United States Government Accountability Office

GAO Report to Congressional Requesters

FOOD ASSISTANCE

FNS Could Take 

Additional Steps to 

Contain WIC Infant 

Formula Costs 

March 2006 

 

GAO-06-380 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

March 2006

FOOD ASSISTANCE

FNS Could Take Additional Steps to 

Highlights of GAO-06-380, a report to Contain WIC Infant Formula Costs 

congressional requesters 

The Special Supplemental Nutrition

Program for Women, Infants and 

Children (WIC) provides food,

nutrition education, and health

care referrals to close to 8 million 

low-income pregnant and 

postpartum women, infants, and 

young children each year. About a 

quarter of these participants are 

served using rebate savings from

contracts with infant formula

manufacturers. WIC is 

administered by the Department of

Agriculture’s Food and Nutrition 

Service (FNS). To better

understand infant formula cost

containment, this report provides 

information on: (1) factors that

influence program spending on

infant formula, (2) how the level of

savings resulting from infant 

formula cost containment has 

changed and the implications of

these changes for the number of 

participants served; and (3) steps 

federal and state agencies have

taken to contain state spending on 

infant formula. 

What GAO Recommends

GAO recommends that the

Secretary of Agriculture consider

providing guidance to help prevent 

infant formula costs from rising 

when manufacturers introduce 

more costly formulas during a 

contract, and that the Secretary 

consider ways to more effectively 

restrict use of non-rebated

formulas by WIC participants. 

Rebates drive state spending on infant formula but use of non-rebated 

formula increases state costs. In fiscal year 2004, states paid an average of 

$0.20 per can for milk-based concentrate formula, a savings of 93 percent off 

the wholesale price. However, states also allow some use of non-rebated 

formula that can cost states more than 10 times as much as contract 

formulas. For example, in 2004, 8 percent of infant formula provided to WIC 

participants was non-rebated. 

Rebate savings from infant formula cost-containment contracts have allowed 

WIC to serve an additional 2 million participants per year, but recent 

increases in the cost per can of formula could lead to reductions in the 

number of participants served with rebates. Rebate savings have remained 

near $1.6 billion per year since 1997 after adjusting for inflation, but the

amount states pay per can of infant formula has increased since 2002. We 

estimated that in 2004, if the cost per can of formula increased in every state 

by as much as it did in two states, approximately 400,000 fewer participants 

would have been able to enroll in WIC nationwide. 

State and federal agencies have both taken steps to contain WIC infant 

formula costs, but FNS also focuses on sustaining the cost-containment 

system. States have sought to increase their costs savings through their 

infant formula contracts—for example, by joining coalitions to leverage 

greater discounts. Some also try to restrict the use of the more expensive 

non-contract formulas. FNS, in turn, helps states to contain costs through its 

review of contracts and through policy and guidance. For example, FNS 

reduced—but did not eliminate—the price increases that can result from the 

introduction of new, more costly formulas. FNS has also used its oversight 

authority to ensure that all interested manufacturers can compete for state 

infant formula contracts in an effort to maintain the long-run sustainability 

of the infant formula cost-containment system. 

National average net price per can of milk-based concentrate, 2000-2005 

Price in 2004 dollars

Source: GAO.

2000 2001 2002 2003 2004 2005

0

0.05

0.10

0.15

0.20

0.25

www.gao.gov/cgi-bin/getrpt?GAO-06-380.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Cindy Fagnoni 

at (202) 512-7215 or fagnonic@gao.gov. 
Contents 

Letter 1

Results in Brief 4 

Background 6

Rebates Drive WIC Infant Formula Costs More Than Any Other 

Factor, but Use of Non-Contract Infant Formulas also Plays a 

Role 9

Rebate Savings Have Been Used to Serve about a Quarter of All 

Participants in Recent Years, but If Rebate Savings Continue to 

Decline, Fewer People Will Be Able to Participate 15 

State and Federal Agencies Take Steps to Contain Costs; however, 

FNS also Focuses on Sustaining the Competitive Bidding System 21 

Conclusion 27

Recommendations for Executive Action 27 

Agency Comments and Our Evaluation 28 

Appendix I Scope and Methodology 30 

Appendix II Use of Non-Contract, Non-Exempt and Exempt 

Infant Formula by State, Fiscal Year 2004 33 

Appendix III GAO Contacts and Staff Acknowledgments 36 

Related GAO Products 37 

Figures 

Figure 1: WIC Infant Infant Formula Rebate Process 3 

Figure 2: Type of Infant Formulas and Percentage of All WIC 

Formula Issued FY 2004 14 

Figure 3: Total Rebate Savings, 1990-2004 16 

Figure 4: National Weighted Average Net Price per Can of MilkBased Concentrate 17 

Figure 5: Change in Net Price Paid under Newly Awarded 

Contracts 18

Page i GAO-06-380 Food Assistance 
Figure 6: Percentage Contract, Exempt, and Non-Contract, Nonexempt Infant Formula Provided 23 

Abbreviations 

ARA arachidonic acid 

DHA docosahexaenoic acid 

FNS Food and Nutrition Services 

FY fiscal year 

NEATO New England and Tribal Organization coalition 

USDA United States Department of Agriculture 

WIC Special Supplemental Nutrition Program for Women, 

 Infants, and Children 

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Page ii GAO-06-380 Food Assistance 
United States Government Accountability Office

Washington, DC 20548 

March 28, 2006 

The Honorable Tom Harkin 

Ranking Minority Member 

Committee on Agriculture, Nutrition, and Forestry 

United States Senate 

The Honorable Arlen Specter 

United States Senate 

The Honorable George Miller 

House of Representatives 

The Special Supplemental Nutrition Program for Women, Infants and 

Children (WIC) provides food, nutrition education, and health care 

referrals to close to 8 million low-income pregnant and postpartum 

women, infants, and young children each year. The 2 million infants who 

receive WIC benefits each year account for about half of infants born in 

the United States. Congress allotted just over $5.2 billion to fund the WIC 

program for fiscal year 2005, of which approximately 16 percent is 

typically used to purchase infant formula, the most expensive item 

supplied under the food grant. The U.S. Department of Agriculture’s 

(USDA) Food and Nutrition Service (FNS) oversees and provides guidance 

to the state and local agencies that implement the WIC program. 

States contain the cost of infant formula using a competitive bidding 

process that awards sole-source contracts to infant formula 

manufacturers. This competitive bidding process allows infant formula 

manufacturers to compete for the contracts by offering sizeable discounts 

to the states on the infant formula that WIC participants purchase. Three 

infant formula companies currently compete and serve WIC participants—

Mead Johnson, Ross Laboratories, and Nestlé. With just three 

manufacturers competing for WIC contracts, infant formula is among the 

most concentrated markets in the United States.1

 State WIC agencies 

provide most of their WIC infants with one of the contract manufacturer’s 

milk-based or soy-based infant formulas designed for healthy infants. 

 1

A fourth manufacturer, PBM Nutritionals, manufactures infant formula for sale under 

store brands. PBM does not compete for WIC contracts. 

Page 1 GAO-06-380 Food Assistance
Infants can also be provided with a “non-contract” infant formula if 

prescribed by a medical professional. There are two types of non-contract 

infant formula. “Exempt” infant formulas are designed for infants with 

specific medical or dietary problems, and “non-contract, non-exempt” 

infant formulas are designed for healthy infants but manufactured by a 

company other than the contract manufacturer. States do not receive

rebates on non-contract infant formulas. 

WIC participants typically purchase infant formula from stores at the full 

retail price using a voucher or coupon. The voucher specifies the brand 

and amount of infant formula the participant can purchase. The store then 

bills the state, and to obtain the price discounts, states then send the 

contract manufacturer an invoice listing the number of cans of contract 

brand infant formula purchased. The manufacturer, in turn, provides 

discounts to the state in the form of rebates for each can of infant formula 

purchased. 

States use the savings generated by these cost-containment contracts to 

serve additional participants. Figure 1 depicts the transactions in the 

rebate process. 

Page 2 GAO-06-380 Food Assistance
Figure 1: WIC Infant Formula Rebate Process 

SALE

GROCERY STORE

State agency

State-contracted

infant formula

manufacturer

WIC participant

purchases infant

formula Store bills state

for WIC formula State bills formula manufacturer for rebate

Formula manufacturer reimburses state

according to contract

State reimburses

store for formula

ABC

Sources: GAO (analysis); Art Explosion (images).

WIC ABC

ABC

$$

State uses rebate to serve more participants

1

2

3

4

5

6

In recent years, some states have seen their savings from cost-containment 

efforts decline, raising concern about the implications that reduced 

rebates might have on the WIC program since more than one-quarter of 

WIC participants are served with rebates. To better understand factors 

that affect state spending on infant formula and the implications of infant 

formula cost containment for the WIC program, this report will provide 

information on: (1) factors that influence program spending on infant 

formula, including the role of rebate savings that states receive through 

infant formula cost-containment contracts; (2) how the level of savings 

resulting from infant formula cost containment has changed over the past 

5 years and the implications of these changes for the number of 

participants served; and (3) steps federal and state agencies have taken to

contain state spending on infant formula. 

To address these research objectives, we analyzed administrative data on 

program participation, food costs, and total rebates provided to us by FNS 

for the years 1999 through 2004, and information on rebates obtained by

individual states per can of milk-based concentrate infant formula for 

fiscal years 2000 through 2005. Using FNS data, we calculated trends in the 

average per-can cost of milk-based concentrate infant formula in the 

50 states plus the District of Columbia between 2000 and 2005, as well as 

Page 3 GAO-06-380 Food Assistance
trends in total rebates, and trends in the share of participants served using

rebate savings. We also used this data to estimate the potential impact of 

reduced rebates on program participation under three alternate scenarios. 

To better understand the factors that affect program spending on infant 

formula, we surveyed 50 state WIC programs and the District of Columbia 

to obtain additional information about their infant formula contracts. We 

achieved a 100 percent response rate. We also reviewed literature on 

factors that influence infant formula spending, and interviewed several 

state and local WIC directors, all three infant formula manufacturers 

currently participating in the WIC market, and policy experts with an 

interest in WIC infant formula cost containment. We performed this work 

between April 2005 and March 2006 in accordance with generally accepted 

government auditing standards. See appendix I for additional information 

on scope and methodology. 

State spending on infant formula is determined primarily by the discounts, 

in the form of rebates, that manufacturers offer, but the use of infant 

formula not covered by contracts with manufacturers can also affect state

spending on infant formula. Over 90 percent of infant formula provided 

through the WIC program is covered by cost-containment contracts with 

manufacturers. In fiscal year 2004, states paid, on average, $0.20 after 

rebates per can for milk-based concentrate infant formula with a 

wholesale price of $2.60 to $3.57. The amount states pay can vary 

significantly—from as low as $0.07 per can of milk-based concentrated 

infant formula to as high as $0.80 per can. The amount of rebate savings 

depends primarily on the rebates offered to states by manufacturers. The 

rebates manufacturers offer, in turn, can be affected by factors that states 

have some control over, including the extent to which a WIC contract will

help a manufacturer market its products to non-WIC consumers and the 

accuracy of state systems used to bill manufacturers for infant formula 

purchased by WIC participants. State spending on infant formula is also 

affected by spending on non-contract infant formulas for which states do 

not receive rebates, including exempt infant formulas and non-exempt 

infant formulas produced by another manufacturer. Non-contract infant 

formulas can cost states more than 10 times as much as contract infant 

formulas; therefore, even modest use can drive up state costs. Over the 

past 5 years, the use of non-contract, non-exempt infant formulas has 

fallen somewhat, but use of exempt infant formulas has risen. 

Results in Brief 

The total amount of money state WIC agencies have saved on infant 

formula through their cost-containment contracts has been relatively 

stable since 1997, but if recent increases in the average price states pay per 

Page 4 GAO-06-380 Food Assistance
can of infant formula continue, the number of participants that can be 

served with rebate savings is likely to fall. Total savings from rebates, 

which increased from about $800 million in 1990 to more than $1.6 billion 

in 1997, have remained near $1.6 billion per year since that time after 

adjusting for inflation. In 2004, rebate savings enabled the WIC program to 

serve an additional 2 million people—about a quarter of all participants. 

In recent years, the average amount states pay per can of infant formula 

purchased through WIC increased as the rebates manufacturers offered 

declined and manufacturers introduced new, more expensive infant 

formulas. Both of these trends contributed to an increase in the price 

states pay for a can of milk-based concentrated infant formula from 

$0.15 per can in 2002 to $0.21 per can in 2005, on average, even after 

adjusting for inflation. When states pay more per can, they cannot serve as 

many participants. We estimated that if the average rebate states received 

per can had fallen to 75 percent of wholesale price in 2004—requiring 

states to pay approximately $0.89 for a can of milk-based concentrate with

a wholesale price of $3.57—approximately 400,000 fewer participants 

would have been able to enroll in WIC nationwide. 

State and federal administrators have taken steps to contain the costs of 

infant formula, but federal efforts also focus on maintaining the long-run 

sustainability of the competitive bidding system by ensuring that all 

interested infant formula manufacturers can compete for WIC contracts. 

States have sought to minimize the cost of infant formula through their 

contracting and infant formula provision practices. For example, 30 states2

have joined coalitions made up of two or more state WIC agencies in an 

effort to maximize cost savings by sharing the costs of administering WIC 

contracts and leverage greater discounts. In addition, recognizing the high

cost of non-rebated infant formula, 12 states do not provide non-contract, 

non-exempt infant formula to WIC participants. Other states rely on the 

federal regulation requiring medical documentation to limit the use of 

these more expensive infant formulas. Despite these efforts, use of nonrebated infant formulas varies significantly by state, from a low of 0 to a 

high of 25 percent. FNS has also taken steps to contain infant formula 

costs. For example, FNS established a regulation requiring manufacturers 

to provide states with the same percent discount on all infant formulas 

covered by the contract, even new, more costly infant formulas introduced 

while a contract is in effect. This requirement helps, but does not entirely 

 2

The 30 states includes the District of Columbia, but does not include Indian Tribal 

Organizations. 

Page 5 GAO-06-380 Food Assistance
prevent states from incurring cost increases when manufacturers 

introduce infant formulas with higher wholesale prices. Because infant 

formulas with higher wholesale prices continue to cost more per can, state 

costs can escalate if manufacturers replace more commonly used infant 

formulas with more expensive ones during a contract as they did in some 

states and localities according to state and local WIC directors. To ensure 

the long-run sustainability of the cost-containment system, FNS has also 

used its oversight authority to ensure that all manufacturers can compete 

for state infant formula contracts regardless of their share of the market. 

For example, FNS does not approve contract provisions designed to 

increase state cost savings when it concludes that the provisions could 

limit competition by giving one or more companies a competitive 

advantage. 

To help states preserve rebate savings generated through infant formula 

cost containment, we recommend that the Secretary of the Department of 

Agriculture consider providing guidance related to product changes to 

ensure that state costs do not increase when infant formula manufacturers 

replace the most commonly used infant formulas with new, more 

expensive infant formulas during a contract. In addition, we recommend 

that the Secretary consider ways to more effectively restrict issuance of 

non-rebated infant formulas to WIC participants. 

The Special Supplemental Nutrition Program for Women, Infants and 

Children (WIC) was established in 1972 to provide food, nutrition 

education, and health care referrals to low-income pregnant and 

postpartum women, infants, and young children. The program is 

administered by FNS in conjunction with state and local health 

departments and related agencies. WIC is almost entirely federally funded.

WIC is not an entitlement program; Congress does not set aside funds to 

allow every eligible individual to participate in the program. Instead, WIC 

is a federal grant program for which Congress authorizes a specific 

amount of funds each year. USDA provides funding for food and nutrition

services and administration. Both funding and participation have 

increased each year since fiscal year 2000. Congress also typically 

provides for a contingency fund to ensure that adequate resources are 

available for the program if unanticipated costs arise. 

Background 

Page 6 GAO-06-380 Food Assistance
WIC participants typically receive food benefits in the form of vouchers or

coupons that they redeem at authorized retail vendors to obtain, at no cost 

to the participants, certain approved foods, including infant formula.3

 State 

WIC agencies then reimburse the retail vendors for the food purchased by 

WIC participants. Since 1989, state WIC agencies have been required by 

law to contain the cost of infant formula using a competitive bidding 

process to award sole-source contracts unless they can demonstrate that 

an alternative method would yield the same or greater cost savings.4

Manufacturers agree to provide a rebate to the state WIC agency for every 

can of infant formula purchased under the WIC contract, and the state 

awards the contract to the bidder offering the lowest net wholesale price 

after subtracting the rebate from the cost of infant formula.5

 In exchange, 

the state provides the contract brand of infant formula to most infants 

enrolled in the program except those that are breastfeeding exclusively 

and those with a medical condition that requires the use of a non-contract 

infant formula. Rebates have become an important source of funding for 

the WIC program. In 2004, rebates totaled more than $1.6 billion and 

funded the benefits provided to about a quarter of WIC participants. 

Infant Formula Rebate 

Savings 

FNS Review of Contracts Contracts for WIC infant formula are between states and infant formula 

manufacturers. States are responsible for issuing requests for bids and 

drafting contract provisions according to state contracting requirements. 

Typically, a WIC agency will draft a bid solicitation and obtain state 

approval for the contract language. Once the state approves the 

 3

Two states, Vermont and Mississippi, operate a direct distribution system whereby WIC 

supplemental foods are distributed directly to participants from state-operated 

warehouses. In these two states, WIC participants do not use the retail system. These states

do, however, negotiate sole-source contracts with infant formula manufacturers and 

purchase WIC infant formula from the manufacturer at a discounted price.

4

Pub. L. No. 101-147 (1989). Under the law, state agencies are required to procure infant 

formula using a competitive bidding system or an alternative method of cost containment 

that yields savings equal to or greater than those produced by a competitive bidding

system.

5

The net wholesale price is calculated by subtracting the rebate per can from the lowest

national wholesale cost per unit for a full truckload of infant formula. The net wholesale 

price of the primary contract infant formula remains fixed over the contract period. The net 

wholesale price does not reflect any additional mark-ups imposed by retailers. Because

state WIC agencies reimburse WIC vendors for the full retail price of infant formulas sold 

to WIC participants using WIC vouchers, the actual cost to the state for each can of infant 

formula is the “net retail price,” or the retail price charged by the vendor less the rebate 

provided by the manufacturer. States generally do not track retail prices of infant formula. 

In this report, we use the term “net price” to refer to the net wholesale price. 

Page 7 GAO-06-380 Food Assistance
solicitation, the WIC agency will submit it to the FNS regional office for 

review. The regional office ensures that the contract adheres to all federal 

requirements and may suggest ways to improve the contract. FNS 

headquarters reviews the contract for final approval. After approval, the 

contracting process is conducted by the state. 

Types of Infant Formula Infant formula comes in three physical forms: liquid concentrate, powder, 

and ready-to-feed. Infants may receive up to 31 13-ounce cans of liquid 

concentrate per month through WIC, or roughly the equivalent amount of 

powdered or ready-to-feed infant formula. Most infants are provided an 

infant formula that is covered by the state’s cost-containment contract. 

There are three categories of infant formula provided to WIC participants:

• Contract brand infant formula is produced by the contract manufacturer 

and is suitable for routine use by the majority of healthy full-term infants. 

These include milk-based and soy-based infant formulas and could include 

milk- and soy-based infant formulas enhanced with DHA and ARA,6

lactose-free infant formula, added-rice infant formulas, and easy-to-digest

infant formulas.7

 “Contract brand infant formula” also includes new infant 

formulas introduced by the contract manufacturer after the contract is 

awarded, with the exception of infant formula under the following 

“exempt” category. 

• Exempt infant formula is represented and labeled for use by infants with 

medical conditions such as inborn errors of metabolism, low birth weight, 

or other unusual medical or dietary problems that require that they use a 

more specialized infant formula.8

 6

Docosahexaenoic acid (DHA) and arachidonic acid (ARA) are fatty acids found in 

breastmilk. 

7

If a state agency elects to solicit separate bids for milk-based and soy-based infant 

formulas, all infant formulas issued under each contract are considered the contract brand

infant formula (see 7 C.F.R. §246.16a(c)(1)(ii)). For example, all of the milk-based infant

formulas issued by a state agency that are produced by the manufacturer that was awarded 

the milk-based contract are considered contract brand infant formulas. Similarly, all of the 

soy-based infant formulas issued by a state agency that are produced by the manufacturer 

that was awarded the soy-based contract are also considered to be contract brand infant 

formulas. 

8

See 21 U.S.C. §350a(h)) and the regulations at 21 C.F.R. parts 106 and 107. 

Page 8 GAO-06-380 Food Assistance
• Non-contract brand non-exempt infant formula is all infant formula 

produced by a manufacturer other than the contract manufacturer that is 

suitable for routine use by the majority of healthy full-term infants. 

FNS regulations require local WIC agencies to obtain medical

documentation to provide all exempt infant formulas and all non-contract, 

non-exempt infant formulas.9

 Medical documentation, for these purposes, 

is a determination by a licensed health care professional authorized to 

write medical prescriptions under state law. A licensed health care 

professional must make a medical determination that an infant has a 

medical condition that dictates the use of these infant formulas. 

State spending on infant formula depends on the discounts, in the form of 

rebates, that states receive from manufacturers, and use of non-contract 

infant formula. Rebates are the most important factor driving state 

spending on infant formula because such a large proportion of WIC infant 

formula is purchased under cost-containment contracts with 

manufacturers. According to infant formula manufacturers, the 

attractiveness of a WIC contract depends, at least in part, on factors over 

which states have some control, including the extent to which a WIC 

contract will help a manufacturer market its products to non-WIC 

consumers; state-level administration of WIC contracts; and the provision 

of powder, concentrate, and ready-to-feed infant formula to WIC 

participants. These factors, in turn, could affect whether or not a 

manufacturer bids on a contract and the level of rebates offered by the 

manufacturers. The provision of non-rebated infant formula also affects 

state spending. 

In 2004, states received rebates on approximately 92 percent of the infant 

formula provided to WIC participants, and saved, on average, 93 percent 

off the wholesale price. As a result, states paid an average of $0.20 per 

13-ounce can of milk-based infant formula with a wholesale price of 

$2.60 to $3.57. However, while average rebates were high, rebate levels 

varied significantly by state. For example, in 2004, Virginia and South 

Carolina were paying as little as $0.07 per can of milk-based concentrate 

after rebates, while New York was paying $0.80 per can after rebates. 

Rebates Drive WIC 

Infant Formula Costs 

More Than Any Other 

Factor, but Use of 

Non-Contract Infant 

Formulas also Plays a 

Role 

States Receive Rebates on 

Most Infant Formula 

Purchased through WIC 

 9

Participants must also provide medical documentation to receive certain types of contract

brand infant formulas such as low-iron infant formula. 

Page 9 GAO-06-380 Food Assistance
Representatives of the three infant formula manufacturers identified 

several factors that influence how “attractive” they find a state contract. 

The attractiveness of a contract, in turn, could influence whether a 

manufacturer bids on a contract and the size of the rebate offered. Many of

the factors cited by manufacturers are things over which states have at 

least some control. 

Shelf space and product placement: WIC-brand infant formulas may 

get more shelf space than competing brands, particularly in stores that 

serve areas with large concentrations of WIC participants. Because WIC 

participants purchase such a large share of infant formula in some stores, 

retailers tend to stock more of the WIC brand of infant formula. In 

addition to shelf space, WIC-brand products may be placed at eye level so 

that they are easy to spot. 

All three infant formula manufacturers noted the importance of shelf 

space and product placement to their marketing strategies. In addition, 

31 of the 51 state WIC directors that responded to our survey felt that shelf 

space was moderately, very, or extremely important to manufacturers in 

determining how much they bid on an infant formula contract. While WIC 

agencies do not have direct control over shelf space and product 

placement, some include stocking requirements in their contracts with 

vendors. 

State policies regarding authorization of WIC vendors can also impact 

manufacturers’ access to non-WIC consumers. Some states have 

authorized WIC vendors that sell exclusively or primarily to WIC 

participants. Manufacturers have less access to non-WIC consumers if 

more WIC participants purchase their infant formula at these “WIC-only” 

stores. In those cases, retailers that serve the non-WIC population in the 

area may be less likely to focus on product placement or devoting shelf 

space to the WIC brand—two factors that benefit manufacturers in their 

drive to reach non-WIC consumers. 

Physician and Hospital Recommendations: Having WIC contracts 

could also benefit manufacturers through physician recommendations. 

State WIC programs often work with physicians to educate them about the 

program and the requirement that most WIC participants use the contract 

brand of infant formula. Physicians may decide to recommend the WIC 

brand of infant formula to all patients to avoid having to differentiate 

between those enrolled and not enrolled in WIC. Similarly, some hospitals 

agree to provide WIC-brand infant formula to new mothers so that they

won’t have to switch infant formulas after they leave the hospital. It may 

Page 10 GAO-06-380 Food Assistance
be easier for hospitals to provide the WIC-brand infant formula to all new 

mothers. Moreover, two of the infant formula companies that participate 

in the WIC market are divisions of pharmaceutical companies that 

primarily market their products directly to physicians and hospitals while 

also marketing, though to a lesser extent, directly to consumers. States 

vary in the extent to which they emphasize doctor and hospital outreach.

Product Innovation: All three manufacturers cited the central role of 

product innovation in their business strategies. Manufacturers seek to 

compete on the basis of product innovation and product quality despite 

the fact that infant formula is a relatively homogeneous product.10

Manufacturers said that certain state practices could make it more difficult 

to pursue their core strategy of innovation, and the development, 

distribution, and marketing of new products. These practices include the 

use of long-term contracts, requirements that manufacturers notify states 

of product changes in advance of introducing new products into the 

market, provisions that allow states to unilaterally extend contracts 

without requesting the consent of the manufacturer, state restrictions on 

the ways in which manufacturers market their infant formula, and 

restrictions on their interactions with physicians. While these state 

practices could inhibit innovation, many are put in place to protect states 

from increases in infant formula costs. 

State Billing Systems: All three manufacturers cited the accuracy of 

state billing systems as a key factor they consider when developing bids, 

and all stated that the vast majority of state billing systems need 

improvement. One manufacturer said that most states rely on antiquated

information technology that is prone to costly billing errors. According to 

FNS officials, disputes over billing for infant formula rebates have long

been a problem in the WIC program. In the past, some states requested 

reimbursement from infant formula manufacturers for every can of infant

formula listed on redeemed vouchers. However, some WIC participants 

did not purchase every can of infant formula listed on the voucher. In 

these instances, the manufacturers claimed they were being billed for 

purchases that were never made. Partly in response to these disputes, a 

new provision was included in the Child Nutrition and WIC 

 10The Infant Formula Act of 1980 requires infant formula manufacturers to follow specific 

guidance on quality, manufacturing practices, and nutrient requirements See 21 U.S.C. 

§350a. 

Page 11 GAO-06-380 Food Assistance
Reauthorization Act of 2004 that requires states to bill only for infant 

formula actually purchased. 

Contract size: State WIC directors said they believe that contracts that 

cover more infants yield higher rebates; however, the manufacturers said 

that the largest contracts may not draw their highest bids. A few state WIC 

directors expressed concerns that new provisions in the Child Nutrition 

and WIC Reauthorization Act of 2004 limiting the size of state coalitions 

and requiring separate contracts for milk-based and soy-based infant 

formula could reduce the size of contracts and the size of rebates. 

However, manufacturers noted that costly shifts in demand occur when 

very large states or coalitions change contractors. Manufacturers must be 

able to respond to these shifts by quickly increasing or decreasing 

production, and must, therefore, consider their own production capacity 

when they bid on very large contracts. 

Contract Provisions: Manufacturers noted that states sometimes include 

contract provisions that manufacturers consider complex, ambiguous, and 

extraneous and inclusion of these provisions could affect rebates. For 

example, manufacturers cited provisions that increase the potential 

liabilities of manufacturers, give states control over manufacturer 

activities, or require manufacturers to provide products or services not 

directly related to the sale of infant formula—such as sponsoring 

conferences, providing literature on nutrition education, or providing free 

infant formula—as particularly unattractive. Because states rarely modify

contract provisions in response to manufacturer concerns, manufacturers 

may respond to these provisions by either not bidding on contracts or 

offering lower rebates. 

Provision of Powder, Concentrate and Ready-to-Feed Infant 

Formulas: All three manufacturers cited the importance of state policies 

governing the provision of powder, concentrate, and ready-to-feed infant

formulas. Historically, the WIC program has issued more concentrate than 

powder, but there has been an increase in the use of powder in the WIC 

program since 2000. Because ready-to-feed infant formula is the most 

expensive, WIC regulations allow WIC agencies to provide it only in 

certain circumstances11 Twenty-nine states were able to provide us with 

 11Ready-to-feed infant formula can be provide when (1) the participant has unsanitary or 

restricted water supply or poor refrigeration; (2) the participant may have difficulty in 

correctly diluting liquid concentrate or reconstituting powder; or (3) ready-to-feed infant

formula is the only form available. 

Page 12 GAO-06-380 Food Assistance
data on their use of the different forms of infant formula in both 2000 and 

2004. In 2000, 55 percent of all infant formula issued in those states was in 

the form of liquid concentrate. By 2004, liquid concentrate represented 

only a third of all infant formula provided to WIC participants in those 

states. Powder use may have increased because it can be more convenient 

for mothers who are partially breastfeeding because mothers can 

reconstitute small amounts of powdered infant formula at a time, whereas 

liquid concentrate must be diluted all at once. Manufacturers did not 

provide information on how the provision of different forms of infant 

formula might affect their bids on infant formula contracts. However, if 

concentrate is more profitable, the shift to powder could reduce 

manufacturer profits—and the rebates they offer to states. Alternatively, if

powder is more profitable or there are no differences in the profitability of

different forms, the shift to powder might not affect rebates. 

Although non-contract infant formula, including both exempt and noncontract, non-exempt infant formula, accounts for less than 10 percent of 

infant formula purchased through WIC, its use can have a significant 

impact on total infant formula spending because it can cost as much as 

10 to 20 times more per can than rebated formula. Among the 27 states 

that were able to provide us with data on their use of contract, exempt, 

and non-contract, non-exempt formulas in both 2000 and 2004, use of 

exempt formula increased and use of non-contract, non-exempt formula 

decreased over the 4-year period.12 Figure 2 shows the average share of 

each type of formula provided to WIC participants in 43 states in 2004. 

Use of Non-Contract Infant 

Formula Increases 

Formula Costs 

 12These 27 states account for 62 percent of WIC participants.

Page 13 GAO-06-380 Food Assistance
Figure 2: Type of Infant Formulas and Percentage of All WIC Formula Issued FY 2004 

Contract brand Exempt Non-contract brand

non-exempt

Type of

infant 

formula

Percentage

provided

All infant formulas produced by 

the manufacturer awarded the 

infant formula cost containment 

contract are suitable for routine 

use by the majority of healthy, 

full-term infants. May include:

• regular milk and soy-based

• those with enhancements:

 • DHA/ARA,

 • lactose-free, and

 • added-rice.

Infant formula that is represented 

and labeled for use by an infant 

who has certain medical needs. 

May include special formulations

for:

 • inborn errors of metabolism, 

 • low birth weight, and

 • other unusal medical or

 dietary problems.

All infant formula produced by a

manufacturer other than the 

contract manufacturer that is

suitable for routine use by the 

majority of healthy, full-term 

infants. May include:

• regular milk and soy-based

• those with enhancements:

 • DHA/ARA,

 • lactose-free, and

 • added-rice.

Rebated Non-rebated

0

20

40

60

80

100

0

20

40

60

80

100 91.8

6.0 2.1

Source: GAO survey of state WIC directors, based on responses from 43 states.

0

20

40

60

80

100

Page 14 GAO-06-380 Food Assistance
Rebate savings have remained relatively stable since 1997 after adjusting 

for inflation, but if recent increases in the amount states pay for each can 

of infant formula they purchase through WIC continue, fewer participants

will likely be served with rebates in the future. About a quarter of all WIC

participants are served using rebate savings. However, over the past 

5 years, the amount states pay for infant formula has increased somewhat, 

particularly among states that have awarded new contracts. There is some 

concern that if the price states must pay for infant formula continues to 

increase, fewer participants will be served using rebates. We estimated 

that in 2004, if all states had paid as much per can of infant formula as the 

two states with the lowest rebates, approximately 400,000 fewer children 

would have been able to enroll in WIC nationwide. 

Rebate Savings Have 

Been Used to Serve 

about a Quarter of All 

Participants in Recent 

Years, but If Rebate 

Savings Continue to 

Decline, Fewer 

People Will Be Able to 

Participate

Total Rebate Savings Have 

Been Stable but the 

Amount States Pay Per 

Can of Infant Formula Has 

Increased Since 2002 

After increasing substantially in the years prior to 1997, the total amount 

that states received from manufacturers in infant formula rebates has 

remained relatively constant since that time. As shown in figure 3, rebate 

savings have remained at about $1.6 billion per year after adjusting for 

inflation. 

Page 15 GAO-06-380 Food Assistance
Figure 3: Total Rebate Savings, 1990-2004

0

.2

.4

.6

.8

1.0

1.2

1.4

1.6

1.8

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Dollars in billions

Source: FNS, Bureau of Labor Statistics.

The percent of participants that have been served using rebates has also 

remained relatively stable over the past 5 years, at about 25 percent. In 

2004, some 2 million participants were served using rebate dollars. 

Although both total rebate savings and the share of participants served 

using rebate savings has changed little in recent years, we found that the 

amount states pay per can of infant formula, after taking rebates into 

account, has increased over the past few years. The average net price 

states paid per can of milk-based concentrate infant formula increased 

from $0.15 in fiscal year 2002 to $0.21 in fiscal year 2005 after adjusting for 

inflation.13

 13These figures are adjusted for inflation using the Producer Price Index for drugs and 

pharmaceuticals. 

Page 16 GAO-06-380 Food Assistance
Figure 4: National Weighted Average Net Price per Can of Milk-Based Concentrate 

Price in 2004 dollars

Source: GAO analysis of FNS data.

2000 2001 2002 2003 2004 2005

0

0.05

0.10

0.15

0.20

0.25

Because most contracts lock in the price states pay for infant formula for 

up to 5 years, average prices tend to move slowly. The price increases are

more apparent among contracts that were newly awarded each fiscal year.

Among newly awarded contracts, there was a fourfold increase in the 

average net price of a can of infant formula over the 3-year period, from 

$0.10 in 2002 to $0.43 in 2005. Figure 4 shows rebates for newly awarded 

contracts between fiscal year 2000 and fiscal year 2005.

14

 14Because the number of states implementing new contracts is different each year, the 

figures shown reflect a simple, not a weighted average for each fiscal year. 

Page 17 GAO-06-380 Food Assistance
Figure 5: Change in Net Price Paid under Newly Awarded Contracts 

2004 dollars

Source: GAO analysis of FNS data.

0

0.10

0.20

0.30

0.40

0.50

0.60

2000 2001 2002 2003 2004 2005

Although the amount states pay for infant formula varies by state, the 

increases in the average net price were not driven by large increases in 

just a few states, but reflect higher wholesale prices and lower rebates 

nationwide. Eight of the 9 states that implemented a new contract in 2002

did so at either the same net price as under their previous contract or at a 

lower net price. This trend shifted over the next few years. By 2004, a 

majority of states implementing new contracts saw their net price 

increase, and in 2005, every state that implemented a new contract did so

at a higher net price than under its previous contract. 

The extent to which net prices increased among newly awarded contracts 

varied, but most states did not experience significant price increases. 

Among states that implemented new contracts in 2005, the average net 

price for a can of milk-based concentrate was $0.43 after rebates. This 

represented a discount of about 87 percent off the wholesale price. In a 

few states, however, the net price states paid for milk-based concentrate 

under their contracts was significantly higher than the average. New York 

implemented a contract in 2004 that provided milk-based concentrate for a 

net price of $0.80 per can, a discount of 75 percent off the wholesale price. 

Page 18 GAO-06-380 Food Assistance
Similarly, North Dakota implemented a contract in 2005 that provided a 

net price of 0.83 per can, a discount of 77 percent off the wholesale price.15

The impact of reduced rebates per can of infant formula was exacerbated 

by an increase in the use of more expensive types of infant formulas. Since 

the early 1990s, infant formula manufacturers have diversified their 

product lines to include a greater number of infant formula types, all of 

which have higher wholesale prices than traditional unenhanced milk- and 

soy-based infant formulas. The most significant change in infant formulas 

came with the introduction of DHA and ARA enhanced infant formulas 

starting in 2002. All three manufacturers have introduced DHA and ARA 

enhanced infant formulas at prices that are higher than the unenhanced 

versions. At the time of our survey in mid-2005, 23 states reported that 

they issue enhanced infant formula as their primary contract brand; only 

8 states reported that they do not approve enhanced infant formula.16 In 

addition, four of the five most recent contracts to be awarded specified the 

enhanced infant formulas as the primary contract brand.17 The increased 

use of infant formulas with a higher wholesale price may have contributed

to the increase in the net price of infant formula under new costcontainment contracts if infant formula companies sought higher 

compensation for their more expensive products. 

Higher Infant Formula 

Costs Could Reduce 

Participation by Nearly 

400,000 

Increases in the cost of infant formula have not yet had a significant 

impact on the share of participants served with rebate savings, but if infant 

formula costs were to continue to increase, it is likely that fewer 

participants would be served using rebate savings in the future absent 

funding increases. To illustrate how infant formula prices can affect WIC 

 15At the beginning of fiscal year 2006, Vermont implemented a new contract under which 

the state is paying $1.11 per can of milk-based concentrate. Vermont operates a home

delivery system. As a result, the state does not receive rebates from the manufacturer. It

purchases infant formula directly from the manufacturer at a reduced price. 

16Twenty-three states reported that they provided enhanced infant formula to all 

participants, or provide it to all participants unless non-enhanced infant formula is

requested. The remaining states provide enhanced infant formula under certain 

circumstances such as when a prescription is provided or when other non-enhanced infant 

formulas are not available in retail outlets. 

17The Child Nutrition Act and WIC Reauthorization Act of 2004 requires state agencies to 

provide, as the infant formula of first choice, the primary contract infant formula specified

in the manufacturer’s bid. As a result, state agencies have no choice but to issue the 

higher-cost DHA/ARA enhanced infant formulas if manufacturers identify these as their 

primary contract infant formulas. 

Page 19 GAO-06-380 Food Assistance
participation, we considered how three different scenarios would have 

affected participation in WIC during fiscal year 2004. We estimated the 

number of WIC participants that would have been served using rebate 

savings if the average rebate in 2004 had been 90 percent of the wholesale 

price of infant formula—slightly less than the actual discount of 

93 percent. We also considered scenarios reflecting larger reductions in 

rebates, to 85 percent and 75 percent of the wholesale price of infant 

formula.18 We compared our estimates to the actual number served using 

rebates in fiscal year 2004.19

We found that with even a modest reduction in rebates across all states, 

fewer participants could be served: 

• If rebates were equal to 90 percent of the wholesale price in all states in 

2004, about 70,000 fewer participants would have received WIC benefits. 

• If rebates were equal to 85 percent of the wholesale price in all states in 

2004, about 175,000 fewer participants would have received WIC benefits. 

• If rebates had fallen to 75 percent of the wholesale price in all states in 

2004, the program would have been able to serve about 400,000 fewer 

participants. 

Because most states are still under existing contracts negotiated in prior 

years, it would take some time for the impact of reduced rebates to be 

fully realized. Many states will be under their current contracts through 

2006 and 2007 and many have contracts that continue through 2008 or 

2009 if they opt to extend their contracts as permitted. State WIC directors 

in 45 of 51 states reported that their infant formula contracts allow for 

 18We selected these percentages based on rebates offered to states over the past 5 years 

and included scenarios representing a modest decrease (90 percent of wholesale price), a

moderate decrease (85 percent of wholesale price) that was approximately equal to the

discount offered on newly awarded contracts in fiscal year 2004, and a larger decrease (75 

percent of wholesale price) that was similar to the discount received in two states during

fiscal years 2004 and 2005. 

19By confining our estimates to 2004, we were able assume that all else remained as it was 

in 2004 and thereby isolate the impact of rebates from other factors that can affect the 

number of participants served, such as changes in the retail prices of WIC foods, changes in 

breastfeeding rates, and changes in the size and composition of the caseload. These

estimates do not take into consideration the availability of the WIC contingency fund that 

can be drawn down to maintain participation when food costs increase more quickly than 

anticipated. Similarly, the estimates do not take into account the possibility that 

supplemental appropriations could make up any funding shortfall to maintain participation. 

Page 20 GAO-06-380 Food Assistance
extensions ranging from 1 year to 4 years. However, if the recent decline in

rebates continues, there could be an impact on the number of participants 

served using rebates within the next few years. 

While both states and FNS try to contain costs, FNS also works to sustain 

the competitive bidding system while states work to maximize their own 

savings. State WIC agencies have taken a variety of actions to promote 

cost containment. For example, some have joined coalitions or barred the 

provision of non-contract, non-exempt infant formula. Similarly, FNS 

promotes cost savings through a requirement that infant formula 

manufacturers provide the same percent discount for all infant formulas, 

even new infant formulas introduced when a contract is already in effect.20

However, FNS attempts to balance its efforts to promote cost containment 

with its larger goal of sustaining the competitive bidding system. For 

example, in some cases, FNS did not approve provisions in costcontainment contracts that would save states money if FNS believed these 

provisions would reduce competition. 

Through their infant formula contract bid solicitations, states have taken

steps to promote cost containment. For example, by including provisions 

they believe manufacturers might find favorable or by omitting provisions 

they believe would have a negative impact on their rebate savings, states 

have sought to maximize their savings. As other examples: 

State and Federal 

Agencies Take Steps 

to Contain Costs; 

however, FNS also 

Focuses on Sustaining 

the Competitive 

Bidding System 

States Have Taken Steps to 

Reduce Infant Formula 

Costs 

• Thirty states have joined coalitions in an effort to share streamline the 

bidding process and leverage greater bargaining power when negotiating 

contracts with manufacturers. 

• Some states allow contract extensions only if both the state and the infant

formula contractor agree, rather than providing for unilateral contract 

extensions at state option. 

States have also taken steps to limit the amount they spend on noncontract infant formulas: 

 207 C.F.R. §246.16A(c)(5)(i). 

Page 21 GAO-06-380 Food Assistance
• Sixteen states purchase some or all of the exempt infant formula that is 

provided to participants directly from manufacturers or from low-cost 

providers. 

• Twelve states do not provide more expensive non-contract brand, nonexempt infant formula to WIC participants, and nine states limit statewide 

use of non-contract, non-exempt infant formula to a specified share of all 

infant formula provided. In addition, 27 states limit the amount of time that 

non-contract, non-exempt infant formulas can be issued to participants. 

• Eight states do not provide more expensive enhanced infant formula.

Despite these state efforts to contain costs, opportunities remain for more 

states to further reduce the use of non-rebated infant formulas. Use of 

non-contract, non-exempt infant formula varies. Twelve states reported 

that they have policies in place not allowing the use of non-contract, nonexempt infant formula. Of the 43 states that provided complete 

information on their average monthly usage of contract, exempt, and noncontract, non-exempt infant formulas in 2004, 27 states reported that 

between 0.3 percent and 4 percent of infant formula provided is noncontract, non-exempt, and 8 states reported use between 4.5 percent and

9 percent.21 As required by the Infant Formula Act, infant formula is a 

relatively homogeneous product. Consequently, it is unlikely that large 

discrepancies among states in the use of non-contract, non-exempt infant 

formulas designed for use by healthy infants can be explained by 

differences in health conditions of infants receiving WIC infant formula in 

these states. There are also large discrepancies in the use of exempt infant 

formula designed to treat infants’ medical conditions. State provision of 

exempt infant formula ranges from a low of 0 percent to a high of about 

23 percent. (See app. II for information on use of non-contract, nonexempt and exempt infant formula by state.) Again, as with non-contract, 

non-exempt infant formula, it is not clear how infants’ medical needs 

could vary so significantly among states. Figure 6 shows the minimum, 

median, and maximum use of each type of infant formula in 2004.22

 21Eight of the states with policies in place to not allow non-contract, non-exempt infant

formula reported providing 0 percent of this type of infant formula. Three states with these 

policies indicated that they provided between 1.6 percent and 3 percent non-contract, nonexempt infant formula per month. One state with these policies did not provide data on 

use of non-contract, non-exempt formula. 

22Forthy-three states provided information on their use of contract, exempt, and noncontract, non-exempt infant formulas in 2004.

Page 22 GAO-06-380 Food Assistance
Figure 6: Percentage Contract, Exempt, and Non-Contract, Non-exempt Infant Formula Provided

Contract brand Exempt Non-contract brand

non-exempt

Type of

infant 

formula

Percentage

provided

(FY 2004)

All infant formulas produced by 

the manufacturer awarded the 

infant formula cost containment 

contract are suitable for routine 

use by the majority of healthy, 

full-term infants. May include:

• regular milk and soy-based

• those with enhancements:

 • DHA/ARA,

 • lactose-free, and

 • added-rice.

Infant formula that is represented 

and labeled for use by an infant 

who has certain medical needs. 

May include special formulations

for:

 • inborn errors of metabolism, 

 • low birth weight, and

 • other unusal medical or

 dietary problems.

All infant formula produced by a

manufacturer other than the 

contract manufacturer that is

suitable for routine use by the 

majority of healthy, full-term 

infants. May include:

• regular milk and soy-based

• those with enhancements:

 • DHA/ARA,

 • lactose-free, and

 • added-rice.

Rebated Non-rebated

0

20

40

60

80

100

0

20

40

60

80

100

75.2

91.5

Source: GAO survey of state WIC directors, based on responses from 43 states.

0

20

40

60

80

100

99.0

0 2.4 9.0

0 6.0

23.1

Minimum Median Maximum Minimum Median Maximum Minimum Median Maximum

Most states reported that they require participants to obtain medical 

documentation for non-rebated infant formula, as required by FNS. 

However, some local WIC directors said there are instances in which 

doctors do not diagnose a medical condition but still write a prescription 

at the request of the participant. Local WIC agency staff told us that they 

identify these cases only by confirming diagnoses with each physician 

which not all agencies have the resources to do. As a result, some WIC 

participants may be receiving non-rebated infant formula even though they 

do not have a medical condition requiring such infant formula. 

Page 23 GAO-06-380 Food Assistance
In its oversight capacity, FNS has helped states increase their costcontainment savings by providing technical assistance to states as they 

develop their cost-containment contracts, and by implementing 

regulations that help states achieve cost savings. For example, FNS 

requires manufactures to provide the same discount on all infant formulas 

after state costs rose with the introduction of a new infant formula. In 

1993, one company introduced a lactose-free infant formula to 

accommodate infants with intolerance for milk-based infant formula.23

When this company introduced its lactose-free infant formula, it provided 

a significantly lower rebate amount on this infant formula than it provided 

on its milk-based infant formula covered by the existing contract, even 

though the wholesale price of the new infant formula was higher per can. 

As a result, states received a much lower discount on the new infant 

formula than they received on the original contract infant formula. At the 

same time, prescriptions for the lactose-free infant formula increased 

because the company marketed the infant formula directly to doctors. The

cost savings states achieved through rebates began to erode. To maintain 

competition by ensuring that all manufacturers could bid on contracts and 

to help preserve rebate savings, FNS in 2000 established the requirement 

that infant formula manufacturers provide the same percent discount for 

all infant formulas, even those introduced when a contract is already in

effect. 

FNS Has Taken Steps to 

Reduce Infant Formula 

Costs 

The requirement that manufacturers provide the same percent discount 

for infant formulas introduced during a contract slows but does not 

completely stem increases in state spending on infant formula. Even with 

the requirement, states must still pay more for each can of newlyintroduced infant formula when the wholesale price of the infant formula 

is higher. As a result, manufacturers still have a financial incentive to 

introduce and market more expensive infant formula because they charge 

a higher price per can. 

By 2003, all three manufacturers introduced new infant formulas enhanced

with the fatty acids DHA and ARA. Like other newly-introduced infant 

formulas, these enhanced infant formulas were more expensive. Two state 

officials told us that the manufacturers replaced the milk-based infant 

 23Until 1993, infants with intolerance for milk-based infant formula were provided with 

either soy infant formula or an exempt infant formula that did not contain lactose. Since

the introduction of lactose-free infant formula, companies have further diversified the 

products they produce for healthy infants. New products include added-rice infant formula, 

DHA and ARA enhanced infant formula, and a variety of other infant formulas. 

Page 24 GAO-06-380 Food Assistance
formula the state was providing to WIC participants in some parts of the 

state with the enhanced infant formula. Retail outlets stopped stocking the 

original milk-based infant formula; as a result, states had to purchase the 

enhanced infant formula. In contrast, when manufacturers introduced new 

infant formulas in the past, states had a choice not to provide the new 

infant formulas or to limit their use because the original milk-based infant

formula was still available. At least one state has since introduced a 

contract provision that requires manufacturers to charge the same price 

per can for newly-introduced products when those products replace the 

primary contract infant formula. 

FNS Promotes the LongRun Sustainability of the 

Competitive Bidding 

System 

Recognizing the history and dynamics of the infant formula market and the 

importance of competition to the cost-containment goals of the WIC 

program, FNS has attempted to ensure that all manufacturers can compete 

for state infant formula contracts regardless of their share of the market. 

Infant formula manufacturers operate within a highly concentrated 

industry. Beginning in the 1970s, three manufacturers—Wyeth-Ayerst, 

Mead Johnson, and Ross Laboratories—dominated the infant formula 

market. By the 1990s, the industry had shifted. Wyeth-Ayerst exited the 

domestic infant formula market in 1996. By then Nestlé had begun selling 

infant formula and had at least one state WIC contract. By 2000, Nestlé still 

had the smallest market share of the three companies. 

In order to ensure the sustainability of competitive bidding, FNS has not 

allowed provisions in cost-containment contracts that would have boosted 

state savings when FNS believed those provisions would reduce 

competition: 

• For example, during negations FNS held with New England and Tribal 

Organization (NEATO) coalition from January 1995 through February 

1996, FNS disapproved a contract provision that would have required that

manufacturers demonstrate that they had the production capacity 

sufficient not only to meet infant formula contract commitments they had 

with NEATO, but also commitments they had made with other states and

those to be awarded. NEATO included this provision, in part, because its 

contractor at the time had run out of infant formula, and, as a result, 

smaller states in the coalition did not have enough infant formula. FNS 

rejected the requirement that manufacturers prove they could fulfill 

contracts commitments with others states, which it viewed as intrusive 

and which it felt hindered fair and open competition. 

• Similarly, in 2005, FNS did not approve a contract provision that would 

have allowed Wisconsin to continue with its current contractor if the bids 

Page 25 GAO-06-380 Food Assistance
it received differed by $10,000 or less. Under the provision, the state could

have avoided expenses associated with switching contracts. FNS did not 

approve the provision because it believed it would give the current 

contract holder an advantage over the other two competitors. 

Several state WIC directors we interviewed questioned FNS’ role in the 

infant formula contracting process. Three state WIC directors pointed out 

that infant formula cost containment was initiated by states. In addition, a 

few state WIC directors noted that the manufacturers have stayed in the 

WIC market for years, even though some say that providing infant formula 

under these contracts is not profitable. FNS officials, however, pointed out

that Wyeth stopped bidding on WIC contracts, and that competition would 

decrease if any other manufacturers stop bidding on WIC contracts. 

The Child Nutrition and WIC Reauthorization Act of 200424contained two 

provisions that promote competition among infant formula manufacturers 

by limiting the size of contracts and coalitions to ensure all manufacturers 

can bid on contracts regardless of their capacity:

• A requirement that states or coalitions serving more than 100,000 infants 

request separate bids for milk-based and soy-based infant formulas. 

• Limits on the size of state coalitions.

The act also addressed manufacturers’ concerns about how WIC agencies 

implement their infant formula contracts: 

• A requirement that states provide participants, as the infant formula of 

first choice, the infant formula designated by the contract manufacturer as

its “primary contract infant formula.”25

• A requirement that manufacturers not only raise the rebates they provide 

to states in response to any increase in wholesale price, but also lower the 

 24Pub. L. No. 108-265. 

25The primary contract infant formula is the infant formula on which contract bids are

evaluated. Therefore, the bidder who offers the lowest net wholesale price on the infant 

formula they designate as their primary contract infant formula becomes the contract 

manufacturer, regardless of rebates provided for other infant formulas covered by the

contract. The requirement that states offer the primary contract infant formula as their first 

choice ensures that the primary contract infant formula is provided before any other infant 

formula covered by the contract. 

Page 26 GAO-06-380 Food Assistance
rebates they provide to states by an amount equal to any decreases in 

wholesale price. 

• A requirement that states accurately account for the number of cans of 

infant formula purchased, not just the number of vouchers redeemed at 

retailers. 

Although states developed and implemented measures to contain the cost 

of infant formula, FNS has played an increasingly important role in 

balancing the goals of containing infant formula costs and maintaining 

competition among infant formula manufacturers. FNS actions have not 

always maximized the cost savings of individual states, but by ensuring 

that all interested manufacturers can compete for WIC contracts, it has 

helped to ensure the long-run sustainability of the WIC cost-containment 

system. However, if manufacturers continue to emphasize a business 

strategy focused on innovation and product differentiation, WIC costcontainment savings are likely to erode further despite existing measures 

to protect state cost savings. By providing manufacturers with a higher 

per-can reimbursement for newly introduced, more expensive products, 

and by allowing states to issue non-contract, non-exempt infant formulas 

to participants with physician prescriptions, federal regulations encourage 

manufacturers to diversify their product lines and charge more for infant 

formula, even within a contract period. Unless FNS takes additional steps 

to safeguard rebate savings, total rebates could continue to erode and the 

number of participants who can be served by WIC will likely fall. 

To help states preserve rebate savings generated through infant formula 

cost containment and reduce costs associated with the purchase of nonrebated infant formula, we recommend that the Secretary of the 

Department of Agriculture take the following two actions: 

Conclusion 

Recommendations for 

Executive Action 

• Consider providing additional guidance related to product changes so that 

state costs do not increase when infant formula manufacturers introduce 

new or improved infant formulas by encouraging all states to include in 

their contracts a provision that requires manufacturers to provide new and 

improved products marketed under a different name at the net wholesale 

price specified in the contract when the new product replaces the product 

the manufacturer designated as its “primary contract infant formula.” We 

recommend that the Secretary consider implementing a regulatory 

provision if necessary to ensure that states implement the guidance. 

Page 27 GAO-06-380 Food Assistance
• Provide guidance or technical assistance to state agencies on ways to 

reduce the use of non-rebated infant formulas in states where use of these 

infant formulas is high. 

On March 13, 2006, we met with FNS officials to discuss their comments. 

The officials said they generally agreed with our recommendations. They

stated that they will provide guidance related to product changes to assist 

state agencies in minimizing cost increases when infant formula 

manufacturers introduce a new infant formula that replaces the primary 

contract infant formula. Officials agree that a regulatory change would be 

necessary to require that state agencies include provisions in their 

contracts to accomplish this goal. They cautioned, however, that they have 

limited influence over the recent increases in infant formula costs 

attributable to manufacturers’ price and product changes. While we agree 

that FNS is constrained in its ability to affect manufacturer marketing and 

pricing decisions, we believe the agency should take any steps available to

contain infant formula costs given the importance of cost-containment 

savings to serving as many eligible women, infants, and children as 

possible. 

Agency officials also stated that they will continue to provide guidance to 

state agencies related to the issuance of non-contract infant formula for 

those states where the use of these infant formulas appears high. 

However, officials expressed concern that some states may have 

misreported their use of exempt and non-contract, non-exempt infant 

formulas due to confusion over terminology and interpretation of the 

survey instrument. Officials noted that since some state agencies may 

require the same medical documentation for exempt infant formulas, noncontract, non-exempt infant formulas, and certain contract infant formulas 

other than the primary contract brand, some states may have

misunderstood the distinction between the three types of infant formula 

we identified and misreported use of the different types of infant formula. 

We believe that the survey provided sufficient examples to allow states to 

distinguish between the three infant formula types we identified. We 

pretested our survey with officials in five states, in which we discussed 

their understanding of each question and the terms we used, and all of the 

officials we spoke with understood the differences between the categories 

of infant formula we identified. However, we acknowledge that because 

states are not required to track infant formula use by the categories we 

used or by the technical categories defined in the Infant Formula Act, our 

estimates of the use of the three types of infant formula may not be 

consistent across all states. 

Agency Comments 

and Our Evaluation 

Page 28 GAO-06-380 Food Assistance
Agency officials also expressed concern over the fact that we requested 

data for non-contract and exempt infant formulas by the average monthly

percentage of total cans issued rather than by average monthly percentage

of participation. Agency officials stated that some state agencies capture 

their data in terms of percentage of participation and this may have 

contributed to misreporting. In our discussions with state officials, we 

were told that because information on the number of cans provided 

through WIC is usually used to bill manufacturers for infant formula 

rebates, most states track the number of cans of infant formula provided 

to WIC participants. 

 

In 2003, GAO reported similar findings related to use of non-contract 

infant formula based on a survey that used different terminology and a 

different measure of use. The consistency between the findings in the two 

reports reinforces the ongoing importance of ensuring that states clearly

understand the distinction between the different types of non-contract 

infant formula, monitoring the use of different types of infant formula, and 

providing technical assistance to state agencies where use of non-contract 

infant formula is high. 

Agency officials also provided technical comments, which we 

incorporated into the report where appropriate. This included revising 

data that had been provided by two states that had reported particularly 

high use of non-contract, non-exempt infant formula. 

We are sending copies of this report to the Secretary of USDA, relevant

congressional committees, and others who are interested. Copies will be 

made available to others upon request, and this report will also be 

available on GAO’s Web site at http://www.gao.gov. 

If you or your staff have any questions about this report, please contact me 

on (202)512-7215 or fagnonic@gao.gov. Contact points for our Offices of 

Congressional Relations and Public Affairs may be found on the last page 

of this report. GAO staff who made major contributions to this report are 

listed in appendix III. 

Cynthia M. Fagnoni 

Managing Director, Education, Workforce, 

 and Income Security 

Page 29 GAO-06-380 Food Assistance
Appendix I: Scope and Methodology 

Page 30 GAO-06-380 Food Assistance

Appendix I: Scope and Methodology 

This appendix provides a detailed description of the scope and 

methodology we used to determine (1) what factors influence program 

spending on infant formula, including the role of rebates that states 

receive through infant formula cost-containment contracts; (2) how the 

level of savings resulting from infant formula cost containment has 

changed over the past 5 years and the implications of these changes for 

the number of participants served; and (3) how federal and state policies 

and guidance have influenced state spending on infant formula. 

To assess what factors influence program spending on infant formula, 

including federal and state policies, we surveyed state directors of the 

Special Supplemental Nutrition Program for Women, Infants, and Children 

(WIC) in all 50 states and the District of Columbia. All 51 survey recipients 

responded to our survey, but not all respondents provided answers to 

every question. Where fewer than 51 responses were provided, we noted in

the text the number of respondents on which the finding was based. We 

pretested the survey questionnaire with state WIC officials in five states. 

During these pretests, we administered the questionnaire and asked the 

officials to fill it out as they would if they had received it in the mail. After 

completing the questionnaire, we interviewed the respondents to ensure 

that the questions were clear and unbiased, the data we requested were 

feasible to collect, and the questionnaire did not place an undue burden on 

the agency officials completing it. To encourage respondents to complete 

the questionnaire, we sent one follow-up mailing containing the full survey 

instrument to nonrespondents approximately 3 weeks after the initial 

mailing and a second follow-up letter about 2 weeks later. 

We also conducted a review of literature on infant formula cost 

containment and spoke with officials from the U.S. Department of 

Agriculture’s (USDA) Food and Nutrition Service (FNS); state WIC 

directors in Illinois, Massachusetts, Minnesota, New Jersey, New York, 

Pennsylvania, and Washington; and local WIC directors from Belford, New 

Jersey; Chicago, Illinois; Odessa, Texas; Salt Lake City, Utah; and Tempe, 

Arizona. These state and local WIC directors were selected based on 

recommendations of the National WIC Association and FNS and represent 

several different geographic areas. We included states that belong to 

contracting coalitions as well as those that contract themselves, and those 

that had rebid their infant formula contracts recently as well as those that

last rebid their contracts several years ago. We also interviewed 

individuals with expertise related to WIC and infant formula cost 

containment from the National WIC Association and the Center on Budget 

and Policy Priorities. In addition, we interviewed representatives from 
Appendix I: Scope and Methodology 

Nestlé, Mead Johnson, and Ross Products to understand the perspectives

of the infant formula manufacturers. 

To assess trends in rebate savings and in the number of participants 

served with rebate savings, we analyzed administrative data we received

from FNS on WIC program participation, food costs, and total rebates 

from 1990 through 2005. We assessed the reliability of the data by 

reviewing existing information about the data and the system that 

produced them and interviewing agency officials knowledgeable about the 

data. We determined that the data were sufficiently reliable for the 

purposes of this report. We adjusted the rebate figures for inflation using 

the producer price index for pharmaceuticals. Infant formula is marketed 

in a way that is similar to pharmaceuticals. 

To estimate the impact of reduced rebates on the number of participants 

served with rebate savings, we used data we received from FNS on total 

rebates for 2004. This allowed us to estimate the share of infant formula 

spending that was spent on rebated infant formula and the share that was 

spent on non-rebated infant formula including exempt and non-contract, 

non-exempt infant formulas. We then held spending on non-rebated infant

formulas constant, and estimated the reduction in total rebates that would 

have resulted if the average rebate states received through their costcontainment contracts in 2004 had been lower than the actual average 

discount of 93 percent of the wholesale price of milk-based concentrate. 

We considered three scenarios to represent recent trends in infant formula 

rebates, either nationwide or in individual states: 

• A reduction in rebates from 93 percent of the wholesale price of infant 

formula to 90 percent of the wholesale price of infant formula, a modest 

decrease to rebate levels experienced by states in 2000. 

• A moderate decrease to 85 percent of the wholesale price of infant 

formula, the average rebate on newly awarded contracts in 2004. 

• A larger decrease to 75 percent of the wholesale price of infant formula, a 

decrease similar to that experienced by two states.1

 1

Between 2004 and 2005, three states received rebate bids that were lower than those of

most existing contracts. New York received a winning bid equal to 76 percent of the

wholesale price of infant formula and North Dakota received a winning bid equal to 

77 percent of the wholesale price of infant formula. Vermont received a winning bid equal 

to 66 percent of the wholesale price of infant formula. 

Page 31 GAO-06-380 Food Assistance
Appendix I: Scope and Methodology 

To estimate trends in the per-can cost of infant formula, we also analyzed 

information we received from FNS on the rebates individual states 

received per can of milk-based concentrate infant formula from fiscal 

years 2000 to 2005. We used this data to calculate trends in state infant 

formula costs. 

Page 32 GAO-06-380 Food Assistance
Appendix II: Use of Non-Contract, 

Non-Exempt and Exempt Infant Formula 

by State, Fiscal Year 2004 

Page 33 GAO-06-380 Food Assistance

Table 1: Non-contract, Non-exempt Infant Formula as a Share of All Infant Formula 

Issued, Monthly Average, Fiscal Year 2004

Statea Non-contract Brand

non-exempt infant formula

(percent)

Virginia 0

Arkansas 0

District of Columbia 0

Louisiana 0

Mississippi 0

New Mexico 0

Pennsylvania 0

Vermont 0

Alaska 0.3

Arizona 0.4

Maryland 0.6

Massachusetts 0.8

Oklahoma 1.0

California 1.2

Texas 1.3

New Jersey 1.6

Ohio 1.7

New York 1.9

Nevada 2.0

Minnesota 2.3

Georgia 2.3

Iowa 2.4

Maine 2.4

Michigan 2.7

Hawaii 2.8

Alabama 3.0

Nebraska 3.0

North Carolina 3.0

Washington 3.0

Colorado 3.7

Illinois 3.9

Oregon 3.9

Delaware 4.0

Appendix II: Use of Non-Contract, 

Non-Exempt and Exempt Infant Formula 

by State, Fiscal Year 2004 
Appendix II: Use of Non-Contract, 

Non-Exempt and Exempt Infant Formula 

by State, Fiscal Year 2004 

Statea Non-contract Brand

non-exempt infant formula

(percent)

West Virginia 4.0

Wisconsin 4.0

Florida 4.5

Wyoming 4.7

Utah 5.0

Connecticut 6.0

Kansas 6.0

North Dakota 6.5

Kentucky 8.3

Idaho 9.0

Source: GAO survey of state WIC directors. 

a

The following states did not provide us with information on their use of non-contract, non-exempt 

infant formula: Indiana, Missouri, Montana, New Hampshire, Rhode Island, South Carolina, South 

Dakota, and Tennessee. 

Table 2: Exempt Infant Formula as a Share of All Infant Formula Issued, Monthly 

Average, Fiscal Year 2004 

Statea

Exempt infant formula

(percent)

District of Columbia 1.0

Nevada 1.0

California 1.7

Washington 2.0

Georgia 2.0

Vermont 2.5

Connecticut 3.0

Idaho 3.0

Kansas 3.0

Wisconsin 3.0

Arizona 3.4

New Jersey 3.6

Colorado 3.8

Texas 4.2

Iowa 4.6

North Carolina 5.0

Page 34 GAO-06-380 Food Assistance
Appendix II: Use of Non-Contract, 

Non-Exempt and Exempt Infant Formula 

by State, Fiscal Year 2004 

StateaExempt infant formula

(percent)

Illinois 5.5

Hawaii 5.7

Oklahoma 6.0

Minnesota 6.5

Alaska 7.0

New Mexico 7.0

Maryland 7.4

Maine 7.5

Alabama 8.0

Mississippi 8.0

West Virginia 8.0

New York 8.2

Kentucky 8.3

Virginia 9.0

Oregon 9.1

Delaware 10.0

Nebraska 10.0

Louisiana 11.3

Utah 12.0

Massachusetts 16.5

Arkansas 17.3

Wyoming 20.1

Ohio 21.0

Pennsylvania 23.1

Source: GAO survey of state WIC directors. 

a

The following states did not provide us with information on their use of exempt infant formula: Florida, 

Indiana, Michigan, Missouri, Montana, New Hampshire, North Dakota, Rhode Island, South Carolina, 

South Dakota, and Tennessee. 

Page 35 GAO-06-380 Food Assistance
Appendix III: GAO

A

 Contacts and Staff 

cknowledgments 

Page 36 GAO-06-380 Food Assistance

Appendix III: GAO Contacts and Staff 

Acknowledgments 

GAO Contact Cynthia M. Fagnoni (202) 512-7215, fagnonic@gao.gov

Kay Brown, Assistant Director; Carol Bray; Kathryn Larin; Lise Levie; 

Lynn Milan; Marc Molino; Luann Moy; Susan Pachikara; Tovah Rom; and 

Daniel Schwimer made significant contributions to this report.

Acknowledgments 
Related GAO Products 

Page 37 GAO-06-380 Food Assistance

Related GAO Products 

Breastfeeding: Some Strategies Used to Market Infant Formula May 

Discourage Breastfeeding; State Contracts Should Better Protect Against 

Misuse of WIC Name. GAO-06-282. Washington, D.C.: February 8, 2006. 

Means-Tested Programs: Information on Program Access Can Be an 

Important Management Tool. GAO-05-221. Washington, D.C.: April 11, 

2005. 

Nutrition Education: USDA Provides Services through Multiple 

Programs, but Stronger Linkages among Efforts Are Needed. GAO-04-528. 

Washington, D.C.: April 27, 2004. 

Food Assistance: Potential to Serve More WIC Infants by Reducing 

Formula Cost. GAO-03-331. Washington, D.C.: February 12, 2003. 

Food Assistance: WIC Faces Challenges in Providing Nutrition Services. 

GAO-02-142. Washington, D.C.: December 7, 2001.

Food Assistance: Research Provides Limited Information on the 

Effectiveness of Specific WIC Nutrition Services. GAO-01-442. 

Washington, D.C.: March 30, 2001. 

FNS: Special Supplemental Nutrition Program for Women, Infants and 

Children: Requirements for and Evaluation of WIC Program Bid 

Solicitations for Infant Formula Rebate Contracts. OGC-00-65.

Washington, D.C.: September 18, 2000. 

Food Assistance: Financial Information on WIC Nutrition Services and 

Administrative Costs. RCED-00-66. Washington, D.C.: March 6, 2000. 

Food Assistance: Efforts To Control Fraud and Abuse in the WIC 

Program Can Be Strengthened. RCED-99-224. Washington, D.C.: August 

30, 1999. 

Food Assistance: Information on WIC Sole-Source Rebates and Infant

Formula Prices. RCED-98-146. Washington, D.C.: May 11, 1998. 

Food Assistance: Information on Selected Aspects of WIC. T-RCED-98-

128. Washington, D.C.: March 17, 1998. 

Food Assistance: WIC Program Issues. T-RCED-98-125. Washington, D.C.: 

March 17, 1998. 
Related GAO Products 

Food Assistance: A Variety of Practices May Lower the Costs of WIC. 

RCED-97-225. Washington, D.C.: September 17, 1997. 

(130455) Page 38 GAO-06-380 Food Assistance
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