In 1994, a group of trial lawyers and state attorneys general devised a novel approach to suing tobacco companies. Despite the fact that people have known for decades that smoking may be harmful to your health, and the presence of labels to that effect on cigarette packages since 1966, they argued that the companies had hidden details on the true extent of the danger while simultaneously promoting tobacco use. The group sought billions of dollars in compensation for state taxpayers who, through Medicaid and other health care transfer payments, had picked up the tab for the medical care of thousands of smokers.

On November 23, 1998, the attorneys general from Michigan and 45 other states agreed to a multi-billion dollar settlement in the case. (Four additional states had already settled independently.) The tobacco industry would provide states up to $206 billion over 26 years, with additional payments as long as the companies sell tobacco. (In states represented not by attorneys general but by trial lawyers - not including Michigan - the lawyers will also get billions in “contingency fees.”) The annual payments are adjusted for inflation, decrease if tobacco use declines, and include a formula to account for nonparticipating manufacturers. Payments are not contingent on how a state uses the money. The Senate Fiscal Agency estimates that Michigan’s share will average around $300 million a year for the next several years.

The settlement agreement also contained provisions limiting the companies’ tobacco promotion practices, including bans on ads targeting youth, cartoon characters in ads, billboards, and the sale of apparel, book packs and other merchandise with tobacco logos. The tobacco industry would fund a $250 million foundation to reduce teenage smoking, and contribute $1.45 billion over five years for a national advertising and education campaign to educate consumers about tobacco-related diseases.

In every state the settlement set off a scramble by politicians and special interests over how to divide the money. In his 1999 State of the State address, Michigan governor John Engler proposed spending part of it on a college and trade school scholarship program. This would pay $2,500 to high school graduates who do well on the Michigan Educational Assessment Program test (MEAP), and lesser amounts for junior high students who do well. The program was quickly agreed to by large bipartisan majorities in the legislature (despite the concerns of conservatives suspicious of government tests, and Democrats concerned that poor and inner city students who don’t test as well could be shortchanged).

For Fiscal Year (FY) 2002-2003, $133 million of settlement money has been appropriated for scholarships to students, around $20 million of that for administration expense and the MEAP test program. The ballot proposal would eliminate this funding source for both the testing and scholarship programs.

In his 2000 State of the State address, Gov. Engler proposed a “Life Sciences Corridor” to be funded by the tobacco settlement money. This would transfer $1 billion over 20 years to subsidize private and university health research. For FY 2002-2003, $45 million has been appropriated for this research subsidy. This would drop to $42.7 million under the proposal, according to the Senate Fiscal Agency. Another $2 million subsidy for a proposed Rare Isotope Accelerator at Michigan State University would also require a new funding source.

Contingent on whether it is needed to replace possible federal funding, $50 million is now set to go to an Elder Prescription Insurance Coverage (EPIC) program, which subsidizes the drug expenses of low income seniors. This would drop to $42.7 million if the proposal is adopted. Other tobacco money expenditures for the coming year include Medicaid, slated to get $30 million from this source, and $10.8 million to other health related spending. Tobacco money transfers to these programs would be eliminated under the proposal. $4 million scheduled to go the Council of Michigan Foundations for anti-smoking efforts would rise to $6.5 million.

Finally, a $100 million transfer to the state general fund - which funds state spending in all areas - would be eliminated. The transfer was authorized to sustain existing state spending levels, given tax revenues that are coming in lower than expected. Instead, the general fund would get around $30 million.

As mentioned, the settlement left it up to the states how to spend the tobacco company money. The lawsuit sought compensation for past health care expenditures by states – that is, by taxpayers. Payment is not contingent on using the money for future state health care expenditures, or for anti-smoking publicity campaigns. State laws passed after the settlement require 75 percent of the annual proceeds to be deposited into a Michigan Merit Award Trust Fund, and 25 percent into a Tobacco Settlement Trust Fund. From there the legislature has discretion on where to spend the money.

Supporters of the initiative contend that tobacco lawsuit settlement money should be spent primarily on health care and anti-smoking efforts. Regarding the latter, there is some dispute about how much the state actually spends. The Michigan Department of Community Health (DCH) says $28.5 million is spent on all anti-smoking programs. The Center for Disease Control (CDC) says the amount is $6.5 million, and supporters of Proposal 02-4 contend the amount is just $5.5 million. The gap is due to differing interpretations of what constitutes “anti-smoking programs.” The state counts all anti-drug and related programs toward the $28.5 million. Anti-smoking activists only count programs dealing exclusively with tobacco.

Initiative supporters also contend that by spending more on anti-smoking programs, tobacco use will decline, causing future health care expenditures by the state to also fall. Opponents point to analysis by the non-partisan House Fiscal Agency showing how the initiative mandates that the proportion of the state budget spent on Medicaid and other health programs in FY 2000-2001 must not be allowed to fall. Any increase in the state budget would require a proportional increase in Medicaid. Also, if federal Medicaid payments decline (as expected), general fund support would have to rise even more to make up the difference. (The "general fund" is the portion of state spending that comes from actual state tax revenues, rather than special restricted fund revenue or federal pass-through dollars.) Total Medicaid spending now accounts for more than 25 percent of the general fund portion of the state budget. Therefore, the agency concludes that Medicaid could absorb more than 30 percent of general fund expenditures within several years.

After School Aid, “Community Health” is by far Michigan’s largest budget item – $8.5 billion in FY 2001-2002, accounting for almost one-quarter of the gross budget (not just General Fund). The legislature appropriated $9.8 billion for FY 2002-2003. Additional state health care spending is contained in several other departmental budgets, further boosting the percentage of the overall budget dedicated to health care.

Despite this high spending, health care providers say they are in trouble, primarily because of capped rates on federal Medicare for seniors, and state/federal Medicaid for the poor. These government programs do not reimburse health care providers at market rates, and providers say they must make up the difference elsewhere. Others contend that hospitals are hurting because of their own sloppy management and excessive overhead. A related problem is that the system is insulated from market forces, because 80 cents of every health care dollar is paid by someone other than the consumer receiving the care. Low co-pays and deductibles are an incentive for consumers to use more, rather than limit expenses, shop around, and ask questions.

The bottom line is, many experts agree there are serious public policy problems involving Michigan and America’s health care delivery system. To a large extent they attribute these problems to a health care market skewed by government transfer payment programs and tax policy. Many believe that these big-picture health finance issues - not a passion for anti-smoking campaigns - are what drove the Michigan Hospital Association to pursue a ballot initiative that would annually deliver approximately $80 million in new funding directly to hospitals, with another $130 million going to other health providers and researchers. The proposal gives hospitals discretion on how to spend the money – they are not required to use it for care of smoking related diseases.

See “Brief Description of the Proposal” for a breakdown of where Michigan tobacco lawsuit settlement dollars now go, and where they would go if the initiative is adopted.