Economist finds more pluses than minuses in restaurant letter grades.

Letter grading of restaurants following inspection has substantial short-term benefits--as well as some drawbacks--according to Stanford University economist Phillip Leslie.

Mr. Leslie, who is assistant professor of strategic management at Stanford, has been studying the impact of Los Angeles County's report card-style letter grading, which went into effect in 1998.

"The lesson for counties is that it's always better to provide more information," Leslie told Food Protection Report (FPR).

His interest was in the effect that letter grades, prominently displayed on L.A. County restaurant windows, would have on consumers and the market in general.

"For an economist, this was an ideal case study. There was a sudden, dramatic change in the amount of information provided to the consumer, and we could then compare the before-and-after effects."

Leslie obtained county data on every restaurant inspection two years before and one year after the start of letter grading. He also reviewed restaurants' revenues during each quarter over the same period by analyzing sales tax data.

Finally, working with colleague Ginger Zhe Jin, assistant professor of economics at the University of Maryland, he analyzed hospitalization data from the California Office of Statewide Health Planning and Development to compare the number of food-related hospitalizations in Los Angeles County with those in the rest of California, as well as with the number of non-food-related hospitalizations in Los Angeles County.

Leslie found that letter grading resulted in a dramatic improvement in restaurant inspection scores. "We found that scores went up. About 25 percent of restaurants would have earned an A rating prior to 1998. Within a year after the new county law went into effect, well over 50 percent of restaurants scored an A," he said.

In addition, he discovered that consumers tended to choose restaurants with good grades. Specifically, Leslie found that establishments earning an A obtained an average of 5.7 percent higher revenue than before the grade cards were required. B-grade restaurants experienced an 0.7 percent increase. For C-grade restaurants, revenue decreased by 1 percent.

"After the grade cards came in, revenue was very sensitive to what grade a restaurant got," Leslie said. He could not calculate profits, however, since profits equal revenue minus cost, and he had no data on the costs restaurants had to incur to get an A rating.

More dramatically, the research revealed that grade cards caused a 20 percent decrease in the number of food-related hospitalizations in Los Angeles County, while a slight increase was seen elsewhere in the state, suggesting that the restaurants' improved cleanliness resulted in fewer illnesses. "We are convinced that the grade cards had a positive effect on health outcomes," Leslie said.

The research findings were originally released last year in the Quarterly Journal of Economics. Leslie is currently working on follow-up research that looks at what happened with hospitalizations for three years after grade cards were issued. "The positive impact on food-related hospitalizations seems to be sustained for all three years," he said. But he said it's not clear whether the benefits will be sustained in the long run.

Inflated Grade Scores Can Be a Problem

The analysis also suggested some massaging of the scores. For example, after the grade cards went into effect, a lot of restaurants scored exactly 90 during inspections, which is the minimum score for an A.

"Almost no restaurants in our analysis received an 88 or 89," Leslie said.

The researchers considered whether restaurants were simply exerting the minimum effort needed to get an A. "The problem with that hypothesis is that you have to assume restaurants have the ability to target a score of 90, which is highly unlikely," Leslie said.

A more plausible explanation, he believes, is that inspectors sometimes give restaurants higher scores than they deserve. "If you talk to inspectors, they will tell you stories of managers getting fired for getting a B grade. Some inspectors feel pressured by restaurants to give them an A when they are only a point or two below the cutoff. Inspectors give restaurants a break; it's human nature. The unfortunate truth is a lot of that is going on," Leslie said.

As a partial remedy, he suggested that grade cards could reflect the letter and the actual points scored. That approach would create separate problems, however. "All of a sudden, it will matter to restaurants if you get a 95 instead of a 90, so there is going to be additional pressure on inspectors over every single violation point," he said.

Industry Criticizes Letter Grades

The Golden Gate Restaurant Association has faulted Leslie's results because his finding of declines in food-related hospitalizations doesn't take into account the impact of food safety educational efforts by state and industry.

The industry also argues that letter grades are misleading and not a true reflection of long-term restaurant operations. Leslie said his findings disprove that contention. "Improvements that restaurants make with respect to physical equipment or structure, such as wellfunctioning refrigerators or better ventilation, are clearly long-lasting. Grade cards are especially informative about these changes. Our research shows that the grade cards cause a decrease in the incidence of hygiene violations related to the structural aspects of restaurants."

Statistically speaking, Leslie explained, although there is a small variation over time in hygiene scores at individual restaurants, there is a larger variation in hygiene quality across different restaurants.

"This is fundamentally why grade cards are more informative for consumers than they are likely to be misleading," he said.

"I don't understand why restaurants are opposed to letter grades," he added.

Leslie did have a final word of caution: "Grade cards are one tool for improving restaurant hygiene quality. They should not be seen as a substitute for training restaurant employees in safe food-handling practices or for having frequent inspections."

(Adapted, with permission, from Food Protection Report [www.food-protectionreport.com], a publication of Setanta Publishing, LLC, Vol. 20, No. 6, June 2004.)