A note on the economic rationale for regulating health claims on functional foods and nutraceuticals: the case of Canada.

• Author: Herath, Deepananda

Introduction

Regulating health claims continues to be among the highly contentious regulatory challenges involving functional foods, nutraceuticals and, more broadly, natural health products. (1) The potential effects of regulations on health claims are multifaceted, and a substantial body of literature has recently emerged examining impacts on innovation/product commercialization, marketing/advertising, promotion of healthy consumption patterns and international competitiveness. (2) We aim here to give an overview of the economic rationale for regulation of health claims, hopefully in a manner that is accessible to both an audience of economists and non-economists.

The premise of regulating health claims is to remedy market failures arising from imperfect information in food markets. (3) Proponents of health claim regulations solicit greater regulatory intervention and, at the extreme, near prohibition of health claims. They argue that incentives are rampant for manufacturers to deceive and/or mislead consumers because claimed health effects cannot be easily verified by consumers, (4) providing scope for 'false' product differentiation. In contrast, opponents of such restrictive regulations on health claims have argued that direct information provision through product labels is an effective approach to informing consumers about potential positive health effects that could not be acquired through pre-consumption information-seeking or post-consumption experience. (5) Further, opponents of regulations argue that, by restricting the provision of information through health claims, consumers are 'kept in the dark' and that the consequent welfare losses to consumers are typically much greater than the potential costs associated with deception. (6) Indeed, there is a substantial body of evidence supporting the notion that provision of information on health effects through product labels not only brings about positive changes in consumer dietary choices, (7) but also intensifies market competition among manufacturers for the supply and disclosure of valued product attributes, in turn enhancing consumer choices. (8)

We contend that both sides of the debate on regulating health claims are centered around, to a large extent, the degree of consumer verifiability of the claimed deliverables, in terms of health effects of product consumption, and that the extant literature tends to gloss over this important aspect. (9) The purpose of this conceptual note is to bridge this gap in the health claim regulations literature. Our arguments and reasoning are borrowed from the literature on the economics of advertisements as information, (10) where claims on product attributes have been examined in terms of their ability to provide truthful and verifiable information to consumers, and in terms of the role of market forces when information verifiability varies across product attributes. We tailor our analysis to view health claims through the lens of information economics and conclude by outlining the potential remedies for certain information failures through the regulation of health claims. In particular, we highlight the potential role of biomarkers that are used to assess disease risk reductions as a remedy for informational failures. Verifiable and authenticated information on such biomarkers related to long term health effects of functional foods and nutraceuticals could be used to remedy the informational failures. The information requirements for this transformation can be considered a public good and, thus, public provision and authentication of such information becomes the prima facie case for regulation of health claims.

Regulation of Health Claims (11)

The Codex Alimentarius Commission has proposed a health claim as "any claim establishing a relation between a food or a constituent of that food and health, (whether it is good health or a condition related to health (or disease)) ... or ... any claim which suggests that food has an impact on health." (12) In most countries such claims are highly regulated and closely associated with controls on advertising. (13) The general premise of regulating health claims is to prevent the public from being misled through communication of erroneous information. (14)

In 1984, the Kellog Company in the United States initiated the modern era of food product health claims, (15) soon followed by the rapid proliferation of health claims by food manufacturers. In due course this led to the promulgation of the Nutrition Labelling and Education Act of 1990, (16) mandating regulatory approval for health claims through the US Food and Drugs Administration (FDA). (17) Other countries and regions have subsequently implemented regulations of health claims, including the European Union and Canada.

Until relatively recently, regulation of health claims in Canada was undertaken under more general provisions related to advertising of foods. Section 2 of the Food and Drugs Act (18) defines advertisement as "any representation by any means whatever for the purpose of promoting directly or indirectly the sale or disposal of any food, drug, cosmetic or device." The definition of a label is "any legend, word, or mark attached to, included in, belonging to or accompanying any food, drug, cosmetic or device or package." (19) Sections 3 and 5 of the Food and Drugs Act establish requirements for food advertising. For example, section 5 (1) declares that no person shall advertise "any food in a manner that is false, misleading, or deceptive or is likely to create an erroneous impression regarding its character, value, quantity, composition, merit or safety." Canadian courts have interpreted this provision as imposing a strict liability offence which is subject to a defence of due diligence. (20) Section 3 of the Act prohibits product-specific disease risk reduction claims: "no person shall advertise any food, drug, cosmetic or device to the general public as a treatment, preventative or cure for any of the diseases, disorders or abnormal physical states referred to in Schedule A." (21)

Moves towards specific regulation of health claims in Canada began in 1998 when Health Canada published a Policy Paper on Nutraceuticals/Functional Foods and Health Claims on Food, (22) proposing the use of generic health claims similar to those allowed in the United States. The Food and Drugs Act was subsequently amended in 2003 to permit five generic health claims. (23) Generic health claims are applied to specific food groups (for example fruits and vegetables) or particular foods that have a specific compositional characteristic (such as fibre) and/or a specific nutrition (such as potassium). (24) These claims, once authorized, can be used on any food product that fits the specified conditions and has the required composition without further scrutiny by Health Canada. However, such claims cannot make reference to a specific food product. (25) Currently, product-specific disease risk reduction claims or product-specific biological role claims are allowed only as "therapeutic claims" that do not make references to any diseases or physiological states listed in Schedule A of the Food and Drug Act, including the majority of diet-related diseases.

Economic Rationale for Regulating Health Claims

In a fundamental sense, health claims represent information provided to consumers via product labels and advertising by sellers whose primary objective is to sell more of their product. (26) In general, economists are in agreement that the free flow of truthful and verifiable information facilitates the convergence of the value of resources used in the production process to the value placed by consumers on the benefits of consuming the associated product, leading to efficient resource allocation in an economy. (27) However, economists are also attentive to the fact that the free flow of truthful and verifiable information is neither the norm nor the likely objective of sellers who are looking for ways to sell more of their product.

Economists carefully examine situations in which the sellers' desire to sell more of their product may jeopardize the free flow of truthful and verifiable information, in extreme cases leading to the notorious market for "lemons" whereby poor quality products drive out good quality products. (28) Economists have asserted that the origin of early food regulations was closely linked to this "lemons" problem due to the adulteration and misbranding of food products. (29) The possibility of misleading consumers by claiming benefits that are, at best, doubtful and, at worst, simply non-existent provides a prima facie case for regulatory intervention to control the information that is permitted in advertisements and/or on labels. However, the role of market forces, manifested...