Prices Paid by Non-WIC Purchasers Rose Faster Than Usual When Rebate Requirement Went Into Effect

Wholesale infant formula prices rose steadily from 1982 to 1996. Since little data are available on the factors that could have affected the price of infant formula, we could not analyze the extent to which, if at all, the accelerated price rise in infant formula was due to the rebate requirement. For WIC agencies, which had previously paid the same price as non-WIC purchasers, the net prices paid for infant formula decreased significantly after rebates went into effect. WIC agencies, for example, paid 85 percent less, on average, than the wholesale price for infant formula after accounting for rebates in 1996. Net Prices for Infant Formula Sold to WIC Agencies Fell Significantly With Introduction of Rebate Requirement

The prices WIC agencies paid for infant formula decreased significantly after the rebate requirement went into effect in 1989. Key Characteristics of Infant Formula Market May Have Contributed to High Rebates

Key characteristics of the infant formula market are the likely reason that manufacturers are able to offer WIC agencies significant rebates. 3.) Subsidy of WIC Infant Formula by Non-WIC Purchasers Is Unlikely

Although we did not have access to price and cost data that could help us determine definitively whether non-WIC consumers subsidized WIC through the prices they paid for infant formula, we relied on economic analysis and other available information to address the issue. Our analysis indicates that it is unlikely non-WIC purchasers subsidized WIC purchases of infant formula as a result of the rebate program. In economic terms, a subsidy of WIC by the non-WIC purchasers of infant formula would occur if a producer sold formula to the WIC market at less than the producer’s cost of production and used the profits generated by the non-WIC purchasers paying a higher price to compensate for the loss. Our economic analysis of the infant formula market, as well as other available evidence, suggests that while prices may have differed significantly between the WIC and non-WIC markets, it is unlikely that an economic subsidy of the WIC market by the non-WIC market occurred. However, such rebates will not generate the level of savings obtained through the rebates on infant formula, in part because these other food products do not account for as large a share of WIC food costs and in part because market characteristics for other products make it likely that manufacturers will offer smaller rebates for each item. Finally, some other options to reduce costs may be more effective in generating savings for WIC than sole-source rebates for foods other than infant formula. Finally, manufacturers may have less incentive to offer substantial rebates for other WIC food products because they do not sell as much of their product to the WIC market. We did this by assuming that after the introduction of sole-source rebates, wholesale prices increased at the same rate as prices in the pharmaceutical industry.
Why GAO Did This Study

Pursuant to a congressional request, GAO provided information on several issues related to Special Supplemental Food Program for Women, Infants, and Children (WIC) rebates for infant formula, focusing on: (1) how prices in the infant formula market changed for non-WIC purchasers and WIC agencies after the introduction of sole-source rebates; (2) how key characteristics of the infant formula market may contribute to the size of rebates offered by the manufacturers; (3) whether there is any evidence indicating that non-WIC purchasers of infant formula subsidized WIC purchases through the prices they paid; and (4) whether the significant cost savings WIC agencies have achieved by using sole-source rebates for infant formula have implications for other WIC products.

What GAO Found

GAO noted that: (1) at about the time the WIC rebate requirement went into effect in 1989, the wholesale prices paid by non-WIC purchasers rose faster than usual while the net prices paid by WIC agencies decreased; (2) since few data are available on the factors that could have affected the price of infant formula, GAO could not analyze the extent to which the accelerated price rise in infant formula was due to the rebate requirement; (3) WIC agencies, which paid the same price as non-WIC purchasers between 1982 and 1989, paid significantly less for infant formula after the rebate requirement was implemented in 1989; (4) key characteristics of the infant formula market are the likely reason that manufacturers are able to offer WIC agencies significant rebates; (5) in particular, the method of marketing infant formula--through physicians' recommendations--contributes to strong brand loyalty among parents; (6) although GAO did not have access to the price and cost data that could determine definitively whether non-WIC consumers subsidized WIC through prices they paid for infant formula, GAO's analysis indicates that it is doubtful that such a subsidy has occurred; (7) a subsidy would occur if a manufacturer sold formula to WIC agencies for less than its cost of production and the price paid by non-WIC purchasers compensated for this loss; (8) although prices have differed substantially between the WIC and non-WIC markets, available evidence indicates that manufacturers are still covering their production costs in the WIC market; (9) furthermore, it is unlikely that manufacturers would have an incentive to sell formula at a loss to over 50 percent of the market--the share accounted for by WIC; (10) rebates for other food products purchased by WIC can help reduce the program's costs but probably will not generate the level of savings generated by infant formula rebates; (11) savings for other products would be lower than for infant formula in part because no other single product accounts for as large a portion of WIC costs as infant formula and because the market characteristics of other products make it likely that manufacturers would offer smaller rebates per item; and (12) ultimately, the states may find that other cost-reducing options are more effective than rebates in generating savings for some WIC foods other than infant formula.