SUBSTANCE ABUSE PREVENTION AND TREATMENT SERVICES: A Cost Benefit Analysis for Texas

SUBSTANCE ABUSE PREVENTION AND TREATMENT SERVICES: A Cost Benefit Analysis for Texas Texas Perspectives, Inc. 111 Congress, 12 th Floor Austin, TX 78701 July, 2000

TABLE OF CONTENTS Executive Summary... ii- vi Overview... 1 The Costs of Drug and Alcohol Use in Texas... 2 Treatment Costs... 3 Productivity Losses... 4 Other Social Costs... 5 Distribution of the Costs of Substance Abuse... 5 Benefit-Cost Analysis of Substance Abuse Programs... 6 Results from NTIES... 7 Application in Texas... 9 Insurance Application... 10 Prevention Results from the MPP... 11 Conclusion... 12 References... 13 Texas Perspectives, Inc. an economic analysis firm was commissioned by the Association of Substance Abuse Programs (ASAP) and the Texas Association of Addiction Professionals (TAAP) to prepare this report. Association of Substance Abuse Programs 169 Catalina Ct. Kerrville, TX 78028 (830) 792-4541 asap@maverickbbs.com Texas Association of Addiction Professionals 1717 W. 6 th St. #214 Austin, TX 78703-4776 (512) 459-3305 aamf@aol.com

SUBSTANCE ABUSE PREVENTION AND TREATMENT SERVICES: A Cost Benefit Analysis for Texas EXECUTIVE SUMMARY Overview Substance abuse traditionally has been considered primarily a social problem. However, the economic implications are equally substantial. In a study for the National Institute on Drug Abuse (NIDA), it was estimated that the combined economic costs alone of alcohol and drug abuse in 1995 exceeded $276 billion for the United States as a whole. Adjusting for price and population increases since then, the current estimated economic cost of substance abuse in America is in the vicinity of $320 billion per year. This amounted to almost 4 percent of the gross domestic product (GDP) in 1998, or about $1,173 per person nationwide. Relying on a similar methodology as that employed in estimating nationwide costs, the Texas Commission on Alcohol and Drug Abuse (TCADA) has estimated the economic cost of substance abuse in Texas during 1997 at about $19.3 billion. A rough projection of this figure to the present would put the current annual tab at $21.3 billion. This represents some 3.1 percent of the projected 1999 gross state product (GSP), or almost $1,100 per Texas resident. Government budget officials have come under increased pressure to show that they are allocating their limited funds as effectively as possible. The premise underlying expenditures for prevention and treatment of substance abuse is that these funds are effective in reducing other costs associated with the problem and increasing the earnings of both would-be abusers and the non-abusing segment of the population. For these efforts to be cost-effective in the aggregate, the nearly $40 billion spent nationwide on drug and alcohol services and treatment of the medical consequences per year today must reduce these other costs and increase overall legitimate earnings by at least that amount. For much of history, advocates for substance abuse services have had to rely more on faith than hard, scientific facts to support their contention that prevention and treatment pay their own way. This has changed in recent years, as methodological improvements and wide-ranging studies have begun to produce plausible and defensible evidence that substance abuse programs not only cover their own costs in the aggregate, but in many cases actually generate substantial net returns for society. This paper reviews findings from 2 recent studies: 1) National Treatment Improvement Evaluation Study (NTIES), a five year nationwide study mandated by Congress, and 2) Midwestern Prevention Project (MPP) funded by the National Institute of Drug Abuse. The findings from these studies were applied to conditions in Texas, and estimates of the benefits of TCADA funded initiatives were derived. Applying these findings to Texas yields some startling results. Prevention and treatment of substance abuse return between $3 to $5 dollars for every dollar spent (Depending on where on the path to addiction these services occur). ii

Categories of Costs There are three principal categories of costs of substance abuse: (1) expenditures incurred in attempting to prevent substance abuse or treating its health consequences, (2) productivity effects resulting from premature death, elevated morbidity rates, or the secondary consequences of criminal activity, and (3) other societal effects. Table 1 summarizes this cost information for Texas, with the first two effects grouped under core costs and the balance considered as related costs. Overall, some 60 percent of these costs are attributable to alcohol abuse, the remaining 40 percent being due to abuse of licit and illicit drugs, either alone or in combination with alcohol. Table 1 Estimated Texas Costs of Substance Abuse (Billions of $1999 Dollars) Total Alcohol Drug/Alcohol Core Costs 14.82 10.20 4.61 Treatment 1.66 0.51 1.15 Morbidity 8.87 6.73 2.14 Mortality 4.28 2.96 1.33 Other Related Costs 5.44 2.00 3.44 Direct Costs 3.16 1.26 1.90 Crime 2.63 0.76 1.88 Motor Vehicle Crashes 0.47 0.45 0.02 Other 0.06 0.05 0.01 Indirect Costs 2.28 0.75 1.53 Victims of Crime 0.28 0.11 0.17 Incarceration 1.61 0.64 0.98 Criminal Careers 0.38 0.00 0.38 Special Disease Groups 1.00 0.67 0.34 TOTAL 21.26 12.87 8.39 Distribution of the Costs of Substance Abuse Four major groups bear the costs of substance abuse: (1) abusers and their immediate family and friends, (2) government, (3) private insurers, and (4) crime and accident victims. Taken together, these latter three groups can be considered the non-abusing segment of society, although this is somewhat of an oversimplification. The non-abusing sector collectively pays about 55 cents of every dollar in direct substance abuse costs, and its share increases somewhat because of indirect transfers. Benefit-Cost Analysis of Substance Abuse Programs The premise underlying expenditures for prevention and treatment of substance abuse the first category of costs discussed above is that these funds are effective in reducing other costs associated with the problem and increasing the earnings of both would-be abusers and the non-abusing segment of the population. For these efforts to be cost-effective in the aggregate, the nearly $40 billion spent nationwide iii

on drug and alcohol services and treatment of the medical consequences per year today must reduce these other costs and increase overall legitimate earnings by at least that amount. Results from the NTIES The National Treatment Improvement Evaluation Study (NTIES) was a major, five-year nationwide study mandated by Congress in the early 1990s. Table 2 summarizes the major findings. Table 2 Economic Effects of Substance Abuse Treatment: All Programs (Averages per Treated Client) Before After Benefits to Benefits to Treatment Treatment Society Non-clients Health Care Cost $2,040 $1,825 $215 $215 Earnings $3,915 $4,266 $351 NA Welfare $724 $732 NA -$8 Payments SSI Payments $587 $582 NA $5 Crime Costs $11,462 $2,851 $8,611 $8,611 Theft Losses $4,924 $1,270 NA $3,654 Total Benefits $9,177 $12,477 Treatment Cost -$2,941 -$2,941 Net Benefits $6,236 $9,536 Source: Koenig et al. (1999), Exhibit III-18 The net benefits to society totaled $9,177 per treatment client for these demonstration projects, at an average cost of $2,941 per client, resulting in a net benefit of $6,236 per client and a benefit-cost ratio of 3.1. It is important to realize that even if the behavioral changes induced by treatment did not persist beyond the evaluation stage, the typical program has much more than paid for itself within a year. To the extent that treatment effects do persist beyond the first year following treatment, the net benefits of that original $2,941 investment increase with the passage of time. Application in Texas Treatment Programs Direct costs associated with the treatment of substance abuse fall into two categories: the actual costs of treatment, and the cost of mandated insurance coverage for those who do not receive treatment. During CY 1998, TCADA provided treatment services for a total of almost 40,000 persons 35,079 adults and 4,739 youths. The FY 1998 TCADA budget for treatment services totaled $96.1 million, or about $2,413 per client. This is about 82 percent of what was spent per client in the NTIES demonstration projects. Some part of this discrepancy is due to lower costs in Texas, but another part is due to relative under-funding of treatment programs. For the purpose of calculating the total benefits of TCADA-funded programs to Texans, this same scaling factor will be applied to the total per client benefits figure for the NTIES client population. The result of this calculation (0.82 x $9,177) is $7,529 in total benefits per client. iv

Using these estimates, the net benefit per TCADA client is $5,113 ($7,529 minus $2,413), and the overall benefit-cost ratio is 3.12 ($7,529 divided by $2,413). These data suggest that TCADA activities during FY 1998 generated net benefits to the Texas economy in the vicinity of $204 million when the entire TCADA client base is considered. TCADA activity represents only a small fraction of total treatment expenditures in Texas, as the Commission estimates that approximately $1.5 billion was spent on treatment statewide during 1997. Updating that figure to 1999, TCADA programs represent approximately six percent of total Texas treatment spending. Applying the same 3.12 benefit-cost ratio, the result is an aggregate net benefit of chemical dependency treatment of approximately $3.52 billion annually in Texas. To the extent that TCADA clients are typically from the lower end of the economic spectrum, these aggregate benefits from public and private expenditures on chemical dependency problems may be significantly understated. Insurance Implications Much has been written about the cost of mandated health benefits, with a wide range of estimates as to the impact on premiums paid. According to the Texas Department of Insurance, 10 million Texans were covered by health insurance of some type during 1996: about 2.3 million were covered under an HMO, 3.5 million were enrolled in a fully-insured health plan, and the balance of 4.2 million were either selfinsured or uncategorized. The Census Bureau estimates that the average per capita cost for health insurance in the Western region of the United States during 1998 was $808. Adjusting these figures for inflation and population growth yields a 1999 Texas premium paid estimate of $9.6 billion. To determine the impact of different mandates on premium costs, the Department of Insurance conducted a survey of the 34 largest insurers in the state. These firms, who write approximately 80 percent of the accident and health coverage in Texas, were asked to report the impact of separate mandates claims on overall premium costs. The findings of this survey were that chemical dependency coverage accounted for 0.6 percent of all claims costs during 1996 for group insurance plans, while the figure for that same period was 0.33 percent for HMOs. These figures do not represent total cost, since administrative expenses and profit are not included, but do serve as an indication of the overall magnitude of the impact of mandated chemical dependency coverage. Moreover, when the additional costs are considered, they appear to be consistent with the findings in other states. In the interest of being conservative, an estimate of 2.5 percent is used for Texas, putting the annual impact on insurance costs at just under $240 million. As a result, the net benefit outlined above is reduced from $3.52 billion to just under $3.3 billion. Prevention Results from the MPP The Midwestern Prevention Project (MPP) is a large prevention trial funded by the National Institute of Drug Abuse in metropolitan areas of Kansas City. A figure of $108 per adolescent and his/her family was used as the cost estimate in the analysis of net benefits and the overall benefit-cost ratio. Program outcomes were reported for myriad of factors, but for evaluation purposes here it is sufficient to focus on one factor--- the costs of drug abuse counseling and treatment. The savings from reduced outpatient treatment and counseling expenditures were restricted to the 5 year follow-up period of the study but still amounted to almost $5 for every MPP dollar spent, or a cost benefit ratio of approximately 5:1. These savings would have been much higher if inpatient treatment costs were used and if the benefits had been projected out over the lifetime of the client. v

In FY1998, TCADA funded a variety of the same types of prevention strategies found in the MPP including mass media programming, school-based programs, parent initiatives, community organization and local policy change efforts. TCADA s prevention programs reached an estimated 2,033,149 persons; 1,190,612 youths and 842,537 adults using a prevention budget that totaled about $29.3 million. Applying the same 5:1 benefit-cost ratio as the MPP, the result is an aggregate net savings of $245.6 million the total foregone costs of approximately $307 million if the prevention and intervention had not been in place, minus the actual costs of $61.4 million between the two. Conclusion In an era of heightened sensitivity to the efficient use of public funds, substance-abuse prevention and treatment programs are at risk of being reduced, partly due to the perception that the benefits are not sufficient to justify the costs. However, research indicates that, when the benefits are more appropriately measured, substance abuse programs are actually highly cost-effective. Applying these findings to Texas yields some startling results using the benefit-cost ratio developed by examining TCADA programs, chemical dependency treatment could be saving the state in excess of $3 billion annually in costs associated with drug and alcohol abuse, after adjustment for the costs of mandated insurance. At the same time, the old saying about an ounce of prevention being worth a pound of cure would seem to hold true, as the findings from the MPP indicate that the benefits of prevention outweigh the costs by 5:1. Taken together, prevention and treatment of substance abuse services return between $3 to $5 dollars for every dollar spent (depending in where on the path to addiction these services occur). Seen in this light, spending on substance abuse prevention and treatment appears to a highly lucrative investment. vi

SUBSTANCE ABUSE PREVENTION AND TREATMENT SERVICES: A Cost Benefit Analysis for Texas FULL REPORT 1

SUBSTANCE ABUSE PREVENTION AND TREATMENT SERVICES: A Cost Benefit Analysis for Texas Overview Throughout the United States, the human and economic costs of substance abuse are enormous, diverse, persistent, and generally growing in both absolute and relative terms. With increased affluence but also increased social detachment, alcohol and drug use by adolescents continues to be a costly problem. As the baby boom generation ages, public health concerns are becoming greater about substance abuse among the elderly population. Still, private and public funding for substance abuse prevention and treatment programs is substantially below where it was in 1980, despite the generally robust economy of the past twenty years. Substance abuse traditionally has been considered primarily a social problem. However, the economic implications are equally substantial. In a study for the National Institute on Drug Abuse (NIDA), it was estimated that the combined economic costs alone of alcohol and drug abuse in 1995 exceeded $276 billion for the United States as a whole. (Harwood et al., 1998) Adjusting for price and population increases since then, the current estimated economic cost of substance abuse in America is in the vicinity of $320 billion per year. This amounted to almost 4 percent of the gross domestic product (GDP) in 1998, or about $1,173 per person nationwide. The aggregate estimates of alcohol abuse costs reported in this study are on a par with inflation and population-adjusted estimates produced by several other major studies dating back more than two decades. Conversely, estimates of the total costs of drug abuse appear to be rising over time. (See Berry et al., 1977; Rufener et al., 1977; Cruze et al., 1981; Harwood et al., 1984; and Rice et al., 1990.) Significant as they are, these statistics reflect only measurable economic costs - just a portion of the total costs of substance abuse to society. Primarily because of methodological limitations, quantitative analyses of substance abuse programs do not account adequately for a potentially significant volume of non-economic costs simply because they are either difficult or impossible to measure accurately. For example, the human and social costs of fractured family and community relationships with substance-abusers are substantial, but such costs are generally excluded from these analyses. At the same time, the impact of lost productivity due to morbidity and mortality is almost certainly significantly understated. Increasingly, technology and information are the basis of the economy, and the ability to leverage these factors to maximize the productivity of their workforce has become the primary determinant of success for many companies. The rise of the information economy and shifting demographic trends have led to virtually full employment with the result that many firms have shifted focus from finding new customers to attracting and retaining quality employees. Seen in this workforce context, substance abuse has become a major economic development issue. 2

The increasing role of managed care health care systems, along with the general trend toward downsizing government budgets and programs, are at least partially responsible for the budget pressures confronting substance abuse service providers. But the challenge of applying conventional cost-effectiveness or cost-benefit analyses is also a significant factor, as budget officials have come under increased pressure to show that they are allocating their limited funds as effectively as possible. It is this heightened focus on the cost-benefit aspects of substance abuse treatment programs that is the genesis of this white paper. The Costs of Drug and Alcohol Use in Texas The use of licit and illicit substances is widespread in Texas. According to a 1996 survey conducted by the Texas Commission on Alcohol and Drug Abuse (TCADA, 1998a), 90% of Texas adults reported ever using alcohol, 72% have used tobacco, and approximately one-third have used an illicit substance at some point during their lives. The same survey indicates that about one adult Texan in five experiences some type of drug or alcohol-related problem. Table 1 Past Year Prevalence of Alcohol, Illicit Drugs, and Substance- Related Problems, by Residence (Percentage of Texas Adults, 1996) Urban Suburb Rural Alcohol Use 64.2 70.9 60.4 Heavy Alcohol Use 5.2 5.7 5.6 Illicit Drug Use 8.1 7.9 5.6 Alcohol Problems 17.7 17.0 14.5 Drug Problems 4.6 4.1 2.9 Relying on a similar methodology as that employed in estimating nationwide costs, TCADA has estimated the economic cost of substance abuse in Texas during 1997 at about $19.3 billion. (TCADA, 1998a.) A rough projection of this figure to the present would put the current annual tab at $21.3 billion. This represents some 3.1 percent of the projected 1999 gross state product (GSP), or almost $1,100 per Texas resident. Categories of Costs Three principal categories of costs of substance abuse are considered in the literature: (1) expenditures incurred in attempting to prevent substance abuse or treating its health consequences, (2) productivity effects resulting from premature death, elevated morbidity rates, or the secondary consequences of criminal activity, and (3) other societal effects. From an economist s perspective, many if not most of the benefits of substance abuse programs are actually avoided costs - costs that would have been incurred had the program not been in place and effective. The remainder of this section discusses the nature of these three types of costs and benefits, describes their relative significance in the estimated current $21.3 billion annual bill from substance abuse, and briefly reviews their distribution to different groups. 3

Table 2 summarizes this information for Texas, with the first two effects grouped under core costs and the balance considered as related costs. Overall, some 60 percent of these costs are attributable to alcohol abuse, the remaining 40 percent being due to abuse of licit and illicit drugs, either alone or in combination with alcohol. Within any category of costs, however, these percentages vary widely. Predictably, for example, substance abuse involving drugs bears more than twice the responsibility than alcohol for the economic costs associated with crime and victimization. Table 2 Estimated Texas Costs of Substance Abuse (Billions of $1999 Dollars) Total Alcohol Drug/Alcohol Core Costs 14.82 10.20 4.61 Treatment 1.66 0.51 1.15 Morbidity 8.87 6.73 2.14 Mortality 4.28 2.96 1.33 Other Related Costs 5.44 2.00 3.44 Direct Costs 3.16 1.26 1.90 Crime 2.63 0.76 1.88 Motor Vehicle Crashes 0.47 0.45 0.02 Other 0.06 0.05 0.01 Indirect Costs 2.28 0.75 1.53 Victims of Crime 0.28 0.11 0.17 Incarceration 1.61 0.64 0.98 Criminal Careers 0.38 0.00 0.38 Special Disease Groups 1.00 0.67 0.34 TOTAL 21.26 12.87 8.39 Treatment Costs This is the most immediate and easily identified type of cost attributable to alcohol and drug abuse. Most TCADA expenditures would fall under this heading. This category also encompasses the costs associated with treating the medical consequences of substance abuse that are incurred by public and private agencies other than drug and alcohol treatment programs hospitals, in particular. These medical consequences add up to about twice the amount expended annually on drug and alcohol treatment programs. Together, these programs represent about 7.8 percent of the estimated total costs of substance abuse today in Texas. Productivity Losses By a large margin, the most significant economic costs of substance abuse are reflected in reduced production and productive activity in the economy. The increased mortality, morbidity 4

and crime rates stemming from alcohol and drug abuse take actual and potentially productive workers away from their jobs or out of the legitimate labor force entirely, both temporarily and permanently. The lost production resulting from this is responsible for more than 61 percent of the annual cost of substance abuse. Mortality Effects Premature deaths from substance abuse the mortality effect take over 150,000 lives nationally per year, even excluding deaths due to substance-related vehicular homicides and violent crime. In addition to the extraordinary emotional toll these deaths take on family and friends, they presently cost about $59.3 billion nationwide in lost economic activity, or 18.5 percent of the overall total. The estimated lost lifetime productivity due to an alcohol-induced premature death is highly variable, but a median value is in the range of $350,000 per death. Premature deaths due to drug abuse are projected to cost about twice that amount in lost production, primarily because these deaths occur on average at a much earlier age, so that more of the individual s work career is truncated. In Texas, TCADA reported a total of 13,335 deaths in 1998 due either directly or indirectly to alcohol and/or drug consumption. Adjusting the estimates of lost productivity reported in the preceding paragraph to account for the somewhat lower average incomes of Texans (92.4 percent of the national mean in 1998), the total economic loss in Texas due to these deaths amounted to $4.3 billion. Morbidity Effects A significant number of American workers abuse substances, and some of this use occurs at work. Most current drug users age 18 and older are employed (73%)--- including 6.7 million full-time workers and 1.6 million part-time workers, according to the 1997 National Household Survey on Drug Abuse. Work time lost to substance-induced illnesses the morbidity effect represents an even greater drain on the economy. These costs accrue in the form of work not performed both on the job and in the household. In the worst-case scenarios, alcohol and drug abusers are institutionalized or homeless, and their employment prospects are severely restricted under these conditions. They may also be spending the majority of their time committing crimes to produce the income needed to support their habits, rather than participating in the mainstream, licit economy. Those who do not fit into these extreme categories still lose more than average amounts of work time at home and their workplace to sickness and recovery from alcohol and drug consumption episodes. An estimated $8.9 billion (42 percent of the total) was lost to the Texas economy in 1999 because of diminished household services, workplace absenteeism, and otherwise impaired onthe-job productivity from alcohol and drug abuse. 5

Criminal Activity Three main types of productivity losses are captured in this subcategory. First, there is the value of lost work time for victims of crime. Victims often lose work days or the ability to perform productive household activities because of psychological or physical damages, time lost to reporting crime and appearing in court, and other inconveniences. Second, individuals who are incarcerated as a result of conviction for drug or alcohol-related crimes also cannot engage in productive activity during the period of their incarceration, representing a further productivity loss to society. Finally, there are the legitimate economic productivity losses associated with unincarcerated individuals who, rather than finding employment in the economy, engage instead in criminal careers to generate the income needed to support their drug habits or alcohol dependence. In Texas, crime-related losses approach $5.0 billion per year about 18 percent of the overall total. Predictably, drug abuse is overwhelmingly responsible for these costs, although the economic costs of drug-related homicides are omitted from this total, as they have already been included in the estimates of mortality losses reported earlier. Other Social Costs Significant property losses and incremental criminal justice system expenditures can also be related to substance abuse. Vehicle crashes and fires cost substantial amounts of money to individuals, insurers and government. The costs of police protection, adjudication, and incarceration of individuals for crimes that are derivative of substance abuse are similarly impressive. Together, these and other miscellaneous costs to society are presently estimated to exceed $1.5 billion in Texas. Distribution of the Costs of Substance Abuse Four major groups bear the costs of substance abuse: (1) abusers and their immediate family and friends, (2) government, (3) private insurers, and (4) crime and accident victims. (Harwood et al., 1998) Taken together, these latter three groups can be considered the non-abusing segment of society, although this is somewhat of an oversimplification. The non-abusing sector collectively pays about 55 cents of every dollar in direct substance abuse costs, and its share increases somewhat because of indirect transfers. Costs primarily absorbed by abusers cover lost legitimate earnings and household productivity due to impaired or curtailed functioning in the labor market, incarceration, and the pursuit of criminal rather than legitimate economic careers. These costs amount to about 45 percent of the total, but they are shifted somewhat to different groups. For example, reduced legitimate earnings results in a loss for government through reduced tax revenues, which then translates into increased taxes or reduced services for the remainder of society. Incremental government services that can be traced to substance abuse include many of the costs of substance abuse programs themselves, supplemental criminal justice and highway safety expenditures, and various social insurance mechanisms. Together, these are estimated to account for 42 percent of the combined costs of alcohol and drug abuse today. Government costs 6

account for about 39 percent of alcohol-related costs and rise to 46 percent of drug-related costs, mainly because of the substantial federal expenditures in the war on drugs. Obviously, these costs are passed along to abusing and non-abusing taxpayers alike, with the abusing population paying even less than their per-capita share because of reduced earnings. Private insurers pay for about 10 percent of alcohol-related costs, but just 3 percent of drugrelated costs, averaging about 7 percent overall. These costs are also passed along in the form of higher premiums. The discrepancy between the two is due in part to reduced coverage and higher costs and premiums for drug abuse services, but many employed drug abusers who are covered frequently prefer to either forgo treatment or pay for it out of their own pocket because of the increased stigma and threat to job security associated with publicizing their need for drug abuse services. Finally, victim losses represent just over 6 percent of all substance abuse costs. These losses include the value of property and cash lost as a result of theft, which is perhaps more properly considered a transfer payment from victims to perpetrators rather than an actual cost to society, as well as lost lifetime earnings of homicide and fatal accident victims, property damages, lost wages, and medical consequences that occur as a consequence of crime and are indisputably costs to society. Benefit-Cost Analysis of Substance Abuse Programs The premise underlying expenditures for prevention and treatment of substance abuse the first category of costs discussed in the preceding section is that these funds are effective in reducing other costs associated with the problem and increasing the earnings of both would-be abusers and the non-abusing segment of the population. For these efforts to be cost-effective in the aggregate, the nearly $40 billion spent nationwide on drug and alcohol services and treatment of the medical consequences per year today must reduce these other costs and increase overall legitimate earnings by at least that amount. For much of the history of these programs, advocates of public funding for prevention and treatment have had to rely more on faith than hard, scientific facts to support their contention that prevention and treatment pay their own way. At the same time, criticism has been leveled in recent years that mandates associated with chemical dependency coverage have driven the up the net cost of insurance. But this has changed in recent years, as methodological improvements and wide-ranging studies have begun to produce plausible and defensible evidence that substance abuse programs not only cover their own costs in the aggregate, but in many cases actually generate substantial net returns for society as a whole. Similarly, data has been developed that shows that mandated chemical dependency coverage is highly cost-effective. This section reviews the findings of a recent study that presents convincing evidence that these treatment programs generate material net benefits to society. The findings from this study are applied to the conditions in Texas, and estimates of the benefits of recent TCADA-funded initiatives are derived. 7

Results from the NTIES The National Treatment Improvement Evaluation Study (NTIES) was a major, five-year nationwide study mandated by Congress in the early 1990s. (NTIES 1997.) The major purpose of NTIES was to evaluate the effectiveness of substance abuse treatment services delivered through comprehensive treatment demonstration grants supported by the Center for Substance Abuse Treatment (CSAT). NTIES was pathbreaking in the substance abuse treatment field in terms of the size and diversity of the sample considered and the length of the follow-up period it considered. Major scientific analyses of the rich database generated by this effort are only starting to emerge, and one such study is the source of most of the benefit-cost findings considered in this section. Table 3 presents some of the major highlights of the NTIES. Aggregated over a wide number of separate but integrated studies, the effects of diverse treatment options are impressive. Table 3 Treatment Effects on Income, Welfare and Homelessness Year Before Year After Percent Treatment Treatment Change(1) Received Income 50.8% 60.3% 18.7% Received Welfare 39.7% 35.4% -10.8% Homeless in Last Year 19.2% 11.0% -42.7% Used Primary Drug 72.8% 37.7% -48.2% Used Cocaine 50.4% 24.8% -54.9% Used Heroin 23.6% 12.6% -46.6% (1) All percent changes are significant at the 5% level. Source: http://www.health.org/nties97/ Low income and unemployment, receipt of welfare payments, and homelessness are key predictors of present or future substance abuse behaviors. As shown, the CSAT-sponsored demonstration projects produced substantial improvements in these parameters. Noteworthy changes in drug use patterns were also observed. In almost all cases, the percentage of clients using particular illicit drugs was cut in half for at least a year following treatment; even users of heroin, which most experts consider the most treatment-resistant of illicit drugs, showed a reduction of almost 47 percent in the proportion of clients using that drug in the year before as compared to the year following treatment. Again, however, these kinds of outcome measures do not specifically address whether these treatment programs produce more benefits than they cost. A recently released study does confront this issue directly, however. (Koenig et al., 1999.) The categories of costs and benefits considered in this study were essentially the same as those discussed in Section 2 of this report. Table 4 provides a summary of these factors for all programs included in NTIES. Post-treatment health care costs for all modalities declined by an average of $215 per client, or about 11 percent. Earnings increased by $351, or 9 percent. This increase is a benefit to society 8

as a whole, but not to the non-client population. The modest increase in welfare payments were offset by slight declines in SSI payments to clients. Because these are transfer payments, they only factor into the benefit-cost analysis for the non-treated segment of society. As with prevention programs, the lion s share of benefits accrued in the area of reduced crimerelated costs. The $8,611 average reduction per treatment client here represents a reduction of 75 percent from the pre-treatment figure. Losses due to theft fell by $3,654 per client, and at 74 percent this drop kept pace with other crime-related costs. Again, though, because theft losses amount to a transfer payment from one segment of society to another, they do not enter into the calculation of net social benefits. Table 4 Economic Effects of Substance Abuse Treatment: All Programs (Averages per Treated Client) Before After Benefits to Benefits to Treatment Treatment Society Non-clients Health Care Cost $2,040 $1,825 $215 $215 Earnings $3,915 $4,266 $351 NA Welfare Payments $724 $732 NA -$8 SSI Payments $587 $582 NA $5 Crime Costs $11,462 $2,851 $8,611 $8,611 Theft Losses $4,924 $1,270 NA $3,654 Total Benefits $9,177 $12,477 Treatment Cost -$2,941 -$2,941 Net Benefits $6,236 $9,536 Source: Koenig et al. (1999), Exhibit III-18 The net benefits to society totaled $9,177 per treatment client for these demonstration projects, at an average cost of $2,941 per client, resulting in a net benefit of $6,236 per client and a benefitcost ratio of 3.1. It is important to realize that even if the behavioral changes induced by treatment did not persist beyond the evaluation stage, the typical program has much more than paid for itself within a year. To the extent that treatment effects do persist beyond the first year following treatment, the net benefits of that original $2,941 investment increase with the passage of time. Table 5 breaks out the costs and benefits of treatment by treatment modality. Only the shortterm hospitalization alternative fails to produce substantial net benefits for society and the nonclient population. This treatment alternative led to substantially higher health care costs (particularly costs of hospitalization) in the following year, but net reductions in transfer payments (welfare and SSI) and a large reduction in crime-related costs. These data strongly suggest that clients of short-term hospitalization programs spend a great deal of their time in the first year following treatment in the hospital. Yet they still managed to increase their average earnings in that period, if only marginally. 9

Table 5 Economic Effects of Substance Abuse Treatment: By Modality (Averages per Treated Client) All Short-term Short-term Long-term Outpatient Ambulatory Programs Hospital Residential Residential Methadone Outpatient Benefits and Costs To Society: Total Benefits $9,177 $2,547 $7,954 $13,902 $5,259 $7,630 Treatment Cost $2,941 $4,160 $2,895 $3,813 $2,575 $2,051 Net Benefits $6,236 -$1,613 $5,059 $10,089 $2,684 $5,579 B/C Ratio 3.1 NA 2.7 3.6 2.0 3.7 Benefits and Costs To Non-clients: Total Benefits $12,477 $3,845 $12,374 $19,398 $12,577 $7,286 Treatment Cost $2,941 $4,160 $2,895 $3,813 $2,575 $2,051 Net Benefits $9,536 -$315 $9,479 $15,585 $10,002 $5,235 B/C Ratio 4.2 NA 4.3 5.1 4.9 3.6 Source: Koenig et al. (1999), Exhibit III-19 Valuable as it is, the NTIES database is not a fully representative sample of the treatment client population nationwide. (CSAT, 1999.) Clients who participated in the study were drawn exclusively from programs served by CSAT grants, which tend to over-represent people from historically under-served populations, such as minorities, pregnant women, at-risk women, public housing residents, welfare recipients, those in the criminal justice system, and adolescents. Compared with nationwide potential service populations, the NTIES database specifically includes higher proportions of clients of publicly supported programs, incarcerated persons, inner-city populations, Hispanics, and African-Americans. Accordingly, findings from NTIES are most generalizable to low-income groups receiving treatment services in publicly funded programs. The TCADA service population would appear to fit this profile closely, and therefore congruent with the NTIES study. Data are not readily available on the distribution of TCADA-funded services by service modality, but it is unlikely that even significant variations from the NTIES profile would substantially affect the results of applying these findings to the Texas situation. Application in Texas Direct costs associated with the treatment of substance abuse fall into two categories: the actual costs of treatment, and the cost of mandated insurance coverage for those who do not receive treatment. During CY 1998, TCADA provided treatment services for a total of almost 40,000 persons 35,079 adults and 4,739 youths. (TCADA, 1999.) The FY 1998 TCADA budget for treatment services totaled $96.1 million, or about $2,413 per client. This is about 82 percent of what was 10

spent per client in the NTIES demonstration projects. Some part of this discrepancy is due to lower costs in Texas, but another part is due to relative under-funding of treatment programs. For the purpose of calculating the total benefits of TCADA-funded programs to Texans, this same scaling factor will be applied to the total per client benefits figure for the NTIES client population. The result of this calculation (0.82 x $9,177) is $7,529 in total benefits per client. Using these estimates, the net benefit per TCADA client is $5,113 ($7,529 minus $2,413), and the overall benefit-cost ratio is 3.12 ($7,529 divided by $2,413). These data suggest that TCADA activities during FY 1998 generated net benefits to the Texas economy in the vicinity of $204 million when the entire TCADA client base is considered. TCADA activity represents only a small fraction of total treatment expenditures in Texas, as the Commission estimates that approximately $1.5 billion was spent on treatment statewide during 1997. Updating that figure to 1999, TCADA programs represent approximately six percent of total Texas treatment spending. Applying the same 3.12 benefit-cost ratio, the result is an aggregate net benefit of chemical dependency treatment of approximately $3.52 billion annually in Texas. To the extent that TCADA clients are typically from the lower end of the economic spectrum, these aggregate benefits from public and private expenditures on chemical dependency problems may be significantly understated. Insurance Application Much has been written about the cost of mandated health benefits, with a wide range of estimates as to the impact on premiums paid. According to the Texas Department of Insurance, 10 million Texans were covered by health insurance of some type during 1996: about 2.3 million were covered under an HMO, 3.5 million were enrolled in a fully-insured health plan, and the balance of 4.2 million were either self-insured or uncategorized. The Census Bureau estimates that the average per capita cost for health insurance in the Western region of the United States during 1998 was $808. Adjusting these figures for inflation and population growth yields a 1999 Texas premium paid estimate of $9.6 billion. To determine the impact of different mandates on premium costs, the Department of Insurance conducted a survey of the 34 largest insurers in the state. These firms, who write approximately 80 percent of the accident and health coverage in Texas, were asked to report the impact of separate mandates claims on overall premium costs. The findings of this survey were that chemical dependency coverage accounted for 0.6 percent of all claims costs during 1996 for group insurance plans, while the figure for that same period was 0.33 percent for HMOs. These figures do not represent total cost, since administrative expenses and profit are not included, but do serve as an indication of the overall magnitude of the impact of mandated chemical dependency coverage. Moreover, when the additional costs are considered, they appear to be consistent with the findings in other states: Virginia reported that chemical dependency coverage increases premiums between 0.7 and 2.4 percent, the range in Maine was 1.5 to 1.8 percent, and Nevada findings were 0.9 to 5.1 percent. In the interest of being conservative, an estimate of 2.5 percent is used for Texas, putting the annual impact on 11

insurance costs at just under $240 million. As a result, the net benefit outlined above is reduced from $3.52 billion to just under $3.3 billion. Prevention Results from the MPP It stands to reason that preventing, rather than treating drug and alcohol abuse and addiction would be the most cost-effective of all service alternatives. To the extent that individuals, particularly youths, can be deterred from engaging in behaviors that increase the likelihood of future substance abuse, those individuals and society as a whole can be spared significant future costs. And, in comparison to the more resource-intensive intervention and treatment alternatives, prevention is a good buy in terms of the per client unit cost. The Federal Center for Substance Abuse Prevention (CSAP) has published a variety of baseline statistics demonstrating that prevention is effective in: Encouraging change in youth behaviors that are predictive of future substance abuse Improving parenting skills and family relationships Reducing delinquent behaviors Transmitting generic life skills that produce short-term reductions in substance use rates among adolescents. These and other similar findings that demonstrate preventon programs can be effective are heartening, but they do not address the more demanding analytical standard of whether the programs produce net benefits for society. The kind of study that better enables analysts to consider questions of cost effectiveness and net benefits can be found in the Midwestern Prevention Project (MPP). The findings presented here were reported in Pentz (1998). The MPP is a large prevention trial funded by the National Institute of Drug Abuse in metropolitan areas of Kansas City. The program is intensive and extensive, consisting of mass media programming, school based programming, a parent-directed imitative, community organization and local policy change efforts. Pentz used a conservative figure of $108 per adolescent and his/her family as the cost figures in his analysis of net benefits and the overall benefit-cost ratio. Program outcomes were reported for myriad of factors, but for evaluation purposes here it is sufficient to focus on one factor--- the costs of drug abuse counseling and treatment. The savings from reduced outpatient treatment and counseling expenditures were restricted to the 5 year follow-up period of the study but still amounted to almost $5 for every MPP dollar spent, or a cost benefit ratio of approximately 5:1. These savings would have been much higher if inpatient treatment costs were used and if the benefits had been projected out over the lifetime of the client. In FY1998, TCADA funded a variety of the same types of prevention strategies found in the MPP including mass media programming, school-based programs, parent initiatives, community organization and local policy change efforts. TCADA s prevention programs reached an estimated 2,033,149 persons; 1,190,612 youths and 842,537 adults using a prevention budget that totaled about $29.3 million. This translates into a unit expenditure of about $14.00 per 12

client. If it can be assumed that the intervention budget of $32.1 million was targeted at a subset of these same individuals, the unit expenditures on prevention and intervention rise to about $30.00 per client which amounts to about what it would cost on annualized basis per family to support the MPP project. Applying the same 5:1 benefit-cost ratio as the MPP, the result is an aggregate net savings of $245.6 million the total foregone costs of approximately $307 million if the prevention and intervention had not been in place, minus the actual costs of $61.4 million between the two. Conclusion In an era of heightened sensitivity to the efficient use of public funds, substance-abuse prevention and treatment programs are at risk of being reduced, partly due to the perception that the benefits are not sufficient to justify the costs. However, research indicates that, when the benefits are more appropriately measured, substance abuse programs are actually highly costeffective. Applying these findings to Texas yields some startling results using the benefit-cost ratio developed by examining TCADA programs, chemical dependency treatment could be saving the state in excess of $3 billion annually in costs associated with drug and alcohol abuse, after adjustment for the costs of mandated insurance. At the same time, the old saying about an ounce of prevention being worth a pound of cure would seem to hold true, as the findings from the MPP indicate that the benefits of prevention outweigh the costs by 5:1. Taken together, prevention and treatment of substance abuse services return between $3 to $5 dollars for every dollar spent (depending in where on the path to addiction these services occur). Seen in this light, spending on substance abuse prevention and treatment appears to a highly lucrative investment. 13

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