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The Economic Costs of Alcohol and Drug Abuse in the United States - 1992

Analysis and Discussion

Based on the estimates of the economic costs of alcohol and drug abuse presented in chapters 1 through 6 of this report, this chapter addresses two additional questions: (1) Who bears the costs of alcohol and drug abuse? and (2) Does it appear that costs are generally greater than, less than, or the same as in previous studies? In short, more than one-half the economic impact of alcohol and drug abuse is passed along to persons who do not abuse alcohol or drugs, including institutions, employers, and families. Moreover, after adjusting for inflation and increases in the population, it appears that the economic burden of alcohol and drug abuse is substantially higher than has been reported in previous studies. For drug abuse, this appears largely to represent a real increase in the costs. For alcohol abuse, it is clear that much of the difference is the result of different approaches taken to estimation of several cost components, rather than a major increase in the problem and its associated costs. The following sections provide more detail on the derivation of and justification for these conclusions. The chapter concludes by presenting projections of the estimates obtained in this study (which are for 1992) to 1995, reflecting corrections for inflation and population changes, and by identifying key topics for future research.


7.1 Who Bears the Cost of Alcohol and Drug Abuse?


More than one-half of the economic impact of drug problems is borne by or transferred to the nonabusing population. Out of the $97.7 billion in drug abuse costs, the nonabusing population bears an estimated $54.8 billion, or 56 percent, of the costs (see table 7.1). Abusers bear $42.9 billion, and arguably the loss by abusers may be lower than this because the financial burden is often shifted to other members of their households and because they participate in underground economies such as drug trafficking, gambling, and prostitution, which generate income. The estimated costs of alcohol abuse fall heavily on alcohol abusers (including their household members). About $66.8 billion (45 percent) is borne by abusers, but an even greater share— $81.2 billion—is borne by nonabusers. Alcohol abusers may bear less of the cost than this, because they, too, shift effects to household members.

The largest share of the costs that are shifted are borne by governments (which ultimately means by taxpayers and those who would have received benefits of reduced taxes or additional government services). Governments bear 46.2 percent of total drug abuse costs and 38.6 percent of total alcohol costs. Private health and life insurance bears 3.2 percent of drug abuse and 10.2 percent of alcohol abuse costs. Nonabusers (actually, victims of crime and accidents) directly bear 6.7 percent of drug abuse and 6 percent of alcohol costs, respectively. Of course, all of the costs borne by government and private insurance are ultimately transferred to taxpayers and insurance policy holders, who are predominantly nonabusers.

The costs/effects of drug and alcohol abuse are spread throughout society (to nonusers) through the following mechanisms:

  • Impacts on nonusers,

  • Government control efforts, and

  • Insurance and social systems (insurance and tax systems).

First, there is evidence that abuse of drugs and alcohol are causal factors in crime as well as transportation accidents that affect nonabusers (see chapter 6 of this report). Largely because of these effects on nonusers, society expends substantial resources attempting to control the consequences of drug and alcohol abuse through the criminal justice system and public health efforts. Also, the effects of drugs and alcohol that might appear to fall on the abusers themselves are often shifted to nonusers. For example, the costs of health problems are transferred through private and public health insurance; lost earnings result in reduced tax revenues and may also be offset through social insurance/welfare programs (unemployment and disability insurance and income supplements).

The following sections present the approach taken to estimating how the economic costs of drug and alcohol abuse have been distributed across several major sectors of society: abusers (and their households); Federal, State, and local governments; private insurance; and nonabusing victims. The results of the analyses for alcohol and drug abuse are presented in table 7.2 and table 7.3, respectively.

7.1.1 The Burden on Employers

This study, like those before it (e.g., Rice et al. 1990), has estimated worksite productivity effects in terms of lost earnings of drug and alcohol abusers. Certain data sets have been analyzed that have yielded plausible estimates about this dimension of drug and alcohol effects. However, few studies (and no rigorous studies) estimate the other costs to a worksite due to drug and alcohol abuse among the workforce. The analyses of lost earnings (section 5.3) in fact indicate that worksites shift at least some of the productivity differential of drug- and alcohol-impaired workers to the workers themselves in the form of lower compensation. To the extent that drug and alcohol abuse cause workers to perform below the levels implied by their wages/salaries, these costs are borne by the worksites in the form of higher costs. Such costs must then be absorbed by a company through a combination of decreased profits, increased product/service prices, or reduced overall compensation for the workers. There are insufficient data to develop such estimates.

Alcohol- and drug-related reductions in earnings are partially shifted to other segments of society because employers generally withhold income and other social insurance taxes and make contributions toward health insurance and social insurance on behalf of employees. Thus, workers' earnings provide a basis for estimating some of these effects. (This is discussed further in section 7.1.5). Much of the government and health insurance shares are collected (or fail to be collected, in the instance of lower earnings) through employers. These effects have been allocated to the social institutions that make the primary disbursements on drug- and alcohol-related services.

7.1.2 The Burden on Households and Families

Although the primary finding of this section is that alcohol and drug abusers appear to bear the largest share of the economic effects on society, this share of the burden can also be shifted. Losses of earnings attributable to alcohol and drug problems affect everyone in a household (children, spouses, and others). Whether earnings are reduced through lower wage rates or reduced days of work, this loss would directly affect the well-being of any additional household members, particularly those who do not work or do not have an independent source of income.

Many other effects on family members may arise that are not fully reflected as economic effects presented in this report, including consequences for the family relationships, ability of substance-abusing family members to carry out their roles and responsibilities in the family, and abuse and neglect. Although research has documented higher prevalence of alcohol and drug abuse in families with pronounced dysfunction (e.g., the National Institute on Alcohol Abuse and Alcoholism [NIAAA] 1993), it is sometimes unclear whether alcohol or drug abuse is the cause or the consequence of family and interpersonal stress. Finally, removal from families of a person with alcohol or drug abuse problems may reduce one set of problems while introducing others.

7.1.3 Health Care Expenditures

Overall, about 80 percent of personal health care expenditures are paid through private or public insurance in the United States. It is estimated that almost 90 percent of health care services for community-based treatment of drug and alcohol abuse (this excludes prison- and jail-based services to inmates) is paid through insurance or direct government financing of services (Harwood et al. 1994). In addition, the Federal Government operates treatment services for veterans, dependents of the Department of Defense, and Native Americans (references in chapter 4 of this report). All alcohol and drug abuse prevention and training services have been allocated to government funding, of which it appears that about 85 percent is from Federal sources and 15 percent is from State and local sources (Office of National Drug Control Policy [ONDCP] 1994; National Association of State Alcohol and Drug Abuse Directors [NASADAD] 1994). Virtually all drug and alcohol abuse research is federally supported. These values primarily represent budgets for NIDA and NIAAA (ONDCP 1995; Office of Management and Budget 1993).

The costs of treating medical consequences attributed to drug and alcohol abuse have been allocated across sources of payment in proportion to national reimbursement patterns for all personal health services (National Center for Health Statistics [NCHS] 1995). The costs of administering health insurance systems have been allocated in proportion to estimated payments by sources.

7.1.4 Mortality - Lifetime Earnings

Much of this loss falls on the household members of the alcohol and drug abusers. However, nonabusing victims also constitute a major part of losses, including homicide victims, the 30 percent of motor vehicle crash fatalities who are passengers or nonintoxicated pedestrians, and certain drug-related AIDS cases (about 15 percent are heterosexual partners of injecting drug users and pediatric cases). Although life insurance offsets some of the loss of expected lifetime earnings, it is a small fraction. No estimates have been made of the number of households that receive social insurance because of the death of a member. Private life insurance made death benefit disbursements of $26 billion in 1992 (U.S. Bureau of the Census 1994), or about $12,000 per death in the United States. It is assumed that private life insurance paid out this amount on average for each of the 106,600 alcohol-related and 23,600 drug-related deaths in 1992. This number may be low because many of the decedents for drug- and alcohol-related causes tend to be in the prime of their working lives and may carry more insurance. However, it is also possible that relatively fewer drug and alcohol abusers have life insurance because of their relative youth, lifestyles, and problems in their work careers.

7.1.5 Morbidity - Lost Earnings

Lost earnings are generally thought to fall on the alcohol or drug abuser; however, it appears that only about 65 percent and 50 percent of such losses fall directly on the household of the alcohol or drug abusers, respectively. Out of the estimated losses in potential productivity (earnings plus nonmarket activities) from alcohol and drug abuse ($69.2 billion and $15.7 billion, respectively), governments are estimated to bear almost 30 to 35 percent of such losses through lost income and employment-related and sales tax payments. This loss only applies to losses of potential market productivity, which is about 85 percent of total potential productivity (the other 15 percent is from household productivity: this proportion is about 10 percent for males and 33 percent for females). The redistribution/allocation of lost earnings to government is based on shares of 1992 net national product (NNP) of $5.367 trillion. The NNP includes production based in the United States and excludes the import- and export-related components of the gross domestic and national product. The Federal Government received $936 billion (17.44 percent of NNP) and State and local governments received $706 billion (13.15 percent) from taxes, social insurance fund payments, and excise taxes (U.S. Bureau of the Census 1994).

The cost to government is further increased because of the value of social welfare transfer payments that are attributable to impairment or disability from drug and/or alcohol abuse. Although the value of transfer payments does not count in total costs to society (transfers represent almost equal gains to one part of society and losses to another part of society), it does shift part of the burden from alcohol and drug abusers and their families to the rest of society. This was about 3 to 4 percent (depending on the particular type of social welfare program) of beneficiaries/payments of the national social welfare system and was an estimated $3.5 billion and $5.6 billion for drug and alcohol abuse, respectively (section 6.3).

7.1.6 Crime-Related Costs

The national criminal justice system spent $94 billion in 1992 (U.S. Department of Justice 1995). This study has attributed $23.6 billion to alcohol and drug abuse, or about 25 percent of total national expenditures. Expenditures have been allocated across Federal, State, and local governments, based on the most recent Survey of Criminal Justice Expenditures and Personnel. For example, about 90 percent of prison inmates are in State institutions and 10 percent in Federal prisons. All jail inmates are in local institutions. Federal expenditures are also estimated from the National Drug Control Strategy (ONDCP 1995) and alcohol control (the Bureau of Alcohol, Tobacco, and Firearms) from the Federal budget (Office of Management and Budget 1993). Victim costs are estimated and reported in the respective tables and sections. These include victim loss of work time because of crime and, under mortality losses, the victim loss of present discounted value of expected lifetime productivity because of homicide. Another victim loss is the value of stolen and/or destroyed money and property.

7.1.7 Social Welfare Administration

The value of transfer payments has already been included under morbidity (above) as a government offset to personal lost earnings. The expense of administering the system, as well as of delivering direct services (such as family and child welfare services), is reported in this item. Drug- and alcohol-related expenses were estimated at $337 million and $683 million, respectively, or about 3 to 4 percent of total system administration expenses (depending on the type of social welfare program). About 80 percent of social welfare services and transfer payments are from Federal funds (U.S. Bureau of the Census 1994); thus, 80 percent of administration costs is allocated to the Federal Government and 20 percent to State and local governments.

7.1.8 Motor Vehicle Crashes and Fire Destruction

Estimated losses attributable to alcohol problems of $13.6 billion include vehicle and roadway damage, legal and court costs, and insurance administration. The allocation of alcohol-related motor vehicle health care costs and mortality (lost lifetime earnings) have been included in estimates under prior sections. All roadway damage ($3.8 billion) was assigned to State and local governments, which are primarily responsible for the upkeep on highways. Insurance administration ($3.1 billion) was assigned directly to private insurance. It was assumed that 90 percent of vehicle damage (estimated at $3.8 billion) was paid by private insurance and 10 percent was borne by victims of drunk drivers. Most States have laws requiring automobile liability insurance, although policies commonly do not cover collision or have high deductibles. Automobile insurance premiums (including liability) were $104.5 billion in 1992 (U.S. Bureau of the Census 1994), which is several times greater than estimated vehicle damage, suggesting that it is justified to assume that most of this cost was borne by private insurance. Alcohol abusers may pay higher insurance premiums as a result of driving infractions, but this has not been examined. It was assumed that of the $2.9 billion in legal and court costs, 20 percent were State and local costs for court expenses and that alcohol abusers and victims of alcohol-related crashes had equal levels of expenses (about $1.15 billion each). For the burden of fire damage ($1.6 billion), it is assumed that 90 percent of the alcohol-related fire damage was paid by private insurance and 10 percent was borne by nonabusing victims of such incidents. Fire insurance premiums were $7.1 billion in 1992 - just about equal to the value of structural fire losses (U.S. Bureau of the Census 1994), which suggests that insurance does pay for most fire losses.

7.1.9 Victims of Crime

Crime losses estimated at $1 billion for alcohol and $2 billion for drugs were attributed to crime victims (those not fatally attacked) in the form of lost earnings. Homicide costs are included elsewhere under the costs of premature mortality and were addressed earlier in this report. Conceivably, some - if not much - of the earnings losses were borne by insurance mechanisms, such as sick leave or disability insurance, but for purposes of these calculations, it is assumed that victims bore all of these costs.

Another cost borne by victims of drug-related property crime is lost cash and property valued at $2.55 billion in 1992. Another $427 million was lost because of alcohol-related property crime. Together, these losses totaled about 30 percent of the stolen property. This value likewise accrues to the benefit of those engaging in crime and serves to offset lost legitimate income. Insurance might offset some of these losses as well. Such losses are again a transfer - albeit involuntary - from one segment of society to another. Thus, the value is not included directly in the calculation of the total economic costs to society, but it does figure in the calculations of who bears what part of the total burden.

7.1.10 Incarceration and Crime Career Losses - Lost Legitimate Earnings

A substantial amount of potential productivity is lost to the economy from incarceration of alcohol and drug abusers ($5.4 billion and $17.9 billion, respectively). Almost 600,000 inmates were incarcerated in 1992 because of drug- and alcohol-defined and related crimes (460,000 and 140,000, respectively). Although this $23 billion in lost potential productivity (almost $39,000 per inmate-year) initially constitutes a loss to the inmate, the burden is shifted somewhat as noted in section 7.1.5 because of losses in government tax and insurance trust revenues. This loss of potential tax revenue - estimated at almost $12,000 per inmate-year - compounds the cost of keeping inmates incarcerated, which is about $20,000 per year. It is also likely that members of alcohol and drug abusers' households may require or receive social welfare payments because a potential income earner is incarcerated. However, these costs have not been estimated.

The drug economy also involves significant losses of potential market productivity - about $19 billion - associated with a full-time equivalent of 600,000 drug abusers dropping out of the legitimate economy in order to engage in the drug economy and/or in a career of income-generating predatory crime (i.e., theft). As before, these losses are partially shifted to government because of losses in tax revenues and contributions to social welfare funds. Where the alcohol and drug abusers engage in income-generating predatory crime, this income is taken directly from their victims, and the cost is directly shifted (discussed in section 7.1.9 above). Drug abusers and alcohol abusers stole an estimated $2.55 billion and $427 million, respectively, in cash and property through personal crimes in 1992, and this was borne by victims. No estimates are available for commercial theft losses.

However, the economic impact of consensual criminal activities, such as drug activities, prostitution, and illegal gambling, is less specific than that of predatory crime. Although the legitimate economy incurs a loss, the individuals engaged in the "underground economy" are generating income for themselves. The estimated loss of legitimate potential earnings may be completely offset. Government may still realize tax revenue from sales and excise taxes on legitimate goods and services purchased by drug abusers. The loss associated with dropping out of the legitimate economy may be primarily from losses of income taxes and employment-related contributions to social insurance trust funds. This study does not make any attribution of economic benefits to participants from such activities. Clearly, important conceptual issues remain to be addressed concerning such activities that are beyond the charge of the current study.

7.1.11 Summary

The economic costs of drug and alcohol problems are distributed across all of society. Although significant costs arguably fall primarily on the abusers, more than one-half of all of the costs are shifted to other institutions and members of society. Even the costs that are most likely to fall on the drug and alcohol abusers themselves may be shifted at least partially to members of their households, such as children and spouses. It has not been possible in this study to estimate the losses that fall on employers; prior studies have also been unable to develop such estimates.

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