Proper nutrition during an infant’s first year
is essential for long-term growth and development. Although breastfeeding
is the best nutritional method of feeding most babies, not all mothers
breastfeed their infants. For these infants, infant formula is a
key, or even sole, source of nutrition during their first months
of life. Each month, USDA’s Special Supplemental Nutrition
Program for Women, Infants, and Children, commonly known as WIC,
provides infant formula at no cost to almost 2 million nutritionally
at-risk infants in low-income households. In fact, over half of
all infant formula sold in the United States is obtained through
WIC. But while WIC’s infant formula is free to WIC participants,
“there’s no such thing as a free lunch.” Infant
formula is no exception to this elementary lesson of economics.
As with other Federal programs, WIC is funded by the U.S. Treasury.
Taxpayers alone, however, do not bear the full economic burden of
WIC. Infant formula manufacturers provide the State agencies administering
the WIC program with rebates of 85 to 98 percent of the wholesale
price for each can of formula purchased by WIC participants. These
rebates totaled $1.48 billion in fiscal 2002 and supported over
a fourth of WIC’s participants.
A recent ERS study of infant formula prices in 47 local areas found
that non-WIC households who pay for infant formula out of their
own pockets share some of the economic burden as well. The study
found that an indirect effect of the program is slightly higher
infant formula prices in supermarkets. For example, depending on
the brand, feeding an average 3-month-old girl costs between $78
and $92 per month, but monthly costs increase anywhere from $0.32
to $5.26 if the girl’s family lives in an area where WIC participation
is significantly higher than the national average. The ERS study
focused on retail pricing behavior by supermarkets, setting aside
wholesale pricing behavior by infant formula manufacturers.
WIC Serves Almost Half of U.S. Infants
Curtia
Taylor, USDA/ERS
WIC is one of the central components of the Nation’s
nutrition assistance system. About half of all infants, a quarter
of all children ages 1-4, and a third of all pregnant women participate.
Federal program costs were $4.5 billion in fiscal 2003, making WIC
the country’s third-largest nutrition assistance program,
behind the Food Stamp Program ($23.9 billion) and the National School
Lunch Program ($7.2 billion) (see box, “WIC
Facts”).
As a supplemental nutrition assistance program, WIC provides vouchers
for specific foods that supply target nutrients—specifically
protein, iron, vitamins A and C, and calcium—identified as
lacking in the diets of low-income pregnant, breastfeeding, and
postpartum women and their infants and young children. WIC-approved
food categories include milk, eggs, cheese, cereal (hot and cold),
infant cereal, juice, peanut butter, dried beans or peas, canned
tuna, carrots, and infant formula. WIC infants receive up to thirty-one
13-ounce cans of liquid formula (or its equivalent) per month—an
amount that accounts for most infants’ formula needs.
Participants exchange the vouchers for WIC-approved foods at authorized
retail outlets, such as supermarkets, small grocery stores, and
pharmacies. Retailers submit the vouchers to their bank, which in
turn submits them to the WIC State agency to be reimbursed the retail
or shelf price of the WIC items.
WIC
Facts
Ken
Hammond, USDA/ERS
The mission of the WIC program is to safeguard
the health of low-income women, infants, and children up to
age 5 who are at nutritional risk, by providing supplemental
foods, nutrition education, and referrals to health care and
other social services. WIC is based on the premise that early
intervention programs during critical times of growth and
development can help prevent future medical and developmental
problems. Administered by USDA’s Food and Nutrition
Service, the program provides grants for supplemental foods,
nutrition services, and administration to 88 WIC State agencies,
including the 50 States, the District of Columbia, Guam, the
U.S. Virgin Islands, American Samoa, the Commonwealth of Puerto
Rico, and 33 Indian Tribal Organizations.
To qualify for WIC, a family’s income must be at or
below 185 percent of the Poverty Income Guidelines ($34,040
for a family of four in June 2004). Applicants who participate
or who have certain family members who participate in the
Food Stamp, Medicaid, or Temporary Assistance for Needy Families
(TANF) programs are deemed to meet the income eligibility
criteria automatically. Applicants must also be nutritionally
at risk, as determined by a health professional.
Formula Manufacturers Offer Big Rebates
WIC was established in the early 1970s. By the mid-1980s, infant
formula was accounting for an increasingly large share of total
WIC food costs. In an effort to control costs, several States implemented
rebate programs with manufacturers of infant formula. As a result
of the cost savings from these rebate programs, a Federal law was
passed in 1989 requiring WIC State agencies to develop cost-containment
systems for the procurement of infant formula.
Most WIC State agencies obtain discounts in the form of manufacturers’
rebates for each can of formula that WIC participants “purchase”
(by exchanging vouchers). In return for the rebates, a formula manufacturer
receives an exclusive sales arrangement within the State. That is,
WIC participants in the State are given vouchers that can be redeemed
only for that brand of formula, making that manufacturer the sole
supplier to the WIC market in the State. Each State’s WIC
contract is awarded to the manufacturer that bids the lowest net
price—wholesale price less the rebate. Thus, the brand of
infant formula purchased by WIC participants (the contract brand)
can vary from State to State. The State WIC agency bills the contract-winning
manufacturer for the rebate specified in the contract. The rebates’
effect on WIC program cost is substantial. In fiscal 2002, it is
estimated that infant formula accounted for about 46 percent of
total WIC food costs on a pre-rebate basis but only 21 percent on
a post-rebate basis.
Rebates per can of formula also vary across States and
ranged from 85 to 98 percent of the manufacturer’s wholesale
price in fiscal 2000. As a result, the highest net price a manufacturer
received for WIC- provided infant formula was only 15 percent of
the wholesale price. Net prices in September 2000 ranged from 6.5
cents (per can of milk-based liquid concentrate) in Florida to 44.7
cents in Nebraska and South Dakota. For the U.S. as a whole, net
prices averaged 18 cents per can in fiscal 2000.
Both supply-side and demand-side characteristics of the infant formula
market help to explain how WIC State agencies can receive such large
rebates. On the supply side, the formula market is highly concentrated:
in 2000, three companies—Mead Johnson (52 percent), Ross (35
percent), and Carnation (12 percent)—accounted for 99 percent
of the infant formula market. A high degree of concentration is
often associated with high profit margins, which, in turn, give
manufacturers the cushion to offer high rebates. On the demand side,
WIC participants purchase over half of all infant formula, assuring
large sales for the contract-winning manufacturer. In addition,
manufacturers can realize spillover benefits of winning a WIC contract:
retailers may devote increased shelf space to the WIC contract brand,
which may then lead to increased sales of the brand to non-WIC participants.
Sales may also rise if physicians recommend the WIC contract brand
to non-WIC mothers. While manufacturers would prefer a higher net
price, stipulating a higher net price in a contract bid could jeopardize
a formula maker’s chances of winning the contract. Ongoing
ERS research is examining factors that affect net formula prices
across States.
Curtia
Taylor, USDA/ERS
WIC Raises Infant Formula Prices Slightly
Each of the three major formula manufacturers sets a national wholesale
price schedule for retailers, with price based on the size of the
purchase. Thus, wholesale prices for a given brand and amount of
formula do not vary by geographic area. Any differences in a brand’s
retail prices across major market areas are determined primarily
by variation in the retail markup—the difference between the
retail price and the wholesale price. Retail prices for a particular
brand of infant formula vary significantly across the country. For
example, the average retail price of a can of Mead Johnson’s
Enfamil milk-based liquid concentrate was $2.56 in supermarkets
in Albany, NY, in 2000. In San Diego, CA, the same product sold
for $3.59. In addition, in any local market, different manufacturers’
brands of formula sell for different prices. Notably, Carnation
brand formula typically sold for less than the brands of Ross and
Mead Johnson in 2000, due in part to Carnation’s lower wholesale
price.
WIC can be thought of as creating two separate markets
for infant formula: the WIC market and the non-WIC market. WIC households
obtain formula at no cost and are therefore price insensitive, while
non-WIC households must pay for the infant formula they purchase
and are relatively price sensitive. Federal regulations prohibit
retailers from charging WIC participants more than non-WIC customers.
However, in local areas where WIC households make up a large share
of the area’s formula-buying households, retailers have an
incentive to increase the price for the WIC contract brand of formula.
Retailers will then receive a higher reimbursement when the WIC
vouchers are submitted to the WIC State agencies. (WIC State agencies
have the authority to limit the price that WIC-authorized vendors
can charge for the WIC contract brand of formula, thus discouraging
retailers from charging exorbitant prices for infant formula.)
An ERS analysis of 47 local areas found that WIC and
its infant formula rebate program do affect the retail price of
formula. Controlling for other factors—such as wholesale price
and household income—a manufacturer’s brand of formula
was priced higher if it was the WIC contract brand in an area. For
a dozen types of infant formula examined, prices increased up to
6 cents (per 26 ounces reconstituted) for the contract brands.
WIC’s relative size in a local area, as measured by the ratio
of WIC to non-WIC formula-fed infants, affected retail prices of
contract brands as expected. And, in areas where the relative size
of WIC is large, retailers have an incentive to raise the price
of noncontract brands of formula as well. Once retailers establish
a higher price for the contract brand, some non-WIC households may
choose to switch to the noncontract brand, resulting in an increase
in demand for the noncontract brand. However, retailers have more
incentive to increase the prices of WIC contract brands, as WIC
households will not change their purchasing behavior if contract-brand
prices rise.
Creatas
What is the impact of these price effects on the monthly
budget of a non-WIC family? The formula needs of infants vary. Parents
of a 3-month-old girl typically spend between $78 and $92 per month
(in 2000 dollars) for milk-based powder formula, depending on brand.
If this family moved from an area where half of all formula-fed
infants are in WIC to an area where two-thirds are in WIC, their
monthly expenditures for infant formula bought in supermarkets would
typically increase. For milk-based formula, the most popular type,
expenditure increases ranged from $2.87 to $5.26 per month for contract
brands and from $0.32 to $4.52 per month for noncontract brands.
Who Pays?
WIC and its infant formula rebate program have been successful in
terms of making infant formula available to needy infants at a low
monetary cost. With rebates from the formula manufacturers, the
cost of the formula to taxpayers is a small fraction of its wholesale
price. However, an indirect effect of the program is higher retail
prices for non-WIC consumers of infant formula. WIC and its infant
formula rebate program each affect the supermarket price of infant
formula, although the estimated impact on a non-WIC family’s
monthly expenditures for infant formula is modest. Balancing these
modest price effects is the fact that rebates support over one of
every four participants in the WIC program, or almost 2 million
low-income people per month in fiscal 2003.
WIC is working to increase breastfeeding rates among WIC mothers
(see box, “WIC and Breastfeeding Rates”).
If successful, these efforts could decrease the ratio of WIC to
non-WIC formula-fed infants. With price-insensitive WIC participants
making up a smaller component of the infant formula market, WIC’s
influence in the retail infant formula market will be lessened,
resulting in lower retail prices for both contract and noncontract
brands of infant formula for non-WIC consumers.
WIC
and Breastfeeding Rates
Digital
Vision
WIC officials recognize the numerous health benefits
of breastfeeding. WIC, through its nutrition education and
breastfeeding promotion programs, encourages mothers to breastfeed
their infants. Breastfeeding women get higher priority for
certification into the program than nonbreastfeeding postpartum
women, and they are eligible to participate in WIC longer
than nonbreastfeeding mothers. Mothers who exclusively breastfeed
their infants receive vouchers for more foods and larger quantities
for some authorized foods than nonbreastfeeding postpartum
women. Breastfeeding mothers can also receive breast pumps
and other breastfeeding aids to help support the initiation
and continuation of breastfeeding.
Although breastfeeding rates are increasing among
women participating in WIC—both while in the hospital
immediately after giving birth, and 6 months after giving
birth—the rates continue to be lower than those of non-WIC
women. Although some have questioned whether WIC provides
a disincentive to breastfeeding by supplying free infant formula,
the women most likely to participate in WIC, including mothers
who are poor and have low education levels, are less likely
to breastfeed their children in general.
This article is drawn from...
WIC and Retail Price
of Formula, by Victor Oliveira, Mark Prell, David Smallwood,
and Elizabeth Frazão, FANRR-39, USDA/ERS, May 2004.
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