Food Assistance
FNS Could Take Additional Steps to Contain WIC Infant Formula Costs Gao ID: GAO-06-380 March 28, 2006The Special Supplemental Nutrition Program for Women, Infants and Children (WIC) provides food, nutrition education, and health care referrals to close to 8 million low-income pregnant and postpartum women, infants, and young children each year. About a quarter of these participants are served using rebate savings from contracts with infant formula manufacturers. WIC is administered by the Department of Agriculture's Food and Nutrition Service (FNS). To better understand infant formula cost containment, this report provides information on: (1) factors that influence program spending on infant formula, (2) how the level of savings resulting from infant formula cost containment has changed and the implications of these changes for the number of participants served; and (3) steps federal and state agencies have taken to contain state spending on infant formula.
Rebates drive state spending on infant formula but use of non-rebated formula increases state costs. In fiscal year 2004, states paid an average of $0.20 per can for milk-based concentrate formula, a savings of 93 percent off the wholesale price. However, states also allow some use of non-rebated formula that can cost states more than 10 times as much as contract formulas. For example, in 2004, 8 percent of infant formula provided to WIC participants was non-rebated. Rebate savings from infant formula cost-containment contracts have allowed WIC to serve an additional 2 million participants per year, but recent increases in the cost per can of formula could lead to reductions in the number of participants served with rebates. Rebate savings have remained near $1.6 billion per year since 1997 after adjusting for inflation, but the amount states pay per can of infant formula has increased since 2002. We estimated that in 2004, if the cost per can of formula increased in every state by as much as it did in two states, approximately 400,000 fewer participants would have been able to enroll in WIC nationwide. State and federal agencies have both taken steps to contain WIC infant formula costs, but FNS also focuses on sustaining the cost-containment system. States have sought to increase their costs savings through their infant formula contracts--for example, by joining coalitions to leverage greater discounts. Some also try to restrict the use of the more expensive non-contract formulas. FNS, in turn, helps states to contain costs through its review of contracts and through policy and guidance. For example, FNS reduced--but did not eliminate--the price increases that can result from the introduction of new, more costly formulas. FNS has also used its oversight authority to ensure that all interested manufacturers can compete for state infant formula contracts in an effort to maintain the long-run sustainability of the infant formula cost-containment system.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-06-380, Food Assistance: FNS Could Take Additional Steps to Contain WIC Infant Formula Costs
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Report to Congressional Requesters:
United States Government Accountability Office:
GAO:
March 2006:
Food Assistance:
FNS Could Take Additional Steps to Contain WIC Infant Formula Costs:
GAO-06-380:
GAO Highlights:
Highlights of GAO-06-380, a report to congressional requesters:
Why GAO Did This Study:
The Special Supplemental Nutrition Program for Women, Infants and
Children (WIC) provides food, nutrition education, and health care
referrals to close to 8 million low-income pregnant and postpartum
women, infants, and young children each year. About a quarter of these
participants are served using rebate savings from contracts with infant
formula manufacturers. WIC is administered by the Department of
Agriculture‘s Food and Nutrition Service (FNS). To better understand
infant formula cost containment, this report provides information on:
(1) factors that influence program spending on infant formula, (2) how
the level of savings resulting from infant formula cost containment has
changed and the implications of these changes for the number of
participants served; and (3) steps federal and state agencies have
taken to contain state spending on infant formula.
What GAO Found:
Rebates drive state spending on infant formula but use of non-rebated
formula increases state costs. In fiscal year 2004, states paid an
average of $0.20 per can for milk-based concentrate formula, a savings
of 93 percent off the wholesale price. However, states also allow some
use of non-rebated formula that can cost states more than 10 times as
much as contract formulas. For example, in 2004, 8 percent of infant
formula provided to WIC participants was non-rebated.
Rebate savings from infant formula cost-containment contracts have
allowed WIC to serve an additional 2 million participants per year, but
recent increases in the cost per can of formula could lead to
reductions in the number of participants served with rebates. Rebate
savings have remained near $1.6 billion per year since 1997 after
adjusting for inflation, but the amount states pay per can of infant
formula has increased since 2002. We estimated that in 2004, if the
cost per can of formula increased in every state by as much as it did
in two states, approximately 400,000 fewer participants would have been
able to enroll in WIC nationwide.
State and federal agencies have both taken steps to contain WIC infant
formula costs, but FNS also focuses on sustaining the cost-containment
system. States have sought to increase their costs savings through
their infant formula contracts”for example, by joining coalitions to
leverage greater discounts. Some also try to restrict the use of the
more expensive non-contract formulas. FNS, in turn, helps states to
contain costs through its review of contracts and through policy and
guidance. For example, FNS reduced”but did not eliminate”the price
increases that can result from the introduction of new, more costly
formulas. FNS has also used its oversight authority to ensure that all
interested manufacturers can compete for state infant formula contracts
in an effort to maintain the long-run sustainability of the infant
formula cost-containment system.
National average net price per can of milk-based concentrate, 2000-
2005:
[See PDF for image]
[End of figure]
What GAO Recommends:
GAO recommends that the Secretary of Agriculture consider providing
guidance to help prevent infant formula costs from rising when
manufacturers introduce more costly formulas during a contract, and
that the Secretary consider ways to more effectively restrict use of
non-rebated formulas by WIC participants.
www.gao.gov/cgi-bin/getrpt?GAO-06-380.
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Cindy Fagnoni at (202)
512-7215 or fagnonic@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Rebates Drive WIC Infant Formula Costs More Than Any Other Factor, but
Use of Non-Contract Infant Formulas also Plays a Role:
Rebate Savings Have Been Used to Serve about a Quarter of All
Participants in Recent Years, but If Rebate Savings Continue to
Decline, Fewer People Will Be Able to Participate:
State and Federal Agencies Take Steps to Contain Costs; however, FNS
also Focuses on Sustaining the Competitive Bidding System:
Conclusion:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II: Use of Non-Contract, Non-Exempt and Exempt Infant Formula
by State, Fiscal Year 2004:
Appendix III: GAO Contacts and Staff Acknowledgments:
Related GAO Products:
Figures:
Figure 1: WIC Infant Infant Formula Rebate Process:
Figure 2: Type of Infant Formulas and Percentage of All WIC Formula
Issued FY 2004:
Figure 3: Total Rebate Savings, 1990-2004:
Figure 4: National Weighted Average Net Price per Can of Milk-Based
Concentrate:
Figure 5: Change in Net Price Paid under Newly Awarded Contracts:
Figure 6: Percentage Contract, Exempt, and Non-Contract, Non-exempt
Infant Formula Provided:
Abbreviations:
ARA: arachidonic acid:
DHA: docosahexaenoic acid:
FNS: Food and Nutrition Services:
FY: fiscal year:
NEATO: New England and Tribal Organization coalition:
USDA: United States Department of Agriculture:
WIC: Special Supplemental Nutrition Program for Women, Infants, and
Children:
United States Government Accountability Office:
Washington, DC 20548:
March 28, 2006:
The Honorable Tom Harkin:
Ranking Minority Member:
Committee on Agriculture, Nutrition, and Forestry:
United States Senate:
The Honorable Arlen Specter:
United States Senate:
The Honorable George Miller:
House of Representatives:
The Special Supplemental Nutrition Program for Women, Infants and
Children (WIC) provides food, nutrition education, and health care
referrals to close to 8 million low-income pregnant and postpartum
women, infants, and young children each year. The 2 million infants who
receive WIC benefits each year account for about half of infants born
in the United States. Congress allotted just over $5.2 billion to fund
the WIC program for fiscal year 2005, of which approximately 16 percent
is typically used to purchase infant formula, the most expensive item
supplied under the food grant. The U.S. Department of Agriculture's
(USDA) Food and Nutrition Service (FNS) oversees and provides guidance
to the state and local agencies that implement the WIC program.
States contain the cost of infant formula using a competitive bidding
process that awards sole-source contracts to infant formula
manufacturers. This competitive bidding process allows infant formula
manufacturers to compete for the contracts by offering sizeable
discounts to the states on the infant formula that WIC participants
purchase. Three infant formula companies currently compete and serve
WIC participants--Mead Johnson, Ross Laboratories, and Nestlé. With
just three manufacturers competing for WIC contracts, infant formula is
among the most concentrated markets in the United States.[Footnote 1]
State WIC agencies provide most of their WIC infants with one of the
contract manufacturer's milk-based or soy-based infant formulas
designed for healthy infants. Infants can also be provided with a "non-
contract" infant formula if prescribed by a medical professional. There
are two types of non-contract infant formula. "Exempt" infant formulas
are designed for infants with specific medical or dietary problems, and
"non-contract, non-exempt" infant formulas are designed for healthy
infants but manufactured by a company other than the contract
manufacturer. States do not receive rebates on non-contract infant
formulas.
WIC participants typically purchase infant formula from stores at the
full retail price using a voucher or coupon. The voucher specifies the
brand and amount of infant formula the participant can purchase. The
store then bills the state, and to obtain the price discounts, states
then send the contract manufacturer an invoice listing the number of
cans of contract brand infant formula purchased. The manufacturer, in
turn, provides discounts to the state in the form of rebates for each
can of infant formula purchased.
States use the savings generated by these cost-containment contracts to
serve additional participants. Figure 1 depicts the transactions in the
rebate process.
Figure 1: WIC Infant Formula Rebate Process:
[See PDF for image]
[End of figure]
In recent years, some states have seen their savings from cost-
containment efforts decline, raising concern about the implications
that reduced rebates might have on the WIC program since more than one-
quarter of WIC participants are served with rebates. To better
understand factors that affect state spending on infant formula and the
implications of infant formula cost containment for the WIC program,
this report will provide information on: (1) factors that influence
program spending on infant formula, including the role of rebate
savings that states receive through infant formula cost-containment
contracts; (2) how the level of savings resulting from infant formula
cost containment has changed over the past 5 years and the implications
of these changes for the number of participants served; and (3) steps
federal and state agencies have taken to contain state spending on
infant formula.
To address these research objectives, we analyzed administrative data
on program participation, food costs, and total rebates provided to us
by FNS for the years 1999 through 2004, and information on rebates
obtained by individual states per can of milk-based concentrate infant
formula for fiscal years 2000 through 2005. Using FNS data, we
calculated trends in the average per-can cost of milk-based concentrate
infant formula in the 50 states plus the District of Columbia between
2000 and 2005, as well as trends in total rebates, and trends in the
share of participants served using rebate savings. We also used this
data to estimate the potential impact of reduced rebates on program
participation under three alternate scenarios. To better understand the
factors that affect program spending on infant formula, we surveyed 50
state WIC programs and the District of Columbia to obtain additional
information about their infant formula contracts. We achieved a 100
percent response rate. We also reviewed literature on factors that
influence infant formula spending, and interviewed several state and
local WIC directors, all three infant formula manufacturers currently
participating in the WIC market, and policy experts with an interest in
WIC infant formula cost containment. We performed this work between
April 2005 and March 2006 in accordance with generally accepted
government auditing standards. See appendix I for additional
information on scope and methodology.
Results in Brief:
State spending on infant formula is determined primarily by the
discounts, in the form of rebates, that manufacturers offer, but the
use of infant formula not covered by contracts with manufacturers can
also affect state spending on infant formula. Over 90 percent of infant
formula provided through the WIC program is covered by cost-containment
contracts with manufacturers. In fiscal year 2004, states paid, on
average, $0.20 after rebates per can for milk-based concentrate infant
formula with a wholesale price of $2.60 to $3.57. The amount states pay
can vary significantly--from as low as $0.07 per can of milk-based
concentrated infant formula to as high as $0.80 per can. The amount of
rebate savings depends primarily on the rebates offered to states by
manufacturers. The rebates manufacturers offer, in turn, can be
affected by factors that states have some control over, including the
extent to which a WIC contract will help a manufacturer market its
products to non-WIC consumers and the accuracy of state systems used to
bill manufacturers for infant formula purchased by WIC participants.
State spending on infant formula is also affected by spending on non-
contract infant formulas for which states do not receive rebates,
including exempt infant formulas and non-exempt infant formulas
produced by another manufacturer. Non-contract infant formulas can cost
states more than 10 times as much as contract infant formulas;
therefore, even modest use can drive up state costs. Over the past 5
years, the use of non-contract, non-exempt infant formulas has fallen
somewhat, but use of exempt infant formulas has risen.
The total amount of money state WIC agencies have saved on infant
formula through their cost-containment contracts has been relatively
stable since 1997, but if recent increases in the average price states
pay per can of infant formula continue, the number of participants that
can be served with rebate savings is likely to fall. Total savings from
rebates, which increased from about $800 million in 1990 to more than
$1.6 billion in 1997, have remained near $1.6 billion per year since
that time after adjusting for inflation. In 2004, rebate savings
enabled the WIC program to serve an additional 2 million people--about
a quarter of all participants. In recent years, the average amount
states pay per can of infant formula purchased through WIC increased as
the rebates manufacturers offered declined and manufacturers introduced
new, more expensive infant formulas. Both of these trends contributed
to an increase in the price states pay for a can of milk-based
concentrated infant formula from $0.15 per can in 2002 to $0.21 per can
in 2005, on average, even after adjusting for inflation. When states
pay more per can, they cannot serve as many participants. We estimated
that if the average rebate states received per can had fallen to 75
percent of wholesale price in 2004--requiring states to pay
approximately $0.89 for a can of milk-based concentrate with a
wholesale price of $3.57--approximately 400,000 fewer participants
would have been able to enroll in WIC nationwide.
State and federal administrators have taken steps to contain the costs
of infant formula, but federal efforts also focus on maintaining the
long-run sustainability of the competitive bidding system by ensuring
that all interested infant formula manufacturers can compete for WIC
contracts. States have sought to minimize the cost of infant formula
through their contracting and infant formula provision practices. For
example, 30 states[Footnote 2] have joined coalitions made up of two or
more state WIC agencies in an effort to maximize cost savings by
sharing the costs of administering WIC contracts and leverage greater
discounts. In addition, recognizing the high cost of non-rebated infant
formula, 12 states do not provide non-contract, non-exempt infant
formula to WIC participants. Other states rely on the federal
regulation requiring medical documentation to limit the use of these
more expensive infant formulas. Despite these efforts, use of non-
rebated infant formulas varies significantly by state, from a low of 0
to a high of 25 percent. FNS has also taken steps to contain infant
formula costs. For example, FNS established a regulation requiring
manufacturers to provide states with the same percent discount on all
infant formulas covered by the contract, even new, more costly infant
formulas introduced while a contract is in effect. This requirement
helps, but does not entirely prevent states from incurring cost
increases when manufacturers introduce infant formulas with higher
wholesale prices. Because infant formulas with higher wholesale prices
continue to cost more per can, state costs can escalate if
manufacturers replace more commonly used infant formulas with more
expensive ones during a contract as they did in some states and
localities according to state and local WIC directors. To ensure the
long-run sustainability of the cost-containment system, FNS has also
used its oversight authority to ensure that all manufacturers can
compete for state infant formula contracts regardless of their share of
the market. For example, FNS does not approve contract provisions
designed to increase state cost savings when it concludes that the
provisions could limit competition by giving one or more companies a
competitive advantage.
To help states preserve rebate savings generated through infant formula
cost containment, we recommend that the Secretary of the Department of
Agriculture consider providing guidance related to product changes to
ensure that state costs do not increase when infant formula
manufacturers replace the most commonly used infant formulas with new,
more expensive infant formulas during a contract. In addition, we
recommend that the Secretary consider ways to more effectively restrict
issuance of non-rebated infant formulas to WIC participants.
Background:
The Special Supplemental Nutrition Program for Women, Infants and
Children (WIC) was established in 1972 to provide food, nutrition
education, and health care referrals to low-income pregnant and
postpartum women, infants, and young children. The program is
administered by FNS in conjunction with state and local health
departments and related agencies. WIC is almost entirely federally
funded. WIC is not an entitlement program; Congress does not set aside
funds to allow every eligible individual to participate in the program.
Instead, WIC is a federal grant program for which Congress authorizes a
specific amount of funds each year. USDA provides funding for food and
nutrition services and administration. Both funding and participation
have increased each year since fiscal year 2000. Congress also
typically provides for a contingency fund to ensure that adequate
resources are available for the program if unanticipated costs arise.
Infant Formula Rebate Savings:
WIC participants typically receive food benefits in the form of
vouchers or coupons that they redeem at authorized retail vendors to
obtain, at no cost to the participants, certain approved foods,
including infant formula.[Footnote 3] State WIC agencies then reimburse
the retail vendors for the food purchased by WIC participants. Since
1989, state WIC agencies have been required by law to contain the cost
of infant formula using a competitive bidding process to award sole-
source contracts unless they can demonstrate that an alternative method
would yield the same or greater cost savings.[Footnote 4] Manufacturers
agree to provide a rebate to the state WIC agency for every can of
infant formula purchased under the WIC contract, and the state awards
the contract to the bidder offering the lowest net wholesale price
after subtracting the rebate from the cost of infant formula.[Footnote
5] In exchange, the state provides the contract brand of infant formula
to most infants enrolled in the program except those that are
breastfeeding exclusively and those with a medical condition that
requires the use of a non-contract infant formula. Rebates have become
an important source of funding for the WIC program. In 2004, rebates
totaled more than $1.6 billion and funded the benefits provided to
about a quarter of WIC participants.
FNS Review of Contracts:
Contracts for WIC infant formula are between states and infant formula
manufacturers. States are responsible for issuing requests for bids and
drafting contract provisions according to state contracting
requirements. Typically, a WIC agency will draft a bid solicitation and
obtain state approval for the contract language. Once the state
approves the solicitation, the WIC agency will submit it to the FNS
regional office for review. The regional office ensures that the
contract adheres to all federal requirements and may suggest ways to
improve the contract. FNS headquarters reviews the contract for final
approval. After approval, the contracting process is conducted by the
state.
Types of Infant Formula:
Infant formula comes in three physical forms: liquid concentrate,
powder, and ready-to-feed. Infants may receive up to 31 13-ounce cans
of liquid concentrate per month through WIC, or roughly the equivalent
amount of powdered or ready-to-feed infant formula. Most infants are
provided an infant formula that is covered by the state's cost-
containment contract. There are three categories of infant formula
provided to WIC participants:
* Contract brand infant formula is produced by the contract
manufacturer and is suitable for routine use by the majority of healthy
full-term infants. These include milk-based and soy-based infant
formulas and could include milk-and soy-based infant formulas enhanced
with DHA and ARA,[Footnote 6] lactose-free infant formula, added-rice
infant formulas, and easy-to-digest infant formulas.[Footnote 7]
"Contract brand infant formula" also includes new infant formulas
introduced by the contract manufacturer after the contract is awarded,
with the exception of infant formula under the following "exempt"
category.
* Exempt infant formula is represented and labeled for use by infants
with medical conditions such as inborn errors of metabolism, low birth
weight, or other unusual medical or dietary problems that require that
they use a more specialized infant formula.[Footnote 8]
* Non-contract brand non-exempt infant formula is all infant formula
produced by a manufacturer other than the contract manufacturer that is
suitable for routine use by the majority of healthy full-term infants.
FNS regulations require local WIC agencies to obtain medical
documentation to provide all exempt infant formulas and all non-
contract, non-exempt infant formulas.[Footnote 9] Medical
documentation, for these purposes, is a determination by a licensed
health care professional authorized to write medical prescriptions
under state law. A licensed health care professional must make a
medical determination that an infant has a medical condition that
dictates the use of these infant formulas.
Rebates Drive WIC Infant Formula Costs More Than Any Other Factor, but
Use of Non-Contract Infant Formulas also Plays a Role:
State spending on infant formula depends on the discounts, in the form
of rebates, that states receive from manufacturers, and use of non-
contract infant formula. Rebates are the most important factor driving
state spending on infant formula because such a large proportion of WIC
infant formula is purchased under cost-containment contracts with
manufacturers. According to infant formula manufacturers, the
attractiveness of a WIC contract depends, at least in part, on factors
over which states have some control, including the extent to which a
WIC contract will help a manufacturer market its products to non-WIC
consumers; state-level administration of WIC contracts; and the
provision of powder, concentrate, and ready-to-feed infant formula to
WIC participants. These factors, in turn, could affect whether or not a
manufacturer bids on a contract and the level of rebates offered by the
manufacturers. The provision of non-rebated infant formula also affects
state spending.
States Receive Rebates on Most Infant Formula Purchased through WIC:
In 2004, states received rebates on approximately 92 percent of the
infant formula provided to WIC participants, and saved, on average, 93
percent off the wholesale price. As a result, states paid an average of
$0.20 per 13-ounce can of milk-based infant formula with a wholesale
price of $2.60 to $3.57. However, while average rebates were high,
rebate levels varied significantly by state. For example, in 2004,
Virginia and South Carolina were paying as little as $0.07 per can of
milk-based concentrate after rebates, while New York was paying $0.80
per can after rebates.
Representatives of the three infant formula manufacturers identified
several factors that influence how "attractive" they find a state
contract. The attractiveness of a contract, in turn, could influence
whether a manufacturer bids on a contract and the size of the rebate
offered. Many of the factors cited by manufacturers are things over
which states have at least some control.
Shelf space and product placement: WIC-brand infant formulas may get
more shelf space than competing brands, particularly in stores that
serve areas with large concentrations of WIC participants. Because WIC
participants purchase such a large share of infant formula in some
stores, retailers tend to stock more of the WIC brand of infant
formula. In addition to shelf space, WIC-brand products may be placed
at eye level so that they are easy to spot.
All three infant formula manufacturers noted the importance of shelf
space and product placement to their marketing strategies. In addition,
31 of the 51 state WIC directors that responded to our survey felt that
shelf space was moderately, very, or extremely important to
manufacturers in determining how much they bid on an infant formula
contract. While WIC agencies do not have direct control over shelf
space and product placement, some include stocking requirements in
their contracts with vendors.
State policies regarding authorization of WIC vendors can also impact
manufacturers' access to non-WIC consumers. Some states have authorized
WIC vendors that sell exclusively or primarily to WIC participants.
Manufacturers have less access to non-WIC consumers if more WIC
participants purchase their infant formula at these "WIC-only" stores.
In those cases, retailers that serve the non-WIC population in the area
may be less likely to focus on product placement or devoting shelf
space to the WIC brand--two factors that benefit manufacturers in their
drive to reach non-WIC consumers.
Physician and Hospital Recommendations: Having WIC contracts could also
benefit manufacturers through physician recommendations. State WIC
programs often work with physicians to educate them about the program
and the requirement that most WIC participants use the contract brand
of infant formula. Physicians may decide to recommend the WIC brand of
infant formula to all patients to avoid having to differentiate between
those enrolled and not enrolled in WIC. Similarly, some hospitals agree
to provide WIC-brand infant formula to new mothers so that they won't
have to switch infant formulas after they leave the hospital. It may be
easier for hospitals to provide the WIC-brand infant formula to all new
mothers. Moreover, two of the infant formula companies that participate
in the WIC market are divisions of pharmaceutical companies that
primarily market their products directly to physicians and hospitals
while also marketing, though to a lesser extent, directly to consumers.
States vary in the extent to which they emphasize doctor and hospital
outreach.
Product Innovation: All three manufacturers cited the central role of
product innovation in their business strategies. Manufacturers seek to
compete on the basis of product innovation and product quality despite
the fact that infant formula is a relatively homogeneous
product.[Footnote 10] Manufacturers said that certain state practices
could make it more difficult to pursue their core strategy of
innovation, and the development, distribution, and marketing of new
products. These practices include the use of long-term contracts,
requirements that manufacturers notify states of product changes in
advance of introducing new products into the market, provisions that
allow states to unilaterally extend contracts without requesting the
consent of the manufacturer, state restrictions on the ways in which
manufacturers market their infant formula, and restrictions on their
interactions with physicians. While these state practices could inhibit
innovation, many are put in place to protect states from increases in
infant formula costs.
State Billing Systems: All three manufacturers cited the accuracy of
state billing systems as a key factor they consider when developing
bids, and all stated that the vast majority of state billing systems
need improvement. One manufacturer said that most states rely on
antiquated information technology that is prone to costly billing
errors. According to FNS officials, disputes over billing for infant
formula rebates have long been a problem in the WIC program. In the
past, some states requested reimbursement from infant formula
manufacturers for every can of infant formula listed on redeemed
vouchers. However, some WIC participants did not purchase every can of
infant formula listed on the voucher. In these instances, the
manufacturers claimed they were being billed for purchases that were
never made. Partly in response to these disputes, a new provision was
included in the Child Nutrition and WIC Reauthorization Act of 2004
that requires states to bill only for infant formula actually
purchased.
Contract size: State WIC directors said they believe that contracts
that cover more infants yield higher rebates; however, the
manufacturers said that the largest contracts may not draw their
highest bids. A few state WIC directors expressed concerns that new
provisions in the Child Nutrition and WIC Reauthorization Act of 2004
limiting the size of state coalitions and requiring separate contracts
for milk-based and soy-based infant formula could reduce the size of
contracts and the size of rebates. However, manufacturers noted that
costly shifts in demand occur when very large states or coalitions
change contractors. Manufacturers must be able to respond to these
shifts by quickly increasing or decreasing production, and must,
therefore, consider their own production capacity when they bid on very
large contracts.
Contract Provisions: Manufacturers noted that states sometimes include
contract provisions that manufacturers consider complex, ambiguous, and
extraneous and inclusion of these provisions could affect rebates. For
example, manufacturers cited provisions that increase the potential
liabilities of manufacturers, give states control over manufacturer
activities, or require manufacturers to provide products or services
not directly related to the sale of infant formula--such as sponsoring
conferences, providing literature on nutrition education, or providing
free infant formula--as particularly unattractive. Because states
rarely modify contract provisions in response to manufacturer concerns,
manufacturers may respond to these provisions by either not bidding on
contracts or offering lower rebates.
Provision of Powder, Concentrate and Ready-to-Feed Infant Formulas: All
three manufacturers cited the importance of state policies governing
the provision of powder, concentrate, and ready-to-feed infant
formulas. Historically, the WIC program has issued more concentrate
than powder, but there has been an increase in the use of powder in the
WIC program since 2000. Because ready-to-feed infant formula is the
most expensive, WIC regulations allow WIC agencies to provide it only
in certain circumstances[Footnote 11] Twenty-nine states were able to
provide us with data on their use of the different forms of infant
formula in both 2000 and 2004. In 2000, 55 percent of all infant
formula issued in those states was in the form of liquid concentrate.
By 2004, liquid concentrate represented only a third of all infant
formula provided to WIC participants in those states. Powder use may
have increased because it can be more convenient for mothers who are
partially breastfeeding because mothers can reconstitute small amounts
of powdered infant formula at a time, whereas liquid concentrate must
be diluted all at once. Manufacturers did not provide information on
how the provision of different forms of infant formula might affect
their bids on infant formula contracts. However, if concentrate is more
profitable, the shift to powder could reduce manufacturer profits--and
the rebates they offer to states. Alternatively, if powder is more
profitable or there are no differences in the profitability of
different forms, the shift to powder might not affect rebates.
Use of Non-Contract Infant Formula Increases Formula Costs:
Although non-contract infant formula, including both exempt and non-
contract, non-exempt infant formula, accounts for less than 10 percent
of infant formula purchased through WIC, its use can have a significant
impact on total infant formula spending because it can cost as much as
10 to 20 times more per can than rebated formula. Among the 27 states
that were able to provide us with data on their use of contract,
exempt, and non-contract, non-exempt formulas in both 2000 and 2004,
use of exempt formula increased and use of non-contract, non-exempt
formula decreased over the 4-year period.[Footnote 12] Figure 2 shows
the average share of each type of formula provided to WIC participants
in 43 states in 2004.
Figure 2: Type of Infant Formulas and Percentage of All WIC Formula
Issued FY 2004:
[See PDF for image]
[End of figure]
Rebate Savings Have Been Used to Serve about a Quarter of All
Participants in Recent Years, but If Rebate Savings Continue to
Decline, Fewer People Will Be Able to Participate:
Rebate savings have remained relatively stable since 1997 after
adjusting for inflation, but if recent increases in the amount states
pay for each can of infant formula they purchase through WIC continue,
fewer participants will likely be served with rebates in the future.
About a quarter of all WIC participants are served using rebate
savings. However, over the past 5 years, the amount states pay for
infant formula has increased somewhat, particularly among states that
have awarded new contracts. There is some concern that if the price
states must pay for infant formula continues to increase, fewer
participants will be served using rebates. We estimated that in 2004,
if all states had paid as much per can of infant formula as the two
states with the lowest rebates, approximately 400,000 fewer children
would have been able to enroll in WIC nationwide.
Total Rebate Savings Have Been Stable but the Amount States Pay Per Can
of Infant Formula Has Increased Since 2002:
After increasing substantially in the years prior to 1997, the total
amount that states received from manufacturers in infant formula
rebates has remained relatively constant since that time. As shown in
figure 3, rebate savings have remained at about $1.6 billion per year
after adjusting for inflation.
Figure 3: Total Rebate Savings, 1990-2004:
[See PDF for image]
[End of figure]
The percent of participants that have been served using rebates has
also remained relatively stable over the past 5 years, at about 25
percent. In 2004, some 2 million participants were served using rebate
dollars.
Although both total rebate savings and the share of participants served
using rebate savings has changed little in recent years, we found that
the amount states pay per can of infant formula, after taking rebates
into account, has increased over the past few years. The average net
price states paid per can of milk-based concentrate infant formula
increased from $0.15 in fiscal year 2002 to $0.21 in fiscal year 2005
after adjusting for inflation.[Footnote 13]
Figure 4: National Weighted Average Net Price per Can of Milk-Based
Concentrate:
[See PDF for image]
[End of figure]
Because most contracts lock in the price states pay for infant formula
for up to 5 years, average prices tend to move slowly. The price
increases are more apparent among contracts that were newly awarded
each fiscal year. Among newly awarded contracts, there was a fourfold
increase in the average net price of a can of infant formula over the 3-
year period, from $0.10 in 2002 to $0.43 in 2005. Figure 4 shows
rebates for newly awarded contracts between fiscal year 2000 and fiscal
year 2005.[Footnote 14]
Figure 5: Change in Net Price Paid under Newly Awarded Contracts:
[See PDF for image]
[End of figure]
Although the amount states pay for infant formula varies by state, the
increases in the average net price were not driven by large increases
in just a few states, but reflect higher wholesale prices and lower
rebates nationwide. Eight of the 9 states that implemented a new
contract in 2002 did so at either the same net price as under their
previous contract or at a lower net price. This trend shifted over the
next few years. By 2004, a majority of states implementing new
contracts saw their net price increase, and in 2005, every state that
implemented a new contract did so at a higher net price than under its
previous contract.
The extent to which net prices increased among newly awarded contracts
varied, but most states did not experience significant price increases.
Among states that implemented new contracts in 2005, the average net
price for a can of milk-based concentrate was $0.43 after rebates. This
represented a discount of about 87 percent off the wholesale price. In
a few states, however, the net price states paid for milk-based
concentrate under their contracts was significantly higher than the
average. New York implemented a contract in 2004 that provided milk-
based concentrate for a net price of $0.80 per can, a discount of 75
percent off the wholesale price. Similarly, North Dakota implemented a
contract in 2005 that provided a net price of 0.83 per can, a discount
of 77 percent off the wholesale price.[Footnote 15]
The impact of reduced rebates per can of infant formula was exacerbated
by an increase in the use of more expensive types of infant formulas.
Since the early 1990s, infant formula manufacturers have diversified
their product lines to include a greater number of infant formula
types, all of which have higher wholesale prices than traditional
unenhanced milk-and soy-based infant formulas. The most significant
change in infant formulas came with the introduction of DHA and ARA
enhanced infant formulas starting in 2002. All three manufacturers have
introduced DHA and ARA enhanced infant formulas at prices that are
higher than the unenhanced versions. At the time of our survey in mid-
2005, 23 states reported that they issue enhanced infant formula as
their primary contract brand; only 8 states reported that they do not
approve enhanced infant formula.[Footnote 16] In addition, four of the
five most recent contracts to be awarded specified the enhanced infant
formulas as the primary contract brand.[Footnote 17] The increased use
of infant formulas with a higher wholesale price may have contributed
to the increase in the net price of infant formula under new cost-
containment contracts if infant formula companies sought higher
compensation for their more expensive products.
Higher Infant Formula Costs Could Reduce Participation by Nearly
400,000:
Increases in the cost of infant formula have not yet had a significant
impact on the share of participants served with rebate savings, but if
infant formula costs were to continue to increase, it is likely that
fewer participants would be served using rebate savings in the future
absent funding increases. To illustrate how infant formula prices can
affect WIC participation, we considered how three different scenarios
would have affected participation in WIC during fiscal year 2004. We
estimated the number of WIC participants that would have been served
using rebate savings if the average rebate in 2004 had been 90 percent
of the wholesale price of infant formula--slightly less than the actual
discount of 93 percent. We also considered scenarios reflecting larger
reductions in rebates, to 85 percent and 75 percent of the wholesale
price of infant formula.[Footnote 18] We compared our estimates to the
actual number served using rebates in fiscal year 2004.[Footnote 19]
We found that with even a modest reduction in rebates across all
states, fewer participants could be served:
* If rebates were equal to 90 percent of the wholesale price in all
states in 2004, about 70,000 fewer participants would have received WIC
benefits.
* If rebates were equal to 85 percent of the wholesale price in all
states in 2004, about 175,000 fewer participants would have received
WIC benefits.
* If rebates had fallen to 75 percent of the wholesale price in all
states in 2004, the program would have been able to serve about 400,000
fewer participants.
Because most states are still under existing contracts negotiated in
prior years, it would take some time for the impact of reduced rebates
to be fully realized. Many states will be under their current contracts
through 2006 and 2007 and many have contracts that continue through
2008 or 2009 if they opt to extend their contracts as permitted. State
WIC directors in 45 of 51 states reported that their infant formula
contracts allow for extensions ranging from 1 year to 4 years. However,
if the recent decline in rebates continues, there could be an impact on
the number of participants served using rebates within the next few
years.
State and Federal Agencies Take Steps to Contain Costs; however, FNS
also Focuses on Sustaining the Competitive Bidding System:
While both states and FNS try to contain costs, FNS also works to
sustain the competitive bidding system while states work to maximize
their own savings. State WIC agencies have taken a variety of actions
to promote cost containment. For example, some have joined coalitions
or barred the provision of non-contract, non-exempt infant formula.
Similarly, FNS promotes cost savings through a requirement that infant
formula manufacturers provide the same percent discount for all infant
formulas, even new infant formulas introduced when a contract is
already in effect.[Footnote 20] However, FNS attempts to balance its
efforts to promote cost containment with its larger goal of sustaining
the competitive bidding system. For example, in some cases, FNS did not
approve provisions in cost-containment contracts that would save states
money if FNS believed these provisions would reduce competition.
States Have Taken Steps to Reduce Infant Formula Costs:
Through their infant formula contract bid solicitations, states have
taken steps to promote cost containment. For example, by including
provisions they believe manufacturers might find favorable or by
omitting provisions they believe would have a negative impact on their
rebate savings, states have sought to maximize their savings. As other
examples:
* Thirty states have joined coalitions in an effort to share streamline
the bidding process and leverage greater bargaining power when
negotiating contracts with manufacturers.
* Some states allow contract extensions only if both the state and the
infant formula contractor agree, rather than providing for unilateral
contract extensions at state option.
States have also taken steps to limit the amount they spend on non-
contract infant formulas:
* Sixteen states purchase some or all of the exempt infant formula that
is provided to participants directly from manufacturers or from low-
cost providers.
* Twelve states do not provide more expensive non-contract brand, non-
exempt infant formula to WIC participants, and nine states limit
statewide use of non-contract, non-exempt infant formula to a specified
share of all infant formula provided. In addition, 27 states limit the
amount of time that non-contract, non-exempt infant formulas can be
issued to participants.
* Eight states do not provide more expensive enhanced infant formula.
Despite these state efforts to contain costs, opportunities remain for
more states to further reduce the use of non-rebated infant formulas.
Use of non-contract, non-exempt infant formula varies. Twelve states
reported that they have policies in place not allowing the use of non-
contract, non-exempt infant formula. Of the 43 states that provided
complete information on their average monthly usage of contract,
exempt, and non-contract, non-exempt infant formulas in 2004, 27 states
reported that between 0.3 percent and 4 percent of infant formula
provided is non-contract, non-exempt, and 8 states reported use between
4.5 percent and 9 percent.[Footnote 21] As required by the Infant
Formula Act, infant formula is a relatively homogeneous product.
Consequently, it is unlikely that large discrepancies among states in
the use of non-contract, non-exempt infant formulas designed for use by
healthy infants can be explained by differences in health conditions of
infants receiving WIC infant formula in these states. There are also
large discrepancies in the use of exempt infant formula designed to
treat infants' medical conditions. State provision of exempt infant
formula ranges from a low of 0 percent to a high of about 23 percent.
(See app. II for information on use of non-contract, non-exempt and
exempt infant formula by state.) Again, as with non-contract, non-
exempt infant formula, it is not clear how infants' medical needs could
vary so significantly among states. Figure 6 shows the minimum, median,
and maximum use of each type of infant formula in 2004.[Footnote 22]
Figure 6: Percentage Contract, Exempt, and Non-Contract, Non-exempt
Infant Formula Provided:
[See PDF for image]
[End of figure]
Most states reported that they require participants to obtain medical
documentation for non-rebated infant formula, as required by FNS.
However, some local WIC directors said there are instances in which
doctors do not diagnose a medical condition but still write a
prescription at the request of the participant. Local WIC agency staff
told us that they identify these cases only by confirming diagnoses
with each physician which not all agencies have the resources to do. As
a result, some WIC participants may be receiving non-rebated infant
formula even though they do not have a medical condition requiring such
infant formula.
FNS Has Taken Steps to Reduce Infant Formula Costs:
In its oversight capacity, FNS has helped states increase their cost-
containment savings by providing technical assistance to states as they
develop their cost-containment contracts, and by implementing
regulations that help states achieve cost savings. For example, FNS
requires manufactures to provide the same discount on all infant
formulas after state costs rose with the introduction of a new infant
formula. In 1993, one company introduced a lactose-free infant formula
to accommodate infants with intolerance for milk-based infant
formula.[Footnote 23] When this company introduced its lactose-free
infant formula, it provided a significantly lower rebate amount on this
infant formula than it provided on its milk-based infant formula
covered by the existing contract, even though the wholesale price of
the new infant formula was higher per can. As a result, states received
a much lower discount on the new infant formula than they received on
the original contract infant formula. At the same time, prescriptions
for the lactose-free infant formula increased because the company
marketed the infant formula directly to doctors. The cost savings
states achieved through rebates began to erode. To maintain competition
by ensuring that all manufacturers could bid on contracts and to help
preserve rebate savings, FNS in 2000 established the requirement that
infant formula manufacturers provide the same percent discount for all
infant formulas, even those introduced when a contract is already in
effect.
The requirement that manufacturers provide the same percent discount
for infant formulas introduced during a contract slows but does not
completely stem increases in state spending on infant formula. Even
with the requirement, states must still pay more for each can of newly-
introduced infant formula when the wholesale price of the infant
formula is higher. As a result, manufacturers still have a financial
incentive to introduce and market more expensive infant formula because
they charge a higher price per can.
By 2003, all three manufacturers introduced new infant formulas
enhanced with the fatty acids DHA and ARA. Like other newly-introduced
infant formulas, these enhanced infant formulas were more expensive.
Two state officials told us that the manufacturers replaced the milk-
based infant formula the state was providing to WIC participants in
some parts of the state with the enhanced infant formula. Retail
outlets stopped stocking the original milk-based infant formula; as a
result, states had to purchase the enhanced infant formula. In
contrast, when manufacturers introduced new infant formulas in the
past, states had a choice not to provide the new infant formulas or to
limit their use because the original milk-based infant formula was
still available. At least one state has since introduced a contract
provision that requires manufacturers to charge the same price per can
for newly-introduced products when those products replace the primary
contract infant formula.
FNS Promotes the Long-Run Sustainability of the Competitive Bidding
System:
Recognizing the history and dynamics of the infant formula market and
the importance of competition to the cost-containment goals of the WIC
program, FNS has attempted to ensure that all manufacturers can compete
for state infant formula contracts regardless of their share of the
market. Infant formula manufacturers operate within a highly
concentrated industry. Beginning in the 1970s, three manufacturers--
Wyeth-Ayerst, Mead Johnson, and Ross Laboratories--dominated the infant
formula market. By the 1990s, the industry had shifted. Wyeth-Ayerst
exited the domestic infant formula market in 1996. By then Nestlé had
begun selling infant formula and had at least one state WIC contract.
By 2000, Nestlé still had the smallest market share of the three
companies.
In order to ensure the sustainability of competitive bidding, FNS has
not allowed provisions in cost-containment contracts that would have
boosted state savings when FNS believed those provisions would reduce
competition:
* For example, during negations FNS held with New England and Tribal
Organization (NEATO) coalition from January 1995 through February 1996,
FNS disapproved a contract provision that would have required that
manufacturers demonstrate that they had the production capacity
sufficient not only to meet infant formula contract commitments they
had with NEATO, but also commitments they had made with other states
and those to be awarded. NEATO included this provision, in part,
because its contractor at the time had run out of infant formula, and,
as a result, smaller states in the coalition did not have enough infant
formula. FNS rejected the requirement that manufacturers prove they
could fulfill contracts commitments with others states, which it viewed
as intrusive and which it felt hindered fair and open competition.
* Similarly, in 2005, FNS did not approve a contract provision that
would have allowed Wisconsin to continue with its current contractor if
the bids it received differed by $10,000 or less. Under the provision,
the state could have avoided expenses associated with switching
contracts. FNS did not approve the provision because it believed it
would give the current contract holder an advantage over the other two
competitors.
Several state WIC directors we interviewed questioned FNS' role in the
infant formula contracting process. Three state WIC directors pointed
out that infant formula cost containment was initiated by states. In
addition, a few state WIC directors noted that the manufacturers have
stayed in the WIC market for years, even though some say that providing
infant formula under these contracts is not profitable. FNS officials,
however, pointed out that Wyeth stopped bidding on WIC contracts, and
that competition would decrease if any other manufacturers stop bidding
on WIC contracts.
The Child Nutrition and WIC Reauthorization Act of 2004[Footnote
24]contained two provisions that promote competition among infant
formula manufacturers by limiting the size of contracts and coalitions
to ensure all manufacturers can bid on contracts regardless of their
capacity:
* A requirement that states or coalitions serving more than 100,000
infants request separate bids for milk-based and soy-based infant
formulas.
* Limits on the size of state coalitions.
The act also addressed manufacturers' concerns about how WIC agencies
implement their infant formula contracts:
* A requirement that states provide participants, as the infant formula
of first choice, the infant formula designated by the contract
manufacturer as its "primary contract infant formula."[Footnote 25]
* A requirement that manufacturers not only raise the rebates they
provide to states in response to any increase in wholesale price, but
also lower the rebates they provide to states by an amount equal to any
decreases in wholesale price.
* A requirement that states accurately account for the number of cans
of infant formula purchased, not just the number of vouchers redeemed
at retailers.
Conclusion:
Although states developed and implemented measures to contain the cost
of infant formula, FNS has played an increasingly important role in
balancing the goals of containing infant formula costs and maintaining
competition among infant formula manufacturers. FNS actions have not
always maximized the cost savings of individual states, but by ensuring
that all interested manufacturers can compete for WIC contracts, it has
helped to ensure the long-run sustainability of the WIC cost-
containment system. However, if manufacturers continue to emphasize a
business strategy focused on innovation and product differentiation,
WIC cost-containment savings are likely to erode further despite
existing measures to protect state cost savings. By providing
manufacturers with a higher per-can reimbursement for newly introduced,
more expensive products, and by allowing states to issue non-contract,
non-exempt infant formulas to participants with physician
prescriptions, federal regulations encourage manufacturers to diversify
their product lines and charge more for infant formula, even within a
contract period. Unless FNS takes additional steps to safeguard rebate
savings, total rebates could continue to erode and the number of
participants who can be served by WIC will likely fall.
Recommendations for Executive Action:
To help states preserve rebate savings generated through infant formula
cost containment and reduce costs associated with the purchase of non-
rebated infant formula, we recommend that the Secretary of the
Department of Agriculture take the following two actions:
* Consider providing additional guidance related to product changes so
that state costs do not increase when infant formula manufacturers
introduce new or improved infant formulas by encouraging all states to
include in their contracts a provision that requires manufacturers to
provide new and improved products marketed under a different name at
the net wholesale price specified in the contract when the new product
replaces the product the manufacturer designated as its "primary
contract infant formula." We recommend that the Secretary consider
implementing a regulatory provision if necessary to ensure that states
implement the guidance.
* Provide guidance or technical assistance to state agencies on ways to
reduce the use of non-rebated infant formulas in states where use of
these infant formulas is high.
Agency Comments and Our Evaluation:
On March 13, 2006, we met with FNS officials to discuss their comments.
The officials said they generally agreed with our recommendations. They
stated that they will provide guidance related to product changes to
assist state agencies in minimizing cost increases when infant formula
manufacturers introduce a new infant formula that replaces the primary
contract infant formula. Officials agree that a regulatory change would
be necessary to require that state agencies include provisions in their
contracts to accomplish this goal. They cautioned, however, that they
have limited influence over the recent increases in infant formula
costs attributable to manufacturers' price and product changes. While
we agree that FNS is constrained in its ability to affect manufacturer
marketing and pricing decisions, we believe the agency should take any
steps available to contain infant formula costs given the importance of
cost-containment savings to serving as many eligible women, infants,
and children as possible.
Agency officials also stated that they will continue to provide
guidance to state agencies related to the issuance of non-contract
infant formula for those states where the use of these infant formulas
appears high. However, officials expressed concern that some states may
have misreported their use of exempt and non-contract, non-exempt
infant formulas due to confusion over terminology and interpretation of
the survey instrument. Officials noted that since some state agencies
may require the same medical documentation for exempt infant formulas,
non-contract, non-exempt infant formulas, and certain contract infant
formulas other than the primary contract brand, some states may have
misunderstood the distinction between the three types of infant formula
we identified and misreported use of the different types of infant
formula. We believe that the survey provided sufficient examples to
allow states to distinguish between the three infant formula types we
identified. We pretested our survey with officials in five states, in
which we discussed their understanding of each question and the terms
we used, and all of the officials we spoke with understood the
differences between the categories of infant formula we identified.
However, we acknowledge that because states are not required to track
infant formula use by the categories we used or by the technical
categories defined in the Infant Formula Act, our estimates of the use
of the three types of infant formula may not be consistent across all
states.
Agency officials also expressed concern over the fact that we requested
data for non-contract and exempt infant formulas by the average monthly
percentage of total cans issued rather than by average monthly
percentage of participation. Agency officials stated that some state
agencies capture their data in terms of percentage of participation and
this may have contributed to misreporting. In our discussions with
state officials, we were told that because information on the number of
cans provided through WIC is usually used to bill manufacturers for
infant formula rebates, most states track the number of cans of infant
formula provided to WIC participants.
In 2003, GAO reported similar findings related to use of non-contract
infant formula based on a survey that used different terminology and a
different measure of use. The consistency between the findings in the
two reports reinforces the ongoing importance of ensuring that states
clearly understand the distinction between the different types of non-
contract infant formula, monitoring the use of different types of
infant formula, and providing technical assistance to state agencies
where use of non-contract infant formula is high.
Agency officials also provided technical comments, which we
incorporated into the report where appropriate. This included revising
data that had been provided by two states that had reported
particularly high use of non-contract, non-exempt infant formula.
We are sending copies of this report to the Secretary of USDA, relevant
congressional committees, and others who are interested. Copies will be
made available to others upon request, and this report will also be
available on GAO's Web site at http://www.gao.gov.
If you or your staff have any questions about this report, please
contact me on (202)512-7215 or fagnonic@gao.gov. Contact points for our
Offices of Congressional Relations and Public Affairs may be found on
the last page of this report. GAO staff who made major contributions to
this report are listed in appendix III.
Signed by:
Cynthia M. Fagnoni:
Managing Director, Education, Workforce, and Income Security:
[End of section]
Appendix I: Scope and Methodology:
This appendix provides a detailed description of the scope and
methodology we used to determine (1) what factors influence program
spending on infant formula, including the role of rebates that states
receive through infant formula cost-containment contracts; (2) how the
level of savings resulting from infant formula cost containment has
changed over the past 5 years and the implications of these changes for
the number of participants served; and (3) how federal and state
policies and guidance have influenced state spending on infant formula.
To assess what factors influence program spending on infant formula,
including federal and state policies, we surveyed state directors of
the Special Supplemental Nutrition Program for Women, Infants, and
Children (WIC) in all 50 states and the District of Columbia. All 51
survey recipients responded to our survey, but not all respondents
provided answers to every question. Where fewer than 51 responses were
provided, we noted in the text the number of respondents on which the
finding was based. We pretested the survey questionnaire with state WIC
officials in five states. During these pretests, we administered the
questionnaire and asked the officials to fill it out as they would if
they had received it in the mail. After completing the questionnaire,
we interviewed the respondents to ensure that the questions were clear
and unbiased, the data we requested were feasible to collect, and the
questionnaire did not place an undue burden on the agency officials
completing it. To encourage respondents to complete the questionnaire,
we sent one follow-up mailing containing the full survey instrument to
nonrespondents approximately 3 weeks after the initial mailing and a
second follow-up letter about 2 weeks later.
We also conducted a review of literature on infant formula cost
containment and spoke with officials from the U.S. Department of
Agriculture's (USDA) Food and Nutrition Service (FNS); state WIC
directors in Illinois, Massachusetts, Minnesota, New Jersey, New York,
Pennsylvania, and Washington; and local WIC directors from Belford, New
Jersey; Chicago, Illinois; Odessa, Texas; Salt Lake City, Utah; and
Tempe, Arizona. These state and local WIC directors were selected based
on recommendations of the National WIC Association and FNS and
represent several different geographic areas. We included states that
belong to contracting coalitions as well as those that contract
themselves, and those that had rebid their infant formula contracts
recently as well as those that last rebid their contracts several years
ago. We also interviewed individuals with expertise related to WIC and
infant formula cost containment from the National WIC Association and
the Center on Budget and Policy Priorities. In addition, we interviewed
representatives from Nestlé, Mead Johnson, and Ross Products to
understand the perspectives of the infant formula manufacturers.
To assess trends in rebate savings and in the number of participants
served with rebate savings, we analyzed administrative data we received
from FNS on WIC program participation, food costs, and total rebates
from 1990 through 2005. We assessed the reliability of the data by
reviewing existing information about the data and the system that
produced them and interviewing agency officials knowledgeable about the
data. We determined that the data were sufficiently reliable for the
purposes of this report. We adjusted the rebate figures for inflation
using the producer price index for pharmaceuticals. Infant formula is
marketed in a way that is similar to pharmaceuticals.
To estimate the impact of reduced rebates on the number of participants
served with rebate savings, we used data we received from FNS on total
rebates for 2004. This allowed us to estimate the share of infant
formula spending that was spent on rebated infant formula and the share
that was spent on non-rebated infant formula including exempt and non-
contract, non-exempt infant formulas. We then held spending on non-
rebated infant formulas constant, and estimated the reduction in total
rebates that would have resulted if the average rebate states received
through their cost-containment contracts in 2004 had been lower than
the actual average discount of 93 percent of the wholesale price of
milk-based concentrate. We considered three scenarios to represent
recent trends in infant formula rebates, either nationwide or in
individual states:
* A reduction in rebates from 93 percent of the wholesale price of
infant formula to 90 percent of the wholesale price of infant formula,
a modest decrease to rebate levels experienced by states in 2000.
* A moderate decrease to 85 percent of the wholesale price of infant
formula, the average rebate on newly awarded contracts in 2004.
* A larger decrease to 75 percent of the wholesale price of infant
formula, a decrease similar to that experienced by two states.[Footnote
26]
To estimate trends in the per-can cost of infant formula, we also
analyzed information we received from FNS on the rebates individual
states received per can of milk-based concentrate infant formula from
fiscal years 2000 to 2005. We used this data to calculate trends in
state infant formula costs.
[End of section]
Appendix II: Use of Non-Contract, Non-Exempt and Exempt Infant Formula
by State, Fiscal Year 2004:
Table 1: Non-contract, Non-exempt Infant Formula as a Share of All
Infant Formula Issued, Monthly Average, Fiscal Year 2004:
State[A]: Virginia;
Non-contract Brand non-exempt infant formula: (percent): 0.
State[A]: Arkansas;
Non-contract Brand non-exempt infant formula: (percent): 0.
State[A]: District of Columbia;
Non-contract Brand non-exempt infant formula: (percent): 0.
State[A]: Louisiana;
Non-contract Brand non-exempt infant formula: (percent): 0.
State[A]: Mississippi;
Non-contract Brand non-exempt infant formula: (percent): 0.
State[A]: New Mexico;
Non-contract Brand non-exempt infant formula: (percent): 0.
State[A]: Pennsylvania;
Non-contract Brand non-exempt infant formula: (percent): 0.
State[A]: Vermont;
Non-contract Brand non-exempt infant formula: (percent): 0.
State[A]: Alaska;
Non-contract Brand non-exempt infant formula: (percent): 0.3.
State[A]: Arizona;
Non-contract Brand non-exempt infant formula: (percent): 0.4.
State[A]: Maryland;
Non-contract Brand non-exempt infant formula: (percent): 0.6.
State[A]: Massachusetts;
Non-contract Brand non-exempt infant formula: (percent): 0.8.
State[A]: Oklahoma;
Non-contract Brand non-exempt infant formula: (percent): 1.0.
State[A]: California;
Non-contract Brand non-exempt infant formula: (percent): 1.2.
State[A]: Texas;
Non-contract Brand non-exempt infant formula: (percent): 1.3.
State[A]: New Jersey;
Non-contract Brand non-exempt infant formula: (percent): 1.6.
State[A]: Ohio;
Non-contract Brand non-exempt infant formula: (percent): 1.7.
State[A]: New York;
Non-contract Brand non-exempt infant formula: (percent): 1.9.
State[A]: Nevada;
Non-contract Brand non-exempt infant formula: (percent): 2.0.
State[A]: Minnesota;
Non-contract Brand non-exempt infant formula: (percent): 2.3.
State[A]: Georgia;
Non-contract Brand non-exempt infant formula: (percent): 2.3.
State[A]: Iowa;
Non-contract Brand non-exempt infant formula: (percent): 2.4.
State[A]: Maine;
Non-contract Brand non-exempt infant formula: (percent): 2.4.
State[A]: Michigan;
Non-contract Brand non-exempt infant formula: (percent): 2.7.
State[A]: Hawaii;
Non-contract Brand non-exempt infant formula: (percent): 2.8.
State[A]: Alabama;
Non-contract Brand non-exempt infant formula: (percent): 3.0.
State[A]: Nebraska;
Non-contract Brand non-exempt infant formula: (percent): 3.0.
State[A]: North Carolina;
Non-contract Brand non-exempt infant formula: (percent): 3.0.
State[A]: Washington;
Non-contract Brand non-exempt infant formula: (percent): 3.0.
State[A]: Colorado;
Non-contract Brand non-exempt infant formula: (percent): 3.7.
State[A]: Illinois;
Non-contract Brand non-exempt infant formula: (percent): 3.9.
State[A]: Oregon;
Non-contract Brand non-exempt infant formula: (percent): 3.9.
State[A]: Delaware;
Non-contract Brand non-exempt infant formula: (percent): 4.0.
State[A]: West Virginia;
Non-contract Brand non-exempt infant formula: (percent): 4.0.
State[A]: Wisconsin;
Non-contract Brand non-exempt infant formula: (percent): 4.0.
State[A]: Florida;
Non-contract Brand non-exempt infant formula: (percent): 4.5.
State[A]: Wyoming;
Non-contract Brand non-exempt infant formula: (percent): 4.7.
State[A]: Utah;
Non-contract Brand non-exempt infant formula: (percent): 5.0.
State[A]: Connecticut;
Non-contract Brand non-exempt infant formula: (percent): 6.0.
State[A]: Kansas;
Non-contract Brand non-exempt infant formula: (percent): 6.0.
State[A]: North Dakota;
Non-contract Brand non-exempt infant formula: (percent): 6.5.
State[A]: Kentucky;
Non-contract Brand non-exempt infant formula: (percent): 8.3.
State[A]: Idaho;
Non-contract Brand non-exempt infant formula: (percent): 9.0.
Source: GAO survey of state WIC directors.
[A] The following states did not provide us with information on their
use of non-contract, non-exempt infant formula: Indiana, Missouri,
Montana, New Hampshire, Rhode Island, South Carolina, South Dakota, and
Tennessee.
[End of table]
Table 2: Exempt Infant Formula as a Share of All Infant Formula Issued,
Monthly Average, Fiscal Year 2004:
State[A]: District of Columbia;
Exempt infant formula: (percent): 1.0.
State[A]: Nevada;
Exempt infant formula: (percent): 1.0.
State[A]: California;
Exempt infant formula: (percent): 1.7.
State[A]: Washington;
Exempt infant formula: (percent): 2.0.
State[A]: Georgia;
Exempt infant formula: (percent): 2.0.
State[A]: Vermont;
Exempt infant formula: (percent): 2.5.
State[A]: Connecticut;
Exempt infant formula: (percent): 3.0.
State[A]: Idaho;
Exempt infant formula: (percent): 3.0.
State[A]: Kansas;
Exempt infant formula: (percent): 3.0.
State[A]: Wisconsin;
Exempt infant formula: (percent): 3.0.
State[A]: Arizona;
Exempt infant formula: (percent): 3.4.
State[A]: New Jersey;
Exempt infant formula: (percent): 3.6.
State[A]: Colorado;
Exempt infant formula: (percent): 3.8.
State[A]: Texas;
Exempt infant formula: (percent): 4.2.
State[A]: Iowa;
Exempt infant formula: (percent): 4.6.
State[A]: North Carolina;
Exempt infant formula: (percent): 5.0.
State[A]: Illinois;
Exempt infant formula: (percent): 5.5.
State[A]: Hawaii;
Exempt infant formula: (percent): 5.7.
State[A]: Oklahoma;
Exempt infant formula: (percent): 6.0.
State[A]: Minnesota;
Exempt infant formula: (percent): 6.5.
State[A]: Alaska;
Exempt infant formula: (percent): 7.0.
State[A]: New Mexico;
Exempt infant formula: (percent): 7.0.
State[A]: Maryland;
Exempt infant formula: (percent): 7.4.
State[A]: Maine;
Exempt infant formula: (percent): 7.5.
State[A]: Alabama;
Exempt infant formula: (percent): 8.0.
State[A]: Mississippi;
Exempt infant formula: (percent): 8.0.
State[A]: West Virginia;
Exempt infant formula: (percent): 8.0.
State[A]: New York;
Exempt infant formula: (percent): 8.2.
State[A]: Kentucky;
Exempt infant formula: (percent): 8.3.
State[A]: Virginia;
Exempt infant formula: (percent): 9.0.
State[A]: Oregon;
Exempt infant formula: (percent): 9.1.
State[A]: Delaware;
Exempt infant formula: (percent): 10.0.
State[A]: Nebraska;
Exempt infant formula: (percent): 10.0.
State[A]: Louisiana;
Exempt infant formula: (percent): 11.3.
State[A]: Utah;
Exempt infant formula: (percent): 12.0.
State[A]: Massachusetts;
Exempt infant formula: (percent): 16.5.
State[A]: Arkansas;
Exempt infant formula: (percent): 17.3.
State[A]: Wyoming;
Exempt infant formula: (percent): 20.1.
State[A]: Ohio;
Exempt infant formula: (percent): 21.0.
State[A]: Pennsylvania;
Exempt infant formula: (percent): 23.1.
Source: GAO survey of state WIC directors.
[A] The following states did not provide us with information on their
use of exempt infant formula: Florida, Indiana, Michigan, Missouri,
Montana, New Hampshire, North Dakota, Rhode Island, South Carolina,
South Dakota, and Tennessee.
[End of table]
[End of section]
Appendix III: GAO Contacts and Staff Acknowledgments:
GAO Contact:
Cynthia M. Fagnoni (202) 512-7215, fagnonic@gao.gov:
Acknowledgments:
Kay Brown, Assistant Director; Carol Bray; Kathryn Larin; Lise Levie;
Lynn Milan; Marc Molino; Luann Moy; Susan Pachikara; Tovah Rom; and
Daniel Schwimer made significant contributions to this report.
[End of section]
Related GAO Products:
Breastfeeding: Some Strategies Used to Market Infant Formula May
Discourage Breastfeeding; State Contracts Should Better Protect Against
Misuse of WIC Name. GAO-06-282. Washington, D.C.: February 8, 2006.
Means-Tested Programs: Information on Program Access Can Be an
Important Management Tool. GAO-05-221. Washington, D.C.: April 11,
2005.
Nutrition Education: USDA Provides Services through Multiple Programs,
but Stronger Linkages among Efforts Are Needed. GAO-04-528. Washington,
D.C.: April 27, 2004.
Food Assistance: Potential to Serve More WIC Infants by Reducing
Formula Cost. GAO-03-331. Washington, D.C.: February 12, 2003.
Food Assistance: WIC Faces Challenges in Providing Nutrition Services.
GAO-02-142. Washington, D.C.: December 7, 2001.
Food Assistance: Research Provides Limited Information on the
Effectiveness of Specific WIC Nutrition Services. GAO-01-442.
Washington, D.C.: March 30, 2001.
FNS: Special Supplemental Nutrition Program for Women, Infants and
Children: Requirements for and Evaluation of WIC Program Bid
Solicitations for Infant Formula Rebate Contracts. OGC-00-65.
Washington, D.C.: September 18, 2000.
Food Assistance: Financial Information on WIC Nutrition Services and
Administrative Costs. RCED-00-66. Washington, D.C.: March 6, 2000.
Food Assistance: Efforts To Control Fraud and Abuse in the WIC Program
Can Be Strengthened. RCED-99-224. Washington, D.C.: August 30, 1999.
Food Assistance: Information on WIC Sole-Source Rebates and Infant
Formula Prices. RCED-98-146. Washington, D.C.: May 11, 1998.
Food Assistance: Information on Selected Aspects of WIC. T-RCED-98-128.
Washington, D.C.: March 17, 1998.
Food Assistance: WIC Program Issues. T-RCED-98-125. Washington, D.C.:
March 17, 1998.
Food Assistance: A Variety of Practices May Lower the Costs of WIC.
RCED-97-225. Washington, D.C.: September 17, 1997.
FOOTNOTES
[1] A fourth manufacturer, PBM Nutritionals, manufactures infant
formula for sale under store brands. PBM does not compete for WIC
contracts.
[2] The 30 states includes the District of Columbia, but does not
include Indian Tribal Organizations.
[3] Two states, Vermont and Mississippi, operate a direct distribution
system whereby WIC supplemental foods are distributed directly to
participants from state-operated warehouses. In these two states, WIC
participants do not use the retail system. These states do, however,
negotiate sole-source contracts with infant formula manufacturers and
purchase WIC infant formula from the manufacturer at a discounted
price.
[4] Pub. L. No. 101-147 (1989). Under the law, state agencies are
required to procure infant formula using a competitive bidding system
or an alternative method of cost containment that yields savings equal
to or greater than those produced by a competitive bidding system.
[5] The net wholesale price is calculated by subtracting the rebate per
can from the lowest national wholesale cost per unit for a full
truckload of infant formula. The net wholesale price of the primary
contract infant formula remains fixed over the contract period. The net
wholesale price does not reflect any additional mark-ups imposed by
retailers. Because state WIC agencies reimburse WIC vendors for the
full retail price of infant formulas sold to WIC participants using WIC
vouchers, the actual cost to the state for each can of infant formula
is the "net retail price," or the retail price charged by the vendor
less the rebate provided by the manufacturer. States generally do not
track retail prices of infant formula. In this report, we use the term
"net price" to refer to the net wholesale price.
[6] Docosahexaenoic acid (DHA) and arachidonic acid (ARA) are fatty
acids found in breastmilk.
[7] If a state agency elects to solicit separate bids for milk-based
and soy-based infant formulas, all infant formulas issued under each
contract are considered the contract brand infant formula (see 7 C.F.R.
§246.16a(c)(1)(ii)). For example, all of the milk-based infant formulas
issued by a state agency that are produced by the manufacturer that was
awarded the milk-based contract are considered contract brand infant
formulas. Similarly, all of the soy-based infant formulas issued by a
state agency that are produced by the manufacturer that was awarded the
soy-based contract are also considered to be contract brand infant
formulas.
[8] See 21 U.S.C. §350a(h)) and the regulations at 21 C.F.R. parts 106
and 107.
[9] Participants must also provide medical documentation to receive
certain types of contract brand infant formulas such as low-iron infant
formula.
[10] The Infant Formula Act of 1980 requires infant formula
manufacturers to follow specific guidance on quality, manufacturing
practices, and nutrient requirements See 21 U.S.C. §350a.
[11] Ready-to-feed infant formula can be provide when (1) the
participant has unsanitary or restricted water supply or poor
refrigeration; (2) the participant may have difficulty in correctly
diluting liquid concentrate or reconstituting powder; or (3) ready-to-
feed infant formula is the only form available.
[12] These 27 states account for 62 percent of WIC participants.
[13] These figures are adjusted for inflation using the Producer Price
Index for drugs and pharmaceuticals.
[14] Because the number of states implementing new contracts is
different each year, the figures shown reflect a simple, not a weighted
average for each fiscal year.
[15] At the beginning of fiscal year 2006, Vermont implemented a new
contract under which the state is paying $1.11 per can of milk-based
concentrate. Vermont operates a home delivery system. As a result, the
state does not receive rebates from the manufacturer. It purchases
infant formula directly from the manufacturer at a reduced price.
[16] Twenty-three states reported that they provided enhanced infant
formula to all participants, or provide it to all participants unless
non-enhanced infant formula is requested. The remaining states provide
enhanced infant formula under certain circumstances such as when a
prescription is provided or when other non-enhanced infant formulas are
not available in retail outlets.
[17] The Child Nutrition Act and WIC Reauthorization Act of 2004
requires state agencies to provide, as the infant formula of first
choice, the primary contract infant formula specified in the
manufacturer's bid. As a result, state agencies have no choice but to
issue the higher-cost DHA/ARA enhanced infant formulas if manufacturers
identify these as their primary contract infant formulas.
[18] We selected these percentages based on rebates offered to states
over the past 5 years and included scenarios representing a modest
decrease (90 percent of wholesale price), a moderate decrease (85
percent of wholesale price) that was approximately equal to the
discount offered on newly awarded contracts in fiscal year 2004, and a
larger decrease (75 percent of wholesale price) that was similar to the
discount received in two states during fiscal years 2004 and 2005.
[19] By confining our estimates to 2004, we were able assume that all
else remained as it was in 2004 and thereby isolate the impact of
rebates from other factors that can affect the number of participants
served, such as changes in the retail prices of WIC foods, changes in
breastfeeding rates, and changes in the size and composition of the
caseload. These estimates do not take into consideration the
availability of the WIC contingency fund that can be drawn down to
maintain participation when food costs increase more quickly than
anticipated. Similarly, the estimates do not take into account the
possibility that supplemental appropriations could make up any funding
shortfall to maintain participation.
[20] 7 C.F.R. §246.16A(c)(5)(i).
[21] Eight of the states with policies in place to not allow non-
contract, non-exempt infant formula reported providing 0 percent of
this type of infant formula. Three states with these policies indicated
that they provided between 1.6 percent and 3 percent non-contract, non-
exempt infant formula per month. One state with these policies did not
provide data on use of non-contract, non-exempt formula.
[22] Forthy-three states provided information on their use of contract,
exempt, and non-contract, non-exempt infant formulas in 2004.
[23] Until 1993, infants with intolerance for milk-based infant formula
were provided with either soy infant formula or an exempt infant
formula that did not contain lactose. Since the introduction of lactose-
free infant formula, companies have further diversified the products
they produce for healthy infants. New products include added-rice
infant formula, DHA and ARA enhanced infant formula, and a variety of
other infant formulas.
[24] Pub. L. No. 108-265.
[25] The primary contract infant formula is the infant formula on which
contract bids are evaluated. Therefore, the bidder who offers the
lowest net wholesale price on the infant formula they designate as
their primary contract infant formula becomes the contract
manufacturer, regardless of rebates provided for other infant formulas
covered by the contract. The requirement that states offer the primary
contract infant formula as their first choice ensures that the primary
contract infant formula is provided before any other infant formula
covered by the contract.
[26] Between 2004 and 2005, three states received rebate bids that were
lower than those of most existing contracts. New York received a
winning bid equal to 76 percent of the wholesale price of infant
formula and North Dakota received a winning bid equal to 77 percent of
the wholesale price of infant formula. Vermont received a winning bid
equal to 66 percent of the wholesale price of infant formula.
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