|
Rising Infant Formula Costs to the WIC Program: Recent Trends in Rebates and Wholesale Prices
Victor Oliveira, Elizabeth Frazao, and David Smallwood
Economic Research Report No. (ERR-93) 46pp, February 2010
USDA’s Special Supplemental Nutrition Program for Women, Infants, and Children (WIC)
provides participating infants with free infant formula. Federal law requires that WIC State
agencies enter into cost-containment contracts with infant formula manufacturers, with agencies
typically receiving substantial discounts (rebates) from manufacturers for each can of formula
purchased through the program. Each WIC State agency or group of agencies awards a contract
to the manufacturer offering the lowest net wholesale price, defined as the difference between
the manufacturer’s wholesale price and the rebate. In exchange for the rebate, a manufacturer is
given an exclusive right to provide its infant formula to WIC participants in the State. In fiscal
2008, infant formula rebates totaled $2.0 billion, compared with total WIC expenditures (after
rebates) of $6.2 billion.
What Is the Issue?
Because of the large volume of infant formula purchased through WIC, even small increases in
net wholesale price can result in large increases in total costs to the program. WIC is a discretionary
grant program funded annually by appropriations law. The number of participants who can be
served within a fixed budget depends heavily on the program’s food package costs, which in turn
are significantly affected by rebates and the cost of infant formula.
What Did the Study Find?
This study found that between 57 and 68 percent of all infant formula sold in the United States in
2004-06 was purchased through WIC. Nearly all WIC State agencies paid more for milk-based
powdered formula (the primary type of infant formula) in their rebate contracts that were in effect
in December 2008 than in their previous contracts, even after adjusting for inflation. Excluding
Mississippi and Vermont, which do not distribute WIC foods through retail foodstores, 45 of 48
States, the District of Columbia, and 5 U.S. territories saw an increase in their real net wholesale
price (December 2008 dollars). Across WIC State agencies, real net wholesale prices increased by
an average 21 cents for 26 fluid ounces of reconstituted formula (WIC’s maximum daily allowance
during the study period) between States’ previous and current rebate contracts (i.e., those
in effect in December 2008). As a result of the increase in real net wholesale prices, WIC State
agencies paid about $127 million more for infant formula over the course of a year. This was
equivalent to the cost of supporting 134,200 persons in WIC for a year or about 2 percent of all
women, infants, and children participating in WIC in fiscal 2008.
Seventy-two percent of the increase in real net wholesale price was due to an increase in the real wholesale price of
infant formula. All rebate contracts in effect in December 2008 were based on formulas supplemented with the fatty
acids docosahexaenoic acid (DHA) and arachidonic acid (ARA), whereas most of the previous contracts were based
on unsupplemented formulas. Because wholesale prices of DHA/ARA supplemented formulas are higher than wholesale
prices of unsupplemented formulas, wholesale prices of infant formula increased more in States that switched to
the more expensive DHA/ARA supplemented formula in their contracts that were in effect in December 2008.
The remaining 28 percent of the increase in real net wholesale price was due to a decrease in real rebates. The average
percentage discount (i.e., the rebate as a percentage of the wholesale price) in the previous contracts was 91 percent.
In other words, WIC on average paid only 9 percent of the wholesale price for formula (plus the retailer’s markup).
The average percentage discount in the contracts in effect in December 2008 fell to 85 percent, indicating that WIC
State agencies were paying a greater percentage of the wholesale price than previously.
Several recent developments, such as the country’s economic condition and revisions to the WIC food packages, have
the potential to affect the net wholesale price to WIC in the future.
How Was the Study Conducted?
In order to examine trends or changes in net wholesale price over time, this report compared the real net wholesale
price in a State’s contract that was in effect in December 2008 to that of its previous contract. The analysis was based
primarily on data on infant formula rebate contracts provided by USDA’s Food and Nutrition Service and infant formula
wholesale prices as reported in the formula manufacturers’ price list catalogs. Proprietary data on infant formula
sales obtained from the Nielsen Company were used to examine the characteristics of the infant formula market.
|
