**Food Stamp**

**EBT Systems**

**and Program-**

**Eligible vs.**

**Non-Eligible Food Items**

**REPORT TO CONGRESS**

***Contract No.***

***53-3198-6-029***

August 1998

*Prepared for*

Ken Offerman, Project Officer

U.S. Dept. of Agriculture

Food and Nutrition Service

3101 Park Center Drive

Alexandria, VA 22302

*Prepared by*

John Kirlin, Abt Associates Inc.

William Adam, CCMI

The U.S. Department of Agriculture (USDA) prohibits discrimination in
all its programs and activities on the basis of race, color, national
origin, gender, religion, age, disability, political beliefs, sexual
orientation, or marital or family status. (Not all prohibited bases
apply to all programs.) Persons with disabilities who require
alternative means for communication of program information (Braille,
large print, audiotape, etc.) should contact USDA's TARGET Center at
(202) 720-2600 (voice and TDD).

To file a complaint of discrimination, write USDA, Director, Office of
Civil Rights, Room 326-W, Whitten Building, 14th and Independence
Avenue, SW, Washington, DC 20250-9410 or call

\(202\) 720-5964 (voice and TDD). USDA is an equal opportunity provider
and employer.

**Table of Contents**

Summary 1

Introduction 3

The EBT System Environment at the Point of Sale 4

POS Terminal Configurations 4

Identifying Eligible Food Items 5

Linking EBT Terminals to Retailers' ECRs 7

Integrated Terminals and ECRs 7

Stand-Alone POS Terminals 8

Estimated Costs 11

Linking EBT and Scanner Systems in the WIC Program 17

Preventing the Purchase of Ineligible Items 18

**Exhibits**

Exhibit 1: Stores with Scanning Capabilities, by Store Type 12

Exhibit 2: Estimated Costs for Stores with Scanning Systems 14

Exhibit 3: Estimated Costs for Stores without Scanning Systems 16

Exhibit 4: Total Estimated Costs, by Store Type 16

**Food Stamp EBT Systems and Program-Eligible**

**vs. Non-Eligible Food Items**

**Summary**

The Food Stamp Program (FSP) is designed to alleviate poverty-related
hunger by increasing the food purchasing power of low-income households.
Program benefits are therefore restricted to the purchase of eligible
food items, as defined by program regulations. As a result, the use of
program benefits to buy non-eligible items and the exchange of benefits
for cash (trafficking) represent major areas of concern within the
program. In an effort to reduce the incidence of these problems, the
U.S. Congress desires to know whether electronic benefits transfer (EBT)
systems can be configured to differentiate between program-eligible and
non-eligible items.

The only technology currently able to differentiate between eligible and
non-eligible items is food retailers' optical scanning systems, which
identify items based on bar-coded information affixed to their
packaging. An estimated 32 percent of all program-authorized retailers
currently use scanning systems, and these stores---which are mostly
supermarkets---redeem approximately 74 percent of all food stamp
benefits. Because many scanning systems are programmed to identify
FSP-eligible items, the accidental purchase of non-eligible items with
FSP benefits should be reduced in these stores.

The mere presence of an optical scanning system, however, is not
sufficient to prevent the purchase of non-eligible items with FSP
benefits. For an EBT system to differentiate between eligible and
non-eligible items, two factors must be present in program-authorized
stores. First, the store must use a scanning system. Second, the store's
EBT terminals must be linked to the store's electronic cash registers at
the point of sale (POS) so that information on scanned and eligible
items can be passed to the EBT system. Only then can EBT purchase
amounts be limited to the total dollar value of program-eligible items.

Achieving this linkage is technically feasible in about 95 percent of
all authorized retailers. Indeed, the required linkage already exists in
a relatively small percentage of FSP stores using newer, integrated POS
systems and in stores participating in an EBT demonstration for the
Special Supplemental Food Program for Women, Infants and Children (WIC).
Introducing the required hardware and software in all FSP-authorized
stores, however, will be quite expensive. The estimated initial cost is
\$4.60 billion, of which \$3.30 billion is for the estimated 68 percent
of program-authorized stores that currently do not scan. To maintain
this functionality over time would require an additional expenditure of
\$752 million per year to equip new stores entering the FSP and to
establish service agreements for equipment in stores that currently do
not use scanning equipment. These cost estimates are not indicative of
the costs the WIC Program would face in implementing EBT, where costs
would likely be lower due to a smaller retailer base, a larger
percentage of WIC stores already scanning, and differences in technical
requirements between the two programs.

No assumptions are made regarding how the estimated cost of \$4.60
billion might be shared between the public and private sectors. Although
many of the equipment upgrades envisioned would benefit retailers as
well as help achieve the desired EBT functionality, most smaller food
retailers have been unwilling to make the investment to date. Further,
when considering non-scanning stores, the hurdles to be overcome in
introducing a scanning system within a store extend well beyond price.
Implementing a scanning system requires much more than simply installing
new hardware and software. The store must be committed to creating an
accurate computerized price file, working with suppliers to keep the
price file up-to-date, training staff on how to use scanners, and
generally dealing with and working through the problems and hassles that
often accompany the introduction of a new technology. Therefore, in
order to achieve Congress's desired intent across all program-authorized
stores, a strong commitment would be needed in terms of both financial
resources and an effort to encourage program-authorized stores to adopt
newer technologies and equipment.

Finally, investing in new hardware and software will not eliminate
trafficking or the purchase of ineligible items with food stamp
benefits. First, scanning is either not feasible or not practicable in
about 5 percent of all program-authorized stores (mostly route venders,
produce stands, and residential facilities), so no controls would be
added there. Second, even where scanners are used, the new technological
controls could be circumvented by retailers who wish to traffic or scan
non-eligible food items as eligible in order to access food stamp
benefits.

**Introduction**

The Food Stamp Program (FSP) is currently transitioning to a new method
for issuing and redeeming food stamp benefits. Paper food stamp coupons
are being replaced with electronic benefits transfer (EBT) systems. In
an EBT system, food stamp recipients receive an EBT card that provides
access to a computerized account in which program benefits are stored.
When the card and its associated security code are used at a special EBT
terminal at a store's checkout lane, the dollar amount of the food stamp
purchase is electronically subtracted from the recipient's EBT account
and credited to the store's account. In March 1993, just over 1 percent
of food stamp households nationwide received benefits through EBT
systems. By March 1998, 37 percent of all food stamp households were
receiving benefits through EBT systems in 30 states. As part of the
Personal Responsibility and Work Opportunity Reconciliation Act of 1996
(PRWORA), Congress has mandated that all states issue and redeem food
stamp benefits with EBT by October 1, 2002.

One provision within PRWORA indicates Congress' desire that EBT systems
be able to differentiate between program-eligible and ineligible food
items. The specific language requires that state EBT systems include:

> \(ii\) effective not later than 2 years after the date of enactment of
> this clause, to the extent practicable, measures that permit a system
> to differentiate items of food that may be acquired with an allotment
> from items of food that may not be acquired with an allot­ment;[^1]

The FSP currently relies on cashiers to determine eligible from
ineligible food items. Neither coupons nor existing EBT systems indicate
what is being purchased and paid for with food stamp benefits. Thus,
they cannot limit what is being paid for with program benefits.

The only automated systems in place in the retail food industry that can
identify the items purchased are optical scanner systems. Using special
bar codes placed on food items, scanner systems can identify what is
being brought to the checkout lane for purchase. Scanner systems,
however, are not configured to place limits on the value of EBT
transactions. Indeed, in most retail stores in EBT states and counties,
there is no direct link between the EBT system and the retailer's
optical scanner system.

This report explores the feasibility and potential cost of enabling EBT
systems to differentiate between program-eligible and ineligible items.
It considers the cost of upgrading systems in stores that now have
scanners and the cost of installing new systems in stores without
scanners. The report also examines the potential for the purchase of
ineligible items even with the introduction of new technological
controls.

**The EBT System Environment at the Point of Sale**

Before identifying ways in which a link between an optical scanning
system and an EBT system might be achieved, it is necessary to
understand how retailers' point-of-sale (POS) systems at the checkout
lane currently operate. We therefore discuss below POS terminal
configurations and how retailers currently identify food stamp-eligible
food items.

**POS Terminal Configurations**

EBT transactions, together with credit card and debit card transactions,
form part of a class of electronic financial transactions known as
electronic funds transfers, or EFT. Any retail food store wishing to
accept a credit, debit, or EBT card for payment must have a terminal at
the point of sale with EFT capabilities. The POS terminal (or a separate
"backroom" computer controlling multiple terminals) formats a message to
the EFT processor seeking payment authorization for individual
transactions initiated with the credit, debit, or EBT card.

Excluding for the moment terminals that can handle EBT transactions,
retailers have two general types of POS terminals capable of handling
EFT transactions. The most common is a "stand-alone" terminal, separate
from the store's cash register. To use a stand-alone terminal, the
cashier needs to manually key-enter the purchase amount on the
terminal's keypad. Far less common are "integrated" POS terminals, in
which all EFT transactions are processed directly by the store's
electronic cash register (ECR). With an integrated terminal no manual
entry of purchase amount is required; the total amount of the sale is
automatically incorporated into the EFT transaction request.

With the addition of EBT, three different terminal configurations are
possible:

> · stand-alone terminals that process only EBT transactions;
>
> · stand-alone terminals that process credit and debit card
> transactions, as well as EBT trans­actions; and
>
> · integrated terminals, in which all electronic funds transactions are
> processed by the store's ECR.

The configuration in place in any given store depends on several
factors. FSP-authorized stores using government-supplied equipment may
participate in an EBT system without paying any program-related fees or
charges. That is, when a state implements an EBT system, stores without
electronic payment terminals (i.e., those stores not accepting credit or
debit cards) can elect to receive stand-alone, EBT-only terminals from
the state free of charge. Unless the store's food stamp redemptions
exceed 15 percent of total food sales, however, the number of lanes that
will be equipped with free EBT terminals is limited to one free terminal
for each \$8,000 or \$11,000 in monthly food stamp redemptions.[^2]

Stores having no EFT capabilities can negotiate if they wish with the
EBT vendor (or another vendor) for installation of stand-alone EFT
terminals that can accept EBT, credit, and debit cards. Unlike the
EBT-only stand-alone terminals, retail stores need to pay for
fully-functional EFT terminals. They may, however, be able to recover
some or all costs through per-EBT-transaction charges negotiated with
the EBT vendor.

Finally, EBT functionality can often be added to stores with existing
credit and debit card capability, whether their existing POS terminals
stand alone or are integrated with the lane's ECR. Typically, the
software controlling the debit and credit transactions must be modified
so that EBT transactions are routed to the state's selected EBT vendor,
either directly or through the store's selected EFT processor.[^3] It is
the store's or processor's responsibility to see that terminal software
is upgraded to handle EBT transactions. Again, per-transaction charges
may be applied to EBT transactions handled by the terminal. These
charges would be paid by the EBT vendor.

**Identifying Eligible Food Items**

Before turning to the issue of how EBT systems might be able to
differentiate between program-eligible and ineligible items, we discuss
how scanning systems identify eligible items.

It is unlawful to use FSP benefits to purchase anything other than
"eligible foods." According to regulation, eligible foods include:

1.  Any food or food product intended for human consumption except
    alcoholic beverages, tobacco, and hot foods and hot food products
    prepared for immediate consumption; and

```{=html}
<!-- -->
```
1.  Seeds and plants to grow foods for the personal consumption of
    eligible households.[^4]

Food stamps cannot be used to buy:

1.  Any non-food items, such as:

-- pet foods

-- soaps, paper products, and household supplies

-- grooming items and cosmetics

1.  Alcoholic beverages and tobacco

2.  Vitamins and medicines

3.  Any food that will be eaten in the store

4.  Hot foods that are ready to eat

5.  Any food marketed to be heated in the store

In many stores it is up to the cashier to enforce these limits on
program-eligible food items. That is, if the customer says that food
stamp benefits will be used to pay for all or a portion of the items
brought to the register, the cashier is supposed to ensure that food
stamp benefits are not used to pay for ineligible items. Although many
cashiers are diligent about ensuring that food stamps are used only for
eligible items, the possibility clearly exists that ineligible items
will sometimes be purchased with program benefits, either intentionally
or accidentally. This is the case regardless of whether the customer is
using food stamp coupons or an EBT card.

In more and more food stores, however, optical scanning devices are
being used to scan bar codes on purchased items to ring up the item's
price. Bar codes on most pre-packaged items (e.g., cereal, milk, canned
fruits and vegetables, frozen dinners) adhere to a Universal Product
Code (UPC) format that enables the store's POS system to uniquely
identify the item.[^5] Food retailers with scanning systems also create
their own unique bar codes for non-UPC items such as meat, cheese, or
fruits and vegetables supplied by local independent suppliers. These
latter bar codes are referred to as price look up (PLU) codes. PLU codes
generally contain coded information about the item's category or
department (e.g., meat) and its unit price.

A store's primary purpose for installing a scanning system is to improve
productivity at the checkout counter. When the store maintains a
computerized "price file" that lists each UPC in its inventory and its
associated price, the store's POS system can automatically ring up an
item's price when the item's UPC code is scanned.[^6] Scanning systems
also provide a means of tracking inventory. More important for this
report, however, is the fact that most stores with scanning systems also
have a means of tracking which items being purchased are food
stamp-eligible. The same computer file that contains a price associated
with each UPC code also can be programmed to contain a food stamp
eligibility "flag" associated with each item. As the store builds and
maintains its price file, the flag is set whenever the item is eligible.
The same process occurs for items with PLU codes. Then, as items are
scanned, the store's POS system tracks both total price and the price of
all food-stamp-eligible items. After all items are rung up, the POS
system can display a food stamp subtotal if the customer plans to use
food stamp benefits to pay for all or part of the purchase. This process
reduces potential cashier error or confusion as to whether an item is
FSP-eligible or not.[^7]

**Linking EBT Terminals to Retailers' ECRs**

To enable EBT systems to distinguish between eligible and ineligible
items, two conditions must be met. First, the store must have an optical
scanning system in place, with a price file that flags food
stamp-eligible items. Second, because the scanning system is linked to
the store's ECR, the EBT terminal must communicate with the ECR as well.
Operationally, with such linkage the ECR would first determine the food
stamp total based on the total price of all food stamp-eligible items
scanned. Then, the ECR would generate the EBT transaction request
**without** requiring manual entry of the food stamp total. Limiting the
transaction request total to the summed value of FSP items would ensure
that food stamp benefits were not used to buy ineligible items.[^8]

**Integrated Terminals and ECRs**

The desire that food stamp benefits be limited to food stamp-eligible
items is already being met in stores with integrated POS terminals.[^9]
In such systems, the POS terminal may be integrated with a store's ECR
through cabling, or the terminal and ECR may be built together as a
single unit. In either situation, the ECR's EFT software module will
normally be configured to prevent a food stamp EBT transaction amount
from exceeding the subtotal of food stamp-eligible items. For example,
once the cashier presses the "Food Stamp EBT" tender key on the ECR, the
ECR will format a message to the EBT vendor requesting authorization for
a food stamp transaction not to exceed the food stamp subtotal of
scanned items.

**Stand-Alone POS Terminals**

Most retail food stores in EBT locations, however, have stand-alone EBT
terminals. The EBT terminal is not linked to either the ECR or the
optical scanner device. Instead, the cashier key-enters the requested
EBT transaction amount into the EBT terminal. In stores with scanners,
the appropriate dollar value of food stamp-eligible items is likely to
be subtotaled by the ECR. In other locations, the clerk must determine
the appropriate subtotal.

For current purposes, stand-alone POS terminals that can process
commercial debit or credit transactions as well as EBT transactions are
similar to EBT-only terminals; the EBT purchase amount still needs to be
manually key-entered into the terminal.[^10] The following discussion
therefore speaks of both types of terminals as simply "stand-alone"
terminals.

The manual key entry of the EBT payment amount on a stand-alone terminal
clearly has the potential for key entry error, even in stores with
scanner systems. Furthermore, with manual key entry, there is no
automatic means to ensure that food stamp benefits are not being used to
purchase ineligible items. To achieve the functionality required by
Congress, a store owner with a stand-alone terminal would have three
options:

> \(1\) Replace the stand-alone terminal (and the retailer's current
> ECR, most likely) with an integrated terminal/ECR with appropriate
> software;
>
> \(2\) Physically connect the existing terminal and ECR and make
> necessary software mod­­ifications; or
>
> \(3\) Transfer EFT processing to the existing ECR by making necessary
> software modifications, and scrap the old stand-alone terminal.

Of course, software modifications would most likely be done by hardware
or software vendors, not by the retailer.

The first option takes us to where this section started---an integrated
terminal/ECR already programmed to meet Congress' requirements.
Integrated systems, however, are a very expensive solution for the
individual retailer.[^11] As such, it seems a viable option only for
retailers who are about to upgrade their POS systems anyway. The
remainder of this section discusses the other two options noted:
physically connecting the terminal and ECR, and transferring all EFT
processing (including EBT) to the ECR.

One way to transfer food stamp subtotal information to an EBT payment
terminal is to connect the two devices physically, for example by
connecting the EBT terminal to the ECR with an RJ45 or RS232 cable. The
ECR would need to be programmed to pass the EBT subtotal amount and
program type to the EBT terminal once the ECR's "EBT Payment" key was
pressed. The EBT terminal would also require programming to accommodate
the EBT tender total and program type information passed from the ECR.

With this reprogramming, the EBT subtotal amount and program type would
automatically be present within the EBT terminal when the clerk (or
client) pressed the EBT terminal's "send" button, thereby initiating EBT
processing of the purchase. The EBT terminal's programming would also
need to allow for an "override" function for food stamp or cash
assistance purchases, allowing the clerk to manually key-enter a
**lower** dollar amount for the EBT transaction, but not a higher
amount. The manual override would be used when the client's remaining
EBT balance was less than the purchase amount (for cash assistance
transactions) or food stamp subtotal (for food stamp transactions), or
when the client decided for other reasons to use another payment form
(e.g., cash) for part of the food stamp-eligible portion of the total
purchase.

To complete the tender process, the customer would enter his or her
security code, and the transaction would be sent to the EBT processor
for approval. Once the EBT transaction was authorized, the EBT terminal
would pass the acknowledgment on to the ECR. Upon receipt of the EBT
acknowledgment, the ECR would apply the EBT payment amount to its record
of the transaction.

There are several substantial hurdles to be faced in achieving the above
physical connection and functionality. First, older ECRs do not have an
available communications port for a connecting cable. In addition,
software revisions to many of these older ECRs are no longer supported
by the ECR vendor. In these situations, retailers would likely need to
replace their ECRs with newer, integrated models to meet the goal of
linkage.

Even when the EBT terminal and ECR can be connected, both require
reprogramming to achieve the desired linkage. Contacts with EBT vendors
suggest that EBT terminal software development would cost at least
\$35,000 to \$40,000. This estimate, however, does not include the cost
of installing the updated software in the EBT terminals. This cost
estimate also assumes that the information being passed from the ECR
would be in a standard format, regardless of ECR manufacturer or model.
Without such a protocol, separate reprogramming would be needed for
**each** model of ECR to which EBT terminals are connected. There are at
least several dozen popular models of ECRs for which separate pro­graming
might be required.

Finally, the ECR needs to be reprogrammed. The programming itself should
not be too difficult. It is likely to be time-consuming and difficult,
however, to get the numerous manufacturers and retailers involved to
undertake the programming. Furthermore, as noted above, the programming
specifications should adhere to a standard interface protocol with the
EBT terminal.

The above discussion suggests that the physical connection approach may
be quite difficult, achievable only on an interface-by-interface basis.
Looking to the future, however, several independent software vendors
offer payment system software that will allow the integration of the
terminal to the ECR. Even this software would need to be modified,
however, to ensure that the EBT total did not exceed the food stamp
subtotal for food stamp purchases and to allow manual override when the
EBT transaction amount needed to be less than the food stamp subtotal.
Due to the expense involved, these software solutions tend to be
targeted to multi-lane supermarkets with newer POS systems.

Another option for "linking" the terminal and ECR involves processing
all EFT transactions directly from the ECR, eliminating the need for a
separate POS (or EBT) terminal. At least two companies provide software
that allows the ECR to control all EFT transactions, directly routing
debit and credit transactions for approval. Although these software
products do not now have the capability to process EBT trans­actions,
this functionality could presumably be added. This approach, however,
would seriously narrow retailers' choice of software vendors unless the
other major vendors of ECR software decided to develop and offer similar
packages. Unless this happened, the physical connection approach would
probably gain wider acceptance among retailers, ECR manufacturers, and
software vendors.

**Estimated Costs**

Approximately 183,300 retailers in the United States are authorized to
participate in the FSP. Of these, about 173,700 represent retail food
outlets where optical scanning systems could be used to identify
program-eligible food items.[^12] In January 1998, these stores redeemed
\$1.44 billion in food stamp benefits, or over 99 percent of that
month's total redemption of \$1.45 billion.

By October 1, 2002, when EBT is mandated for all states, having
established in the prior section that it should be technically feasible
to link ECRs to EBT terminals, the next question is what costs would be
incurred to achieve this linkage. This section assembles available
information to provide an estimate of the cost to upgrade EBT systems.
The cost calculations are meant to be conservative, providing a
lower-bound estimate of the cost to link ECRs, scanners, and EBT
terminals in nearly all program-authorized stores. No attempt is made to
discuss how these costs, which are substantial, might be allocated or
shared between the public and private sectors.

Exhibit 1 presents the distribution of the 173,700 program-authorized
food stores in the United States by store type, together with two
estimates of the percentage of stores equipped with optical scanning
systems. The first estimate is based on USDA's Store Tracking and
Redemption Subsystem (STARS) database. This estimate is a known
lower-bound estimate; retailers self-report their scanning status when
they are authorized, but this information is not updated at
re-authorization. Overall, the STARS database indicates that about 18
percent of program-authorized stores use scanners.

The second estimate of stores with scanning systems is based on figures
presented in industry trade publications and, where figures are not
available, on the judgement of an independent contractor with experience
in retail scanning systems.[^13] Trade publications indicate that about
93 percent of chain-based supermarkets use scanning systems, compared to
about 83 percent of independent supermarkets. The estimate of 88 percent
in Exhibit 1 assumes that chain-based and independent supermarkets are
evenly distributed across program-authorized stores. These publications
also indicate a substantial recent jump in the percentage of convenience
stores with scanners---up to 33 percent. This estimate seems skewed by
the small sample of convenience stores responding to an industry survey,
however, so we have used a more conservative estimate of 25 percent. For
the other store types, no evidence regarding the prevalence of scanning
systems is currently available. The assumed values in the exhibit are
meant to be con­servative while acknowledging that, over time, more
stores are installing scanning systems. With these newer figures, the
estimated proportion of all program-authorized stores with scanning
systems is 32 percent.

Stores with scanning systems can be grouped into three categories,
depending on what needs to be done in the store to achieve linkage
between the POS/EBT terminal and the ECR. Nothing needs to be done in
stores whose ECRs and POS terminals are already integrated. In stores
with newer ECRs and stand-alone terminals, the terminals and ECRs need
to be physically linked, and software needs to be upgraded. Finally, in
stores with older ECRs, physical linkage often is impossible because the
ECR has no available communications port for a cable to the EBT/POS
terminal. Linkage in these stores is possible only by replacing the
older systems with newer ones. In estimating the cost of achieving
linkage, we have assumed a 20/40/40 distribution across these
categories. That is, we assume that 20 percent of stores with scanning
systems have integrated POS systems, 40 percent have terminals and ECRs
that can be physically linked, and 40 percent have systems requiring
complete replacement.[^14]

Exhibit 2 shows the estimated cost of achieving linkage among stores
with scanning systems. Total estimated cost for these stores is \$1.30
billion. For the estimated 22,387 stores needing a physical connection
between their ECRs and EBT/POS terminals, the total cost is \$15.0
million, or an average of \$670 per store. For the estimated 22,387
stores requiring new equipment, however, the total cost is \$1.29
billion, or an average of \$57,410 per store. These cost estimates are
based on the following assumptions developed by the study's
subcontractor:

1.  For stores requiring new equipment

> -- For multi-lane stores, cost for a system controller averages
> \$15,000 per store, including regular POS software.[^15]
>
> -- Cost for a basic integrated ECR/terminal, with regular POS software
> and an optical scanner, averages \$8,000 per lane.
>
> -- The cost to modify ECR software averages \$40 per store.
>
> -- The average cost to modify EBT terminal software is \$25 per store.
>
> -- Cost for installation and training averages \$800 per day, with two
> to five days needed per store, depending on size.
>
> -- All lanes are equipped, even if EBT terminals are not present in
> all lanes.

1.  For stores needing an upgrade

> -- The cost to modify ECR software averages \$40 per store.
>
> -- The average cost to modify EBT terminal software is \$25 per store.
>
> -- The cost to install software and physically link the ECR and
> terminal averages \$200 per lane.
>
> -- In stores with one or two lanes, all lanes are upgraded. In stores
> with three or more lanes, one-half of all lanes, on average, are
> upgraded.[^16]

Note that the assumptions regarding lane coverage differ for the two
groups of stores. In stores in which linkage can be achieved with a
software upgrade, the ECR software in each lane gets upgraded (at an
average cost of \$40 per store), but cabling is required only in those
lanes where EBT terminals are present. Thus, costs are reduced to the
extent that EBT lane coverage in a store is less than 100 percent. In
contrast, for stores needing upgraded ECRs, **all lanes** need to be
upgraded even if all lanes are not equipped with EBT terminals.
Otherwise, the store would be operating with a mix of both new and old
ECRs and software. A store could not operate efficiently with two
different POS systems, so we must assume that all lanes are equipped
with new ECRs. This accounts for the high cost of totally replacing the
store's POS and ECR terminals.

Turning to stores without scanning systems, their equipment and software
needs are similar to scanning stores with older POS systems. That is,
they need a complete ECR and POS system at each lane. Thus, the same
assumptions are used in estimating equipment costs for these stores.
These stores, however, also have to develop an infrastructure to support
use of scanners. In particular, a store-specific price file needs to be
created and maintained. The price file is a computer file with one
record for each type of item in the store's inventory. Each record
typically includes a short descriptor for the item, its bar code
identifier (which is the item's UPC or PLU code), a food
stamp-eligibility flag, and the item's price. Whenever the store wishes
to change the price of an item or add a new item to its inventory, the
price file needs to be updated. The cost of creating a price file will
vary depending on the size of the store and how data are collected and
added to the file. In any event, it is typically a labor-intensive
process. The estimated cost here varies between \$4,000 and \$7,500 per
store, based on information provided by the study's subcontractor.

Exhibit 3 presents the estimated costs for installing scanner systems
with the desired linkage in stores that currently do not use scanning
systems. The average cost for a single store, \$28,028, is much lower
than for scanning stores needing equipment upgrades because stores
without scanners tend to be much smaller.[^17] Even with a lower
per-store cost, however, the total amount is \$3.30 billion. With the
number of program-authorized non-scanning stores estimated at nearly
118,000, any attempt to introduce improved technology at the checkout is
going to be expensive. When the cost of \$3.30 billion is added to the
estimated cost of \$1.30 billion for already-scanning stores needing
upgrades or new equipment, the total cost is \$4.60 billion. Exhibit 4
shows how this total cost is distributed across the different store
types within the FSP. Even though 88 percent of supermarkets already
scan, the cost of upgrades at these stores and new equipment at the
remaining supermarkets represents 30 percent of the total estimated cost
for all stores. This expense arises because the average number of
checkout lanes in supermarkets (nearly nine lanes per store, based on
data in the STARS database) is much higher than in other stores. Costs
are high at small- to medium-grocery stores and convenience stores
because of the large number of these stores participating in the FSP.

The total cost estimate of \$4.60 billion represents the cost to achieve
a linkage between EBT terminals and store ECRs in all currently
authorized FSP stores. The cost estimate, which equals approximately
\$26,000 per store, will change somewhat to the extent that the number
of FSP-authorized stores changes in the near future. Over time,
estimated costs would be expected to decrease as more stores introduce
newer scanner and POS systems on their own. Any expected reduction in
total costs is likely to be small, however, unless the percentage of
stores adopting scanner systems increases dramatically, especially in
supermarkets, medium- to small-grocery stores, and convenience stores.

It is also important to consider any costs which would be required to
**maintain** the linkage between EBT and ECR systems in the future. In
recent years, an average of about 21,000 new stores have been authorized
annually. If one assumes that these new stores have the same
distribution of store types and existing scanning equipment as current
program-authorized stores, then the estimated cost of linking these
stores' EBT terminals with their ECRs would be about \$556 million per
year.[^18] All stores, both new and old, would also need to establish
service agreements to maintain their equipment in working order.
Providing service agreements for all stores would cost about \$371
million per year.[^19] Of course, stores with existing scanning
equipment and ECRs already pay for their own service agreements, so the
total cost for service agreements in stores that do not currently scan
would be lower---about \$196 million per year. In addition, in future
years, the scanning equipment and ECRs in many stores may need to be
updated as improved technology becomes available. This report, however,
does not attempt to estimate the cost of future upgrades.

**Linking EBT and Scanner Systems in the WIC Program**

In recent years, the Special Supplemental Food Program for Women,
Infants and Children (WIC) has begun to explore EBT as a means to
automating its paper-based transaction process. WIC benefits, however,
comprise a specific "prescription" of food items tailored to the
nutritional needs of the participant. This makes WIC's requirements much
different from those of the FSP. In particular, because the prescribed
quantity and list of authorized foods varies from one participant to
another, an EBT system for the WIC Program **must** be able to recognize
what is being purchased before authorizing payment to the retailer. That
is, an automated screening process for eligible foods must be
incorporated within the system. An EBT demonstration in Natrona County,
Wyoming showed the technical feasibility of integrating scanner
technology with an EBT system, and other states are planning similar
demonstration projects.

At this point it is too early to determine how the WIC Program's efforts
to integrate EBT systems and scanner systems might affect efforts to
achieve a similar functionality in the FSP. The two programs are very
different. For instance, whereas there are over 173,000 FSP-authorized
food retailers, WIC has only about 45,000 retailers authorized
nationwide. Furthermore, although detailed information is not available,
a larger percentage of WIC versus FSP retailers are supermarkets where
scanning systems are already likely to be present.

The technical requirements for integration also differ between the two
programs. The total number of WIC-eligible food items across the nation
is estimated to be on the order of 10,000, whereas the number of
FSP-eligible items is at least ten times greater. Furthermore, within
any given state, the number of WIC-eligible items can be as few as
2,000. Thus, it is possible to develop an EBT system for the WIC Program
**without** linking the EBT terminal to the retailer's scanner system
and associated host price file. Instead, a scanning device can be hooked
directly to the EBT terminal, and information about the limited set of
WIC-authorized food items can be stored in a separate EBT file. This
approach bypasses the difficult task of integrating the EBT terminal
with the retailer's ECR.[^20] Due to these differences in retailer
populations and technical requirements, the cost estimates presented in
the previous section should not be extended to the WIC Program.

**Preventing the Purchase of Ineligible Items**

At a total estimated initial cost of \$4.60 billion, plus an additional
cost of \$752 million per year, about 95 percent of all FSP-authorized
stores could be configured so that EBT benefits could be used to
purchase only program-eligible food items. These stores redeem over 99
percent of all food stamp benefits. The final question addressed by this
report is how effective this investment might be in limiting the use of
program benefits to the purchase of eligible items. Although we are
unable to quantify this effectiveness, it must be acknowledged that the
technological controls offered by scanning systems can be circumvented
in several ways.

The first circumvention arises simply because it is not feasible to link
EBT terminals to scanning systems in about 5 percent of the 183,300
establishments authorized by the FSP. Two percent of these
estab­lishments are not retail outlets and therefore do not sell
bar-coded items.[^21] There is nothing to scan in these establishments.
The other 3 percent represent route vendors and produce stands. These
estab­lishments either sell large quantities of non-bar-coded items, or
they operate in an environment where scanning would be very difficult to
implement. All together these route vendors, produce stands, and
non-retail establishments redeem about 0.8 percent of all food stamp
benefits. Although this percentage is small, it still represents
approximately \$135 million in annual food stamp benefits that would not
be subject to scanning controls.

For the estimated 173,700 retail food outlets where scanners either are
or could be installed and linked to EBT terminals, retailers who wish to
circumvent the technological controls would have at least two means to
do so. First, we note that the retailer's price file is a critical
element to ensuring that only eligible food items are purchased with
program benefits. The price file needs to be programmed to include a
food stamp eligibility flag for each item in the retailer's inventory of
goods sold. If an ineligible item was flagged on the file as eligible,
then the EBT system would have no way of limiting the purchase of that
item with food stamp benefits. In some cases the flag for an ineligible
item could be mistakenly programmed to indicate eligibility, thereby
allowing the inadvertent use of program benefits for ineligible items.
In other cases, however, a retailer could fraudulently flag one or more
ineligible items as eligible. (The programming is straightforward.) Such
abuse could be prevented only by government monitoring of the
eligibility flags on retailers' price files. This monitoring would
require an entirely new set of compliance procedures that would be both
intrusive and expensive. For instance, it could entail unannounced,
periodic government review of the food stamp eligibility flags on store
price files.

Even if monitoring procedures were implemented, trafficking in program
benefits would not be eliminated. Retailers who wished to traffic could
simply affix a series of UPC codes for eligible food items to a sheet of
paper or cardboard kept near the EBT terminal and scanner. When a client
wishing to traffic benefits came to the store, the retailer could scan
any combination of the UPC codes until the desired total amount of the
trafficked benefits was reached. The retailer could then give the client
an agreed-upon percentage of the total "sale" in cash and receive the
full amount of the sale during the EBT system's normal daily settlement.
By using different combinations of valid UPC codes each time, the
retailer could avoid having the transactions identified as suspect
during any subsequent investigation or agency review of EBT transaction
data.

It is beyond the scope of this report to estimate how often either of
the above means to circumvent scanning controls might be used. The
important point to recognize, however, is that trafficking would still
be possible after EBT terminals were linked to scanners, as would the
actual purchase of ineligible items.

[^1]: Public Law 104-193, Section 825 (a)(2)(D)(ii).

[^2]: The monthly redemption figure for supermarkets is \$11,000; for
    all other stores it is \$8,000.

[^3]: Some stores process their own EFT transactions, whereas others
    contract with a third party for this service.

[^4]: CFR Section 271.2 (Definitions). "Eligible foods" also includes
    meals prepared and delivered or served by various institutions, as
    specified in the regulation.

[^5]: The UPC is typically a 12-digit number composed of a six-digit
    manufacturer's code, a five-digit item number (selected by the
    manufacturer), and a single check digit. Some versions of the code
    remove embedded zeros; the remaining portion of the code follows an
    accepted pattern for indicating where the zeros are located within
    the overall code.

[^6]: Prices for items with PLU codes are computed by multiplying the
    item's unit price, coded within the PLU, by its weight or size, as
    determined at the checkout counter.

[^7]: The POS software that identifies FSP-eligible items has been
    created independent of USDA involvement. Programming and updating
    the software to identify which items are eligible are the
    responsibility of the retailer and product suppliers. USDA has made
    no effort to monitor or verify the accuracy or timeliness of this
    software to ensure that items are properly flagged.

[^8]: This, of course, assumes no overt fraudulent activity, such as
    scanning eligible items that the customer does not intend to
    purchase. The potential for fraud is examined further later in this
    report.

[^9]: It should also be pointed out that, in the EBT demonstration in
    Wyoming, a small number of stores have integrated POS terminals that
    limit the purchase of food items in the Special Supplemental Food
    Program for Women, Infants and Children (WIC) to WIC-prescribed
    items. The efforts of the WIC Program to link scanner systems and
    EBT are described later in this report.

[^10]: This is the principal distinction between stand-alone and
    integrated terminals.

[^11]: As discussed later in the report, an integrated system is likely
    to cost at least \$8,000 per lane.

[^12]: The remaining locations include about 5,500 route vendors and
    produce stands---places where optical scanning systems cannot be
    installed or where installation would make no sense because the
    product being sold has no affixed UPC codes. Another 3,900 locations
    are not retail food outlets; they include places like drug and
    alcohol treatment centers, women's shelters, group living homes,
    communal dining facilities, and food wholesalers.

[^13]: Consumer Card Marketing, Inc. (CCMI) is a subcontractor to Abt
    Associates Inc. for the study under which this report has been
    prepared. CCMI markets card-based "frequent shopper" systems to
    stores with scanner systems.

[^14]: No industry source tracks the distribution of scanning systems
    according to these categories, either for all stores as a group or
    for specific store types. One EBT vendor stated that, in the states
    it served, about half of the ECR systems were so old that no
    communication ports existed. The assumed split of 20/40/40 is a bit
    more conservative in terms of estimated total costs required to
    upgrade or replace ECR systems in stores with scanning systems.

[^15]: No controller is needed for single-lane stores.

[^16]: The assumption is that all lanes with EBT terminals are upgraded.
    Under federal EBT regulations, about 47 percent of all lanes are
    eligible for free, government-provided EBT terminals. The actual
    percent is higher because all lanes are equipped in some stores,
    whether by the EBT vendor or store owner.

[^17]: Based on the STARS database and this report's assumptions
    regarding the percentage of stores with scanning equipment,
    non-scanning stores average 1.8 lanes per store. In contrast, stores
    with scanning systems average 5.2 lanes per store. This arises
    because supermarkets and military commissaries are both the largest
    types of store and the most likely to scan.

[^18]: The estimated cost is based on an average cost of \$26,482 per
    store.

[^19]: This cost estimate assumes that annual service agreement costs
    would average \$1,000 per lane in small stores, \$750 per lane in
    medium-sized stores, and \$500 per lane in supermarkets and military
    commissaries. The costs are based on information supplied by a firm
    providing POS service agreements.

[^20]: Several retailers participating in the Wyoming WIC demonstration
    have had their ECRs integrated with the EBT terminal, but the EBT
    vendor had to custom design and build a separate interface for each
    different POS system in the demonstration area.

[^21]: These establishments include shelters, rehabilitation centers,
    group living quarters, and other providers of prepared meals.