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In my opinion, the policy should be adjusted. If the concern is health-care issues, fine. Make a policy available in which the company has limited liability for smoking-related situations. If the real issue is that he doesn't want his company, a health benefits-related company, to be associated with people who smoke, then fine. Make that clear, don't hide behind health-care as the "reason" for the policy, and offer some sort of counciling / remediation prior to termination. Does he want to be part of the solution, or part of the problem?
I'd also be curious to know if he fires people for involvement in "risky" sexual behavior, large numbers of accumulated speeding tickets, high-risk sports, etc. Otherwise, his position, in my opinion, is hypocritical.
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