Cigarette makers, 17 states settle on health-care payment credits

Cigarette makers, 17 states settle on health-care payment credits

December 19th, 2012

By Jay Keller

U.S. cigarette manufacturers announced on Tuesday a resolution over the amount they are to pay for participation in a 1998 anti-smoking agreementPhilip Morris USA Logo

Under the settlement, 19 jurisdictions, collectively known as the “states,” will get their share of $4 billion in disputed payments and, in return, cigarette makers will receive credits against future payments.

Philip Morris USA Inc. and R.J. Reynolds Tobacco are among the participating cigarette manufacturers who were required to help cover the health bills of ailing smokers under the 1998 agreement.

The long-standing adjustment disputes began with the initial settlement where leading cigarette manufacturers would financially support 46 states and their attempts to recover health care costs.

The conflict largely revolves around the state’s escrow statutes, under which non-participating cigarette manufacturers are required to make escrow payments for volume sold in each participating state.

The 1998 agreement imposed significant restrictions on how cigarettes are advertised, marketed and sold in the U.S. and required participating manufacturers to make yearly payments to the states which total over $85 billion.

The 46 states that participated in the 1998 agreement shared $6.15 billion in payments in April, up from $6.03 billion in April 2011, according to the National Association of Attorneys General.

Participating tobacco companies have disputed the amount of payments they owe to states after losing market share to cigarette makers who didn’t participate in the agreement.

The tobacco companies are expected to recoup at least $1.5 billion in credits.

Other states may apply and enter into the new settlement, and if they are approved, the arbitration for that state will end.

For the joining states, the new settlement is “net cash positive” and also removes the risk of substantial reductions of revenues for the years in dispute, 2003-2012, under the 1998 settlement.

The jurisdictions that have agreed to join include 17 states plus the District of Columbia and Puerto Rico.  The states are: Alabama, Arizona, Arkansas, California, Georgia, Kansas, Louisiana, Michigan, Nebraska, Nevada, New Hampshire, New Jersey, North Carolina, Tennessee, Virginia, West Virginia and Wyoming.

Based on current assumptions, Phillip Morris will receive approximately 28 percent of the credits to the companies that were original participants in the original 1998 accord.

The credit Phillip Morris will receive is, based on the current roster of 17 states and two jurisdictions, estimated to total approximately $450 million.

This estimate is subject to change depending on a variety of factors related to the calculation of the credit and, according to Phillip Morris, the company is expected to record a corresponding increase in its reported pre-tax earnings.

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