Cigarette Manufacturers Have Passed Through Their Recent Settlement Costs To Consumers in the Form of Higher Prices

During 1997, defendant cigarette manufacturers entered into settlement agreements with two states – Mississippi¹ on July 3 and Florida² on August 25 – as well as with plaintiffs in the Broin flight attendant case³ on October 9. These settlements required payments of $896.8 million in 1997, including $246.8 million to Mississippi, $650 million to Florida, and $149 million to the Broin plaintiffs.⁴ During 1998, manufacturers have thus far entered into new settlement agreements with the state of Texas⁵ on January 16 and most recently with the state of Minnesota ⁶ and Blue Cross/Blue Shield of Minnesota 5 on May 8. These settlements – along with continuing obligations from the previous year’s settlements – will require payments totaling $2.4 billion during 1998, including $1,324 million to Texas, $588 million to Minnesota and Minnesota Blue Cross/Blue Shield, $68 million to Mississippi, $320 million to Florida, and $100 million to the Broin plaintiffs. ⁷

These financial obligations can be translated into cents per pack. Thus, total 1997 settlement payments of $896.8 million amounted to 3.7 cents per pack (that is, $896.8 million divided by 24 billion packs sold). As of April of this year, cumulative payments for 1997-1998 equaled $1.712 billion, which amounted to 10.9 cents per pack. ⁸

Figure 1 below shows the wholesale price of premium-brand cigarettes quoted by U.S. manufacturers during the period from November 1993 through April 1998.⁹ In November 1993, manufacturers set their wholesale price at $1.12 per pack. This price remained unchanged until May 1995, when it increased to $1.15 per pack. Wholesale premium prices were again raised to $1.19 per pack in May 1996 and $1.24 per pack in March 1997. Thereafter, from March 1997 through April 1998, wholesale premium price increased by 14 cents per pack.

Figure 1 also shows the expected trend lines in wholesale prices based on two different assumptions. For the solid line, I assume that the March 1997 increase anticipated the nationwide settlement on June 20 and the Mississippi settlement o July 3. For the dashed line, I assume that the March 1997 price increase did not reflect such anticipated payments. Under these two assumptions, respectively, the price of premium cigarettes increased by 14 and 9 cents per pack beyond the predicted trend.

Caption to Figure 1: The open circles represent quoted wholesale prices per pack of 20 cigarettes. (Source: USDA Tobacco Situation and Outlook Report. ¹⁰) The solid line represents the best-fitting log-linear regression line for the points from November 1993 through May 1996. The dashed line represents the corresponding best-fitting line for the points from May 1995 through March 1997. The predicted values of these two trend lines for April 1998 are, respectively, $1.24 and $1.29. The actual quoted wholesale price in April 1998 was $1.38.

¹ In the Chancery Court of Jackson County, Mississippi. In Re Mike Moore, Attorney General ex rel., State of Mississippi Tobacco Litigation, Cause No. 94-1429. Memorandum of Understanding. July 3, 1997. http://stic.neu.edu/MS/mssettle.htm.

² Circuit Court of the Fifteenth Judicial Circuit, In and For Palm Beach County, Florida. The State of Florida, et al., v. The American Tobacco Company, et al., Civil Action No. 95-1466 AH. Settlement Agreement, August 25, 1997. http://stic.neu.edu/Fl/flsettle.htm

³ In the Circuit Court of the 11th Judicial Circuit In and For Dade County, Florida General Jurisdiction Division. Norma R. Broin, et al., v. Philip Morris Incorporated, et al. Case Number: 91-49738 CA (22). Settlement Agreement. October 9, 1997.

⁴ Mississippi payments in 1997 included: $170 million in an initial lump-sum payment; $15 million in costs; and $61.8 million for a pilot program to prevent underage smoking.  Florida payments in 1997 included: $550 million in an initial lump-sum payment and $100 million for a pilot program to reduce underage smoking.

⁵ In the United States District Court for the Eastern District of Texas, Texarkana Division, The State of Texas vs. The American Tobacco Company, et al., No. 5-96CV-91. Comprehensive Settlement Agreement and Release. January 16, 1998. http://stic.neu.edu/Tx/Texas-settlement.htm.

⁶ The full text of the settlement agreement has not been made public as of this writing. The main financial terms are given at: http://www.ag.state.mn.us/press/newssearch.qry?function=detail&Layout_0_uid1=33334.

⁷ Texas payments in 1998 include: $725 million in an initial lump-sum payment, $264 million for certain public health and research programs, $45 million in costs and attorneys fees, and a first- year installment of $290 million, which equals Texas’ 7.25% share of state payments under the first year of the Proposed Resolution of June 20, 1997. Mississippi payments in 1998 include: $68 million, which is the state’s 1.7% share of state payments during the first year of the Proposed Resolution. Florida payments in 1998 include: $100 million toward the pilot program to reduce underage smoking; and $220 million, which is the state’s 5.5% share of state payments during the first year of the Proposed Resolution. Minnesota payments in 1998 include: $240 million in retroactive damages; $142 million in attorneys’ fees and costs; $10 million for a special research fund; $94 million to Blue Cross/Blue Shield; and $102 million, which equals Minnesota’s 2.55% share of state payments under the first year of the Proposed Resolution. (It appears that, unlike Texas, Mississippi, and Florida, Minnesota’s share was based on smoking-attributable Medicaid costs rather than state population. For the differential effects of these two criteria on state recoveries, see Harris JE. Written Testimony Before the Subcommittee on Courts and Intellectual Property, Committee of the Judiciary, U.S. House of Representatives, Oversight Hearing on "Attorneys Fees and the Proposed Global Tobacco Settlement," Washington, DC, December 10, 1997.)

⁸ All four parent companies – Philip Morris, RJR Nabisco, Loews, and BAT Industries – charged their respective shares of 1998 initial payments to Texas to the fourth quarter of 1997. See Philip Morris Companies Annual Report 1997, p.55; RJR Nabisco Annual Report 1997, p. 67; and Loews Corporation Annual Report 1997, p. 79; BAT Industries Annual Report 1997, p. 13, and BAT

⁹ Prices are quoted inclusive of the Federal excise tax, which remained unchanged at 24 cents per pack during the period covered by Figure 1.

¹⁰ USDA Economic Research Service. Tobacco Leaf Situation and Outlook Report . Table 8: Wholesale cigarette price revisions, 1980-97. Updated 5/4/98.

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