Peter Schmeidler and Howard Kunreuther

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Third Party (Voluntary) versus
Government Certifications for Food
Safety
Howard Kunreuther and Peter Schmeidler
Risk Management and Decision Processes Center
E-mail: pschmeid@wharton.upenn.edu
Presented at a Conference on
ALL FOOD IS NOT CREATED EQUAL:
Policy for Agricultural Product Differentiation
Berkeley, CA.
November 16, 2004
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?
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
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
Nat’l Institute of Standards and Technology – Safer Communities
Web site: http://opim.wharton.upenn.edu/risk
EXAMPLES OF SAFETY
INSPECTIONS
• Steam Boilers - mandatory (by
insurer)
• Workers Compensation –
mandatory (by insurer, if
indicated)
• LA County Restaurant Ratings
Mandatory (by County)
NEED FOR WELL ENFORCED
CHEMICAL SAFETY REGULATIONS
Firms Don’t Make Benefit-Cost Tradeoffs
Threshold Models
Myopia (NIMTOF)
Limited Assets
Interdependencies in Multi-Division Firms
Externalities
And these points hold for other industries!
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
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
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
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
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
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
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
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
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
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%
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
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
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
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 (SOP’s)
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
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
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?
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
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