The Pennsylvania Office of the Attorney General has filed a motion appealing an arbitration panel’s decision to cut the state’s multibillion-dollar tobacco settlement by 60 percent next year. The decision to shrink PA’s annual payment by $180 million has immediate impacts to some of the state’s health and human services programs.
The panel ruled on settlement payment disputes involving 15 states. Nine won favorable decisions, while the panel found six failed to properly enforce escrow settlement provisions involving “nonparticipating” manufacturers.
According to the Pennsylvania Office of the Budget, the reduction will occur in the state’s April 2014 Master Settlement Agreement (MSA) payment, which supports spending in the current year’s budget. The reduction in funds will require the state to immediately freeze discretionary funding from the MSA, which will reduce funds for uncompensated care to hospitals, health research, life sciences greenhouses, and discretionary funds related to tobacco prevention and cessation programs.
Funding for services will continue without interruption for: individuals over 60 years of age who are receiving home and community-based services; individuals ages 16 to 65 with a disability who are employed with limited earnings and resources and enrolled in the Medical Assistance for Workers with Disabilities program; and Medical Assistance recipients receiving long-term care nursing facility services. The freeze will not impact Department of Aging programs or mandated components of tobacco use prevention, cessation and enforcement programs.
While the legal process continues, state officials have begun outreach to contractors and affected organizations to notify them of the impacts. Without a resolution, the Governor and General Assembly will have to address the shortfall in the 2014-2015 budget.
The payment dispute with tobacco companies centers on whether Pennsylvania has fully followed the settlement agreement. Settlement participants Philip Morris USA Inc., R.J. Reynolds Tobacco Co. and Lorillard Tobacco Co. have challenged whether the state collected money from the sales of products made by competitors that did not join the pact.
A provision in the settlement entitles participating companies to a reduction in their payments if they lose market share to competitors that did not join the agreement. States were exempt from this reduction if they enacted and enforced a statute that imposed obligations on non-participating manufacturers doing business within their borders.
The tobacco companies claimed Pennsylvania failed to properly tax loose-leaf tobacco used in handmade cigarettes in 2003. The arbitration panel of three former federal judges sided with the tobacco companies. In its appeal, the Attorney General’s office argues the companies miscalculated the percentage of sales of roll-your-own tobacco, saying it represents just a fraction of the overall tobacco market.
Since signing the MSA with 45 other states on November 23, 1998, Pennsylvania has received $300 million a year. Addressing claims from 2003, the panel of arbitrators ruled last month to shrink the payments by 60 percent to about $120 million a year.
In the MSA, the original participating manufacturers agreed to pay a minimum of $206 billion to the participating states over the first twenty-five years of the agreement for recovery of their tobacco-related health-care costs while exempting the companies from private tort liability regarding harm caused by tobacco use. In exchange, the companies agreed to curtail or cease certain tobacco marketing practices, as well as to pay, in perpetuity, various annual payments to the states to compensate them for some of the medical costs of caring for persons with smoking-related illnesses.
The money also funds an anti-smoking advocacy group called the American Legacy Foundation that is responsible for such campaigns as The Truth. The settlement dissolved the tobacco industry groups Tobacco Institute, the Center for Indoor Air Research, and the Council for Tobacco Research.