COSTS OF HARMFUL ALCOHOL AND OTHER DRUG USE

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1 Report to: COSTS OF HARMFUL ALCOHOL AND OTHER DRUG USE FINAL REPORT Prepared by Adrian Slack Dr Ganesh Nana Michael Webster Fiona Stokes Jiani Wu Copyright BERL BERL ref #4577

2 ACKNOWLEDGEMENTS BERL wishes to acknowledge the assistance of: ACC Peter Larking, Peter Roscoe, Agnes Guevara, and Wen Jhe Lee Department of Corrections Peter Johnston Health Outcomes International Ltd Jim Hales and Jane Manser Ministry of Health Susan Joy, Chris Laurenson, Fiona Julian, Chris Lewis (NZHIS) and Miranda Devlin (H&DIU) Ministry of Transport Wayne Jones New Zealand Police Jonathan Lyall, Rebecca Stevenson and Virginia Andersen St Johns Ambulance Andrew Cratchley Statistics New Zealand Lynne Mackie University of Otago Des O Dea and Richard Edwards (Wellington School of Medicine), and Susan Dovey (Dunedin School of Medicine) We are grateful to both the wider project team (Des, Richard and Susan) for comments received during the course of the project and external reviewers (Professor David Collins and Professor Helen Lapsley) on the final draft of the report. All suggestions were carefully considered and were incorporated as appropriate. The views expressed in this report are not necessarily those of the New Zealand Ministry of Health or the Accident Compensation Corporation. ii Costs of Harmful Alcohol and Other Drug Use

3 Costs of Harmful Alcohol and Other Drug Use 1 Executive Summary Introduction Research scope Report structure Literature Review Methodological issues Analytical perspectives Cost categories Method and Calculation Summary Method Population patterns and impacts related to AOD use Calculations of the costs of harmful drug use Results: the Costs of Harmful AOD Use Costs of harmful alcohol and other drug use overall Costs of harmful alcohol use Costs of harmful other drug use Additional Analytical Focuses Avoidable costs Injury costs Costs to the government References Glossary Appendix Method and Calculation Detail Method Methodological issues Population patterns and impacts related to drug use Cost calculations Appendix Additional Tables Appendix Sensitivity Analysis Harmful drug use and consumption decisions Appendix Alternative GP cost estimates iii Costs of Harmful Alcohol and Other Drug Use

4 Tables Table 2.1 Drinking pattern thresholds by gender, grams of alcohol per day... 9 Table 4.1 Harmful drug users by sex and age group, 2005/ Table 4.2 New Zealand (2005/06) and Australia (2004/05) alcohol use prevalence by drinking pattern Table 4.3 New Zealand (2006) and Australian (1998) illegal drug use prevalence by age group Table 4.4 Average daily alcohol consumption by sex and drinking pattern (grams of alcohol per day), 2005/ Table 4.5 Police activity by offence category, 2005/ Table 4.6 AOD-related apprehensions by offence category, 2005/ Table 4.7 AOD-related Police expenditure ($m) by offence category, 2005/ Table 5.1 Social costs of harmful drug use ($m), 2005/ Table 5.2 Tangible costs of harmful drug use ($m), 2005/ Table 5.3 Intangible costs of harmful drug use ($m), 2005/ Table 5.4 Social costs of harmful alcohol use ($m), 2005/ Table 5.5 Tangible costs of harmful alcohol use ($m), 2005/ Table 5.6 Social costs of harmful other drug use ($m), 2005/ Table 5.7 Tangible costs of harmful other drug use ($m), 2005/ Table 6.1 Potential avoidable alcohol consumption and mortality in Australia, 2004/ Table 6.2 Potential avoidable costs of harmful drug use in New Zealand, 2005/ Table 6.3 Injury costs of harmful drug use ($m), 2005/ Table 6.4 Total tangible and intangible costs of road crash injuries ($m), 2005/ Table 6.5 ACC claim numbers and costs due to harmful drug use ($m), 2005/ Table 6.6 Proportion of AOD injury and social costs borne by ACC, 2005/ Table 6.7 Costs of harmful drug use government perspective ($m), 2005/ Table 9.1 Alcohol consumption by drinking pattern, sex and age group, 2005/ Table 9.2 Total alcohol and other drug use by sex and age group, 2005/ Table 9.3 Harmful drug users by sex and age group, 2005/ Table 9.4 New Zealand (2005/06) and Australian (2004/05) alcohol use prevalence by drinking risk Table 9.5 New Zealand (2006) and Australian (1998) illegal drug use prevalence by age group Table 9.6 Workforce status of the additional population with no harmful AOD use, 2005/ Table 9.7 Workforce status of working-age harmful AOD users by drug type, 2005/ Table 9.8 Police activity by offence category, 2005/ Table 9.9 AOD-related apprehensions by offence category, 2005/ Table 9.10 AOD-related Police expenditure ($m) by offence category, 2005/ Table 9.11 Comparison of NZ-ADAM and Alco-Link offence and apprehension rates with alcohol involvement by offence category, 2005/ Table 9.12 Case-weight multipliers, 1998/ / Table 9.13 Estimated hospital costs of AOD-caused cases 2001 to iv Costs of Harmful Alcohol and Other Drug Use

5 Figures Figure 3.1 Cost categories, components and analytical focuses Appendix Tables Appendix Table 1 Harmful drug use cost inclusions and exclusions Appendix Table 2 Tangible costs of harmful drug use ($m), 2005/06 detail Appendix Table 3 Intangible costs of harmful drug use ($m), 2005/06 detail Appendix Table 4 Drug use prevalence 13+ year olds, 2005/ Appendix Table 5 Total alcohol caused deaths by nature of cause, Appendix Table 6 Alcohol caused deaths and age-gender mortality rates, Appendix Table 7 Total other drug caused deaths by nature of cause, Appendix Table 8 Other drug deaths and age-gender mortality rates, Appendix Table 9 Counterfactual population estimates males, 2005/ Appendix Table 10 Counterfactual population estimates females, 2005/ Appendix Table 11 Counterfactual population estimates total, 2005/ Appendix Table 12 NZ-ADAM distribution of crime by offence category and drug type, 2005/ Appendix Table 13 Crime multipliers to estimate actual crime from recorded crime, 2003/ Appendix Table 14 NZP offence codes and offence categories Appendix Table 15 NZ-ADAM offence categories (HOI) Appendix Table 16 Lost output due to harmful drug use ($m), 2005/06 - detail Appendix Table 17 Justice sector costs of harmful drug use ($m), 2005/06 - detail Appendix Table 18 Health sector costs of harmful drug use ($m), 2005/06 - detail Appendix Table 19 Hospital costs due to alcohol use by category, Appendix Table 20 Hospital costs due to other drug use by category, Appendix Table 21 Road crash costs due to harmful drug use ($m), 2005/06 - detail. 147 Appendix Table 22 Drug-attributable morbidity and mortality health conditions Appendix Table 23 Alcohol-attributable morbidity and mortality conditions Appendix Table 24 Cost to business of lost output ($m), 2005/ Appendix Table 25 Cost to government of lost output ($m), 2005/ Appendix Table 26 Costs to government of harmful drug use ($m) detail, 2005/ Appendix Table 27 Sensitivity analysis of general assumptions, 2005/ Appendix Table 28 Sensitivity analysis of lost output assumptions, 2005/ Appendix Table 29 Sensitivity analysis of drug production assumptions, 2005/ Appendix Table 30 Sensitivity analysis of crime assumptions, 2005/ Appendix Table 31 Sensitivity analysis of health assumptions, 2005/ Appendix Table 32 Sensitivity analysis of intangible cost assumptions, 2005/ Appendix Table 33 Sensitivity analysis of harmful AOD use assumptions, 2005/ v Costs of Harmful Alcohol and Other Drug Use

6 1 Executive Summary The New Zealand Ministry of Health and the Accident Compensation Corporation engaged BERL to estimate the social cost of harmful drug use in New Zealand. Harms related to drug use include a wide range of crime, lost output, health service use and other diverted resources. Drug harm may be avoided via interventions that interrupt supply, reduce demand or encourage safe drug use. The study analyses two categories of drugs: alcohol and other drugs, where other drugs include both illegal and misused legal drugs. It does not cover tobacco. The focus of the study is on the harmful effects of drug use, that is, use that results in a net social cost. This reflects that society, as a whole, has fewer resources and less welfare than in the absence of harmful use. Given this focus, the study covers a broad range of personal, economic, and social impacts, which we denote collectively as social costs. This report provides four broad answers. First, it estimates the total social costs from harmful drug use in the 2005/06 year. Second, it uses these estimates to characterise the potential level of costs that are avoidable. Third, it estimates the social cost stemming from injuries as a result of alcohol and other drug use. Fourth, it provides an estimate of the social costs from harmful drug use borne by the government. The study shows that harmful drug use imposed a substantial cost on New Zealand in 2005/06. Overall, harmful drug use in 2005/06 caused an estimated $6,525 million of social costs. This is equivalent to the GDP of New Zealand s agricultural industry ($6,701 million) or finance industry ($6,982 million). The total was made up of $4,562 million of tangible resource costs and $1,963 million of intangible welfare costs. 1 Harmful alcohol use in 2005/06 cost New Zealand an estimated $4,437 million of diverted resources and lost welfare. To put this figure in perspective, the social cost across all cost categories was equivalent to almost two fifths of Vote Health in 2005/06; and the tangible costs alone to over one quarter of Vote Health. 2 1 GDP does not include intangible costs according to its definition in the system of national accounts (SNA). This may suggest that a comparison between social costs (that include intangible costs) and GDP may not be useful, as they have different conceptual bases. However, Easton (1997) argues that some form of benchmarking is useful for informed decision-making. It states that the magnitudes shed light on the enormity of the problem, and the significance of its various components. In this report, comparisons made with GDP figures are used as orders of magnitudes, to provide an indicator of size rather than a precise measurement of proportion of GDP. 2 The term Vote refers to funding approved by parliament for a specified range of outputs and that is the responsibility of a particular government Minister (the Vote Minister). 1 Costs of Harmful Alcohol and Other Drug Use

7 Harmful other drug use was estimated to cost $1,427 million, of which $1,034 million were tangible costs. The total is equivalent to over half of the justice sector Vote funding (Justice, Customs, Police, Courts, Corrections), and the tangible costs were equivalent to almost two fifths of the Vote funding. Joint alcohol and other drug use that could not be separately allocated to one drug category cost a further $661 million. If the joint costs are split proportionately, total alcohol and total other drug costs equate to $4,939 million (over three quarters) and $1,585 million (just under one quarter). Using estimates from international research, this study suggests that up to 50 percent ($3,260 million) of the social costs of harmful drug use may be avoidable. The research indicated that 29.9 percent (or $1,951 million) of the social costs of harmful drug use result from injury. This equates to $2,900 per harmful drug user per annum. The costs of harmful drug use from a government perspective amount to an estimated $1,602 million, or almost one third (35.1 percent) of the total tangible costs to society. Summary Table 1 Total social costs of harmful drug use ($m), 2005/06 ($m) Alcohol Other drugs Joint AOD Total Tangible costs 2, , ,561.5 Intangible costs 1, ,963.1 Total social costs 4, , ,524.6 % of social costs 68.0% 21.9% 10.13% 100.0% Source: BERL Summary Figure 1 Tangible costs of harmful drug use by cost type ($m), 2005/06 Health % Road % Drug prod'n % Lost output % Crime % Source: BERL 2 Costs of Harmful Alcohol and Other Drug Use

8 Tangible costs reflect productive resources diverted due to harmful drug use and totalled $4,562 million in 2005/06. This was equivalent to 2.9 percent of GDP in 2005/06. 3 Lost output ($1,952 million), crime costs not included in other components ($1,111 million) and drug production ($861.0 million) were the largest resource drains overall. Drugattributable health care and road crashes not included elsewhere cost a further $638 million. Drug users and victims suffered a further $1,963 million of intangible costs. The three largest tangible cost drivers for alcohol were labour costs, justice sector costs and drug production, which accounted for 84 percent of the tangible costs of alcohol. Similarly, drug production, crime and labour costs accounted for 92 percent of the tangible costs of other drug use. Given an estimated 513,000 harmful alcohol users, 27,000 other drug users and 127,000 joint alcohol and other drug users, harmful drug use cost approximately $9,800 per user, where over 70 percent of these impacts represented tangible resource costs. The research indicates that there is substantial scope to avoid costs resulting from harmful drug use via interventions that target supply and demand and that aim to reduce harmful use. The research did not specifically examine the cost-effectiveness of alcohol and other drug prevention and treatment interventions. Summary Table 2 Avoidable costs of harmful drug use ($m), 2005/06 Avoidable costs ($m) Alcohol Other drugs Joint AOD Total Tangible costs 1, ,280 Intangible costs Total avoidable costs 2, ,260 % of avoidable costs 70% 20% 10% 100% % of social costs 34% 11% 5% 50% Source: BERL International studies suggest that potentially up to 50 percent of social costs can be avoided. Applying this proportion to this study s main estimates indicates that $3,260 million of these social costs of harmful alcohol and other drug use are avoidable. However, this figure should be viewed as providing an order of magnitude on potential avoidable costs, rather than an accurate estimate based on New Zealand evidence. At this stage, further analysis cannot be made, and this is an area where we recommend further research. 3 The estimates are GST exclusive figures. GDP, however, is measured at 'market prices', which includes indirect taxes such as GST. Therefore the estimates are not directly comparable with GDP. The percentage figure is indicative of magnitude, but is not precise. 3 Costs of Harmful Alcohol and Other Drug Use

9 Summary Table 3 Injury costs of harmful drug use ($m), 2005/06 Injury costs ($m) Alcohol Other drugs Joint AOD Total Tangible costs Intangible costs ,222.4 Total injury costs 1, ,951.4 % of injury costs 81.6% 17.3% 0.9% 100.0% % of social costs 24.4% 5.2% 0.3% 29.9% Source: BERL Total injury costs due to harmful alcohol and other drug use were estimated to be $1,951 million, or just over one quarter of the total social costs of harmful alcohol and other drug use. According to the injury cost analysis, tangible costs associated with harmful alcohol and other drug use totalled $729 million, and intangible costs was estimated to be around $1,222 million. 4 Harmful alcohol use was estimated to cost our community approximately $1,592 million in total in 2005/06. This equates to injury costs of approximately $3,100 per harmful drinker, of which $1,200 is tangible and $1,900 is intangible. Other drug use accounted for a relatively smaller proportion of total injury costs (17.3 percent); it had an estimated impact of $337 million, the majority of which were intangible costs ($254 million in 2005/06). Approximately 27,000 people (aged 13 years old plus) were estimated to use illegal drugs and not alcohol, implying costs of $12,300 per drug user, of which $3,000 is tangible and $9,300 is intangible. The research also investigated the impacts of injuries resulting from joint alcohol and other drug use. The tangible costs of injury due to harmful joint alcohol and other drug use were estimated to be around $17.5 million. Almost all of these costs (97.0 percent) were estimated to be tangible costs associated with health care. 5 The costs of harmful drug use to the government amount to an estimated $1,602 million, or over one third (35.1 percent) of the total tangible costs to society. Reallocating the joint costs, just under 70 percent of the costs are due to alcohol and just over 30 percent are attributable to other drugs. Justice sector costs related to harmful drug use impose the largest burden on the government, accounting for just under half (49.4 percent) of the 4 Intangible costs make up a relatively larger proportion of injury costs than other costs. This is because many of the tangible costs were excluded as they were not injury related, or in some cases, for example the lost output for victims, it was impossible to separate out injury and non-injury related costs. This latter issue also means that the relativity between tangible cost components, such as lost output versus healthcare costs, will differ from the main estimates, partly as a result of the data issues rather than underlying behaviours and the consequent costs. 5 See footnote 4 for discussion on the implications of data availability for the relativity of tangible injury cost components. 4 Costs of Harmful Alcohol and Other Drug Use

10 estimated cost to the government. Over one third (38.2 percent) of the government s costs were due to lost tax revenue from reduced output, while a substantial 20.6 percent were borne by the health sector. Estimated costs in this report drew on a range of data and working assumptions. To give a measure of confidence in the robustness of results derived from these assumptions, sensitivity analyses were performed on several key factors. These sensitivity analyses suggest that the estimates of harmful alcohol and other drug use in 2005/06 are robust. On average, a one percent increase in the factors analysed leads to 0.1 percent increase in estimated costs (for positive changes) and a percent reduction in estimated costs (for negative changes). The results are most sensitive to the assumptions about mortality rates; a 10 percent increase in mortality rates leads to a 3.3 percent increase in total social costs. A 10 percent increase in the proportion of the supply of illegal drugs that is imported reduces the total social costs by 1.0 percent. Other sensitive results include harmful alcohol and drug use prevalence, and the value of a statistical life year. 5 Costs of Harmful Alcohol and Other Drug Use

11 2 Introduction The Ministry of Health and the Accident Compensation Commission (ACC) commissioned BERL to estimate the social costs of harmful alcohol and other drug (AOD) use in New Zealand. The Ministry of Health funds a substantial proportion of health care for New Zealanders and has a policy interest in the health and other impacts of harmful drug use. This research estimates the social costs of harmful drug use across a range of sectors, and includes a particular focus on these costs from a government perspective. ACC is a public insurer charged with providing cover for both workplace and non-workplace accidents. As part of this research, ACC asked for an analysis of the social costs of harmful drug use related injuries. In addition, we were able to access ACC data and provide a further analysis of the implications of harmful drug use for ACC s expenditure. 2.1 Research scope This report separately identifies, where possible, the social cost from harmful alcohol use and other drug use borne by the country in 2005/06. The other drug category in this study primarily covers illegal drugs including cannabis, opioids, stimulants, and hallucinogens. Where possible, the social costs of legal drug use were also included, such as the health care for harmful legal drug use (for example, legal anabolic steroid poisoning) and the cost of providing treatment using legal drugs (for example, methadone and naltrexone use for people receiving treatment for substance dependence). The study also carried out three sub-analyses of harmful drug use: avoidable costs, injury costs, and costs from a government perspective. Avoidable costs are the portion of total social costs that may be avoided by reducing harmful use via government intervention or changes in user behaviour. The second analysis focused on costs stemming from injuries as a result of AOD misuse. The third analysis uses the main estimates to determine the impacts of harmful AOD use on government expenditure and revenue Drugs: alcohol and others The study analyses two categories of psychoactive substances: alcohol and other drugs. The research specifically excludes consideration of tobacco. 6 6 The social costs of tobacco were recently updated in two pieces of work by Des O Dea and co-researchers, O Dea et al (2007a) and O Dea (2007b). 6 Costs of Harmful Alcohol and Other Drug Use

12 The alcohol category includes both home and commercially produced alcohol. 7 The other drugs category refers to both illegal drugs and medicines or other legal products diverted from legitimate use to be used for their psychoactive effects 8. The study mainly found suitable evidence on the impacts of illegal drug use, but evidence on the use and impact of legal, but misused drugs, such as some party pills or solvents, tend to be limited. As such, the results are likely to underestimate the impact of misused, legal drugs Harmful use We define harmful AOD use as use that results in a net social cost. 9 That is, society as a whole has fewer resources and less welfare than it would in the absence of harmful use. This approach focuses on observed negative impacts of rather than on the level of consumption. For example, we include the costs of road crashes where alcohol is a causal factor regardless of the driver s level of consumption. The World Health Organisation has a lexicon of terms related to harmful alcohol and drug use. Several of these terms are used in the articles, books, and journals reviewed and the media often uses these terms when discussing alcohol. These terms include, for example: substance misuse, substance abuse, addictive substance use alcohol use, alcohol misuse, hazardous drinking, heavy drinking, binge drinking, abnormal drinking behaviour illegal/non-medical drug use, harmful drug use, dependent/ habitual drug use. Some authors reserve the term abuse for illegal substances, such as illegal drugs, while harmful use of legal drugs, such as alcohol, is called misuse. The phrasing of use, misuse and abuse is complicated by the possibility of beneficial substance use, particularly in the case of moderate alcohol consumption. This possibility is based on epidemiological studies 7 While all alcohol is considered in the characterisation of usage patterns and its harmful impacts, it was not possible to determine the share of overall harmful consumption that resulted from home-made alcohol. As such, the estimate of resources diverted by alcohol production is likely to be underestimated. According to the Ministry of Health's (2007) report "Alcohol use in New Zealand 2004", 1.8 percent of New Zealanders reported producing home-made alcohol in The proportion that home-made alcohol makes up of the total volume of alcohol consumed is likely to be smaller than the proportion of the population making home-make alcohol. Therefore, we believe that this omission will have a minimal impact on the study s results and will result in a conservative estimate. 8 That is, drugs classified as controlled drugs under the Misuse of Drugs Act 1975 and its subsequent amendments. However, although benzylpiperazine (BZP) was reclassified as a class C drug in April 2008 under the Misuse of Drugs (Classification of BZP) Amendment Act, there was insufficient information on its impacts to robustly include it in this study. 9 Epidemiological literature and previous drug abuse cost studies were used to determine thresholds for harmful AOD use (English et al 1995, Ezzati et al 2004, Rehm et al 2004, Connor et al 2005). This study defines harmful alcohol use as average daily consumption of alcohol per day over 20 grams for women and 40 grams for men. Any illegal drug use is classified as harmful for the range of impacts investigated in this study. 7 Costs of Harmful Alcohol and Other Drug Use

13 showing reduced risk of certain diseases, such as ischaemic heart disease among light to moderate drinkers. 10 So, while alcohol use may be benign or harmful in some cases, it is possible that it may be beneficial in other cases. Aside from medical drug use, other drug consumption is routinely presented in the literature as misuse or having harmful impacts only. This tends to reflect the absence of evidence for the non-medical health benefits from the consumption of other drugs (Ridolfo and Stevenson 2001). Collins and Lapsley (2008), for example, have no problem in using the term abuse when referring to the consumption of illegal drugs. The authors argue, in the case of illegal drugs, by definition, society has decided to proscribe their consumption, with the implication that any consumption is abuse. This study uses the term harmful drug use instead of abuse. This term is: less judgmental than abuse recognises the complicated relationship between substance use and its impacts allows for the possibility that some use may be benign or beneficial. This term is consistent with the requested focus for this project on drug abuse: where society, including the substance user, incurs extra costs as a result of the drug use. This study concentrates on the economic costs of harmful use. It does not explicitly estimate the social impacts of non-harmful use, nor the private costs associated with such use. Literature on beneficial use was not specifically reviewed, and estimated impacts of beneficial drug use were not included in this study. 11 However, there are intangible benefits, for example, to consumers from non-harmful consumption of alcohol. As these impacts are benefits, however, they do not fall within the scope of this study on the social costs of harmful drug use The British Medical Association Board of Science (2008) argues that alcohol consumption is linked to long-term health and social consequences through three main causal pathways: intoxication, dependence and toxic (and beneficial) biological effects. WHO (2002) has also used this schema, but only with reference to harmful alcohol consumption. These arguments are reinforced by recent epidemiological work that argues that firm conclusions on potential health benefits of moderate alcohol consumption cannot be made on the evidence that is available (Lindberg and Amsterdam 2008, Fillmore et al 2007, 2006). 11 In the case of alcohol, there is substantial and on-going epidemiological debate about the existence and magnitude of any health benefits from any level of alcohol consumption. For example, Begg et al (2007) and Connor et al (2005) estimate some positive impacts of alcohol consumption for particular age groups and health conditions. But Lindberg and Amsterdam (2008), Fillmore et al (2007) and Fillmore et al (2006) contest the evidence base of the health benefits of alcohol, and suggest that it is not currently possible to conclude that alcohol is a causal factor for good health. 12 We use Collins and Lapsley s (2008) attributable fractions in our estimates of AOD-related hospital use and mortality rates. These fractions indicate some alcohol use may be beneficial but any other drug use is harmful. To 8 Costs of Harmful Alcohol and Other Drug Use

14 Our study does not assume that the legal status has any necessary implication for the harmfulness of the substance. For example, legality does not imply the substance is harmless nor does illegality imply it is harmful. The basis of whether use is harmful is determined on available epidemiological and other relevant evidence. This study defines harmful alcohol use as a hazardous or high risk drinking pattern (English et al 1995, Rehm et al 2004, Connor et al 2005). 13,14 Table 2.1 below reports the drinking pattern thresholds, in grams per day, used in this study. They allow for different impacts by gender, and are based on population average levels. Table 2.1 Drinking pattern thresholds by gender, grams of alcohol per day Grams of alcohol per day Women Men Abstinent Low risk Hazardous High risk Source: Connor et al (2005) Low risk drinkers, such as social drinkers, are assumed to have no harmful alcohol use, unless specific information to the contrary was found. For example, the analysis includes harms resulting from road crashes, hospitalisations, workplace absenteeism or criminal offences involving low-risk drinkers, as these incidents are captured in the data sources used for this study. Any illegal drug use is assumed to be harmful. This reflects an absence of evidence for the non-medical health benefits from the consumption of illegal drugs (Ridolfo and Stevenson 2001). This approach is also consistent with the approach used in recent Australian social cost estimates (Collins and Lapsley 2002, 2008). concentrate on harmful drug use, zero fractions were applied to conditions for which alcohol provided a net benefit, that is, for conditions with negative attributable fractions. This approach is likely to underestimate the harmful impacts of drug use. Although the net beneficial impact was removed, the harmful component for those conditions could not be estimated. However, Collins and Lapsley advise that the harmful impact for beneficial conditions is minute. 13 The average daily consumption ranges are consistent with the WHO categories (Rehm et al 2004), the Australian alcohol guidelines (NHRMC 1992), Australian epidemiological and substance abuse studies (English et al 1995, Pidd et al 2006, Collins and Lapsley et al 2008) and a recent New Zealand study on the burden of death, disease and disability due to alcohol (Connor et al 2005). 14 These patterns are notional concepts that are derived from aggregated population information and used in a wide variety of social cost estimation studies. However, these levels should not be interpreted as individual consumption guidelines. ALAC provides guidance and advice on individual alcohol consumption levels that are likely to minimise risk. 9 Costs of Harmful Alcohol and Other Drug Use

15 2.1.3 Costs of harmful drug use This study focuses on a broad range of costs covering personal, economic, and wider social impacts. These costs are collectively denoted by the term social costs in this report. This focus is consistent with that presented in Collins and Lapsley (2008). Collins and Lapsley gives a comprehensive economic definition of harmful drug use costs: The value of the net resources which in a given year are unavailable to the community for consumption or investment purposes as a result of the effects of past and present drug abuse, plus the intangible costs imposed by this abuse. Our definition assumes a counterfactual situation in which no harmful drug use has occurred. The range of costs included in this study is detailed in Appendix Table 1. The inclusions and exclusions are compared to the range of costs found in Collins and Lapsley (2008), BERL (2008a) and other drug misuse cost studies. The study aimed to estimate net social costs, rather than gross social costs of harmful drug use. 15 That is, drug use may offset some costs as users reduce the burden on society s scarce resources. For example, while drug use may impose costs on the health system, premature death reduces the health care that users might otherwise have required if they had lived longer. Net costs are conceptually distinct from avoidable costs as they reflect impacts from consumption. Avoidable costs refer to the potential reduction in net costs due to effective policy or clinical interventions that reduce harmful substance use or minimise harm from substance use. The present study, however, does not extend to analysing the costeffectiveness of specific drug interventions. This study takes a conventional approach for economic cost studies, which do not attempt to fully consider the economic benefits of alcohol and other drugs, and should not be confused with cost-benefit or cost-effectiveness analyses (Single et al, 2003: 14). 15 A related, but separate, issue is that of the beneficial consequences of drug consumption. This report concentrates specifically on the social costs of harmful use. It does not analyse the impacts from non-harmful use, such as any protective health effects of alcohol consumption. That is, beneficial impacts of alcohol use are not included as cost offsets. Aside from medical drug use, illegal drug consumption is routinely presented in the literature as misuse or having harmful impacts only. This tends to reflect the absence of evidence for the nonmedical health benefits from the consumption of illegal drugs (Ridolfo and Stevenson 2001). Therefore, to be consistent with the focus on harmful drug use and the available evidence base, all illegal drug use is deemed harmful. A focus on the total impacts of drug use, rather than the harmful impacts, would allow for such beneficial impacts and result in lower net harmful effects. 10 Costs of Harmful Alcohol and Other Drug Use

16 2.1.4 The counterfactual The literature presents two conventional approaches to evaluate the costs of harmful substance use: prevalence and incidence. This cost study uses a prevalence approach as prevalence-based studies are considered useful for planning and budget decisions. Both prevalence and incidence approaches value a range of cost components that result from misuse and compare these costs to a hypothetical scenario. This scenario is known as the counterfactual. In this study, the counterfactual reflects the costs that would not occur if there was no past or present harmful drug use. The main difference between these approaches relates to whether the focus is on when the costs occur (prevalence) or when the use occurs (incidence) Caveats on interpretation The study has a number of limits. Where possible, it uses New Zealand data and research. Where appropriate, we draw on Australian and American research to support our assumptions. Attributable fractions It was not feasible to re-calibrate attributable fractions using New Zealand prevalence statistics due to data constraints. In particular, it was not possible to get recent drug use prevalence statistics in a form that would suitably match up by drinking pattern with the relevant epidemiological literature on the relative risks associated with harmful drug use. Therefore, we use Collins and Lapsley s (2008) attributable fractions to estimate the proportions of mortalities and morbidities caused by AODs. This approach is likely to result in reasonably robust estimates given that the population and policy parameters in Australia and New Zealand are similar. However, New Zealand has a higher prevalence of harmful alcohol use than Australia, and a lower prevalence of other drug use. This means that this study is likely to underestimate the social costs of alcohol, while overestimating those for other drugs, where the estimated components draw on the Australian attributable fractions. Mortality rates We calculated AOD-related mortality rates for the 2001 to 2005 period using NZHIS data and attributable fractions. These rates are projected backwards to calculate AOD-related deaths from 1951 to 2006, and the likely survival of these people to 2005/06. That is, we estimate the number of people in the past who would have survived to live in 2005/06 if there was no harmful alcohol or drug use. 11 Costs of Harmful Alcohol and Other Drug Use

17 One assumption used in this estimation process is that the prevalence of drug use has remained constant over the estimation timeframe. The prevalence of hazardous drinking has remained reasonably constant over the past decade at a population level, although this experience may differ for specific groups within the population (Ministry of Health 2008). It is possible that the prevalence of harmful drinking in earlier periods was lower (Easton 1997). However, other drug use patterns and trends have changed over time (Wilkins and Sweetsur 2007). The mortality rates are based on data from the 2001 to 2005 period. But these rates are likely to overstate mortality from heroin and cocaine use in the 1950s or 1960s when use of these drugs in New Zealand was likely to be lower. Similarly, the data is not sufficient to include changes in recent trends, such as an increase in amphetamine use (and the related specific health conditions) over the last decade and a fall in cocaine use. Therefore our estimates for the additional population in the absence of harmful drug use are likely to be over-stated. Exclusions due to limited data In some cases, the local and international research was not sufficient to estimate some components. For example, this study does not provide an estimate of the intangible costs that result from poor health caused by harmful AOD use. This is likely to underestimate overall intangible costs. General equilibrium impacts Drug producers provide employment, income and output. This research does not, however, examine the general equilibrium (economy-wide) impacts of reducing harmful drug use. It is beyond the scope of this report to examine the alternatives to which these resources could be put. Such an evaluation would require industry (microeconomic) and countrywide (macroeconomic) analyses of the relative productivity of these resources in their current and alternative uses. 16 In the case of alcohol production, this analysis would be complicated by impacts on the cost of production, i.e. economies of scale, from substantial reductions in the size of the industry. 16 The size of the illegal drug industry poses a social and economic policy issue in New Zealand, particularly as some drug production has a strong regional concentration. Drug laws and enforcement lead to high prices for illegal drugs. While these prices may encourage some drug production, the prices give a distorted signal about the social value of that activity. That is, drug production may be profitable but producers fail to (fully) account for the harmful impact of their output. The harmful impacts that drug use imposes on that and other regions should be set against drug profits. Furthermore, the drug industry may trap resources and stop them from moving to better alternatives, such as innovation or education. Reforming the drug industry and moving resources to other industries may cut income in the short term but strengthen a region s economic base and deliver higher, sustainable growth in the future. 12 Costs of Harmful Alcohol and Other Drug Use

18 2.2 Report structure The remainder of the report is divided into three main parts. Sections 3 and 4 provide background to the study. Section 3 provides a summary of a brief literature review completed for this project. 17 Section 4 briefly sets out the broad methods and definitions BERL used in this study; appendix 8 provides more detail on our methods and calculations. Section 5 presents the study s main results. It analyses the overall impacts of harmful AOD use, including estimated costs for alcohol, other drugs and joint AOD costs, which are costs that could not be attributed to a specific drug given the available data. Separate subsections examine those costs identified as relating specifically to alcohol or to other drugs. Section 6 reports three sub-analyses of harmful drug use: avoidable costs, injury costs and costs from a government perspective. Avoidable costs are the portion of total social costs that may be avoided by reducing harmful use via government intervention or changes in user behaviour. The second analysis focused on what part of total social costs results from AODrelated injuries. The third analysis estimates the costs to government of harmful AOD use. The report ends with literature references and a glossary (sections 7 and 8). Additional tables and materials are appended in sections 9 through The literature review is available in a separate report, BERL (2008) AOD cost analysis literature review. 13 Costs of Harmful Alcohol and Other Drug Use

19 3 Literature Review This section summarises a literature review carried out as an initial step in this project. 18 The literature review surveys major international and New Zealand literature on harmful substance use cost estimation and drug-related research. It explicitly excludes research on the costs of tobacco. It initially informed key methodological decisions and later provided a context to interpret the study s results. As such the literature review is organised around particular decisions that have been made in the course of the research, works from the general to the particular, and considers various analyses that could build on the main cost estimates. 3.1 Methodological issues The cost of harmful substance use literature presents two conventional approaches to evaluate these costs: prevalence and incidence approaches (BERL 2008, Collins and Lapsley 2008, Johansson et al 2006, Rehm et al 2006, UK Cabinet Office 2003, Catalyst Health Economics 2001, ONDCP 2001, Devlin 1997, Easton 1997). 19 International guidelines for harmful substance use cost estimation recognise both approaches as legitimate (Single et al 2003), but they address different research questions. Both approaches value a range of misuse cost components and compare these costs to a hypothetical or counterfactual scenario where there is no misuse. The main difference relates to whether the focus is on estimating costs of impacts occurring in the current period, which are attributable to past and current drug use (prevalence), or of estimating the current and future impacts of current drug use (incidence). Single et al (2003) discusses prevalence studies as those that estimate the number of deaths and hospitalisations attributable to harmful substance use in a given year, and the costs associated with these deaths or hospitalisations. These costs also take into account harmful substance use prevention and intervention, and law enforcement costs in the same period. The study argues that prevalence is commonly used to refer to the number of cases of a particular disease or disorder that occurs in the general population during a specified period. Using a prevalence approach is therefore useful to estimate the social costs of 18 The summary is based on a separate literature review report, BERL (2008) 19 The terms incidence and prevalence may have different interpretations in other contexts. For example, in the justice sector, the New Zealand Crime and Safety Survey (Mayhew and Reilly 2007a) notes, "Risks can be measured in terms of incidence rates the number of offences per 100 households or adults. Incidence rates are used to estimate the full volume of crime taking into account that some people are victimised more than once. Risks can also be measured in terms of prevalence rates, which show the percentage of households, or adults who have been victimised once or more. 14 Costs of Harmful Alcohol and Other Drug Use

20 alcohol misuse as you are able to estimate the costs based on the number of cases of a particular disease or disorder that has occurred in a given year. The alternative incidence-based approach aims to estimate current and future costs resulting from harmful substance use by people in a given year. For example, the value of lost output from a person who dies prematurely as a result of harmful substance use is based on their estimated lifetime earnings rather than the single year of output lost in the year of their death. This requires projections into the future and the use of discount rates to establish the potential loss in output incurred due to morbidity and mortality resulting from harmful use. This approach is more complicated than the prevalence approach, as it involves estimating a lifetime profile of earnings (or other impacts) and choosing an appropriate valuation method so that present and future costs are measured in commensurate terms. A prevalence approach focuses on the impacts due to current and past AOD use that occur in a given year. Prevalence-based studies are useful for planning and budget decisions. It is for these reasons that this study uses a prevalence approach. 3.2 Analytical perspectives The primary analytical perspective of this study is the social costs of harmful AOD use; this is the most common perspective used in the major harmful substance use cost studies. The analytical perspective of a study determines what costs are relevant and may be captured in the analysis. Possible viewpoints in the general health economics literature include private, business, government and social (Drummond et al 1994). Single et al (2003) makes a distinction between private costs and costs borne by others such as businesses or governments. The report argues a key distinction is that private decision costs are knowingly borne by an individual, while social costs are not knowingly or freely borne by the user or are borne by others such as businesses or government. Accurately valuing private benefits is likely to be complicated by the role of addiction, information issues (Collins and Lapsley 2008, Easton 1997) and the hidden nature of illegal drug use. Social costs are defined in various ways, but a common thread is a version of the economic idea of negative externalities. Conventionally, an externality is an impact positive or negative that is borne by a third party and for which there is no compensation, for example, alcohol-related crime. Social costs are the costs imposed on New Zealand society by harmful drug use, excluding purely private impacts. Markandya and Pearce (1989) extends this idea to include third-party costs plus costs unknowingly borne by the user, for example, where the actual cost is greater than the 15 Costs of Harmful Alcohol and Other Drug Use

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