# Presentation: 713209

## Analysis of Economic Impact

- Significant Impact on the Industry
- Significant Impact on a Substantial Number of Small Businesses

**Notes:**
Large Staff of FDA economists and epidemiologists conducted the analysis

Analysis conducted in accordance with EO 12866 – requires an assessment of all costs and benefits

Select regulatory approaches that maximize net benefits

We determined that the rules if adopted, would be 
	significant – impact on economy is greater than $100 million

	significant – impact on Small Businesses 
	Looked at regulatory options for small businesses 

## Need for Regulation

- Market incentives may not be sufficient to adopt controls to prevent adulteration and misbranding
- Voluntary controls do not provide sufficiently protective industry-wide minimum requirements
- Controls are costly and benefits are diffuse

**Notes:**
Economic rationale for the proposed regulation - Market Failure 

Consumers cannot take control of their choices – hidden defects
And private incentives not sufficient to adopt adequate preventative controls

	Controls today are mostly voluntary

	Controls are costly – competitive disadvantage

	Consumers cannot distinguish between products made w/controls from those without controls

	34% of consumers think that FDA already requires safety standards 

	Adverse selection caused by hidden quality creates race to the bottom – 
		creates incentives to lower industry wide quality for all firms

## Regulatory Options

- No new regulatory action
- Fewer requirements for vitamin and mineral manufacturers
- More restrictive regulations

**Notes:**
FDA considered several regulatory options
No new regulatory option – voluntary adoption of stricter standards, state and local enforcement – alternative institutions cannot create nationwide incentives for strict standards 
	48% of very small firms and even 11% of large firms do not follow any GMP model
2. Fewer requirements for Vitamin and Mineral manufacturers – if plant and animal derived DS products have   
   greater variation in product quality than synthetically derived products, then more requirements for them.	
  	Advantage - fewer products and firms would be effected – total compliance costs lower
	Disadvantage – no evidence of difference in health risk between synthetic and natural ingredients 
3. More restrictive regulations – 
product quality testing for each shipment lot, 
mandatory written procedures for each provision 
	Disadvantage - costly and difficult to link to health benefits

## Regulatory Options (Con’t)

- HACCP without other elements of CGMP’s
- Final Product Testing Only
- Regulate High Risk Products or Hazards Only

**Notes:**
4. HAACP  manufacturers determine how they will best eliminate or control hazards
	Disadvantage is that it would not create uniform minimum product quality across the industry
5. Final Product Testing Only 
	Disadvantage – not every finished product has a test that confirms identity, purity, quality, strength and composition.  Also, finished product testing does not ensure discovery of all contaminants I.e. when there are hot spots – false negatives
6. High Risk Products
	Disadvantage – we don’t know what the high risk products are – 
1. significant underreporting  2.  What is most reported may not be linked with highest risks

## Industry Survey

- Covered Establishments           1,566
- Manufacturers		1,228         78% of total
- Dietary Ingredient Supplier        7%
- Repacker/Relabeler			  7%
- Holder					  7%
- Other					  6%

**Notes:**
We developed a database of firms derived from several sources
FDA’s official establishment inventory
		trade organizations
		electronic databases – infoUSA

Total covered firms 1,566  
Covered firms are firms that manufacturer, pack, dietary ingredient supplier, repacker, holder

Most firms are manufacturers

Most firms are small as classified by the Small Business Administration < 500 employees

Sent survey to 966 firms and we received 240 responses

## Consumer Use Is Growing

- Significant growth in the use of dietary supplements

**Notes:**
There has been a significant growth in the market – very large competitive pressures
	Growth rate about 10%/year for the last decade 
	Per capita consumption (number of units per US resident) has grown also – about 3% or more per year
	Total Industry Size – about $15 billion 

## Producer Baseline Practices

- 65% of all firms follow some type of GMP model (primarily food GMP’s)
- 30 % follow drug GMP’s
- 35 % do not follow any GMP model

**Notes:**
To learn about Manufacturers practices – FDA conducted an industry wide survey in 1999
	Stratified the industry by manufactures product type and size category
	Vitamin and Mineral 
	Botanical and herbal
	Amino Acid, Proteins and animal extracts
	Other  
Size:  Large (500 >), Small, Very Small and Unknown (17% - industry has very large turnover) 

## Consumer Benefits

- Better Health
- Less Time Searching for High Quality Products
- Fewer Product Recalls

**Notes:**
The major benefits of the proposed regulation are
	1.  better consumer health – from the lower risk of contamination misbranding
		reduced risk of glass fragments, salmonella, selenium poisoning, superpotent zinc, iron poisoning
		EMS (Eosinophilia-Myalgia Syndrome)
		These risks and health benefits were identified by FDA epidemiologists 

	2.  Consumers spend less time searching for safely manufactured products  - standardization
		with uniform quality standards, consumers will spend less time shopping for differences in quality 			based on different manufacturing practices	
		save just a few minutes/year for adult consumers (205 million @ $15.65/hr)

3.    Fewer product recalls

## Industry Compliance Costs

- New record keeping requirements
- New final product testing

**Notes:**
Industry costs

record keeping

Final product testing

Other  - capital improvements, new laboratory equipment etc

## Health Benefits

- Health Benefits from reduced illnesses
- Baseline number of illnesses caused by poor manufacturing practices
- Expected reduction in illnesses
- Health cost saved per prevented illness

**Notes:**
It is difficult to estimate the health benefits – a great deal of uncertainty
We would like your comments 

Cost of Illness based on severity of illness
Quality Adjusted Life day
	Lost functionality
	Lost productivity
	Direct Medical Costs

Duration of Illness in Days

 reduced risk of glass fragments, salmonella, selenium poisoning, superpotent zinc, iron poisoning
		EMS (Eosinophilia-Myalgia Syndrome)

## Reduced Search Costs

- Consumers will spend less time searching for quality products
- Indirect evidence of how consumers shop
- Drug Store
- Grocery Store
- Use of Studies

**Notes:**
With adoption of GMP’s consumer will change their behavior – consumers will shop less
More precisely, spend less time shopping per purchase 
Search time includes 
Reading product labels and other literature
Comparing one product with other products –searching the internet I.e. consumerlab.com
Examining the product itself
Thinking about the product
Second guessing final decisions
Very difficult to measure – no formal studies so we relied on studies in other industries
Drug Store  Grocery Store  Use of Time Studies
Reduced search time due to GMP regulation = change in time spent shopping for quality
We characterized the change using Monte Carlo Simulations  - probability of change between 1% and 50% - 
most likely 33%  (also expert opinion of pharmacists)

## Summary of Annual Benefits

- Fewer Illnesses    			$105 million
- Reduced Consumer Search 	$109 million
- Fewer Product Recalls		    $3 million

**Notes:**
Summary of total benefits

Fewer Illnesses    			$105 million/year
Reduced Consumer Search 	$109 million/year
Fewer Product Recalls		    $3 million/year
_______________________________________
Total Social Benefits 		$217 million/year

## Summary of Annual Costs(after 3rd year)

- Industry Compliance Cost             $86 million
- Very Small 	      		      $38,000/firm
- Small               			      $61,000/firm
- Large                                          $47,000/firm

**Notes:**
Industry Compliance Cost             $86 million

Very Small 	      		      	$38,000/firm 
Small               			$61,000/firm
Large                                     $47,000/firm	

## Key sources of uncertainty

- Number and cost of tests per batch
- Number and cost of tests for contaminants per batch
- Cost and benefits of creating and using records
- Consumer Complaints

**Notes:**
Costs are caused by a change in practices – the adoption of new practices   Firms must comply with the 
Physical Plants – capital improvements such as replacing the floors, walls etc with smooth, hard surfaces
Equipment and Instrumentation Controls – additional or new equipment of all kinds 
Quality Control and Laboratory operations – 85% have a qc unit or function already but 15% do not – cost for new qc unit 

Key uncertainty about
Number and cost of tests per batch
Number and cost of tests for contaminants per batch
Cost of creating and using new records
Cost to investigate Consumer Complaints – adverse health events

## Burden on Small Firms

- Requirements may be significant
- Several hundred firms are at risk of going out of business or changing product lines

**Notes:**
Burden is significant on firms that are low revenue – less than $500,000/year.  
If they incur the average or higher compliance cost 
Very Small 	      		      		$38,000/firm 
Small               			         $61,000/firm
Large                                              $47,000/firm

Then at risk of stopping operations  - 
regulatory option - 3 year compliance period for small entities	

## Suggested Areas for your Comments

- Need for the Rule
- What it will cost you to comply
- Whether the rule will accomplish the goals
- Are there other ways to accomplish goals

**Notes:**
Need for the Rule  - Market Failure – do you agree that voluntary controls are not sufficient or that consumers cannot distinguish adulterated from nonadulterated products

What it will cost you to comply with the rule

Whether the rule will accomplish the goals – if we adopt the rule will there still be significant quantities of adultered products 

and other ways to accomplish goals – that cost less and do more.  Are their options that we neglected.

## Do’s and Don’ts

- Do – send specific numbers, if possible
- Don’t – send unsupported opinions
- Do – send comments in on time
- Do – send comments to docket
- Do – if possible, send combined comments through association (e.g., survey’s)
- Don’t – send sensitive information

**Notes:**
Do – send specific numbers, if possible
Don’t – send unsupported opinions
Do – send comments in on time
Do – send comments to docket
Do – if possible, send combined comments through association (e.g., survey’s)
Don’t – send sensitive information