Tuesday, May 31, 2005

Under the guise of protecting the public health

I don't smoke. Restaurants, bars or any other businesses that are privately owned may serve the "public," but I believe they should be able to set their own smoking policies. But I do favor the rights of municipalities to ban smoking in true public areas, i.e. public sidewalks near building entrances, government-owned buildings, etc., because of the health risks that come from breathing second-hand smoke.

Then we have another government blunder when the state tries to regulate the public health, not just safeguard it.

Tobacco Companies Deal With Settlement
Three years ago, Steven Bailey's tobacco company in rural southern Virginia was growing so fast he could have counted on early retirement. Now, he's fighting for every sale. On July 1, a new Virginia law will force S&M Brands Inc. to raise prices on its Bailey's and Tahoe cigarettes. That's on top of a $2-per-carton increase last year, after other states passed similar laws at the urging of large tobacco companies....

Many people would have a tough time shedding tears for a cigarette maker — small or large. But Bailey's reversing fortunes show how the states' $206 billion settlement with major tobacco companies over smoking-related Medicaid costs is dramatically altering the industry. Critics say the 1998 Master Settlement Agreement, or MSA, has steered far from some of its original objectives. Small businesses that weren't sued were forced to pay up, while the big players accused of wrongdoing wound up with market protections....

Under the settlement, the big cigarette companies agreed to restrict their marketing, fund smoking-cessation efforts and make annual payments to the states over 25 years.

But attorneys on both sides knew the large tobacco companies would raise cigarette prices to help make their payments, so they agreed to build in protections to prevent companies outside the MSA from taking too much of their sales. They invited other manufacturers to join the settlement, offering favorable deals. Those who did not join had to pay about $4 per carton into escrow accounts, which would be refunded in 25 years if the states didn't sue them over health care costs....

In the 10 states where S&M does business, profits are stagnating.

But Philip Morris USA is pleased. In the first quarter of 2005, the nation's largest cigarette maker saw operating profit rise and its domestic market share grow to 50 percent, up from 48.3 percent two years earlier.

The new escrow laws provided even more opportunities for companies like Liggett Group Inc. and Commonwealth Brands Inc., which joined the MSA on the favorable terms. On average, this group paid less than $2 per carton in 2003, rather than $4.
Brilliant, wasn't it? The protections hardly worked, and the big tobacco companies probably knew they wouldn't. It was a great way for them to use government to squash their smaller competitors. In fact, it's reminiscent of one way John D. Rockefeller drove competitors out of business, by getting legislation passed that mandated certain levels of fire insurance. It made it too expensive for some startups.

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