's worth it to "buy peace" since it would only reduce Philip Morris' earnings by about 15 cents a share.
Immunity: This is an absolute must for the industry. It faces lawsuits around the nation. Although it has yet to pay a dime to any plaintiff, this might be changing. Public health groups object to any immunity from future liability.
Regulation: Almost every nontobacco negotiator believes the industry must agree to be regulated by the US Food and Drug Administration. This may mean renaming the organization to eliminate industry objections that its product is neither a food nor a drug.
The tobacco industry has agreed to be regulated by the FDA as long as the regulator does not force it to change the product.
The FDA issue could create a major roadblock to any settlement. The major health organizations adamantly oppose any limits on FDA power. Last Thursday, John Garrison, managing director of the American Lung Association, sent a letter to the 22 state attorneys general involved in the negotiations. He warned the Lung Association will "vigorously" oppose any deal that might include such limits.
Education: Most of the nontobacco negotiators feel it's critical to trim teen smoking through a TV ad campaign. Mr. Novelli suggests the tobacco firms pay more money if underage smoking does not drop. "Maybe there should be some kind of incentive," he says.
Marketing: The talks have apparently made significant progress on getting tobacco firms to agree to end their current marketing practices. They will stop using human figures and cartoon characters in their marketing. Black says this is because most people smoke because of peer pressure and the feeling of being comfortable around their friends. Novelli says they have also agreed to limit package identification and have agreed to much stronger warning labels on the cigarette packs.
If there is a final deal, other countries may start their own versions. For example, this month New Zealand began exploring the possibility of suing the tobacco companies for health costs. Novelli says his office has received e-mails from around the world, asking "Where is the global aspect?" He answers, "If this is a good settlement, then countries around the world can use this."
WHAT TOBACCO COMPANIES ARE CONSIDERING
In a dramatic about-face from their don't-give-an-inch policy, the nation's major tobacco firms have reportedly proposed to do the following. In return, they expect to get, among other things, full immunity from lawsuits.
* Put cigarettes behind store counters and to strip stores of indications they sell cigarettes - from brand-specific 'open' signs to clocks and more.
* Require retailers to obtain a special license to sell cigarettes.
* Get rid of cigarette vending machines
* Make warnings on cigarette packs more prominent and more explicit.
* Disclose all ingredients and additives in cigarettes, and make the nicotine-measuring system more accurate.
* Be regulated by the Food and Drug Administration, which would be renamed the Food, Drug, and Tobacco Administration.
* Pool about $300 billion over the next 25 years to pay smokers for health-related problems.
* Drop all adds such as the Marlboro man and Joe Camel; run only black and white print ads. And drop all sponsorships - such as of auto races or other sporting events.
* Drop cigarette-related product lines such as 'Marlboro Gear'.
- Associated Press