Submitted to: Food and Drug Administration Dockets Management Branch (HFA-305) Room 1-23 12420 Parklawn Drive Rockville

, MD 20857 Written Comments on the Regulatory Impact Analysis of the Proposed Rules to Amend the Food Labeling Regulations as published in 56 FR 60856 Wednesday, November 27, 1991 Submitted by Clyde Wayne Crews, Jr. On behalf of Citizens for a Sound Economy Foundation (CSEF) February 25, 1992

Citizens for a Sound Economy Foundation (CSEF), a 250,000member grassroots organization which promotes economic opportunity for all citizens through advocacy of policies consistent with a thriving, vigorous system of free enterprise, is pleased to submit these comments on the proposed rules to implement the Nutrition Labeling and Education Act Amendments of 1990. I. The Question of Market Failure

The proposed food labeling regulations address what the Food and Drug Administration (FDA) regards as a failure of the market to provide the optimal amount of reliable information on food product labels. This failure is assumed to thwart consumers' ability to compare the relative health benefits of foods. Regulators are concerned that if health claims or descriptor terms used on product packages are not monitored, they may degenerate into puffery at best and outright false assertions at worst, leaving consumers unable to rely on manufacturer-provided information. The agency is also concerned that unconstrained health claims or descriptors, even if technically true, may stress a positive product feature while omitting negative aspects, resulting in increased consumption of undesirable components such as sodium and fat. While FDA's intentions are commendable, its failure to appreciate the economics aspects of information flows

2 within markets is a certain formula for restricting, rather than increasing, the amount of information and the array of healthy foods available. The proposed rules will make consumers worse off from a health standpoint because they strip firms of incentives to produce healthy products. Nor will firms be motivated by competition to reformulate existing products to make them healthier, since health attributes are effectively removed as a competitive feature. Instead, firms will emphasize superficial attributes like taste and convenience, and the average nutritional quality of the overall food supply may decline. There are far better ways for FDA to regulate the food industry, and vigorously prosecute those who defraud the public. II. Scope of the Proposed Rules

Because the Nutrition Labeling and Education Act Amendments are law, alternatives to federal regulation, such as encouraging recourse against false claimants through the judicial system or allowing states to regulate health claims, are pre-empted to an extent even though these may be preferable in many cases. The key features of the NLEA in terms of health claims is that claims must meet a "significant scientific agreement" standard and that petitioners must adhere to specific and rigid filing requirements to show their conformity to this standard. While these provisions are universal for manufactured foods, there appears to be some flexibility and room for interpretation as far as the extent of significant agreement and the degree of filing complexity required in any given application. Altering these conditions will change the levels of benefits and costs from the regulations. The level of consensus and degree of filing complexity need not be the same across substance/health claim classes. The 1990 Act states that the Secretary of Health and Human Services must authorize health claims, but it does not specify any particular level of agreement or filing complexity -these are variables. Those claims that will be minimal in their impact on public health if they turn out to be untrue, or that pose no health risk potential, should require less substantiation than those that potentially have a profound public health effect or possess an exaggerated potential to mislead, for reasons discussed below. III. Public Health Costs of the Prohibition of Health Claims

The statutory objective of the NLEA is to increase the amount of information publicly available to consumers and to eliminate deceptive claims, but an overly strict barring of health claims will do exactly the opposite and decrease consumer welfare by placing poor products on a par with products with significant nutritional characteristics. Consumers won't be able to easily distinguish between them. According to the proposed rule, out of the entire universe of potential links between

3 nutrients and a health condition, only four health links between nutrients and health effects will be permitted, out of ten Congress required the agency to investigate. Because reasonable nutritionists, scientists, and doctors may disagree about the validity of some health connections, there is unlikely to be any consistent emergence of "significant scientific agreement," so FDA will ultimately determine what will qualify as sufficient evidence, based on pluralities rather than majorities. FDA is obligated in its role as overseer of the public food supply to consider and weigh the potentially vast benefits of a program that allows claims for which there is a reasonable basis with the comparatively small benefits of prohibiting these claims, especially since our knowledge about nutrition is constantly advancing. FDA will do the public a grave disservice by denying consumers access to information about health relationships -- in spite of the fact that some of the information comes from the manufacturers themselves. 1. Consumer welfare loss: The broad-stroke bias against the allowance of health claims presupposes that present labeling is on the whole inaccurate and misleading and that consumers are receiving no net benefit from access to the claims that already exist in the marketplace. This deep-rooted mistrust of free enterprise as such and disdain for the critical faculties of the average individual is apparently a philosophical position of the regulation writers at FDA that is too fundamental to debate in public comments. But philosophical differences aside, economic reasoning and empirical evidence suggest that restricting information that emerges from well-meaning manufacturers, as opposed to the fraudulent ones who deserve prosecution, lessens the amount of useful information that reaches consumers, removes incentives for manufacturers to improve products, and limits consumers' ability to respond favorably way to the latest scientific findings as they emerge. The Federal Trade Commission (FTC) has provided evidence that consumer awareness of the relationship between certain nutrients and resultant health states was indeed limited prior to the introduction of a health claim, but that awareness increased after claims appeared in advertising (the specific nutrient in FTC's example was fiber).1 FDA has yet to concur in any such health relationship, but the correlation appears to be supported by much available scientific evidence. This sort of useful information will be withheld from consumers by a monopolistic FDA. No level of falseness of present claims has been Pauline Ippolito and Alan Mathios, The Regulation of ScienceBased Claims in Advertising. Manuscript presented at the Second International Conference on Research in the Consumer Interest, August 9-11, 1990, p. 7.

4 established by the agency, yet it would restrict the public's access uniformly. The consumer benefits of a well-policed market that permits responsible health claims far outweigh the cost to consumers of reacting when responsible scientific claims turn out to be mistaken, a cost which is necessarily limited to the price paid for a food product. Repeat sales of the product would simply be lost (along with the firm's reputational capital). There is no economic or reasonable basis for FDA's presumption that consumers would prefer no health information on the label at all to the information that is currently available to them, despite the possibility that some claims are inflated (which can be policed) or simply mistaken at times. The potential upside benefits are far too great to forego by an authoritarian policy that, ex ante, suppresses or delays information because it regards all manufacturers with suspicion at best, or as deliberate cheats at worst. FDA has already demonstrated a bias against permitting the use of claims even when scientific evidence seems to be overwhelming, and there is no evidence that the agency has overcome this tendency or will suddenly overcome it in time to implement the NLEA in a nonharmful way. Despite the frequent endorsement of fiber by scientists, nutritionists, and doctors, the claims for the benefits of fiber in the reduction of heart disease or cancer are still under "review" by the agency and do not enjoy its endorsement. Further, there is overwhelming evidence that aspirin aids in the prevention of heart attacks, but the agency has issued warnings against the advertising of these peer-reviewed findings. Without an abrupt shift in policy administration, the agency cannot be counted on to allow consumers widespread access to information that will help them. Consumers will be at the mercy of a monopolistic FDA to reveal to them what counts as good science. 2. Consumer harm: Closely related to the consumer welfare loss issue is the claim that the restriction of information directly harms consumers because it places nutritionally unsound products on a par with those products that FDA or other authorities would prefer consumers select under normal circumstances. Consumers are less able to tell if a product is likely to be nutritious compared to competing products. Recall that existing claims or descriptors (such as the "no cholesterol" claim on vegetable oils) are technically true even if arguably misleading. At the very least, the allowance of claims weeds out those products that have no basis whatsoever for making a claim: labels simply will not appear on such products.2 (For example, nonfiber products do not claim to be fiber, and foods that

Ippolito and Mathios, pp. 15-16.

5 contain cholesterol do not claim to be cholesterol-free.) A policy that forbids or delays health claims, however, will make these poorer products indistinguishable from those that on the whole are better for consumers' health. These costs of FDA's preventing consumers from having access to health claims should not be brushed aside as irrelevant. Such costs are far greater in scope than the costs of misleading claims. Withholding information is detrimental to consumers' health, especially in an environment in which the evolution of scientific information, to which consumers should have access, is progressing rapidly. Again, FDA should vigorously prosecute the guilty or fraudulent, but should not punish honest manufacturers who, as one part of a vast network of information, are providing an important public service regardless of intent. Paul H. Rubin has pointed out how the market process in fact induces firms to actively reveal negative product characteristics.3 Price itself is a negative feature since consumers would prefer to obtain products free of charge -- yet it is a highly advertised and emphasized feature. One virtue of advertising is that it serves the producer's purpose of demonstrating his product's superiority when his product has less of a given negative characteristic than his competitor's. Where no advertising appears, consumers rationally assume that the product is at the lowest level. Carrying this process over to the competition for health claims, Rubin cites the study by Pauline M. Ippolito and Alan D. Mathios of the Federal Trade Commission, which found that the advertising of cereal fiber content (a good feature) induced some fiber cereal manufacturers to advertise that their products contained less sodium and fat than their competitors' offerings.4 These other producers then reformulated their cereals. The overall result was that the negative features became specifically revealed to the public and average levels of the "negatives" sodium and fat in fiber cereals declined during the health claim period. One of the most important results of advertising or health claims, therefore, is that they underline negative product characteristics relative to one's competitors, and in turn motivate product reformulations toward greater health benefits. 3. Decrease in nutritional qualities of foods: It has been demonstrated how a dynamic market acts to reduce negative product characteristics and provide information to consumers. As the primary guardian of the food supply, FDA should actively concern Paul H. Rubin, "The FDA's Prescription for Consumer Ignorance," Journal of Regulation and Social Costs. Vol. 1, No. 4, November 1991, p. 13.
4 3

Rubin, p. 16.

6 itself with the question of which scenario or level of health claim deterrence will increase consumption of products with bad or lesser nutritional characteristics. The Federal Trade Commission advises regulators to contrast the impact on average nutritional quality of food in a "world" in which manufacturers are free to communicate the benefits of their product improvements with a world in which they are not.5 There is little or no incentive for producers to create and develop more nutritious products during a period in which they are hindered or forbidden from marketing them on a nutritionoriented basis.6 Competition plays an important role in getting healthier products to market: if health characteristics are not a competitive feature, food products will compete on the basis of other relatively superficial characteristics, such as taste or convenience, and nutrition will no longer be a primary concern of producers. Clearly, the consumer loses if the average nutritional profiles of new foods brought to market decline, but this outcome is a virtual guarantee if the mention of health characteristics is forbidden. The prevention of health claims will increase consumption of products with less desirable nutritional features by withholding useful information from consumers, and by discouraging the production of products with improved nutritional qualities. IV. Responsible Interpretation of "Significant Scientific Agreement" 1. Minimizing filing costs: Any individual may file a request for a regulation characterizing the relationship between a nutrient and a state of health, and once it is approved, all manufacturers using the same substance should be able to make the claim. This process is useful since it eliminates the wasteful duplication that would occur if each manufacturer were required to obtain separate substantiation. The fixed costs of undergoing separate filing requirements would be a substantially greater relative burden on smaller firms. Additionally, eliminating duplication would lessen the likelihood of already-successful firms, with accumulated reputational capital, free-riding on the efforts of small, unknown firms. Otherwise, large firms, with a safety and quality reputation firmly established, could hastily produce a copycat product identical in substance to that of the small firm engaged in petitioning, but merely advertise other aspects of the product (like taste) rather than the health claim. In this manner the large firm could shift nearly the entire
5 6

Ippolito and Mathios, p. 9.

This inability to underline nutritional characteristics will be especially harmful to small or unknown firms, for reasons that will be explained later in the document.

7 burden of securing approval onto unknown or small firms, that are likely to have a greater need to make a health claim in order to establish a quality/health reputation of their own.7 The preferable public nature of the right to make a claim once approved by FDA and the feature that permits any individual to make the request provide an economic incentive for all within a substance category to assist in securing approval of their mutual claim. Obviously, some manufacturers will attempt to free-ride on the effort required of the filing process itself (i.e., providing data, studies, and other evidence in support of a claim), but in all likelihood trade associations and other industry specifics will induce claimants to internalize these costs: the quicker that the FDA gets the required supporting material, the sooner that all may make the health claim, so there should be little desire to withhold relevant information. However, even a general-support filing requirement is still likely to have a negative impact on innovation (and consequently business start-ups and employment), especially in the case of small firms. A firm with a unique product that has yet to register a reputation for healthfulness must prematurely "publicize" the product's arrival in the marketplace yet is forbidden to market it in the manner necessary for business success for the duration of the approval process (up to 180 days). This gives competing firms ample time to plan for the manufacture and marketing of a copycat product, which they will then be free to tout the health benefits of if they or the small firm is "successful" in securing the claim. Potentially, a public filing process could eliminate the ability of small firms to establish themselves in any industry in which perception of health benefits is important to survival: product introduction will be delayed by the filing period when the small business is at its most critical and vulnerable stage. How will trade secrets be protected in the approval process?8 The gains of innovative food products may thereby be appropriated whether one or all must secure claim approval, and this will lower the information flow to consumers. It is difficult to determine the net effects of a mismanaged filing process on innovation, but it would appear to eliminate the Similar arguments are made regarding advertising substantiation (as opposed to labeling) in Richard S. Higgins and Fred S. McChesney, "Truth and Consequences: The Federal Trade Commission's Ad Substantiation Program," Public Choice and Regulation. Edited by Robert Mackay, James C. Miller III, and Bruce Yandle. The proposed regulation states that a petition filed for a health claim shall be available to the public.
8 7

8 ability of small firms to gain an edge in a competitive marketplace. There is little incentive for a small innovator to market potentially better products if, in addition to the uncertainty of getting a stamp of approval from FDA, the approval process itself will encourage others to mount a competitive campaign of their own. This unfortunate side effect could be mitigated if filing requirements and scientific agreement standards were more lax within the subcategory of claims in which the cost of a mistaken claim is minimal. 2. Deadweight losses of rigid scientific and filing standards: Deadweight losses occur when governmental action prevents mutually beneficial exchanges from taking place between consumers and producers. As increasing attempts are made to secure evidence of the truthfulness of a health claim category -holding risk level constant -- the costs to society of obtaining greater and greater certainty increase, while the benefits of knowing more decrease. There is an optimal level of effort that balances the amount of verification of a claim with the costs of securing that information. Beyond this point, the costs to society of obtaining greater certainty exceed the benefits. This optimal scientific consensus level will rarely, if ever, be 100 percent. To maximize public benefits, the threshold level of scientific agreement for approval of a health claim, therefore, should not be fixed simply to make matters convenient for FDA. For example, perhaps if a substance is known to be harmless (like fiber) and a majority (51%) of scientists (either as revealed in surveys or in published studies) agree that a health relationship exists, the claim should be allowed. A broader consensus should be required where the effects of the substance are more questionable or potentially dangerous. The aim should always be to avoid requiring excessive levels of verification where they are not warranted by or do not serve any public health purpose. In those instances in which harm to consumers is minimal or nonexistent, a large consensus will be easier to obtain as long as a health claim is credible. Any mechanism that FDA can devise to tap into the existence of such a consensus quickly, and that will perhaps bypass some of the filing requirements that are required for more questionable claims should be employed by the agency. This policy will avoid denying consumers the benefit of the claim for what potentially could be the duration of the entire statutory filing period. There are likely to be signaling factors in the scientific community that will assist a regulator in certifying that a mere simple majority exists on the one hand, and that near-unanimity exists on the other. Where nearunanimity is easily discernable, it should be reflected in the speed with which the requested health claim regulation is processed by FDA. The required level of accuracy is a variable that the regulator is able to select. If a logjam develops and claimants are routinely turned away, one may reasonably conclude that accuracy requirements are set at an inefficiently high

9 level. Alternative levels of stringency will have a direct effect on social benefits and costs and should be taken seriously. In its most benign form, a scientific standard requirement will delay a truthful claim for up to the statutory approval period. Methods of lessening this effect in terms of its detrimental impact on small business and consumers have already been discussed in the above section. In its worst form, a "type II" error -- rejecting a health claim that is in fact true -prevents a true claim from benefitting the public at all. A scientific standard, however, is by law required to minimize the possibility of harm from a false claim. The same calculus directed at ascertaining a reasonable consensus level to fulfill this mandate will have a direct impact on the potential for type II errors: the greater the consensus required the greater the likelihood of a type II error. Therefore, the carefully considered selection of a consensus level, given the nature of potential risk, is crucial in minimizing the likelihood that a valid claim will be denied. Where a low consensus is required for a substance claim that has unanimous scientific support and poses no risk, type II errors will rarely, if ever, occur. Social losses from delays in the use of a true claim will be of little importance as long as a "variable consensus" rule, rather than an inflexible standard set at too high a level, is employed by regulators. Efforts at designing reasonable consensus requirements would clearly be a plus for competitiveness in food manufacturing. The greater the costs of using the regulatory process (represented by filing requirements and the need to secure consensus), the more that efforts at securing approval of a claim will be reduced by all firms, but especially by higher-cost firms -- including those who may have a better or safer product. Requiring more information or agreement than is reasonably obtainable poses the potential for reducing the amount of health information and healthy products that are ultimately available to the public, since firms' costs to provide and market healthy goods will be increased, and output thereby restricted. Additional regulatory requirements will always restrict output all else equal, even of more nutritious products. To curtail this effect, care should be taken to avoid the improper imposition of a strict, non-variable level of consensus that requires unwarranted levels of accuracy. V. Conclusion

FDA's chief argument for forbidding health claims and the unregulated use of descriptors is that consumers may be deceived. These comments have argued that the level of this deception is debatable since FDA has not established the degree of truth or falsity of claims. Moreover, the agency seems unprepared to permit claims even when scientific consensus does appear to

10 exist. This bias against health claims will induce firms to advertise other product features like taste and convenience and not bother to reformulate current products or develop new ones with the aim of emphasizing a beneficial health relationship. Furthermore, it is not apparent that consumers would prefer no information whatsoever to the information that emerges through market processes. Clyde Wayne Crews, Jr.

CSE Foundation 470 L'Enfant Plaza, SW East Building #7112 Washington, DC 20024

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