Regulatory Impact Analysis Training Course Office of the Presidency South Africa 1-5 September Session 19

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1 Regulatory Impact Analysis Training Course Office of the Presidency South Africa 1-5 September 2008 Structure of Session 19 Session 19 Case Study on Food Labels for Trans fat 1 (Copyright held by Jacobs and Associates, Not to be reproduced without permission.) BACKGROUND MATERIALS This document presents background material on a RIA case. The class will be divided into breakout groups that will develop the RIA analysis quantitatively and qualitatively as follows. The section below called Components of the RIA contains the step by step approach taken by the regulator. Your task is to critique the RIA. Each group should review the regulator s method in the RIA, and either AGREE or DISAGREE with the regulator s approach. If the group disagrees, the group should suggest a better approach. Each group should give the RIA a grade of A (excellent), B (good), C (acceptable), or F (unacceptable), and shall explain why. MAGNITUDE AND POSSIBLE TRENDS OF THE PROBLEM In the United States, heart disease causes 1.1 million heart attacks annually, killing over 500,000 people each year. A fat called trans fat is used in many foods and contributes, on average, about 3 percent of calories in U.S. diets. Americans eat a lot of trans fat. The estimated average intake of trans fat is 5.3 grams/day (2.6 percent of calories). According to the best estimate, men eat 4.4 grams/day while women eat 3.6 grams/day. (By contrast, in Europe, a study found the average intake of trans fat to be about 2 g/day or approximately 1 percent of calories). However, such estimates of dietary intakes of trans fat are subject to multiple sources of error and that the average U.S. consumers could eat from 1.3 grams to 12.8 grams/day of trans fat. 1 This case study draws on the RIA published at Food and Drug Administration, Department of Health and Human Services, US Government (July 11, 2003) Food Labeling; Trans Fatty Acids in Nutrition Labeling; Consumer Research to Consider Nutrient Content and Health Claims and Possible Footnote or Disclosure Statements; Final Rule and Proposed Rule, US Federal Register: (Volume 68, Number 133), Pages

2 Consumption of food containing trans fats, like saturated fats, results in increased serum lowdensity lipoprotein cholesterol (LDL-C), a major risk factor for heart disease. In 2001, the Institute of Medicine of the National Academy of Sciences issued a report that found, similar to the effect of saturated fat, a positive linear trend'' between eating trans fat and increased risk of heart disease. Panels of scientists found that, based on the current body of scientific evidence, there is strong agreement that the available evidence is sufficiently compelling to conclude that trans fat intakes increase CHD risk. Those who want the regulation argue that Consumers may increase or decrease their risk of heart disease based on the level of trans fat in their diets. Consumers must know the amount of trans fat in food products that they select as part of their total daily diet to choose products that would allow them to reduce their intake of trans fat, and thus, reduce the risk of heart disease. Without mandatory labeling, consumers would not be able to understand the relative contribution that foods make to their total daily intake of trans fat. Scientists did not suggest that trans fats should be eliminated from food because this would require extraordinary changes in dietary intake patterns that might introduce other undesirable effects and unknown health risks. Because trans fats are unavoidable in ordinary diets, the Institute of Medicine report recommended that ``trans fat consumption be as low as possible while consuming a nutritionally adequate diet.'' Most food products on the U.S. market contain trans fat. These foods include those high in some vegetable oils, such as hard margarines and shortenings. Foods with a high amount of trans fat include commercially fried foods and baked goods. The Institute of Medicine encourages the use of liquid vegetable oil, soft margarine, and trans fatty acid-free margarine instead of butter, hard margarine, and shortening. At least one manufacturer has announced the reformulation of its snacks and chips to decrease trans fat. Because of the size of the affected population (around 300 million), even a small improvement in eating habits can significantly reduce the number of premature deaths from heart disease. THE REGULATION: PUT THE AMOUNT OF TRANS FAT IN THE LABEL The U.S. Food and Drug Administration (FDA) can regulate nutrients on food labels if it finds labels necessary to assist consumers in maintaining healthy diets. FDA must ensure that labeling provides truthful and non-misleading information to consumers. FDA amended its regulations on nutrition labeling to require that the amount of trans fat be stated in the nutrition label of foods. FDA stated: FDA believes that the declaration of this nutrient on a separate line will help consumers understand that trans fat is chemically distinct from saturated fat and will assist them in maintaining healthy dietary practices.to reduce the risk of heart disease, consumers need information about the level of trans fat in food products. This new label will be placed on a separate line immediately under the line for the declaration of saturated fatty acids. Consumers will have information on the amount of trans fat in a product, along with other information about the amount of saturated fat and cholesterol. Consumers could use information about all three fats when they buy food. FDA is also considering promoting consumer awareness and understanding of the health effects of trans fat as part of an educational program. Other stakeholders asked that FDA tailor its approach to labeling to exempt foods containing 2

3 very small amounts of trans fat. THE STAKEHOLDERS FDA received over 1,650 comments on its earlier draft RIA. They were from industry, trade associations, consumers, consumer advocacy organizations, academia, health care professionals, professional societies, city and State governments, other Federal agencies, and other countries. On the basis of these comments, FDA changed the regulation and the final RIA. COMPONENTS OF THE FINAL RIA Step 1: Setting the baseline FDA used today s situation as the baseline, assuming that nothing will change without regulation. But comments from the public questioned if FDA was right. The level of heart disease has been declining in the United States for the past few decades due to better medical care and other labels for saturated fats. Heart disease might decline even without trans fat labels. The FDA might over-estimate benefits if it did not include this future decline in heart disease. FDA rejected this argument. It showed that the risk of heart disease is greater at older ages, that the U.S. population is aging, and that the number of deaths from heart disease was fairly level from 1992 through FDA concluded that it is reasonable to assume that the level of heart disease will remain the same in the future. STEP 2: Identifying alternative solutions The FDA decision was to inform consumers about the risks of trans fat so that they could make their own decisions about their health. The FDA considered other alternatives but did not find any obvious less-burdensome alternatives. In the draft RIA, FDA listed a number of regulatory alternatives regarding trans fat, including: (1) Take no new regulatory action (2) Require mandatory labels (accepted) (3) Label only foods with high levels of fat. The FDA did not accept this alternative, because it believed that the science supports the conclusion that trans fat is dangerous at average intake levels in the U.S. population. (4) Directly regulate the amount of trans fat rather than relying on consumer choice. The FDA could have set an upper limit on the amount of trans fat in foods, rather than relying on consumer choice. The FDA rejected the alternative because there is no scientific evidence of the right upper level, and because trans fats are unavoidable in ordinary diets and achieving an upper limit would require extraordinary changes in diets that might introduce other undesirable effects and unknown health risks. (5) Voluntary labeling of trans fat. An alternative considered was that trans fat labels should be voluntary. The theory is that more and more foods would disclose trans fat due to competitive pressures and market incentives. FDA rejected this alternative because it thought that consumers would want a standard approach to labelling of such hazards, and that a standard approach would make it easier for consumers to find the information. (6) Expand regulatory action to require labeling at restaurants. FDA found this was very costly and impractical. 3

4 (7) Adjust the effective date to reduce costs. FDA originally proposed that a final rule be effective 1 year after publication. Many comments stated that it was important for small businesses to be able to phase in the cost associated with the new label requirements so that they have extra time to absorb the costs of these changes. FDA decided to allow firms more than 2 years to implement the final rule providing some regulatory relief and economic savings for small businesses FDA evaluated these regulatory alternatives in the draft RIA, although FDA said it lacked sufficient data to evaluate all of the options quantitatively. No comparison of the benefits and costs of alternatives is presented in the final RIA. COSTS STEP 3. Identifying Potential Cost impacts. FDA said that the costs of the regulation would come from three sources: 1. Cost of testing food to determine the amount of trans fat in food, 2. Cost of printing new labels for products containing trans fat, 3. Cost of reformulating food products to reduce the amount of trans fat. Manufacturers will want to make their products more attractive to consumers. Labeling of trans fat will create provide an incentive to food manufacturers to reduce the amount of trans fat in their products. STEP 4. Identifying the number of affected foods Because of the size and diversity of the affected foods, FDA needed to organize its analysis. To estimate the costs of the rule, FDA used a unique Labeling Cost Model developed for FDA by a consultant. The model indicated that there are over 300,000 different food products in different sizes sold in the United States, but only about 154,000 products contained vegetable oils, and so could be potentially affected by this regulation. FDA first estimated that only 42,000 products with the most oil content would be tested, but after public comments pointed out that manufacturers would have to test almost everything containing oil, FDA estimated that 154,000 food products would be tested for trans fat content. STEP 5: Targeting the regulation toward higher risks To reduce costs, the FDA exempted low-risk products: products with less than 0.5 g trans fat per serving do not have to change their labels. Products that sell less than 100,000 units per year in the United States, that are made by firms that have fewer than 100 employees, that do not make nutrition or health claims, and that have filed a notification with FDA are also exempt. STEP 6: Estimating the costs of testing In the RIA, FDA used a per product cost of testing for trans fat of $200. Included in the analytical testing estimate is the cost of testing two samples of each product, one hour of 4

5 labor to prepare and package the product (at $14.73 per hour) and delivery charges for one two-pound package delivered overnight (at $26.30). The labor cost estimate was based on the average total compensation (wages and benefits) for handlers, equipment cleaners, helpers, and laborers in manufacturing industries. 5

6 Estimated Range of Per Product and Total Testing Costs Low Medium High Cost per Product $261 $291 $371 Total Testing Costs $40,298,000 $44,930,000 $57,282,000 STEP 7: Estimating the costs of relabeling Based on information in the model, three-quarters of the labels normally will be scheduled to be changed during the 30 month compliance period. FDA estimates that about 78,000 (25%) of the almost 308,000 products will have to be changed earlier than would have been planned without this rule. Included in the cost of relabeling are administrative, graphic design, pre-press preparation, printing and engraving, and the lost value of discarded labels. Across product categories, the average low relabeling cost per product is about $1,100 and the average high relabeling cost per product is $2,600. The estimated costs of changing labels varies because different packaging converters and food manufacturers reported different costs to FDA in the public consultation. Table 5 shows the total products changed earlier than planned and the total estimated costs of relabeling for the entire industry. Table 5.--Range of Relabeling Costs by Product Category Products Relabelled Low Medium High Total 78,400 $85,964,000 $126,835,000 $204,986,000 STEP 8: Estimating the costs of reformulating products An impact of this regulation will be the reformulation of some foods to reduce trans fat. Because those changes in food composition are due to this rule, the costs of reformulation are counted here. In the analysis in the proposed RIA, FDA estimated the average reformulation would cost $440,000 per product and would take a full year. No comments contradicted FDA's estimate of the per product cost of reformulation or provided information to change that estimate, so FDA will continue to use a per product reformulation cost of $440,000. FDA estimates that 15 percent of margarine products have already been reformulated to eliminate trans fat. For margarine reformulation, FDA has estimated no increase in ingredient costs, because the price of reformulated margarine products that are already on the market is no higher than the price of margarine products containing trans fat. The different ingredients used in the products appear to have had no impact on the cost of production. Therefore, FDA estimates that 10 percent of the margarine products that have not yet been reformulated will be reformulated to reduce trans fat content. We assume that reformulating 10 percent of margarine products will result in a 10 percent reduction in the average trans fat content of margarine as a product category. The reformulation will therefore reduce the trans fat content of margarines as a whole by 10 percent. 6

7 Data in the Labeling Cost Model indicate that there are 300 margarines sold in the US. The data was used to estimate that 30 margarine products will reformulate as the result of this rule, if 10 percent of the total number of margarine products are reformulated. Table 6 shows the cost of margarine reformulation. Table 6.--Cost of Margarine Reformulation Cost of Reformulating per Product $440,000 Products Reformulating 30 Total Cost $13,200,000 STEP 9: Being honest about uncertainties FDA explained that it was not sure about three major costs: Increased cost of substitutes (substitute effects) for partially hydrogenated oil for producers of reformulated products. FDA did not include any costs for this item. FDA explained, o Competition provides producers with incentives to use the least expensive ingredients that are acceptable for the quality of product they are making. Therefore, in general, any change in existing formulations (such as is expected to occur as a result of this rule) can increase the cost of ingredients. Even a very small increase in the price of a minor ingredient can amount to an increase in production costs of millions of dollars when multiplied by millions of units. However, FDA believed there is good reason to believe that, in the long run, ingredient costs may not increase. If producers rely on newly formulated ingredients made with new technologies, the price of these ingredients largely depends on the industrial capacity to produce them. As the demand for such ingredients increases, producers will have more incentive to increase capacity and the prices of these ingredients will fall. Where producers use different mixes of oils, agricultural inputs are well known for being able to be supplied in greater and greater quantities without an increase in price. FDA does not have sufficient information on the types of substitutes that will be used, on the volume of substitutes that will be needed, or on the future price of the substitutes at the time that reformulation is completed. Product reformulation (effects of innovation): The unknowns include the number of products that will be reformulated, the cost of reformulation, the length of time needed to reformulate products, and the degree to which the reformulation of some products reduces the cost of reformulating other products. The estimates might be either overor underestimates of the actual costs of reformulation. Number of labels (affected population) to be changed. FDA said that actual costs are likely to be lower than those estimated. 7

8 STEP 10: Presenting total costs Total costs were summarized, showing upper and lower estimates: Cost category Low Medium High Testing $40,298,000 $44,930,000 $59,282,000 Relabeling $85,964,000 $126,835,000 $204,986,000 Reformulation $13,200,000 $13,200,000 $13,200, Total $139,000,000 $185,000,000 $275,000,000 BENEFITS STEP 11: Prove that trans fat causes heart attacks, and estimate the risk of eating trans fat FDA had to show the causality between the risk factor and the disease: Does eating trans fat increase the risk of heart disease? If so, what is the level of risk? The technique chosen was risk assessment. FDA used regression equations based on an analysis of many medical studies to quantify the relationship between trans fat and heart disease. Analysts predicted linear increases in heart attack risks as a function of the level of trans fat intake. Linear increase means that if 1 gram of trans fat causes X heart attacks, then 100 grams causes 100*X heart attacks. This linear relationship was used as the basis for estimating the benefits of the proposed rule. FDA calculated the actual risk of heart disease from eating any amount of trans fat. FDA used the regression analysis to find that reducing trans fat intake by 0.1 % reduces heart disease risk by to %. STEP 12: Estimate how much trans fat people eat How much trans fat do Americans actually eat? No one knows how much trans fat is eaten by Americans. Data of the US Department of Agriculture for the trans fat in foods is limited to a few foods. Extrapolation to the whole US diet results in errors with unknown effects. FDA agreed that estimates of dietary intakes of trans fat are subject to multiple sources of error. FDA used three methods to estimate the amount of trans fat: (1) National food consumption survey. This annual survey asks people what they eat. Its advantage is that it covers the entire US population, but it normally under-estimates consumption because people lie about how much they eat. 8

9 (2) National disappearance data: This method calculates the difference between food produced and food in inventories. The difference is what is consumed. This method over estimates consumption because some food is spoiled or thrown away, and not eaten. (3) Food frequency questionnaires of specific groups. These studies are done for medical reasons, but apply only to small groups of people and are possibly biased. FDA decided to use the national food consumption survey to estimate how much trans fat people eat. It estimated an annual trans fat consumption of 6.86 grams/day for men and 4.78 grams/day for women, about 2.55 percent of energy. Major sources of trans fat intake as a percent of energy are margarine, 0.42 percent; cake and related products, 0.61 percent; cookies and crackers, 0.25 percent; fried potatoes, 0.21 percent; chips and snacks, 0.12 percent; household shortening, 0.11 percent STEP 13: Show that labels will reduce trans fat in diets and by how much Would Americans actually eat less trans fat due to a content label? FDA had to: show that a label showing the amount of trans fat will actually reduce the eating of trans fats, that is, the information would change the behaviour of American consumers, show that Americans would NOT eat more of other dangerous fats to replace the trans fats; estimate how much less American would eat so that FDA could estimate the actual reduction in heart disease in the United States. Can consumers understand this information on the label? Current labels on saturated fat would encourage consumers to eat MORE trans fat unless they were told that trans fat was as dangerous as saturated fats The FDA said that, if trans fat was not labelled, food manufacturers would try to substitute trans fat for saturated fats. FDA cited two studies: A study on saturated fat labels found that 73% of people in the survey use nutrition labels and look for information on saturated fat. Those people ate 15 % less saturated fat than did those who did not read nutrition labels. Other research on how consumers use food labels to make purchase decisions suggests that 45 % of consumers will reduce how much fat they eat by about 2.2 %. 9

10 FDA concluded that consumers would read the label and would eat less trans fat. FDA said, Because of uncertainties regarding the magnitude of consumer response to trans fat labeling we have chosen a very low estimate of consumer response to the new label, a decrease of 0.1 percent of trans fat intake FDA has chosen a very low estimate of consumer response to the new label. The actual change that occurs may be larger. However, FDA chose this amount so as not to overestimate benefits of this rule. STEP 14: Show how many heart attacks will be avoided as a result The next step is a simple mathematical calculation. FDA used the regression analysis to find that reducing trans fat intake by 0.1 % reduces heart disease risk by to %. Therefore, reducing trans fat by about 0.04 percent of energy is projected to decrease heart disease risk by about 0.05 percent. This will prevent approximately 600 heart attacks per year, including 200 fatal heart attacks. FDA used values of a statistical life (VSL) of $5 million and $6.5 million. These values represent reasonable best estimates among a range of VSL estimates reported in the literature (from $1 million to $10 million). The benefits are expected to begin 3 years after the effective date of the regulation, because a dietary change takes several years to begin to affect health risk. Other benefits were included in the analysis, such as the avoided costs of medical care STEP 15: Compare benefits and costs FDA then presented its summary table, and concluded that the mandatory label would produce net benefits. Quantified Costs Quantified Benefits (Low Scenario) Quantified Benefits (High scenario) Estimated range of the net present value of the cost of the regulation is from $139 million to $275 million. Prevention of about 600 heart attacks per year, including 200 fatal heart attacks. Preventing these heart attacks is valued at $4.1 billion, net present value. Prevention of about 1,200 heart attacks per year, including 480 fatal heart attacks. Preventing these heart attacks is valued at $8.3 billion, net present value. 10