Cost of Infant Formula for the WIC Program Rising
Victor
Oliveira
Over half of all infant formula sold in the
U.S. is purchased through the Special
Supplemental Nutrition Program for Women, Infants,
and Children (WIC). An ERS study, the first
to consider the impact of retail prices on WIC costs,
finds that the cost of providing infant formula
has increased in recent years. Since WIC is a discretionary
program with fixed funding, this trend, if sustained,
means that additional funds will be needed to maintain
the level of services or that fewer low-income infants,
young children, and women will be served.
Federal law requires that WIC
State agencies enter into cost-containment contracts
with infant formula manufacturers. Contracts are
awarded to the manufacturer offering the lowest
net wholesale price—the manufacturer’s
wholesale price minus a rebate or discount provided
by the manufacturer. In exchange for the rebate,
the manufacturer receives an exclusive sales arrangement
within the State: WIC participants in the State
are given vouchers that can be redeemed in authorized
retail foodstores only for that brand of formula.
The cost of infant formula to
WIC has two components: (1) the net wholesale price—the
payment ultimately received by the manufacturer;
and (2) the retail markup—the retail price
of the formula minus its wholesale price. Supermarket
scanner data indicate that, for most States, the
retail markup accounts for about 60 percent of the
total cost to WIC. The size of the markup relative
to the net wholesale price is largely due to the
effectiveness of the rebate program. Rebates as
a percentage of the wholesale price have ranged
from 65 to 98 percent since 1998. In other words,
infant formula purchased through WIC has cost States
only 2 to 35 percent of its wholesale price, plus
the retail markup.
This analysis suggests that both
net wholesale price and retail markup have increased
over time. However, much of the increase in costs
is due to higher prices for infant formula supplemented
with DHA and ARA (two fatty acids found in breast
milk); these supplemented formulas average a much
greater retail markup than unsupplemented formulas.
DHA- and ARA-supplemented formulas
were first introduced in 2002, and by mid-2004
they accounted for almost two-thirds of total dollar
sales of formula in supermarkets. Often, “new and improved” products carry
price premiums that disappear over time. It is possible
that the retail markups observed in this study for
the supplemented formulas may lessen over time as
well.
|
Download PDF version