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Executive Summary

WIC INFANT FORMULA REBATES SAVED $326 MIL. IN FIRST TWO YEARS of the program's operations, according to a recent report from the Congressional General Accounting Office. About $293 mil. of the savings were provided during 1989, when rebate programs were more widely implemented. Because of the rebate savings, the Women, Infants and Children supplemental nutrition program was able to expand coverage to 60% of the population eligible for assistance, from less than 50% in the early 1980s, the GAO report notes. The two-year increase translates into an additional 474,000 individuals served by WIC. According to the GAO report, WIC had a monthly enrollment of 4.1 mil. women and children during 1989, with total federal costs of$1.9 bil. The report, entitled "Infant Formula: Cost Containment and Competition in the WIC Program," was prepared at the request of House Energy & Commerce/Oversight Subcommittee Chairman Dingell (D-Mich.). The Federal Trade Commission recently launched an investigation into possible price-fixing in the infant formula market ("The Pink Sheet" June 4, T&G-8). GAO focused on 57 WIC agencies that both operate rebate programs and use retail distribution. These programs generally provide clients with vouchers to purchase infant formula, and manufacturers provide a rebate after purchase to the WIC agency. Of the 57 agencies, 18 awarded contracts to a single vendor after competitive bidding. However, the 18 contracts cover more than half of the overall WIC infant population in the U.S. Three agencies used a multi-source bidding approach, where all firms meeting pre-set criteria were awarded contracts, and one used a preferred provider program as another variation on competitive bidding. The other 35 WIC agencies followed an "open market" approach whereby rebates were sought but clients were not restricted or even steered to the firms agreeing to rebates. Almost all of the contracts were awarded to the industry's two largest firms, Enfamil-maker Mead Johnson and Similac-maker Ross Laboratories, the GAO found. On average, states using a competitive bid contract with one provider paid about 36 cents less per 13-ounce can of milk-based concentrated formula than states using the open market approach, according to the GAO. Based on the GAO data, the average savings represented a discount of about 25% from the wholesale price of about $1.50 for formula. The report also shows a wide range of rebates offered to the WIC agencies, even among those offered by the same manufacturer. As of June 1, 1989, for example, Ross' wholesale price was $1.58. Under the single-winner bidding systems, Ross' adjusted price (wholesale minus rebate) ranged from 13 cents to 57 cents. Under multi-source bidding programs, Ross infant formula prices ranged from 37 cents to 57 cents per can. This compares to adjusted prices under the open market rebate programs, which ranged from 57 cents to $1.11. Mead Johnson's wholesale price for infant formula was $1.55, according to the GAO. Adjusted prices for programs with one accepted bid ran from 19 cents to 46 cents a can. Where several bids were accepted, Mead Johnson offered its infant formula for 58 cents a can. For open market programs, the company charged from 58 cents to $1.08 a can. The GAO found three statistically significant predictors of whether a state received a lower price: use of competitive bidding, an agency's coverage of only a small percentage of eligible infants, and whether it was a Native American WIC agency. The 1989 WIC reauthorization law requires all states using retail distribution to undertake competitive bidding, unless an alternative strategy yields equal or greater savings. A manufacturer may be more attracted to agencies previously aiding a smaller percentage of eligible infants, GAO speculates, because those agencies can plow back the savings to provide more infants with that same company's product. GAO suggested that "manufacturers may be reluctant to offer high rebates when savings unused by a WIC agency are returned to FNS [the Federal Nutrition Service] and distributed to other agencies that may be served by competing manufacturers." The absolute number of infants in an agency's program was not found to be predictive of higher rebates. WIC programs administered by Native American organizations paid 55 cents more per can of formula than did other programs. About half that difference can be attributed to the use by all Native Americans of the open market approach and these programs' already existing coverage of a large percentage of eligible infants, GAO said. While Mead Johnson has slightly more WIC rebate contracts than Ross, Ross's contracts cover about 57% of the WIC infant population, versus 34% for Mead Johnson. Some observers have drawn parallels between the infant formula and pharmaceutical industries, especially with the overlap of companies in both businesses. For example, Sen. Pryor (D-Ark.), to illustrate his concern that proposed Medicaid drug discounts should be maintained in future years, cited the example of infant formula companies increasing prices after the first few years ("The Pink Sheet" Sept. 3, p. 11). GAO's report notes that the nine states that reopened rebate programs during 1990 received rebate offers that were lower than before. In addition, after Mead Johnson notified states in March 1990 that it planned to offer rebates of 75 cents to all states, other firms "also appeared to be lowering their bids to about the 75 cents level for rebate contracts." Shortly after, the FTC announced it had opened an inquiry into pricing patterns within the infant formula industry.

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