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Recent Trends and Economic Issues in the WIC Infant Formula
Rebate Program
Victor Oliveira and David Davis
Economic Research Report No. (ERR-22), August 2006
Over half of all infant formula sold in the United States is
purchased through the Special Supplemental Nutrition Program
for Women, Infants, and Children (WIC). Typically, WIC State
agencies obtain significant discounts in the form of rebates
from infant formula manufacturers for each can of formula purchased
through WIC. In exchange, the manufacturer is given exclusive
right to provide its product to WIC participants in the State.
Contracts are awarded to the manufacturer offering the lowest
net wholesale price (manufacturer's wholesale price minus the
rebate).
Infant formula rebates totaled $1.6 billion in fiscal year
2004. Since the establishment of the rebate program in 1988,
rebates as a share of total pre-rebate WIC food costs increased
rapidly, peaking at 33.5 percent in fiscal year 2000. In other
words, without the rebates, WIC food costs would have been one-third
higher. However, rebates as a share of WIC’s food costs
have fallen each year since 2000 (down to 31.6 percent in 2004),
In recent years, some States awarding new infant formula rebate
contracts have seen a marked increase in the net wholesale price
for formula. Since WIC is a discretionary program with fixed
funding, higher costs mean that fewer persons will be served
(or that additional funds need to be appropriated)
What Did the Project Find?
The cost that WIC pays for each can of formula provided through
the program has two components: the net wholesale price that
goes to the manufacturer and the retail markup that goes to
the retailer. Both these costs have increased in recent years.
Prior to 2004, most infant formula rebate contracts were bid
on by two manufacturers, usually Mead Johnson and Ross, with
Nestlé bidding on just more than one-quarter of all contracts.
Nestlé has since joined in bidding on nearly all contracts,
which would seemingly make it less likely that a manufacturer
would win a contract with an unusually low rebate (resulting
in a high net wholesale price to the WIC agency). However, the
real net wholesale prices bid by all three competitors have
increased in recent years. Of the 16 States that have awarded
infant formula rebate contracts since 2003, 10 (63 percent)
saw a net increase in real net wholesale price relative to their
latest pre-2003 contract for powder and 13 (81 percent) saw
an increase relative to their pre-2003 contract for liquid concentrate.
Some of this recent increase in net wholesale price can be
attributed to the introduction of more costly formulas supplemented
with DHA and ARA (two fatty acids found in breast milk). Although
not all States currently offer these new formulas to their WIC
recipients, recent legisla-tion requires that all States offer
the supplemented formula as of their next rebate contract, presuming
that the manufacturers submit bids based on these supplemented
formulas.
During the second quarter of 2004, the retail markup was substantially
greater for the new DHA- and ARA-supplemented infant formulas
than for unsupplemented formulas (retail markups for the new
supplemented formulas were also found to exceed the markup of
unsupplemented formulas from 1994 to 2000, indicating that retail
markups to WIC have increased over time). The effect of the
markup that States pay retailers can be substantial. In many
cases, it is the largest component of the cost to WIC. However,
it is because of the effectiveness of the rebate program that
net wholesale prices are so low. If net wholesale prices were
to increase to the level experienced in New York in 2003 (where
net wholesale prices of powder were over three times the retail
markup), total costs to States would increase significantly.
This analysis suggests that both cost components to WIC—net
wholesale price and retail markup—have increased over
time. However, much of the increase in costs is due to the higher
priced DHA- and ARA-supplemented infant formulas. Because these
supplemented formulas are relatively new to the market (first
introduced in 2002), conditions observed in this study may change
once the market reaches long-term equilibrium.
How Was the Project Conducted?
This report examines trends in the factors affecting WIC infant
formula costs from January 1998 to January 2006. The cost that
WIC pays for each can of formula provided through the program
after rebate has two components: a part that goes to the manufacturer
and a part that goes to the retailer. The part that goes to
the manufacturer is the net wholesale price (wholesale price
minus the rebate); this has been the subject of most previous
studies on WIC's infant formula rebate program. Retail markup—the
part that WIC pays to the retailer (retail price minus wholesale
price) has not received nearly as much attention.
This study examines the cost of infant formula to the WIC program
in light of recent changes in the infant formula market and
in the program's authorizing legislation. It is the only study
to examine the rebates associated with infant formula in both
liquid concentrate and powdered forms. Powdered formula has
not been the focus of most previous studies, yet it has become
the most prevalent form of formula provided in WIC. Information
comes from several sources—data on infant formula manufacturers'
bids for rebate contracts, formula manufacturers' wholesale
price lists, and scanner-based retail sales data from supermarkets.
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