Food Assistance:

FNS Could Take Additional Steps to Contain WIC Infant Formula Costs

GAO-06-380: Published: Mar 28, 2006. Publicly Released: Mar 28, 2006.

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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.

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.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: The Food and Nutrition Service (FNS) routinely reviews WIC state agency draft solicitations for infant formula rebate contracts to ensure the solicitations contain language requiring the manufacturer to pay a rebate that yields the same net cost per ounce for a new infant formula intended to replace the primary infant formula. In instances where a solicitation did not contain language, guidance was provided ensuring the solicitation was modified. As a result, the majority of infant formula rebate contracts implemented over the past year contain such language. FNS has included this issue in its ongoing review of draft solicitations.

    Recommendation: To help states preserve rebate savings generated through infant formula cost containment and reduce costs associated with the purchase of non-rebated infant formula, the Secretary of the Department of Agriculture should 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." The Secretary should consider implementing a regulatory provision if necessary to ensure that states implement the guidance.

    Agency Affected: Department of Agriculture

  2. Status: Closed - Implemented

    Comments: The Food and Nutrition Service (FNS) has provided technical assistance to state agencies on ways to reduce their usage of non-contract and exempt infant formulas. States have instituted a variety of policies and procedures that limit the use of non-contract and exempt infant formulas. Moreover, on December 6, 2007, FNS published an interim final regulation in the Federal Register that revises the food packages provided by WIC, tightens medical documentation requirements for issuance of non-contract formula and requires states to coordinate with other federal, state or local government agencies or with private agencies that operate programs that also provide or could reimburse for exempt infant formulas and WIC-eligible medical foods (non-contract formulas). The interim final regulation was effective February 4, 2008.

    Recommendation: To help states preserve rebate savings generated through infant formula cost containment and reduce costs associated with the purchase of non-rebated infant formula, the Secretary of the Department of Agriculture should 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 Affected: Department of Agriculture

 

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