	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. Both funding and participation have  increased each year since fiscal year 2000. FNS Review of Contracts

Contracts for WIC infant formula are between states and infant formula  manufacturers. 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. 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. 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. In  2004, some 2 million participants were served using rebate dollars. 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. 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. Despite these state efforts to contain costs, opportunities remain for more  states to further reduce the use of non-rebated infant formulas. 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. 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. 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. Food Assistance: Financial Information on WIC Nutrition Services and  Administrative Costs.
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.