Moira Zellner, PhD
10/ 25/ 2018
The US Department of Health and Human Services released a report in August 2018 (US Department of Health and Human Services, 2018) concluding that communities adjacent to EtO sterilization plants are at high levels of cancer risk due to long-term chronic exposure to the pollutant. In the wake of this report and the public concern it has caused, the industry has argued, among other things, that the benefits provided to society (the sterilization of medical products) far outweighed any perceived costs to the public.
The industry’s economic reasoning is invalid; it excludes several critical economic costs to, and their distribution in, society. The present document seeks to clarify how such analyses should be appropriately conducted, if an economic argument were to inform policy action and regulation.
1. The existence of externalities
A market is a complex system that can successfully allocate scarce resources, without the need for a central authority to do so. As such, it allows for individual actors to behave according to their own values, capabilities, and needs, and in this manner it is assumed to create the greatest benefit for all. That said, this principle only works under very strict assumptions of market conditions, such as a high number of buyers and sellers so as not to distort prices, perfect information to support rational decision-making, low transaction costs that do not impede the efficient transfer of goods and services or the exchange of information, and clearly defined property rights that allow owners to derive the benefits or pay for the costs associated to those rights.
There are no clear property rights over air. When air pollutants produced by an EtO sterilization plant or hospital are emitted, it is extremely difficult to contain them within the property of the plant. Metaphorically speaking, this would be akin to running your car in an enclosed space. If this were the case, the costs of pollution would be internalized, and the firm would self-regulate its production in order to maximize the net benefit (benefits – costs) of its production. In theory, they would engage in the activity until the marginal costs are equal to the marginal benefits and they would not produce beyond that. If the costs were too high (in the car example, the exhaust would make us sick and potentially kill us), the firm would cease to engage in the activity. Because pollution is released to the air and disseminates, it externalizes the cost; in the case of air pollution (like any local pollutants), the external costs would fall particularly hard on those areas proximate to the pollution source (again, in the car example, those individuals close to the car exhaust would be more likely to suffer negative consequences than those on the next street or the next neighborhood). Similarly, we would expect the negative externalities an EtO facility’s operation to fall most heavily on its surrounding communities. These costs include, not only the short-run and long-run impacts on public health, but also, for instance, the loss of property values due to the fact that people moving into the area were not aware of the presence of carcinogens in the air (imperfect information), thus paying more for their homes than they would have otherwise. In other words, property values (as a proxy for the value placed on attributes/characteristics of the property and neighborhood) would now reflect this new information, so the associated prices would likely be lower as negative externalities are now included in the set of attributes that a potential buyer would consider.
Due to the above market distortions, the costs to society of EtO sterilization production are therefore higher than the firm’s private production costs. This introduces an incentive for the firm to produce (and pollute) more than would be efficient if the above social costs were considered. There is a very deep literature in environmental economics that underpins what is called the “polluter pays principle,” a way to address these externalities. This principle is the basis for the analysis and recommendations below.
2. Determining the efficient allocation of pollution
Given the need to reduce emissions to account for social costs externalized, the question becomes, how much should pollution be reduced? The natural reaction is to say zero, but often society accepts a certain level of damage compared to the benefits associated for the activity. Fundamentally, the question of how much pollution should be reduced depends on both the toxicity of the contaminant (which may have a geospatial component) and its cost of control. An economic analysis would estimate the efficient level of pollution control where the marginal cost of control equals the marginal cost of damage. EtO has been shown to be highly carcinogenic (US Department of Health and Human Services, 2018), so that each additional unit of EtO rapidly increases the marginal cost of damage. The US EPA “recommends that the central estimate of $7.4 million ($2006), updated to the year of the analysis, be used in all benefits analyses that seek to quantify mortality risk reduction benefits regardless of the age, income, or other population characteristics of the affected population until revised guidance becomes available” (US EPA, 2018). Moreover, recent studies have looked into the cost of cancer in the US (Yabroff et al., 2011). They cite 2010 studies that estimate monthly net costs (a relative measure comparing cancer costs to medical costs of individuals of similar characteristics without cancer) to be “$1,923 for female breast and $5,074 for female lung cancer patients in the initial phase of care... In the continuing phase of care, mean monthly net costs were $184 and $678, respectively. In the last year of life among patients who died of cancer, mean monthly net costs were $5,238 and $7,710.” Assuming 9 years survival after diagnosis, with each phase occupying a third of that time, total net costs (i.e., not total costs) per patient would amount to approximately $500,000 per patient for the most expensive cancers, like the ones EtO produces. In addition to direct medical costs associated to diagnosis, maintenance and final stages of cancer, indirect costs represent “the monetary losses associated with time spent receiving medical care, time lost from work or other usual activities (morbidity costs), and lost productivity due to premature death (mortality costs)” incurred by both patients and their caregivers (Yabroff et al. 2011). While the study doesn’t give a total number per case, the researchers state “Regardless of the approach, in the few studies that estimate both mortality costs and direct costs of medical care, mortality cost estimates are generally at least the equivalent of the direct costs of medical care.” This means that the cost for each cancer patient could be conservatively estimated at $8,000,000, but could be as high as $15,000,000.
We apply these costs to the case of the Willowbrook Sterigenics plant as an illustration. According to a preliminary analysis that found statistically significant higher cancer rates around the Sterigenics Willowbrook plant relative to the state’s incidence rate (Stamatoukos, 2018), approximately 206 new cases of cancer per year could be attributed to proximity to the plant. Using the most conservative cost values above, this would amount to a social cost of $1,650,000,000 per year ($2006), distributed over the lifetime of each annual set of new cancer patients.Over 30 years of operation, assuming constant rates, this would amount to approximately $49,500,000,000 ($2006). This value does not account for the direct or indirect medical costs of other non-cancer health impacts of exposure to EtO, or exposure to those who work in the area but do not live there or who have moved out before being diagnosed. Moreover, it does not include the costs of property value lost caused by an unhealthy environment.
Even using the most conservative cost estimates, without updating the cost of life to 2018 dollars, accounting for non-cancer health effects, for the health impacts of the public exposed to EtO but who don’t live there, or loss of property value, it becomes clear that the marginal damage curve for EtO is steep enough to suggest that the efficient level of EtO pollution should be close to zero.
3. Benefit cost analysis of changing sterilization processes
The industry has claimed that changing sterilization processes or relocating would be overly onerous to the industry and to society. That argument is misplaced, however, because it only shifts the health burden to a different sector of society, which by definition is economically inefficient (and also raises ethical concerns of valuing the life of some sectors more than the life of others). Losers in the current state of affairs must be fairly compensated, according to economic principles. Even if such compensation were accepted by the affected population to allow the firm to make them sick with cancer and other life-threatening diseases, the costs above far outweigh the procedural change from EtO sterilization to alternatives, or the relocation of plants.
Moreover, there are alternatives to sterilization with EtO currently used in the industry. A significant portion of the demand for sterilized medical equipment would be met by the industry. The current regulations give sterilization firms that use EtO an unfair advantage over those that do not impose external costs of pollution on society, thus further distorting the market. For any medical equipment currently not treated with alternatives to EtO, proper incentives should be set in place to ensure a smooth transition to cleaner processes, including changes in the use of plastic medical equipment. Such incentives include undistorted pricing that reflects both the private and public costs of production, and the use of pollution taxes to fund the necessary R&D (more on this below). Lax regulations are effectively subsidies that make polluting activities artificially cheap and place clean competitors at a disadvantage, creating an inefficient delay to the much- needed development of new production processes. Essentially, the polluter pays principle is being violated. Removing those barriers would not only support a healthier and more robust environment, it would also create new economic sectors and jobs.
Rather than shifting the burden to different sectors of society, which is clearly inefficient (and unethical), EtO sterilization firms should commission an independent and verifiable benefit cost analysis to determine whether they should relocate or change their process to eliminate EtO (see point above). According to economic theory, it is up to the firm to determine how to minimize their costs, given the requirements to internalize the social costs they impose. It is not the role of government to determine how they should internalize that cost, only to ensure and enforce internalization. The internalization of social costs applies not just to EtO, but to all other toxic releases to the environment.
4. The economic justification for changes in regulation
In sum, the industry’s so-called economic argument is neither ethically nor economically sound. Within a complete economic framework, government intervention is justified and required to correct for market failures like the one described above and restore efficiency. The following are complementary ways to achieve that goal, applicable to all types of toxic emissions:
a. Banning potent and presumed carcinogens, rather than controlling them. The latter introduces a high transaction cost for permitting, monitoring, and updating treatment and permits. Moreover, due to the enforcement costs, the government relies heavily on self-reporting, with a significant incentive for firms to under-report their results. Furthermore, the current system imposes fines that are too low to ensure treatment at efficient levels. Finally, neither compensation nor reporting to the general public is required when spills occur. All of these introduce severe inefficiencies in the market with little social cost internalization and significant distortion of information and pricing.
b. Pricing emissions of other non-carcinogenic pollutants to reflect their external costs to society. This could be done through a pricing mechanism (e.g. a per unit tax that accounts for the marginal cost to society) or through a quantity mechanism (e.g. placing an upper limit on the amount of emissions permitted and allowing the polluter to find the most efficient way to achieve the new cap, including tradable permits).
c. Continuous updating of scientific information on toxins based on academic or peer-reviewed studies, rather than industry or third party studies funded by special interest groups, which have obvious conflicts of interest. This should be accompanied by added legislation that allows for environmental authorities to revoke and renew permits immediately when updated science shows changing levels of toxicity classification. IARC and WHO re-classified EtO to a level 1 in 2012, the US EPA only changed its classification in 2016, and it still took two more years to conduct a study on the impact of a single plant on its surrounding communities. Today’s information technology allows for the quick identification of sources of pollutants, in Illinois and elsewhere, which would enable governmental agencies to work with firms to adapt to new requirements in an open and transparent process. Moreover, ethical concerns over dose-response toxicity research with human subjects are high enough to prohibit studies exposing humans to toxins. The same restrictions should apply to industrial sources of those pollutants.
d. Sensor technology has become cost-effective enough to allow for continuous ambient air (and water and soil) monitoring around different kinds of polluting sources, reducing the over-reliance on self-reporting, and its consequent incentives to under-report the results. This information could be used to create a public registry of toxic releases, accidental or otherwise, much like there are for other social offenses to identify repeated and convicted offenders. This platform would provide more complete information for rational decision-making, and an incentive for firms to internalize their social costs while gaining in reputation and public relations with the communities and customers that sustain them.
e. Funding for studies, information platforms and compensation mentioned above should be raised through pollution charges that would efficiently transfer the social costs of production to both producers and users of the goods and services provided by the polluting firms. The charges would work together with the regulations proposed above to internalize social costs, while funding the programs to monitor and regulate the industry, to develop alternatives that are less harmful, and to support the necessary job training to adapt to a changing economy.
By implementing the suite of recommendations above, the State would be taking important steps towards improving the economic, health and environmental conditions of Illinois’ residents and businesses.
References
Stamatoukos, A. (2018). “Illinois Cancer Data Analysis.” Accessed on http://rpubs.com/astama/illinois_cancer, October 2018.
U.S. Department of Health and Human Service (2018). “Evaluation of Potential Health Impacts from Ethylene Oxide Emissions: Sterigenics International, Inc., Willowbrook, Illinois.” Accessed on
https://www.atsdr.cdc.gov/HAC/pha/sterigenic/Sterigenics_International_Inc- 508.pdf, October 2018.
US Environmental Protection Agency (2018). “Mortality Risk Valuation.” Accessed on https://www.epa.gov/environmental-economics/mortality-risk-valuation, October 2018.
Yabroff, K. R.; Lund, J.; Kepka, D.; Mariotto, A. (2011). “Economic Burden of Cancer in the US: Estimates, Projections, and Future Research.” Cancer Epidemiol Biomarkers Prev. 2011 Oct; 20(10): 2006–2014.
Acknowledgments
Many thanks go to Simon McDonnell, and to the community that I am part of, who provided data, references, statistical analysis, reviews, and emotional support.
Disclaimer:
This blog post is a representation of the author's opinion. Blog posts are intended for informational purposes only and not indented to provide medical or legal advice. Individual authorship may not represent all opinions of the Stop Sterigenics community.