Food Assistance

Because of the large number of infants enrolled in the Special Supplemental Nutrition Program for Women, Infants, and Children (WIC), WIC purchases of infant formula, according to industry estimates, account for more than half of this product's sales in the United States. During the 1980s, as WIC participation grew and the price of infant formula rose, infant formula became a large and growing portion of WIC costs. In 1989, the states were required by law to take steps to contain the cost of infant formula. These measures have primarily taken the form of state programs that award a contract to a manufacturer for the exclusive right to sell its infant formula to WIC participants. The manufacturer that wins the contract is billed by state WIC agencies for rebates on all infant formula purchased by WIC participants with vouchers at authorized retail outlets. The competitive bidding process has resulted in significant rebates to state WIC agencies for infant formula, dramatically reducing their costs. This report discusses (1) how prices in the infant formula market changed for non-WIC purchasers and WIC agencies after the introduction of sole-source rebates, (2) how key characteristics of the infant formula market may contribute to the size of the rebates offered by manufacturers, (3) whether evidence exists that non-WIC purchasers of infant formula subsidized WIC purchases through the prices they paid, and (4) whether the significant cost savings that WIC agencies have realized by using sole-source rebates for infant formula have implications for the use of rebates for other WIC products.

GAO noted that: (1) at about the time the WIC rebate requirement went into effect in 1989, the wholesale prices paid by non-WIC purchasers rose faster than usual while the net prices paid by WIC agencies decreased; (2) since few data are available on the factors that could have affected the price of infant formula, GAO could not analyze the extent to which the accelerated price rise in infant formula was due to the rebate requirement; (3) WIC agencies, which paid the same price as non-WIC purchasers between 1982 and 1989, paid significantly less for infant formula after the rebate requirement was implemented in 1989; (4) key characteristics of the infant formula market are the likely reason that manufacturers are able to offer WIC agencies significant rebates; (5) in particular, the method of marketing infant formula--through physicians' recommendations--contributes to strong brand loyalty among parents; (6) although GAO did not have access to the price and cost data that could determine definitively whether non-WIC consumers subsidized WIC through prices they paid for infant formula, GAO's analysis indicates that it is doubtful that such a subsidy has occurred; (7) a subsidy would occur if a manufacturer sold formula to WIC agencies for less than its cost of production and the price paid by non-WIC purchasers compensated for this loss; (8) although prices have differed substantially between the WIC and non-WIC markets, available evidence indicates that manufacturers are still covering their production costs in the WIC market; (9) furthermore, it is unlikely that manufacturers would have an incentive to sell formula at a loss to over 50 percent of the market--the share accounted for by WIC; (10) rebates for other food products purchased by WIC can help reduce the program's costs but probably will not generate the level of savings generated by infant formula rebates; (11) savings for other products would be lower than for infant formula in part because no other single product accounts for as large a portion of WIC costs as infant formula and because the market characteristics of other products make it likely that manufacturers would offer smaller rebates per item; and (12) ultimately, the states may find that other cost-reducing options are more effective than rebates in generating savings for some WIC foods other than infant formula.