Howard Kunreuther and Peter Schmeidler

1
Third Party (Voluntary) versus Government
Certifications for Food Safety

• Howard Kunreuther and Peter Schmeidler
• Risk Management and Decision Processes Center
• E-mail pschmeid_at_wharton.upenn.edu
• Presented at a Conference on
• ALL FOOD IS NOT CREATED EQUAL
• Policy for Agricultural Product Differentiation
• Berkeley, CA.
• November 16, 2004

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OUTLINE OF TALK

• Examples of Safety Inspections
• Introduction to EPA Risk Management Program
  (RMP)
• Third Party RMP Audit Project
• Introduction to the Risk Management and Decision
  Processes Center at the Wharton School
• Product differentiation and safety and quality
  certification
• Examples of Third Parties in Food Safety
• Potential for Third Parties in Product
  Differentiation?

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WHARTON RISK MANAGEMENT CENTER

• Focus on low probability-high consequence events
• Natural Disasters
• Chemical Manufacturing Incidents
• Terrorism and Interdependent Security
• Workplace Safety
• Use of Public-Private Partnerships to develop
  strategies to manage these risks
• Private Component Insurance and Third Party
  Inspections
• Public Component Regulations and Well Enforced
  Standards

4
WHARTON RISK CENTER PROJECTS

• Agreement with EPA Office of Emergency
  Prevention, Preparedness and Response (OEPPR)
• Near Miss
• Third Party RMP Audits
• Accident Epidemiology
• Lockheed-Martin - Airline Security
• Drug-Related Risk Management with a large
  pharma firm
• Managing and Financing Extreme Risks
• Natl Institute of Standards and Technology
  Safer Communities
• Web site http//opim.wharton.upenn.edu/risk

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EXAMPLES OF SAFETY INSPECTIONS

• Steam Boilers - mandatory (by insurer)
• Workers Compensation mandatory (by insurer, if
  indicated)
• LA County Restaurant Ratings
• Mandatory (by County)

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NEED FOR WELL ENFORCED CHEMICAL SAFETY
REGULATIONS
Firms Dont Make Benefit-Cost Tradeoffs
Threshold Models Myopia (NIMTOF) Limited
Assets Interdependencies in Multi-Division
Firms Externalities And these points hold
for other industries!

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EPA RISK MANAGEMENT PROGRAM (RMP) BACKGROUND
There are 15,500 sites that meet the RMP
threshold of handling at least one of 143 listed
hazardous chemicals The threshold chemical at
50 of the sites is ammonia (refrigeration for
food processing) and at 30 of the sites is
chlorine (waste water treatment and
purification) EPA has 50 inspectors to cover
the above Some states such as Delaware and NJ
have their own RMP programs and carry out
inspections in lieu of EPA RMP is administered
by OEPPR formerly CEPPO , the Chemical Emergency
Preparedness and Prevention Office
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WHY THIRD PARTY AUDITS FOR RMP?

• An alternative to Command and Control
• Limited EPA resources infrequent inspections
• Volunteer sites means EPA can focus on bad
  facilities
• 3rd Party provides benchmark for best practices
• Private party rather than a regulator inside the
  facility
• Opportunity for Community goodwill via
  transparency
• Potential to avoid penalties by self reporting
• Potential for lower insurance premiums
• Regulatory/litigation relief in case of an
  incident

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INSURANCE AS THE THIRD PARTY
Insurers want inspections to be complete enough
because otherwise they lose in claims Inspection
can reveal ways the individual company can reduce
its safety and legal risks   Analysis of all
inspection data can identify patterns to reduce
safety risks    Insurers should reduce premiums
to reflect lower risk
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PILOT STUDY AUDITOR TRAINING

• Two day training of insurance engineers and
  safety consultants in ammonia and chlorine safety
  by DNREC
• Delaware has state RMP program 4 ammonia and 4
  chlorine sites follow-up inspections by DNREC
• Pennsylvania does not have state RMP program
• 4 ammonia and 9 chlorine sites follow-up
  inspections by EPA
• Region III
• Conclusions Trainees are capable of conducting
  RMP compliance inspections with performance
  parallel to an implementing agency

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PROPOSED REVISION TO SECTION 112(r) OF THE CLEAN
AIR ACT AMENDMENTS FOR 3RD PARTY AUDITS

• Voluntary participation 
• EPA establishes qualification standards for
  auditors 
• Facility hires auditor or works with insurer 
• Comprehensive RMP audit performed 
• Auditor provides report to facility 
• Facility reviews report 
• Facility can
• Take corrective action and submit report to
  EPA or
• Take corrective action and not submit report
  to EPA or
• Take no action and not submit report 
• If report is submitted, EPA provides regulatory
  benefits of waiver of fines for non-compliance
  (within limits) and a three year window of
  freedom from an EPA RMP audit
•  

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SAFETY QUALITY CERTIFICATION IN FOOD MARKETS

• Supermarket Food Products are Becoming More
  Differentiated
• More processing outside the home
• For example, branded meat entrees
• Distinctive agricultural production
• Organic produce hormone free meats
• Large scale Production special processing
• potential for greater impact if breakdown occurs
• Foreign sourcing

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DIFFERENTIATION IMPOSES NEW PRESSURES ON
REGULATORY CERTIFICATION FUNCTIONS

• Regulation How should meat inspection respond to
  varying safety emphases?
• Certification What role should USDA play in
  responding to consumer demands regarding
  production processes?
• Each stretches resources alters traditional focus

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INSURANCE AND FOOD SAFETY

• Insurer has staff with food experience that spend
  80 of their time
• in facilities (including
  restaurants)
• Several certified in HACCP (Hazard
  Analysis/Critical Control Points)
• Regional firms are biggest challenge normally
  started small and
• still behaving as a small
  organization despite growth
• Lack of resources QC person becomes HACCP
  person and HACCP
• program done in-house without consultation
• Relationship with insurer grows such that
  facilities feel more comfortable with than
  regulator leads to sharing of best practices
• Concerns consolidation leading to fewer
  batches, if problem occurs it can effect a
  larger population
• Forces insurer to look at more closely at
  controls

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EXAMPLES OF THIRD PARTIES IN FOOD SAFETY

• Pa. Egg Quality Assurance Program
• Ca. Dairy Quality Assurance Program
• Fresh Produce Audit Verification
• Program
• Qualified Through Verification
• Minnesota Certified Pork

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PA. EGG QUALITY ASSURANCE PROGRAM(PEQAP)

• Voluntary program developed by PennAg Industries
  Poultry Council to minimize Salmonella
  enteritidis (SE) contamination
• Third party monitoring by the Pa. Dept. of
  Agriculture
• Program elements rodent control, remedying
  positive houses,optional vaccination for SE, egg
  holding and processing requirements, testing
• PEQAP symbol for successful audit
• By 2002 85 of egg production PEQAP
• Program started in 1994
• Results 1992 SE positive product 23 vs. 2003
  1.8
• Flocks 1992 38 positive vs
  2003 4.4

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CALIFORNIA DAIRY QUALITY ASSURANCE PROGRAM (CDQAP)

• Three components Food Safety, Environmental,
  Animal Welfare
• Environmental component fully operational with
  third party audits
• Food safety course ready for implementation Food
  Safety and
• Emergency Preparedness with focus on
  bio-terrorism
• Use of third-party audit for Food Safety under
  discussion

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FRESH PRODUCE AUDIT VERIFICATION PROGRAM

• GAP/GHP Good Agricultural Practices/Good
  Handling Practices
• Based on Guide to Minimize Microbial Food Safety
  Hazards for Fresh Fruits and Vegetables
• Voluntary independent third-party audit by F/SIS
• Auditors are licensed fresh fruit and vegetable
  inspectors
• Passing audit results are posted on USDA website
• Results are valid for one year
• USDA Certificate (suitable for framing)
• Program has been in place for 2 years
• No plans for metrics

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QUALIFIED THROUGH VERIFICATION (QTV) FOR
MINIMALLY PROCESSED PRODUCE

• Based on AMS QTV manual
• Voluntary independent audits by AMS
• Facility develops QTV plan 30 day trial
• AMS starts audit after plan trial successful
• Audit levels IV to I frequency range 2/mo to
  1/3 mo
• Avg. audit cost - 1200 range - 400 to 1800
• USDA shield with QTV in center band on passing
• Website designating participants in development
• Pilot of project started in 1996
• Informal internal metrics

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MINNESOTA CERTIFIED PORK(MNCEP)

• Pilot program covering five herds part of wider
  Mn. Certified Production program
• Based on MNCEP Quality Handbook (ISO 9000 basis)
• Components Best production procedures
  Pre-harvest food safety Environmental
  stewardship Animal welfare Recording and
  Documentation (SOPs)
• Internal monthly audit by DVM/ Annual Handbook
  compliance audit by MN. Dept of Ag.
• Processing by Swift sold to upscale grocery
  chain
• Salmonella levels reduced form 8.7 to
  essentially 0
• Not successful because
• competition from case ready goods
• consumer would not pay premium for
  guarantees
• quality inconsistent because herds not
  genetically identical

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WHY THIRD PARTY AUDITS FOR FOOD SAFETY?

• An alternative to Command and Control
• Limited USDA resources infrequent inspections
• Volunteer sites means USDA can focus on bad
  facilities
• 3rd Party provides benchmark for best practices
• Regulatory/litigation relief in case of an
  incident
• Opportunity for Community goodwill via
  transparency
• Potential for lower insurance premiums

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Questions for discussion

• Are there additional opportunities in food safety
  for third parties?
• Could these opportunities benefit the movement to
  product differentiation?
• Can insurers play an important role as third
  party certifiers in food safety in conjunction
  with USDA?

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REFERENCES

• Collins, L. et al. The Insurance Industry as a
  Qualified Third Party Auditor. Professional
  Safety, April 2002, 31-38
• Jin, G. and Leslie, P., The Effect of
  Information on Product Quality Evidence from
  Restaurant Hygiene Grade Cards. The Journal of
  Economics, May 2003, 409-451
• Kunreuther,H., McNulty,P. and Kang,Y. Third
  Party Inspection as an Alternative to Command and
  Control Regulation. Risk Analysis, Vol. 2, 2002,
  309-318
• Kunreuther, H., Metzenbaum, S., Schmeidler, P.,
  Private Inspections and Mandatory Insurance for
  Managing Safety and Environmental Risks,
  Leveraging the Private Sector Management-Based
  Strategies for Improving Environmental
  Performance (Cary Coglianese and Jennifer Nash,
  editors), forthcoming in RFF Press