71708 Federal Register / Vol. 70, No. 228 / Tuesday, November 29, 2005 / Rules and Regulations 

DEPARTMENT OF AGRICULTURE 

Food and Nutrition Service 

7 CFR Part 246 

RIN 0584–AD71 

Special Supplemental Nutrition 

Program for Women, Infants and 

Children (WIC): Vendor Cost 

Containment 

AGENCY: Food and Nutrition Service, 

USDA. 

ACTION: Interim rule. 

SUMMARY: This interim rule amends the 

regulations governing the Special 

Supplemental Nutrition Program for 

Women, Infants and Children (WIC) to 

strengthen vendor cost containment. 

The rule incorporates into program 

regulations new legislative requirements 

that affect the selection, authorization, 

and reimbursement of retail vendors. 

These requirements are contained in the 

Child Nutrition and WIC 

Reauthorization Act of 2004, enacted on 

June 30, 2004. The rule reflects the 

statutory provisions that require State 

agencies to implement a vendor peer 

group system, competitive price criteria, 

and allowable reimbursement levels in 

a manner that ensures that the WIC 

Program pays authorized vendors 

competitive prices for supplemental 

foods. It also requires State agencies to 

ensure that vendors that derive more 

than 50 percent of their annual food 

sales revenue from WIC food 

instruments do not result in higher food 

costs to the program than do other 

vendors. The intent of these provisions 

is to maximize the number of eligible 

women, infants, and children served 

with available Federal funding. 

DATES: Effective Date: This rule is 

effective December 29, 2005. 

Implementation Date: State agencies 

must implement the provisions of this 

rule no later than December 30, 2005. 

Comment Date: To be assured of 

consideration, comments on this interim 

rule must be received by the Food and 

Nutrition Service (FNS) on or before 

November 29, 2006. 

ADDRESSES: FNS invites interested 

persons to submit comments on this 

interim rule. Comments may be 

submitted by any of the following 

methods: 

• Mail: Send comments to Patricia 

Daniels, Director, Supplemental Food 

Programs Division, Food and Nutrition 

Service, USDA, 3101 Park Center Drive, 

Room 528, Alexandria, Virginia 22302, 

(703) 305–2746. 

• Web Site: Go to http:// 

www.fns.usda.gov/wic. Follow the 

online instructions for submitting 

comments through the link at the 

Supplemental Food Programs Division 

Web site. 

• E-Mail: Send comments to WICHQSFPD@fns.usda.gov. Include Docket ID 

Number 0584–AD71, Vendor Cost 

Containment Interim Rule, in the 

subject line of the message. 

• Federal eRulemaking Portal: Go to 

http://www.regulations.gov. Follow the 

online instructions for submitting 

comments. 

All comments submitted in response 

to this interim rule will be included in 

the record and will be made available to 

the public. Please be advised that the 

substance of the comments and the 

identities of the individuals or entities 

submitting the comments will be subject 

to public disclosure. All written 

submissions will be available for public 

inspection at the address above during 

regular business hours (8:30 a.m. to 5 

p.m.), Monday through Friday. 

FNS also plans to make the comments 

publicly available by posting a copy of 

all comments on the FNS Web site at 

http://www.fns.usda.gov/wic. 

FOR FURTHER INFORMATION CONTACT: 

Debra Whitford, Chief of the Policy and 

Program Development Branch, 

Supplemental Food Programs Division, 

at the address indicated above or at 

(703) 305–2746, during regular business 

hours (8:30 a.m.–5 p.m.), Monday 

through Friday. 

SUPPLEMENTARY INFORMATION: 

Executive Order 12866 

This rule has been determined to be 

Significant and was reviewed by the 

Office of Management and Budget under 

Executive Order 12866. 

Regulatory Impact Analysis 

As required for all rules that have 

been designated as Significant by the 

Office of Management and Budget, a 

Regulatory Impact Analysis was 

developed for the WIC Vendor Cost 

Containment Interim Rule. A complete 

copy of the Impact Analysis appears in 

the appendix to this rule. 

Need for Action 

This action is needed to implement 

the vendor cost containment provisions 

of the Child Nutrition and WIC 

Reauthorization Act of 2004, Public Law 

108–265. The rule requires WIC State 

agencies to operate vendor management 

systems that effectively contain food 

costs by ensuring that prices paid for 

supplemental foods are competitive. 

The rule also responds to data which 

indicate that WIC food expenditures 

increasingly include payments to a type 

of vendor whose prices are not governed 

by the market forces that affect most 

retail grocers. As a result, the prices 

charged by these vendors tend to be 

higher than those of other retail grocery 

stores participating in the program. To 

ensure that the program pays 

competitive prices, this rule codifies the 

new statutory requirements for State 

agencies to use in evaluating vendor 

applicants’ prices during the vendor 

selection process and when paying 

vendors for supplemental foods 

following authorization. 

While the Child Nutrition and WIC 

Reauthorization Act mandates that 

States establish peer groups, 

competitive price criteria and allowable 

reimbursement levels and states that 

these requirements must result in the 

outcome of paying above-50-percent 

vendors no more than regular vendors, 

the Act does not specify particular 

criteria for peer groups or acceptable 

methods of setting competitive price 

criteria and allowable reimbursement 

levels. FNS considered mandating 

specific means of developing peer 

groups, competitive price criteria and 

allowable reimbursement levels in order 

to ensure that the outcome of this 

legislation was achieved. However, 

given State agencies’ responsibility to 

manage WIC as a discretionary grant 

program, the varying retail food market 

conditions in each State, and the wide 

variations in current vendor cost 

containment systems operated by State 

agencies, FNS believes that State 

agencies need flexibility to develop 

their own peer groups, competitive 

price criteria and allowable 

reimbursement levels. 

Thus, the rule gives State agencies 

flexibility to design cost containment 

practices that would be effective in their 

own markets and would ensure 

adequate participant access. In addition, 

there is little information about the 

effectiveness of particular cost 

containment practices in the variety of 

markets represented by the 89 State 

agencies. Mandating more specific 

means of developing peer groups, 

competitive price criteria and allowable 

reimbursement levels could have 

unintended, negative consequences on 

participant access, food costs and 

administrative burden. 

As State agencies gain experience and 

the results of their vendor cost 

containment practices become apparent, 

FNS may develop further regulations 

and guidance to improve WIC vendor 

cost containment. In the interim, FNS 

believes that the current rule will 

substantially accomplish the goal of the 

Act of containing food costs and 

ensuring that above-50-percent vendors 

Federal Register / Vol. 70, No. 228 / Tuesday, November 29, 2005 / Rules and Regulations 71709 

do not result in higher costs to the 

program than regular vendors. 

As noted previously, FNS believes 

that State agencies need flexibility to 

develop their own peer groups, 

competitive price criteria and allowable 

reimbursement levels. Given State 

agencies’ responsibility to manage WIC 

as a discretionary grant program, the 

varying retail food market conditions in 

each State, the wide variations in 

current vendor cost containment 

systems operated by State agencies, the 

limited amount of information about the 

effectiveness of particular cost 

containment practices in the variety of 

markets represented by the 89 State 

agencies, and the need to minimize 

administrative burden, this is the most 

appropriate approach for the interim 

final rule. 

In order to better assess the 

effectiveness of specific cost 

containment strategies, FNS will be 

collecting and analyzing data from State 

agencies, in anticipation of issuing a 

final rule. This will enable the agency 

to analyze the effect of particular vendor 

peer group systems, competitive price 

criteria, and allowable reimbursement 

levels on WIC food prices, participant 

access, the vendor community and a 

range of other measures. FNS will also 

be collecting information on 

administrative burden associated with 

the new requirements. This will enable 

FNS to identify and consider a 

reasonable number of regulatory 

alternatives when considering the final 

rule and adopt the most cost-effective or 

least burdensome alternative that 

achieves the objectives of the rule. 

While we expect the final rule to be 

promulgated within three years, it is 

important that sufficient time be 

allowed to assess the impacts of this 

interim final rule before moving to alter 

any of its provisions. 

Benefits 

The WIC Program will benefit from 

the provisions of this rule by reducing 

unnecessary food expenditures, which 

increases the potential to serve more 

eligible women, infants, and children 

for the same cost. The rule should have 

the effect ensuring that payments to 

vendors, particularly vendors that 

derive more than 50 percent of their 

annual food sales revenue from WIC 

food instruments reflect competitive 

prices for WIC foods. Currently, the WIC 

Program pays vendors whose food sales 

consist primarily of WIC transactions 

substantially more for supplemental 

foods than it pays other authorized 

vendors. Under this rule, State agencies 

that choose to authorize these vendors 

will demonstrate that payments to them 

do not exceed the competitive prices 

paid to other vendors. FNS 

conservatively estimates that 

implementation of the rule will result in 

a cost savings of approximately $75 

million annually. 

Costs 

In order to comply with this rule, 

State agencies will need to make onetime changes in their vendor cost 

containment systems. Some State 

agencies may already be in full or 

partial compliance with the rule, while 

others may demonstrate that they meet 

the conditions for an exemption from 

the vendor peer group system 

requirement. Many State agencies, 

particularly those that choose to 

authorize vendors that rely 

predominantly on WIC food instruments 

for food sales revenue, will incur 

additional costs and administrative 

burden to achieve compliance with its 

provisions. These costs are associated 

with establishing or restructuring 

vendor peer groups, revising 

competitive price criteria and allowable 

reimbursement levels for those peer 

groups, collecting and monitoring 

vendor shelf prices for supplemental 

foods, and evaluating payments to 

vendors. Variations in State agency 

vendor management systems and 

staffing resources make it difficult to 

derive a cost estimate. State agencies 

will not receive additional funds to 

administer the program with these new 

requirements. 

Some WIC vendors, particularly 

smaller stores that are not also 

authorized by the Food Stamp Program, 

may incur costs to compile data on their 

total annual food sales. State agencies 

will require this data in order to 

determine, as required by law, whether 

a vendor derives more than 50 percent 

of their total annual food sales revenue 

from WIC food instruments. 

Regulatory Flexibility Act 

This rule has been reviewed with 

regard to the requirements of the 

Regulatory Flexibility Act (5 U.S.C. 

601–612). FNS does not believe this rule 

will have a significant economic impact 

on a substantial number of small 

entities. With the high degree of State 

flexibility allowable under this rule, 

small entities will be impacted 

differently in each State depending 

upon how that State chooses to meet the 

requirements set forth here. It is 

therefore not feasible to accurately 

estimate the rule’s impact on small 

entities. As FNS is concerned about 

these impacts, we plan to collect data on 

the implementation of this interim final 

rule and the options States select in 

order to better assess the impact for the 

final rulemaking and the Final 

Regulatory Flexibility Analysis and 

publish it for comments. 

In fulfilling the intent of the Child 

Nutrition and WIC Reauthorization Act 

of 2004, the rule may have a significant 

economic impact on a small number of 

vendors that have been authorized to 

participate in the WIC Program. These 

vendors tend to be smaller grocery 

stores that serve WIC participants 

exclusively or predominantly, have a 

large volume of WIC transactions, and 

are not subject to the retail market forces 

that keep food prices at competitive 

levels. In accordance with the law, the 

rule requires that State agencies 

implement effective competitive price 

criteria in selecting and reimbursing 

vendors, including assurance that 

payments to vendors that derive more 

than 50 percent of their annual food 

sales revenue from WIC food 

instruments do not result in higher food 

costs to the program than other vendors. 

Only those vendors that are able to meet 

competitive pricing requirements will 

be able to continue participating in the 

program. Currently FNS estimates that 

between three and four percent of the 

approximately 45,000 authorized 

vendors will need to make changes in 

the prices that they offer the WIC 

Program in order to be deemed 

competitive. 

Public Law 104–4 

Title II of the Unfunded Mandates 

Reform Act of 1995 (UMRA), Public 

Law 104–4, establishes requirements for 

Federal agencies to assess the effects of 

their regulatory actions on State, local 

and tribal governments and the private 

sector. Under section 202 of the UMRA, 

FNS generally must prepare a written 

statement, including a cost benefit 

analysis, for proposed and final rules 

with ‘‘Federal mandates’’ that may 

result in expenditures by State, local or 

tribal governments, in the aggregate, or 

the private sector, of $100 million or 

more in any one year. When such a 

statement is needed for a rule, section 

205 of the UMRA generally requires 

FNS to identify and consider a 

reasonable number of regulatory 

alternatives and adopt the most costeffective or least burdensome alternative 

that achieves the objectives of the rule. 

This interim rule contains no Federal 

mandates (under the provisions of Title 

II of the UMRA) for State, local and 

tribal governments or the private sector 

of $100 million or more in any one year. 

Thus, the rule is not subject to the 

requirements of sections 202 and 205 of 

the UMRA. 

71710 Federal Register / Vol. 70, No. 228 / Tuesday, November 29, 2005 / Rules and Regulations 

Executive Order 12372 

The Special Supplemental Nutrition 

Program for Women, Infants and 

Children (WIC) is listed in the Catalog 

of Federal Domestic Assistance under 

10.557. For the reasons set forth in the 

final rule in 7 CFR part 3015, subpart V 

and related Notice (48 FR 29115), this 

program is included in the scope of 

Executive Order 12372, which requires 

intergovernmental consultation with 

State and local officials. 

Federalism Summary Impact Statement 

Executive Order 13132 requires 

Federal agencies to consider the impact 

of their regulatory actions on State and 

local governments. Where such actions 

have federalism implications, agencies 

are directed to provide a statement for 

inclusion in the preamble to the 

regulations describing the agency’s 

considerations in terms of the following 

three categories called for under section 

(6)(b)(2)(B) of Executive Order 13132. 

Prior Consultation With State Officials 

State agencies have expressed 

concerns and shared information 

regarding implementation of the new 

vendor cost containment legislative 

requirements. Because the WIC Program 

is a State-administered, federally funded 

program, our regional offices have 

formal and informal discussions with 

State agencies on an ongoing basis 

regarding program implementation and 

policy issues. This arrangement allows 

State agencies to raise questions and 

provide comments that form the basis 

for many of the implementation detail 

decisions in this and other WIC Program 

rules. Following the enactment of Public 

Law 108–265, several regional offices 

convened meetings with State WIC staff 

that included discussion of the vendor 

cost containment provisions of this law. 

As a result of these meetings, FNS 

continues to receive State agency 

requests for policy guidance on the 

vendor cost containment requirements. 

These questions have helped us make 

the rule responsive to State agency 

concerns. 

In addition, in October 2004, the 

Supplemental Food Programs Division 

(SFPD) convened a meeting of WIC State 

agency representatives, USDA 

headquarters and regional office staff, 

and an outside expert on competitive 

pricing systems, to obtain more 

information on State agencies’ current 

vendor cost containment systems. 

During the meeting, participants 

identified salient issues that State 

agencies are likely to confront in 

implementing the new competitive 

pricing requirements. Following the 

meeting, FNS received input from 

additional State agencies on their 

current competitive pricing policies, as 

well as from representatives of retail 

grocers. 

Nature of Concerns and the Need To 

Issue This Rule 

State agencies have inquired about the 

intent of the vendor cost containment 

provisions, particularly as amended by 

Public Law 108–265. They have asked 

whether these provisions require State 

agencies to improve the effectiveness of 

their competitive pricing systems, or 

whether they primarily address the 

competitiveness of prices charged by a 

comparatively small number of stores 

that derive their revenue from WIC food 

instruments predominantly and that 

generally charge higher prices than 

other authorized vendors. State agencies 

also have requested clarification of the 

term ‘‘comparable vendors;’’ guidance 

on how to determine a vendor’s revenue 

from food sales; criteria for developing 

effective vendor peer groups and for 

obtaining an exemption from the vendor 

peer group requirement; and criteria for 

identifying, grouping, and setting 

allowable reimbursement levels for 

stores that are likely to derive more than 

50 percent of their annual revenue from 

food sales from WIC transactions. Some 

State agencies have expressed concern 

over the potential cost of implementing 

changes to their automated systems for 

editing and payment of WIC food 

instruments. Many have indicated that 

the regulations should allow them 

maximum flexibility to define the 

competitive pricing approaches that best 

suit their individual circumstances. 

Extent to Which We Will Meet Those 

Concerns 

FNS has considered the impact of this 

interim rule on WIC State and local 

agencies. This rule makes changes 

required by law that became effective 

October 1, 2004. Through the 

rulemaking process, FNS has attempted 

to balance the need for State agencies to 

meet the new competitive pricing 

requirements against the administrative 

challenges that State agencies are likely 

to encounter in meeting them. These 

challenges include the commitment of 

adequate resources to configuring 

vendor peer groups and allowable 

reimbursement methodologies, ongoing 

monitoring of vendors’ prices, and 

maintaining competitive pricing over 

time. 

There is limited information available 

on proven competitive pricing 

approaches. Variations in State agency 

vendor populations, geography, and 

other characteristics also preclude the 

use of a standardized approach. 

Therefore, this rule sets forth principles 

to guide State agency efforts, while 

allowing State agencies the flexibility to 

meet the legislative requirements 

through a variety of acceptable 

approaches. The inclusion of 

competitive pricing principles in this 

interim rule responds to State agency 

requests for criteria for developing 

effective peer groups and allowable 

reimbursement levels, so that foods can 

be purchased at the lowest prices 

consistent with maintaining adequate 

participant access to vendors. 

Executive Order 12988 

This rule has been reviewed under 

Executive Order 12988, Civil Justice 

Reform, and is intended to have 

preemptive effect with respect to any 

State or local laws, regulations or 

policies which conflict with its 

provisions, otherwise impede its full 

implementation, or result in any delay 

of implementation of provisions beyond 

the statutory implementation date 

established in the Child Nutrition and 

WIC Reauthorization Act of 2004, Public 

Law 108–265. Section 203(e)(10) of 

Public Law 108–265 amends section 

17(h) of the Child Nutrition Act of 1966 

by adding the new paragraph 17(h)(11) 

which specifies that the State agencies 

shall comply with the provisions of the 

paragraph not later than 18 months after 

the date of enactment. Since the 

amendment was enacted on June 30, 

2004, State agencies must be in 

compliance by December 30, 2005. This 

rule is not intended to have retroactive 

effect unless so specified in the DATES

paragraph of this preamble. Prior to any 

judicial challenge to the provisions of 

this rule or the application of its 

provisions, all applicable administrative 

procedures must be exhausted. 

Civil Rights Impact Analysis 

FNS has reviewed this interim rule in 

accordance with Departmental 

Regulation 4300–4, ‘‘Civil Rights Impact 

Analysis,’’ to identify and address any 

major civil rights impacts the rule might 

have on minorities, women, and persons 

with disabilities. FNS has determined 

that the rule’s intent and provisions will 

not adversely affect access to WIC 

services by eligible persons. All data 

available to FNS indicate that protected 

individuals have the same opportunity 

to participate in the WIC Program as 

non-protected individuals. FNS 

specifically prohibits State and local 

government agencies that administer the 

WIC Program from engaging in actions 

that discriminate based on race, color, 

national origin, sex, age or disability. 

Section 246.8 of the WIC regulations (7 

Federal Register / Vol. 70, No. 228 / Tuesday, November 29, 2005 / Rules and Regulations 71711 

CFR part 246) indicates that Department 

of Agriculture regulations on nondiscrimination (7 CFR parts 15, 15a and 

15b) and FNS instructions ensure that 

no person shall on the grounds of race, 

color, national origin, age, sex, or 

disability, be excluded from 

participation in, be denied benefits of, 

or be otherwise subjected to 

discrimination under the Program. 

Discrimination in any aspect of 

program administration is prohibited by 

Department of Agriculture regulations 

on non-discrimination (7 CFR parts 15, 

15a, and 15b), the Age Discrimination 

Act of 1975 (Pub. L. 94–135), the 

Rehabilitation Act of 1973 (Pub. L. 93–

112, section 504), and title VI of the 

Civil Rights Act of 1964 (42 U.S.C. 

2000d). Enforcement action may be 

brought under any applicable Federal 

law. Title VI complaints shall be 

processed in accordance with 7 CFR 

part 15. Where State agencies have 

options, and they choose to implement 

a particular provision, they must 

implement it in such a way that it 

complies with the § 246.8 of the WIC 

regulations. 

Paperwork Reduction Act 

The Paperwork Reduction Act of 1995 

(44 U.S.C. Chap. 35; see 5 CFR 1320) 

requires that the Office of Management 

and Budget (OMB) approve all 

collections of information by a Federal 

agency before they can be implemented. 

Respondents are not required to respond 

to any collection of information unless 

it displays a current valid OMB control 

number. This interim rule contains new 

information collections that are subject 

to review and approval by the Office of 

Management and Budget. FNS is 

submitting for public comment the 

information collection burden that 

would result from the implementation 

of the provisions in this rule. 

Comments are invited on: (a) Whether 

the proposed collection of information 

is necessary for the proper performance 

of the functions of the agency, including 

whether the information shall have 

practical utility; (b) the accuracy of the 

agency’s estimate of the burden of the 

proposed collection of information, 

including the validity of the 

methodology and assumptions used; (c) 

ways to enhance the quality, utility, and 

clarity of the information to be 

collected; and (d) ways to minimize the 

burden of the collection of information 

on those who are to respond, including 

use of appropriate automated, 

electronic, mechanical, or other 

technological collection techniques or 

other forms of information technology. 

Comments may be sent to Debra R. 

Whitford, Chief, Policy and Program 

Development Branch, Supplemental 

Food Programs Division, Food and 

Nutrition Service, U.S. Department of 

Agriculture, 3101 Park Center Drive, 

Room 522, Alexandria, Virginia 22302. 

Comments may also be submitted via 

the FNS Web site at http:// 

www.fns.usda.gov/wic, by following the 

online instructions. In all cases, please 

label your comments as ‘‘Proposed 

Collection of Information: WIC Vendor 

Cost Containment Interim Rule.’’ All 

written comments will be open for 

public inspection at the office of the 

Food and Nutrition Service during 

regular business hours (8:30 a.m. to 5 

p.m. Monday through Friday) at 3101 

Park Center Drive, Room 522, 

Alexandria, Virginia 22302. All 

responses to this notice will be 

summarized and included in the request 

for OMB approval. All comments will 

be a matter of public record. 

OMB Number: 0584–0043. 

Expiration Date: March 31, 2007. 

Type of Request: Revision of a 

currently approved collection. 

Abstract: The information collection 

and reporting burden associated with 

this interim rule meets new vendor cost 

containment requirements contained in 

the Child Nutrition and WIC 

Reauthorization Act of 2004, Public Law 

108–265. These requirements affect the 

selection, authorization, and 

reimbursement of WIC vendors. The 

rule requires State agencies to report on 

a number of factors so that FNS can 

meet the goals of effectively containing 

food costs by ensuring that the WIC 

Program pays competitive prices for 

WIC foods and providing guidance to 

State agencies on best competitive 

pricing practices. These include new 

State Plan components, collection of 

information to identify vendors that 

derive more than 50 percent of their 

food sales revenue from WIC food 

instruments, and collection of vendor 

shelf prices for WIC foods. FNS deems 

this information collection and 

reporting burden to be necessary in 

order to fulfill the legislative 

requirements and ensure State agency 

compliance with the interim rule. 

Section 246.4(a)(14)(xv) is a new 

section on vendor cost containment. It 

requires a State agency to include in the 

State Plan a description of the vendor 

peer group system and allowable 

reimbursement levels that demonstrates 

that the State agency is in compliance 

with WIC cost containment provisions. 

The vendor peer group description will 

include the criteria used to classify 

vendors into groups, the number and 

types of vendors in each peer group, 

identification of peer groups with 

vendors that derive more than 50 

percent of their annual food sales 

revenue from WIC food instruments and 

comparable vendor peer groups, and the 

competitive price criteria and maximum 

reimbursement levels applicable to each 

peer group. The State Plan also must 

include the information specified in 

§ 246.12(g)(4)(iv) of the interim rule on 

non-profit vendors that the State agency 

plans to exempt from the competitive 

price criteria and allowable 

reimbursement levels that are applicable 

to other vendors. State agencies seeking 

an exemption from the vendor peer 

group requirement based on the 

conditions stated in § 246.12(g)(4)(v) of 

the interim rule must submit a 

justification with documentation 

supporting their request. The 

justification will consist largely of a 

detailed description of how the State 

agency’s alternative vendor cost 

containment system operates, with shelf 

price and/or redemption data to 

demonstrate that the system is as 

effective as a vendor peer group system. 

Under § 246.12(g)(4)(vi) of the rule, 

State agencies that authorize vendors 

that derive more than 50 percent of their 

annual food sales revenue from WIC 

food instruments must describe their 

methodology for ensuring that average 

payments per food instrument to such 

vendors do not exceed average 

payments per food instrument to 

comparable vendors in order to obtain 

vendor cost containment certification. 

To demonstrate that their competitive 

price criteria and allowable 

reimbursement levels meet regulatory 

requirements, State agencies will 

provide the following data for selected 

food instruments redeemed by vendors 

that derive more than 50 percent of their 

annual food sales from WIC food 

instruments and regular vendors: The 

number of food instruments redeemed; 

average food instrument redemption 

amounts and standard deviations by 

peer group; and the average variance in 

redemption amounts; the total dollar 

amount of WIC redemptions by peer 

group; and statewide weighted average 

redemption prices to demonstrate 

whether vendors that derive more than 

50 percent of their annual food sales 

from WIC food instruments resulted in 

higher costs than would have occurred 

if participants had used other vendors. 

State agencies using EBT systems must 

make similar comparisons between the 

prices paid to vendors that derive more 

than 50 percent of their annual food 

sales revenue from WIC food 

instruments and the prices paid to 

comparable vendors. FNS will require 

annual updating of selected food 

71712 Federal Register / Vol. 70, No. 228 / Tuesday, November 29, 2005 / Rules and Regulations 

instrument redemption data.—874 

hours 

Section 246.12(g)(4)(i) requires a State 

agency to collect annual food sales data 

from authorized vendors and vendor 

applicants in order to identify the 

vendors that derive, or that may be 

expected to derive, more than 50 

percent of their food sales revenue from 

WIC food instruments. A State agency 

that elects to authorize vendors that 

meet the above-50-percent criterion 

must identify these vendors annually 

using a methodology approved by FNS. 

A State agency that chooses not to 

authorize such vendors must use an 

approved methodology to identify 

vendor applicants that would be 

expected to meet the more than 50 

percent criterion if authorized.—45,178 

hours. 

Section 246.12(g)(4)(ii)(B) requires 

State agencies to collect the shelf prices 

for WIC-approved foods from authorized 

retail vendors twice annually. In 

meeting this requirement, a State agency 

may limit data collection to prices that 

have changed from a vendor’s previous 

submission. A State agency also may 

collect prices from a random sample of 

authorized vendors and/or for selected 

supplemental foods.—90,178 hours. 

Respondents: WIC State agencies and 

vendors. 

Estimated Number of Respondents: 89 

State agencies and 45,000 vendors. 

Estimate of Burden: Estimates of the 

information collection and reporting 

burden contained in this interim rule 

are detailed below. 

ESTIMATED ANNUAL REPORTING BURDEN

Section of interim rule 

Estimated 

number of 

respondents 

Data collections 

or reports 

required annually 

Estimated 

average 

burden 

hours per 

response 

Estimated 

annual 

burden 

hours 

246.4(a)(14)(xv) 

• Description of vendor peer group system and allowable reimbursement 

levels; average redemption amounts for selected food instruments.

89 1 ......................... 4 356 

• Notification of exemption of non-profit vendors ............................................ 5 1 ......................... 1 5 

• Request for exemption from vendor peer group requirement ...................... 30 1—every three 

years.

8 80 

• Information required for certification of vendor cost containment system 

and to monitor ongoing compliance with certification requirements.

65 

65 

1—every three 

years.

1 .........................

8 

4 

173 

260 

246.12(g)(4)(i) .......................................................................................................... 89 1 ......................... 2 178 

45,000 1 ......................... 1 45,000 

246.12(g)(4)(ii)(B) .................................................................................................... 89 2 ......................... 1 178 

45,000 2 ......................... 1 90,000 

Burden hours due to program changes ........................................................... .................... ............................ .................... 136,230 

Total adjustments * .................................................................................................. .................... ............................ .................... 203 

Currently Approved WIC Reporting and Recordkeeping Burden Hours ................ .................... ............................ .................... 2,817,091 

Total Proposed WIC Reporting and Recordkeeping Burden Hours ....................... .................... ............................ .................... 2,953,524 

* Adjustments are due to an increase in the number of State agencies from 88 to 89. 

FNS also plans an information 

collection to assess the impact of this 

regulation on State agencies at a later 

time. 

Government Paperwork Elimination 

Act 

FNS is committed to compliance with 

the Government Paperwork Elimination 

Act (GPEA), which requires Government 

agencies to provide the public the 

option of submitting information or 

transacting business electronically to 

the maximum extent possible. This 

interim rule encourages WIC State 

agencies to collect data from retail 

vendors using electronic methods. 

Good Cause Determination 

As discussed above, section 203(e)(10) 

of the Child Nutrition and WIC 

Reauthorization Act of 2004, Public Law 

108–265, contained provisions that 

significantly impact vendor cost 

containment in the WIC Program, 

particularly the costs of vendors that 

derive more than 50 percent of their 

food sales revenue from WIC food 

instruments. Section 501 of Public Law 

108–265 requires that guidance to 

implement section 203(e)(10) of the law 

be issued as soon after the date of 

enactment as practicable, and authorizes 

the issuance of interim final regulations. 

Therefore, Under Secretary Eric M. Bost 

has determined, in accordance with 5 

U.S.C. 553(b), that prior notice and 

comment would be unnecessary, and 

that good cause exists for making this 

rule effective without first publishing a 

proposed rule. 

Background 

Retail vendors make a major 

contribution to the success of the WIC 

Program by providing supplemental 

foods to program participants as an 

extension of their normal business 

practices. FNS recognizes that State 

agencies must balance multiple 

objectives when authorizing vendors, 

i.e., they must ensure adequate 

participant access to supplemental 

foods; maintain effective program 

management within available 

administrative resources; and pay 

reasonable food costs. Therefore, State 

agencies have broad authority to 

authorize only those vendors needed to 

best serve these objectives. Since WIC is 

best served if foods are purchased for 

the lowest prices, while maintaining 

reasonable access for program 

participants, this authority includes 

eliminating vulnerability to excessive 

food payments by applying competitive 

price methods during and following 

vendor selection, so the State agency 

can serve the maximum number of 

participants with limited funding. 

Major amendments to the WIC 

Program regulations governing food 

delivery systems were last published on 

December 29, 2000, at 65 FR 83248. 

These amendments, referred to as the 

WIC Food Delivery Systems Rule, 

established mandatory vendor selection, 

training, and monitoring requirements 

to strengthen State agency vendor 

management systems and prevent abuse 

of the program. The WIC Food Delivery 

Federal Register / Vol. 70, No. 228 / Tuesday, November 29, 2005 / Rules and Regulations 71713 

Systems Rule implemented provisions 

of the William F. Goodling Child 

Nutrition Reauthorization Act of 1998, 

Public Law 105–336 (which amended 

the Child Nutrition Act of 1966, 42 

U.S.C. 1786), that required State 

agencies to identify high-risk vendors, 

conduct compliance buys on high-risk 

vendors, and consider food prices in the 

selection of vendors. State agencies 

were required to implement the 

provisions of the WIC Food Delivery 

Systems Rule no later than October 1, 

2002. 

The use of a price criterion in the 

vendor selection process has been a 

critical first step in ensuring that the 

WIC Program pays competitive prices 

for supplemental foods. Appropriate 

application of this criterion, coupled 

with price limitations on the amount 

that the State agency will pay vendors 

subsequent to authorization, is essential 

to successful food cost containment. 

The WIC Food Delivery Systems Rule 

authorized State agencies to make price 

adjustments to the purchase price on 

food instruments submitted by the 

vendor for redemption to ensure 

compliance with the price limitations 

applicable to the vendor. 

The Child Nutrition and WIC 

Reauthorization Act of 2004 (Pub. L. 

108–265) amended the Child Nutrition 

Act of 1966 (CNA) to reinforce and 

strengthen the use of competitive price 

criteria and price limitations for vendor 

cost containment. It expanded the 

competitive pricing requirement of the 

WIC Food Delivery Systems Rule to 

address the application of competitive 

pricing methods to vendors that derive 

their revenue from food sales 

predominantly, if not exclusively, from 

WIC food instruments. The prices that 

such stores (often referred to as ‘‘WIConly stores’’) charge for supplemental 

foods are generally higher than prices of 

other authorized retailers. Recent trends 

showing an annual increase in the 

number of WIC-only stores and in the 

percentage of the total WIC redemptions 

that they receive were a primary factor 

in the development of the vendor cost 

containment provisions of Public Law 

108–265. Congress intended that the 

authorization of WIC-only stores should 

not result in higher food costs than if 

program participants used their food 

instruments in regular grocery stores. 

Section 203(e)(10) of Public Law 108–

265 amended section 17(h)(11) of the 

CNA to address the emergence of such 

vendors in the WIC Program because of 

their potential adverse impact on the 

future cost of the program particularly if 

these trends continue. The vendor cost 

containment provisions of this interim 

rule will promote sound stewardship of 

taxpayer dollars; help ensure that the 

WIC Program continues to rely on 

market forces to contain food costs; and 

protect the program’s ability to serve the 

greatest number of eligible women, 

infants, and children. 

Overview of the New Vendor Cost 

Containment Requirements 

In accordance with section 203(e)(10) 

of Public Law 108–265, this interim rule 

requires State agencies to implement 

competitive pricing systems that foster 

financial integrity and the most efficient 

use of their food funds. When State 

agencies craft these systems properly, 

they will not pay higher prices than 

necessary for supplemental foods. While 

State agencies have the discretion to 

determine many of the details of their 

competitive pricing approaches, section 

203(e)(10) of Public Law 108–265 now 

requires them to establish a vendor peer 

group system, and competitive price 

criteria and allowable reimbursement 

levels for each vendor peer group. 

Previously, the use of peer groups in 

competitive pricing systems was 

optional under § 246.12(g)(4)(i) of the 

WIC regulations. 

This rule also implements new 

legislative requirements for State 

agencies that choose to authorize forprofit vendors that derive more than 50 

percent of their revenue from food sales 

from WIC food instruments. It requires 

State agencies to ensure that vendors 

that meet, and vendor applicants that 

are expected to meet, the more than 50 

percent criterion are cost neutral to the 

program. (Note: This preamble will refer 

to vendors that meet or are expected to 

meet the more than 50 percent criterion 

as ‘‘above-50-percent vendors.’’) The 

first cost neutrality requirement in 

section 203(e)(10) of Public Law 108–

265 is that payments to above-50- 

percent vendors may not result in 

higher food costs than if program 

participants purchased their WIC foods 

at regular vendors. The second cost 

neutrality requirement is that average 

payments per food instrument to above50-percent vendors may not be higher 

than average payments per food 

instrument to comparable vendors. 

Comparable vendors cannot be other 

vendors that meet the above-50-percent 

criterion. 

To achieve the cost neutrality 

requirements, section 203(e)(10) of 

Public Law 108–265 requires State 

agencies that authorize above-50- 

percent vendors to distinguish between 

these vendors and regular vendors when 

establishing vendor peer groups, 

competitive price criteria, and allowable 

reimbursement levels. In determining 

competitive prices for WIC foods and 

establishing allowable reimbursement 

levels, State agencies would be required 

to compare above-50-percent vendors 

with regular vendors, i.e., vendors that 

set their prices based on market forces 

and that compete for non-WIC 

customers. Since the WIC Program 

receives a finite amount of funding 

annually to serve as many participants 

as this funding allows, it is necessary for 

each State agency to implement a 

system that ensures foods are acquired 

at the most economical cost consistent 

with participant access needs. Clearly, 

reducing the costs to the program of 

vendors that have historically charged 

high prices for supplemental foods is 

imperative. Consistent with section 

203(e)(10) of Public Law 108–265, this 

rule reflects the fact that State agencies 

have clear authority not to authorize any 

above-50-percent vendors. 

As set forth in section 203(e)(10) of 

Public Law 108–265, this rule allows 

FNS to exempt a State agency, under 

certain conditions, from the requirement 

to establish a vendor peer group system. 

It would also allow State agencies to 

exempt from competitive price criteria 

and allowable reimbursement levels 

pharmacies that supply only exempt 

infant formula or medical foods under 

the program; non-profit vendors that 

derive more than 50 percent of their 

revenue from food sales from WIC food 

instruments; and non-profit vendor 

applicants that are likely to meet the 

above-50-percent criterion. 

Implementation of This Interim Rule 

Section 203(e)(10) of Public Law 108–

265 requires State agencies to 

implement the provisions included in 

this interim rule by December 30, 2005. 

Therefore, State agencies must take all 

steps that are necessary, including 

compliance with any applicable State 

rulemaking or legislative requirements, 

in order to establish policies to comply 

with the requirements of this rule by 

December 30, 2005. To facilitate 

implementation of the interim rule, this 

preamble addresses comments and 

questions that State agencies have 

presented regarding the requirements to 

establish vendor peer groups, 

competitive price criteria, and allowable 

reimbursement levels. This preamble 

also discusses criteria for developing 

effective vendor peer groups and for 

obtaining an exemption from the vendor 

peer group requirement. It also clarifies 

the meaning of key concepts, such as 

‘‘comparable vendors,’’ and describes 

appropriate ways to identify above-50- 

percent vendors. 

This preamble recognizes that 

applying competitive pricing techniques 

to contain food costs remains a 

71714 Federal Register / Vol. 70, No. 228 / Tuesday, November 29, 2005 / Rules and Regulations 

challenge for some State agencies. 

Recently, several State agencies have 

conducted formal analyses of their 

competitive pricing systems and, as a 

result, are in the process of planning or 

implementing changes to enhance 

system performance. FNS believes that 

State agencies will continue learning 

and adopting more efficient ways of 

containing food costs through 

competitive pricing systems. Therefore, 

this preamble offers principles to assist 

State agencies in assessing the 

performance of their competitive pricing 

systems as they make modifications to 

comply with the mandatory changes 

covered by this interim rule. 

Vendor Peer Group System 

General Requirement 

Section 203(e)(10)(A) of Public Law 

108–265 added section 17(h)(11)(A) to 

the CNA to require each State agency to 

establish a vendor peer group system, 

except in certain circumstances. This 

interim rule incorporates the legislative 

requirement into § 246.12(g)(4) of the 

WIC regulations. A vendor peer group 

system is a means of classifying 

authorized vendors into groups based 

on common characteristics that affect 

food prices. The purpose of peer groups 

is to facilitate the application of 

competitive price criteria at vendor 

authorization and during the food 

instrument redemption process. When a 

vendor peer group system is properly 

constructed, the prices that vendors 

within a peer group charge for WIC 

foods will be more similar internally 

than they are to the prices charged by 

other peer groups; and the peer group 

system should account for most of the 

food price variations. A State agency 

that did not have a vendor peer group 

system at the time Public Law 108–265 

was enacted in June 2004 must 

implement such a system by December 

30, 2005. 

Many State agencies already have a 

vendor peer group system. The structure 

and use of peer groups varies widely. 

Vendor peer groups are often 

established based on a combination of 

two factors—vendor size and vendor 

location. Vendor size may be 

determined through a variety of factors, 

such as total business volume, WIC 

business volume, square footage of 

store, number of cash registers (or point 

of sale devices), or type of store (e.g., 

supermarket, grocery store, convenience 

store, military commissary, nonprofit 

co-op, or pharmacy). Vendor location is 

often divided into geographic categories, 

such as urban, suburban, and rural, 

which may also include a number of 

subcategories within the State. Some 

State agencies use three criteria in 

establishing peer groups. 

Some State agencies use peer groups 

to set the competitive price range for 

WIC foods, assess whether a vendor 

applicant’s prices are competitive, and 

to establish maximum reimbursement 

levels for WIC food instruments. Others 

use vendor peer groups to assess the 

competitiveness of a vendor applicant’s 

prices, but they do not limit 

reimbursements based on a vendor’s 

peer group. Instead, these State agencies 

apply a single statewide maximum 

reimbursement level for each food 

instrument type to all peer groups. 

Section 246.12(g)(4) of the interim rule, 

in implementing section 17(h)(11)(A)(i) 

of the CNA, clarifies that a State agency 

must establish competitive price criteria 

and allowable reimbursement levels that 

are applicable to each peer group. 

Because characteristics of the retail 

grocery marketplace vary from State to 

State, this interim rule continues to 

allow State agencies broad latitude in 

establishing peer groups. To ensure that 

vendor peer group systems continue to 

be effective, § 246.12(g)(4)(ii) of this rule 

requires State agencies to assess their 

peer groupings at least every three years 

and to modify them as necessary. It also 

indicates that a State agency may 

change the peer group into which it 

places a vendor whenever it determines 

that such action is warranted. 

Specific Requirements 

Section 17(h)(11)(A)(III) of the CNA 

requires a State agency that chooses to 

authorize for-profit vendors that derive 

or are expected to derive more than 50 

percent of their annual revenue from 

food sales from WIC food instruments to 

distinguish between the above-50- 

percent vendors and regular retail 

vendors for cost containment purposes. 

Accordingly, § 246.12(g)(4)(i) of this rule 

requires a State agency that chooses to 

authorize any above-50-percent vendors 

to distinguish between these vendors 

and regular vendors in its peer group 

system. In meeting this requirement, a 

State agency may establish separate peer 

groups for above-50-percent vendors or 

place them in peer groups with regular 

vendors, but establish distinct 

competitive price criteria and allowable 

reimbursement levels for the above-50- 

percent vendors within the peer groups. 

Both approaches require a State agency 

to compare the prices of above-50- 

percent vendors against the prices of 

regular retail vendors for vendor 

selection and reimbursement purposes. 

A State agency’s vendor peer group 

system must meet this requirement 

unless the State agency chooses not to 

authorize any above-50-percent vendors. 

In the past, State agencies that 

authorized a specific type of vendor 

known as WIC-only stores have tended 

to place them into separate peer groups 

where their prices were compared with 

other WIC-only stores. This practice 

generally has resulted in the payment of 

higher prices to WIC-only vendors than 

to regular retail vendors. In many 

instances, payment of higher prices to 

WIC-only vendors was unnecessary 

because other competitively-priced 

vendors were accessible to WIC 

participants. In implementing this rule, 

a State agency that authorizes any 

above-50-percent vendors would be 

required to determine whether it is more 

effective, from a cost containment 

perspective, to group them with regular 

retail vendors than by themselves, and 

if so, how to group them with regular 

vendors without inflating the peer 

group’s prices. 

Some State agencies have expressed 

the view that grouping above-50-percent 

vendors with regular vendors would 

increase a State agency’s ability to 

monitor their prices; provide an 

incentive for such vendors to offer 

competitive prices; and help a State 

agency hold them to the same pricing 

standard as regular retail vendors. State 

agency arguments against this approach 

include the likelihood that the prices of 

above-50-percent vendors would be too 

high to allow them to be grouped with 

regular vendors. State agencies also 

thought that above-50-percent vendors 

would skew the average prices for the 

peer group. Section 246.12(g)(4)(i) of 

this interim rule states that State 

agencies must ensure that the prices of 

above-50-percent vendors do not inflate 

the competitive price criteria and 

allowable reimbursement levels 

applicable to each peer group. 

When a State agency assigns above50-percent vendors to a peer group with 

regular vendors, it must use the prices 

of the regular vendors within the peer 

group to establish the competitive price 

criteria and allowable reimbursement 

level for the above-50-percent vendors. 

If a State agency assigns above-50- 

percent vendors to separate peer groups, 

the State agency may not reimburse 

them at a higher level than that for peer 

groups consisting of comparable regular 

vendors. 

In identifying vendors that are 

comparable to above-50-percent 

vendors, the State agency must consider 

geographic area; however, the State 

agency has the discretion to determine 

how much weight to give to geographic 

considerations. The State agency may 

interpret comparability differently for 

regular retail vendors than for above-50- 

percent vendors. For example, a State 

Federal Register / Vol. 70, No. 228 / Tuesday, November 29, 2005 / Rules and Regulations 71715 

agency might determine that geographic 

location and number of cash registers 

adequately define peer groups for 

regular vendors, but that it must utilize 

an additional criterion, such as WIC 

sales volume, to identify stores that are 

comparable to the above-50-percent 

vendors. 

Identifying Above-50-Percent Vendors 

In order to comply with requirements 

of section 17(h)(11)(A)(III) of the CNA 

with regard to above-50-percent 

vendors, § 246.12(g)(4)(i) of this interim 

rule requires each State agency to 

determine on an annual basis whether 

any authorized vendors meet the more 

than 50 percent criterion and whether 

each new vendor applicant is expected 

to meet it. In making its determination, 

the State agency would be required to 

consider a vendor’s annual revenue 

from the sale of food items. Under this 

rule, revenue from the sale of food items 

means the sum of all payments 

(including, cash, Food Stamp Program 

and WIC redemptions, and credit/debit 

transactions) received by the vendor for 

the sale of foods that can be purchased 

under the Food Stamp Program (FSP). 

Currently, there is no standard 

definition of ‘‘food sales’’ used in the 

retail food industry. Since 

approximately 85 percent of current 

WIC vendors are authorized by the Food 

Stamp Program, most vendors are 

familiar with the eligible food items and 

there would be a consistent definition of 

food sales between WIC and the FSP. 

Vendors that utilize scanning 

equipment during the checkout process 

are able to flag foods that are eligible for 

purchase with food stamp benefits and, 

thus, to capture the total sales amount. 

Eligible food sales include sales of 

foods intended for home preparation 

and consumption, including meat, fish, 

and poultry; bread and cereal products; 

dairy products; and fruits and 

vegetables. Items such as condiments 

and spices, coffee, tea, cocoa, and 

carbonated and noncarbonated drinks 

may be included in food sales when 

they are offered for sale along with the 

abovementioned foods. Items that 

cannot be purchased using food stamp 

benefits include, but are not limited to, 

hot foods and food that will be eaten in 

the store. This rule does not require that 

a vendor be authorized by the Food 

Stamp Program. 

State agencies must use the following 

approach to identify above-50-percent 

vendors. State agencies may use 

additional methods, if approved by 

FNS. 

1. Current Vendors 

To determine whether a currently 

authorized vendor meets the more than 

50 percent criterion, the State agency 

must calculate WIC redemptions as a 

percent of the vendor’s total foods sales 

for the same period. If WIC redemptions 

are more than 50 percent of the total 

food sales, the vendor must be deemed 

to be an above-50-percent vendor. As an 

initial step in identifying above-50- 

percent vendors, the State agency 

should compare each vendor’s WIC 

redemptions to FSP redemptions for the 

same period. If more than one WIC State 

agency authorizes a particular vendor, 

then each State agency must obtain and 

add the WIC redemptions for each State 

agency that authorizes the vendor to 

derive the total WIC redemptions. Most 

WIC vendors also have FSP 

authorization and, consequently, have 

FSP redemptions. If FSP redemptions 

exceed WIC redemptions, no further 

assessment would be required. The 

vendor clearly would not be an above50-percent vendor. 

For vendors whose WIC redemptions 

exceed their FSP redemptions, further 

assessment would be required. The 

State agency should ask these vendors 

to provide the total amount of revenue 

obtained from the sale of foods that 

could be purchased using food stamp 

benefits. The State agency should 

request documentation (such as tax 

documents or other verifiable 

documentation) to support the amount 

of food sales claimed by the vendor. 

After evaluating the documentation 

received from the vendor, the State 

agency must calculate WIC redemptions 

as a percent of total food sales and 

classify the vendor as meeting or not 

meeting the more than 50 percent 

criterion. 

For vendors that are not authorized by 

the FSP, the State agency should clarify 

the types of foods that may be included 

in food sales, using the list of eligible 

and ineligible food items that applies to 

FSP retailers. The State agency should 

request and evaluate verifiable 

documentation on the store’s revenue 

from food sales and classify the vendor 

as appropriate. 

2. Vendor Applicants 

As part of the vendor application 

process, the State agency must ask 

vendor applicants whether they expect 

to derive more than 50 percent of their 

annual revenue from the sale of food 

items from transactions involving WIC 

food instruments. This question applies 

whether or not the State agency chooses 

to authorize above-50-percent vendors. 

Vendor applicants include a new store 

location for any ownership entity that 

currently has a WIC authorized store, as 

well as an entirely new vendor 

applicant. If the vendor applicant’s 

answer is ‘‘yes,’’ no further assessment 

would be necessary. The State agency 

would treat this vendor as likely to meet 

the more than 50 percent criterion, if the 

vendor were authorized. 

The State agency would further assess 

all other vendor applicants using the 

following indicators to determine 

whether they would be expected to meet 

the more than 50 percent criterion if 

authorized. First, the State agency must 

calculate WIC redemptions as a percent 

of total food sales in existing WICauthorized stores owned by the vendor 

applicant. Secondly, the State agency 

must calculate or request from the 

vendor applicant the percentage of 

anticipated food sales by type of 

payment, i.e., cash, FSP, WIC, and 

credit/debit card. Thirdly, the State 

agency must request and review 

inventory invoices to determine if the 

vendor will offer for sale on a 

continuous basis a variety of meats, 

poultry or fish; breads or cereals; 

vegetables or fruits; and dairy products. 

Fourthly, the State agency must 

determine whether WIC authorization is 

required in order for the store to open 

for business. To the extent possible, the 

State agency should validate 

information received from the vendor 

applicant against other data sources. 

Use of the percent of anticipated food 

sales by payment type provides 

information on WIC as a percentage of 

total food sales. Having a variety of 

foods other than supplemental foods 

would indicate that the vendor has or 

expects to have non-WIC sales. If the 

vendor is already operating a viable 

business without WIC transactions, this 

might indicate that the vendor will not 

be dependent upon WIC as a primary 

source of revenue. These indicators 

should provide the State agency with 

sufficient information on which to base 

its assessment of a vendor applicant. At 

its discretion, the State agency may use 

additional data sources and 

methodologies. 

The State agency must maintain 

documentation indicating the basis for 

its determination as to whether a 

current vendor or vendor applicant 

meets or is expected to meet the more 

than 50 percent criterion. Section 

246.12(g)(4)(i) of the interim rule 

requires the State agency to assess the 

accuracy of its determination within six 

months of authorizing the new vendor 

to determine whether the vendor should 

have been authorized, and/or to ensure 

that the State agency is applying the 

appropriate competitive price criteria 

71716 Federal Register / Vol. 70, No. 228 / Tuesday, November 29, 2005 / Rules and Regulations 

and allowable reimbursement level to 

the new vendor. If necessary, the State 

agency would terminate the vendor 

agreement or reassign the vendor to the 

appropriate peer group based on this 

assessment. 

Acceptable Vendor Peer Group 

Methodologies 

Structuring an effective vendor peer 

group system involves an ongoing 

process of monitoring the prices 

vendors charge for supplemental foods 

and adjusting the peer groups as needed 

for better cost containment. FNS 

believes State agencies should not view 

peer groups as permanent or fixed 

designations; rather, they should be 

prepared to modify the vendor peer 

group structure when needed based on 

price data (i.e., shelf prices, bid prices, 

food instrument redemption data, and 

market surveys) and other information. 

For example, a State agency that fails 

to distinguish between different types of 

vendors (e.g., chain stores, large 

independent stores, and small 

neighborhood grocery stores) in a 

particular geographic area might be 

overlooking pricing variations or 

characteristics that are apparent when 

these vendors are further classified by 

type or size of store. While a State 

agency might find it easier to manage 

peer groups constructed solely on the 

basis of geographic location, creating 

peer groups that further differentiate 

between vendors could improve cost 

containment by allowing the State 

agency to replace a single high 

allowable reimbursement level for a 

geographic area with several lower 

allowable reimbursement levels tailored 

to the prices of each subgroup of 

vendors in the area. A State agency 

should consider the effectiveness of 

such alternative approaches in 

implementing a vendor peer group 

system. 

Available information on the effective 

design of vendor peer groups for cost 

containment purposes suggests that 

State agencies could benefit from 

applying two principles to this process. 

1. Peer Group Criteria 

A State agency should use a sufficient 

number of criteria to differentiate 

between vendors and account for 

variations in price. Criteria used by one 

State agency may not have the same 

effect when used by another State 

agency. Available data suggest that State 

agencies benefit from using geographic 

location as a criterion in establishing 

peer groups, and that the use of two or 

more criteria is preferable to using a 

single criterion. Therefore, 

§ 246.12(g)(4)(ii) of the interim rule 

requires a State agency to use at least 

two criteria in establishing peer groups, 

one of which must be a measure of 

geographic location. Under 

§ 246.12(g)(4)(ii), a State agency may 

receive FNS approval to use a single 

criterion to establish vendor peer 

groups. FNS approval will be based on 

a State agency’s demonstration that the 

use of a single criterion significantly 

accounts for variations in prices among 

vendors, and that using a second 

criterion would not further contain food 

costs. The State agency’s peer group 

criteria, including its criteria for 

identifying above-50-percent vendors 

and vendors that are comparable to 

above-50-percent vendors, are not 

subject to administrative review under 

§ 246.18(a)(1)(iii) of the interim rule. 

The public has an opportunity to 

comment on these criteria as part of the 

State Plan process; thus interested 

parties should use this process to 

provide input. FNS must review and 

approve peer group-related criteria as 

part of the State Plan process. 

2. Periodic Assessment of Peer Group 

Structure 

To ensure that vendor peer groups 

remain effective, § 246.12(g)(4)(ii) of this 

interim rule requires the State agency to 

assess its peer groupings at least every 

three years and make adjustments as 

necessary. This process would include 

using statistical methods to verify the 

appropriateness of the peer group 

criteria and the methodology for 

establishing competitive price. The 

State agency is encouraged to work with 

its vendor advisory group in this 

process. 

Exemptions From Peer Group 

Requirements 

In accordance with section 

17(h)(11)(A)(ii) of the CNA, the interim 

rule (§ 246.12(g)(4)(v)) establishes two 

conditions under which FNS may grant 

a State agency an exemption from the 

peer group requirements. The first 

condition applies to a State agency that 

elects not to authorize any above-50- 

percent vendors. The State agency must 

demonstrate to FNS that establishing a 

vendor peer group system would be 

inconsistent with efficient and effective 

operation of the program, or that its 

alternative cost containment system 

would be as effective as a peer group 

system. 

The second condition for an 

exemption applies to a State agency that 

authorizes above-50-percent vendors. 

The WIC redemptions of above-50- 

percent vendors authorized by the State 

agency must be less than five percent of 

the State agency’s total WIC 

redemptions (dollars) in the year 

preceding a year in which the 

exemption is effective. By law, the State 

agency must demonstrate that its 

alternative vendor cost containment 

system would be as effective as a vendor 

peer group system and would not result 

in higher costs if program participants 

transact their food instruments at above50-percent vendors rather than at 

regular vendors. 

1. Request for Exemption 

A State agency that believes it meets 

either of the conditions for an 

exemption may request from FNS an 

exemption from the vendor peer group 

system requirement. A State agency 

proposing an alternative cost 

containment system must support its 

request with a detailed description of 

the alternative cost containment system, 

including documentation that compares 

the potential costs and benefits of a peer 

group system with the costs and benefits 

of the State agency’s alternative cost 

containment system. Justifications based 

solely on insufficient time or resources 

to implement a vendor peer group 

system would not be acceptable. If the 

State agency elects to authorize any 

above-50-percent vendors, the State 

agency’s alternative cost containment 

system justification must include a 

detailed description of how the State 

agency will establish competitive price 

criteria and allowable reimbursement 

levels for above-50-percent vendors as 

compared to regular vendors. The 

justification must include the average 

payments that the State agency would 

make to above-50-percent vendors and 

to regular vendors for either the 

standard food packages or the most 

frequently issued food instrument types 

for women, infants, and children. 

Rather than presenting an alternative 

cost containment system, a State agency 

that elects not to authorize any above50-percent vendors may request an 

exemption from the vendor peer group 

system requirement by providing a 

detailed explanation of why 

implementation of a peer group system 

would be inconsistent with the efficient 

and effective operation of the program 

in the State. The State agency’s 

explanation might address such factors 

as the number of WIC participants 

served, the degree of variability in food 

prices and types of vendors, the number 

of vendors authorized, the State 

agency’s average food package costs, 

and previous experience with a vendor 

peer group system. 

If the State agency seeks an exemption 

because payments to above-50-percent 

vendors comprise less than five percent 

of total WIC redemptions, the State 

Federal Register / Vol. 70, No. 228 / Tuesday, November 29, 2005 / Rules and Regulations 71717 

agency’s submission to FNS must also 

include redemption data. The data must 

include the total dollar amount of all 

WIC redemptions and the dollar amount 

and percentage of WIC redemptions 

attributable to above-50-percent vendors 

in the fiscal year preceding the year for 

which an exemption is sought. 

FNS will review the information 

submitted by the State agency and 

determine whether the State agency 

qualifies for an exemption. A State 

agency that obtains an exemption from 

the peer group requirement still must 

establish competitive pricing criteria for 

vendor selection and allowable 

reimbursement levels. 

2. Term of Exemption 

An exemption from the peer group 

requirement would remain in effect 

until the State agency no longer meets 

the conditions in § 246.12(g)(4)(v) on 

which the exemption was based (e.g., 

redemptions to above-50-percent 

vendors comprise more than five 

percent of the total annual WIC 

redemptions); until FNS notifies the 

State agency that it has revoked the 

exemption for cause; or for three years, 

whichever occurs first. During the 

period of the exemption, the State 

agency must provide to FNS annually 

documentation that it either authorizes 

no above-50-percent vendors or that 

such vendors’ redemptions continue to 

represent less than five percent of total 

WIC redemptions, depending on the 

terms of the exemption. 

Competitive Pricing 

General Requirement 

The use of price criteria in vendor 

authorization and reauthorization is a 

primary mechanism in vendor cost 

containment. In accordance with section 

17(h)(11)(B) of the CNA, § 246.12(g)(4) 

of this rule requires the State agency to 

establish competitive price criteria for 

each peer group for the selection of 

vendors for participation in the 

program. Competitive price criteria 

allow the State agency to determine 

whether the prices charged by a vendor 

applicant are competitive with prices 

charged by other vendors. In 

determining whether a vendor 

applicant’s prices are competitive, the 

State agency is required to consider 

either the vendor’s shelf prices or the 

prices the vendor bid for supplemental 

foods, which may not exceed the 

vendor’s shelf prices. 

The competitive pricing requirement 

in section 17(h)(11)(B) of the CNA 

largely restates the requirement 

established by section 203(l) of the 

Goodling Act (Pub. L. 105–336) and 

implemented through the WIC Food 

Delivery Rule at § 246.12(g)(3)(i). WIC 

regulations, as amended by the WIC 

Food Delivery Rule, require the State 

agency to apply a competitive price 

criterion during the vendor selection 

process by comparing the prices a 

vendor applicant charges for 

supplemental foods to the prices 

charged by other vendor applicants and 

authorized vendors. State agencies have 

implemented this provision in different 

ways. For example, some use historical 

data, such as average prices of redeemed 

food instruments, to establish dollar 

limits against which they evaluate a 

vendor applicant’s prices. Other State 

agencies use the prices for WIC food 

items submitted by a vendor applicant 

to calculate the amount the applicant 

would charge for a standard 

combination of WIC foods or for 

selected WIC food packages. They then 

compare this result with what other 

vendor applicants and currently 

authorized vendors in the same peer 

group would charge for the same foods 

or food packages. Some State agencies 

apply multiple criteria when assessing 

the competitiveness of a vendor 

applicant’s prices, for example, 

requiring a vendor’s prices to be within 

a certain percentage of the average food 

instrument redemption prices of 

authorized vendors in its peer group 

and within a certain percentage of the 

average retail price for individual WIC 

foods. 

The competitive price range also 

varies among State agencies. State 

agencies that compare a vendor 

applicant’s prices against an average 

redemption price for selected food 

instruments or against average prices for 

individual WIC foods have allowed the 

applicant’s prices to exceed the peer 

group average by amounts ranging from 

5 percent to 30 percent. In addition, 

State agencies differ regarding whether 

they consider factors such as 

transportation costs or current 

wholesale costs of WIC foods when 

assessing a vendor applicant’s prices. 

Under this interim rule State agencies 

retain flexibility in establishing 

competitive price selection criteria. FNS 

encourages State agencies, in 

implementing this rule, to re-examine 

the standards that they use to assess the 

prices of vendor applicants and 

currently authorized vendors to 

determine if they are paying competitive 

prices for supplemental foods. In this 

process, State agencies should ensure 

that they are paying the lowest prices 

for WIC foods by authorizing vendors 

whose prices fall at the lower end of the 

State agency’s competitive range and 

that are needed to ensure participant 

access to WIC foods. Section 

246.12(g)(1) of the WIC regulations has 

been amended to clarify the cost 

containment emphasis in addition to 

authorizing an appropriate number and 

distribution of vendors in order to 

ensure participant access to 

supplemental foods and effective State 

agency management, oversight, and 

review of its authorized vendors. This 

requirement, in combination with the 

competitive pricing requirement, should 

enable the State agency to select a 

vendor population that is manageable 

both administratively and from a cost 

perspective. 

Specific Requirements 

In accordance with section 

17(h)(11)(B) of the CNA, this interim 

rule requires State agencies to establish 

and apply appropriate competitive price 

criteria in keeping with several specific 

requirements. 

1. Participant Access 

Under § 246.12(g)(4) of this rule, the 

State agency must consider participant 

access by geographic area in 

establishing competitive price criteria. 

This means that the State agency may 

not deny authorization to a vendor that 

is needed to ensure participant access to 

supplemental foods because that 

vendor’s prices do not meet the 

competitive price criteria for the 

vendor’s peer group. The assumption is 

that there are no alternative vendors in 

the area with prices that meet the State 

agency’s competitive price selection 

criteria and that, bearing in mind where 

participants typically shop, there is no 

other practical way to provide WIC 

foods. In such instances, FNS would 

encourage the State agency to negotiate 

with the vendor, if possible, to secure 

lower prices for WIC participants than 

the prices the vendor charges other 

customers. The authorization of vendors 

whose prices exceed the competitive 

price selection criteria, but that are 

needed for participant access, should be 

the exception and not the rule. The 

State agency has sole discretion to make 

participant access determinations. The 

validity or appropriateness of the State 

agency’s participant access criteria and 

the State agency’s participant access 

determinations are not subject to appeal 

(§ 246.18(a)(1)(iii)(B)). 

2. Vendors that Meet the More-than-50- 

Percent Criterion 

If a State agency chooses to authorize 

above-50-percent vendors, 

§ 246.12(g)(4)(i) of the interim rule 

requires the State agency to establish 

distinct competitive price selection 

criteria for such vendors. To comply 

71718 Federal Register / Vol. 70, No. 228 / Tuesday, November 29, 2005 / Rules and Regulations 

with the competitive pricing 

requirement in section 17(h)(11)(B) of 

the CNA, the State agency would not 

necessarily have to achieve lower 

program costs when food instruments 

are transacted at above-50-percent 

vendors, rather than at regular retail 

vendors. The State agency would, 

however, be required to demonstrate to 

FNS that its competitive price criteria 

and allowable reimbursement levels for 

above-50-percent vendors do not result 

in average payments per food 

instrument that are higher than average 

payments per food instrument to 

comparable vendors that do not meet 

the more-than-50-percent criterion. In 

addition, competitive price criteria may 

not result in higher total food costs if 

participants use their food instruments 

at above-50-percent vendors rather than 

at regular vendors. This means that the 

total payments to above-50-percent 

vendors for supplemental foods may not 

exceed the total amount that the State 

agency would have paid to regular 

vendors for the same types and 

quantities of supplemental foods. 

To determine whether a State agency 

is meeting the requirement that above50-percent vendors do not result in 

higher food costs than regular vendors, 

the State agency must compare the 

average cost per food instrument 

redeemed at above-50-percent vendors 

to the average cost per food instrument 

redeemed at regular vendors. The State 

agency must compute statewide average 

redemption amounts for each type of 

food instrument redeemed or for each 

distinct combination of foods on 

redeemed food instruments, depending 

on whether or not the State agency uses 

standardized food instrument types. The 

average cost per food instrument must 

be weighted to reflect the relative 

proportion of food instruments 

redeemed by each vendor peer group. 

By using a weighted average, the State 

agency takes into account the frequency 

with which vendors redeem food 

instruments of varying redemption 

amounts. If a State agency makes more 

payments to vendors that offer the 

lowest prices for WIC foods, a weighted 

average will reflect this fact more than 

a simple average. The weighted average 

correlates with WIC participants’

shopping patterns by giving the most 

weight to redemption prices of stores 

with the largest number of WIC 

transactions. The following charts 

display the weighted average 

redemption amounts for an infant 

formula food instrument (type ABC) 

redeemed by regular vendors and above50-percent vendors. 

Chart 1: Weighted Average 

Redemption Amounts for Regular 

Vendors 

CHART 1.—WEIGHTED AVERAGE REDEMPTION AMOUNTS FOR REGULAR VENDORS

Peer group number 

Average redemption 

amount (dollars) 

FI Type ABC 

Number and percent of 

redeemed food instruments 

Type ABC Weight 

Number % 

1 ........................................................................................................................................... $ 81.51 8,481 0.82 0.008 

2 ........................................................................................................................................... 111.56 54,748 4.99 0.050 

3 ........................................................................................................................................... 113.89 217,684 21.01 0.210 

4 ........................................................................................................................................... 110.93 758,175 73.18 0.732 

Total .............................................................................................................................. ........................ 1,036,088 100.00 1.000 

Weighted average redemption amount ....................................................................................................................................................... $113.66 

Simple average of all 1,036,088 redemption amounts ............................................................................................................................... $108.26 

CHART 2.—WEIGHTED AVERAGE REDEMPTION AMOUNTS FOR ABOVE-50-PERCENT VENDORS

Peer group number 

Average redemption 

amount (dollars) 

FI Type ABC 

Number and percent of 

redeemed food instruments 

Type ABC Weight 

Number % 

1 ........................................................................................................................................... $130.68 43 0.03 0.000 

2 ........................................................................................................................................... 128.94 513 0.34 0.003 

3 ........................................................................................................................................... 125.09 10,242 6.82 0.068 

4 ........................................................................................................................................... 127.96 139,314 92.81 0.928 

Total .............................................................................................................................. ........................ 150,112 100.00 1.000 

Weighted average redemption amount ....................................................................................................................................................... $128.38 

Simple average of all 150,112 redemption amounts .................................................................................................................................. $127.35 

The weighted average redemption 

amounts for food instrument type ABC 

shown in the preceding charts were 

calculated using a standard statistical 

formula. (The formula derives the 

weighted average by multiplying each 

food instrument redemption amount by 

the corresponding weight, adding these 

individual sums, and dividing this total 

by the sum of the weights used in the 

calculation.) In Chart 1 the weighted 

average redemption amount of $113.66 

for food instrument ABC redeemed by 

regular vendors is $5.40 more than the 

simple average redemption amount of 

$108.26. The weighted average more 

accurately reflects the cost of these food 

instruments to the State agency than 

does the simple average. The weighted 

average indicates that the State agency 

paid substantially more food 

Federal Register / Vol. 70, No. 228 / Tuesday, November 29, 2005 / Rules and Regulations 71719 

instruments at higher redemption prices 

than at lower prices. In Chart 2 the 

weighted average redemption amount of 

$128.38 for food instrument ABC 

redeemed by above-50-percent vendors 

exceeds the simple average redemption 

amount by $1.03. In this instance the 

difference between the simple average 

and the weighted average cost of food 

instrument ABC is not as large as it was 

for the same food instrument redeemed 

by regular vendors because 93 percent 

of the food instruments were redeemed 

by vendors in the same peer group. 

There was also less variation in the 

individual food instrument redemption 

amounts. The weighted average captures 

the impact of this redemption pattern. 

Charts 1 and 2 show the disparity in 

payments for infant formula made to 

regular vendors and above-50-percent 

vendors. When State agencies 

implement competitive price criteria 

and allowable reimbursement levels as 

required in this interim rule, weighted 

average redemption amounts of food 

instruments redeemed by above-50- 

percent vendors should not exceed 

weighted average redemption amounts 

for the same food instruments redeemed 

by regular vendors. In general, for 

above-50-percent vendors to not result 

in higher costs to the program than 

regular vendors, the State agency’s 

payments to these vendors should 

resemble payments to regular vendors in 

dollar amount and distribution among 

peer groups. A State agency that 

consistently reimburses above-50- 

percent vendors at or near the highest 

food instrument redemption amounts, 

while reimbursing most regular vendors 

at lower levels, would have difficulty 

meeting the cost neutrality requirement 

that above-50-percent vendors not result 

in higher costs to the program than 

regular vendors. If the average food 

instrument cost for above-50-percent 

vendors does not exceed the average 

food instrument cost for all regular 

vendors, then the State agency has 

assurance that above-50-percent vendors 

do not cost the program more than 

regular vendors. The average food 

instrument cost for above-50-percent 

vendors need not be less than that for 

regular vendors. The average costs may 

be equal or statistically equivalent. 

A State agency must monitor average 

redemption amounts at least quarterly, 

and more frequently for newlyauthorized above-50-percent vendors, 

and if necessary adjust payment levels, 

recoup excess payments, or take other 

actions to ensure compliance. 

Appropriate action may include 

terminating vendor agreements with 

above-50-percent vendors whose prices 

are least competitive, unless a vendor is 

needed to ensure participant access to 

WIC foods. If FNS determines that a 

State agency has failed to meet the 

requirements in § 246.12(g)(4)(i)(A) to 

ensure that above-50-percent vendors do 

not result in higher costs to the program 

than if participants redeem their food 

instruments at regular vendors, FNS 

will establish a claim against the State 

agency to recover excess food funds 

expended and will require appropriate 

remedial action. 

3. Maintaining Competitive Prices After 

Authorization 

In amending section 17(h)(11) of the 

CNA, Public Law 108–265 retained the 

requirement that State agencies 

establish procedures to ensure that a 

retail store selected for participation in 

the WIC Program does not increase its 

prices subsequent to selection to levels 

that would make the store ineligible for 

selection. Section 246.12(g)(4)(iii) of the 

interim rule contains this legislative 

requirement, which also applies to State 

agencies under current regulations. To 

meet the requirement, the State agency 

must hold authorized vendors 

accountable for maintaining prices at a 

level consistent with the selection 

criteria applied to the vendors at 

authorization. For example, if a vendor’s 

prices must be within a certain range of 

the peer group’s average shelf prices in 

order for the vendor to be authorized, 

then the vendor’s prices must remain 

within this range subsequent to 

authorization. By using competitive 

price criteria to establish allowable 

payment levels for redeemed food 

instruments, State agencies can ensure 

that vendors remain eligible for 

selection. They also avoid excessive 

payments for food instruments with 

prices that are below a statewide not-toexceed amount, but outside of the 

competitive price range for the vendor’s 

peer group. A vendor’s failure to remain 

price competitive is cause for 

termination of the vendor agreement, 

even if actual payments to the vendor 

are within the not-to-exceed amount. 

One example of a failure to remain price 

competitive would occur if a vendor, or 

vendors, raised the price for a WIC food 

with no basis in wholesale price or 

handling costs. 

Currently, State agencies use different 

approaches to monitor the food prices of 

vendors subsequent to redemption. 

Some are more rigorous than others, 

particularly in terms of whether the 

State agency reviews shelf prices or 

redemption data to assess a vendor’s 

continued compliance with the 

competitive price selection criteria, and 

the action the State agency takes if it 

determines that a vendor is not meeting 

the competitive price selection criteria. 

Some State agencies require authorized 

vendors to submit shelf price surveys at 

regular intervals during the year; others 

collect price data during store visits. 

Some State agencies collect price data 

on all WIC foods; others collect price 

data only on selected foods and/or from 

a subset of authorized vendors. At least 

one State agency monitors prices on a 

monthly basis to determine if vendors 

still meet selection criteria; others have 

no clearly defined protocol for assessing 

continued compliance with competitive 

price criteria. State agencies with EBT 

systems can monitor prices of 

individual WIC foods using data 

scanned into the system at the point of 

sale. State agencies vary in the extent to 

which they monitor wholesale price 

fluctuations and can anticipate and 

estimate the impact of these fluctuations 

on WIC food prices and food instrument 

redemption amounts. 

Acceptable Competitive Price Selection 

Methodologies 

State agencies are acutely aware of the 

staff time and other costs involved in 

administering their vendor cost 

containment system. They look for ways 

to streamline procedures and reduce the 

level of effort and paperwork required 

for vendor selection, without 

compromising the system’s 

effectiveness. Investing careful and 

thoughtful effort in improving the 

selection of vendors based on 

competitive price can yield substantial 

cost savings. Some ways to enhance 

current competitive price selection 

approaches are outlined in this section. 

1. Standards for Evaluating Vendors’

Prices 

Setting appropriate quantitative 

standards for determining whether a 

vendor’s prices are competitive is 

critical. The State agency develops these 

standards by reviewing the prices of 

applicant and authorized vendors and 

price data from the larger retail 

marketplace. The standards should not 

be so flexible or loose that no vendor is 

denied authorization; rather they should 

influence vendor participation by 

allowing the State agency to 

differentiate between store prices. 

Allowing a small range of variation in 

prices produces a better standard than 

allowing a wide range of variation. State 

agency standards preferably should be 

expressed in terms of the number of 

standard deviations above the mean 

redemption amount (or other amount 

used for determining competitive price), 

rather than as a percentage, unless the 

percentage is linked to the standard 

deviation. 

71720 Federal Register / Vol. 70, No. 228 / Tuesday, November 29, 2005 / Rules and Regulations 

2. Linking Competitive Price 

Determinations to Participant Access 

Requirements 

Authorizing a sufficient number of 

vendors in appropriate locations 

throughout the State is critical to 

competitive price selection. Although a 

State agency is not required to limit the 

number of vendors it will authorize, it 

has the authority to do so and should 

use information on the number of 

vendors required to ensure participant 

access to WIC foods when establishing 

competitive prices. For example, if a 

State agency has 100 vendor applicants, 

including currently authorized vendors 

in a particular geographic area, but only 

needs 80 vendors to ensure participant 

access, then the State agency should 

determine competitive prices based on 

the 80 stores with the lowest prices. The 

State agency need not authorize the 

twenty additional stores. However, if 

the State agency has the administrative 

resources to manage the additional 

vendors, it may choose to give these 

vendors the opportunity to submit new 

price lists for consideration. 

Some State agencies can improve 

their methodologies for determining 

competitive price by improving their 

participant access criteria, including 

participant-to-vendor ratios. Having 

participant-to-vendor ratios that are too 

low could result in a State agency 

authorizing higher-priced stores for 

participant access reasons. If enough of 

these higher-priced stores are 

authorized in a geographic area, they 

will inflate the competitive price criteria 

used to select and reimburse vendors. 

Having a high participant-to-vendor 

ratio, that is based on a realistic 

assessment of the capacity of vendors to 

serve WIC participants, could increase 

competition for WIC authorization and 

result in more competitive prices. 

When a particular vendor (or small 

number of vendors) that is needed to 

ensure participant access has prices that 

are higher than the State agency’s 

competitive price criteria, the State 

agency should treat this vendor as an 

exception, and exclude the vendor’s 

prices from its calculation of 

competitive price criteria in order to 

avoid raising the competitive range for 

all vendors. 

3. Monitoring Shelf Prices After 

Authorization 

At least every six months following 

authorization, the State agency must 

collect and review vendors’ shelf prices. 

FNS believes that State agencies should 

not rely on redemption data alone to 

ensure that vendors have not, 

subsequent to authorization, raised their 

prices to a level that would exceed the 

competitive price selection criteria 

under which they were authorized. 

Monitoring of shelf prices should help 

the State agency interpret changes in 

average redemption amounts of food 

instruments. A State agency could also 

use shelf price data to detect partial 

redemptions and possible overcharging. 

In monitoring prices, the State agency 

should observe the overall rate of 

increase in prices within and between 

peer groups, and whether any vendors 

have increased their prices at a higher 

rate than other vendors in their peer 

group during the monitoring period. 

State agencies should identify methods 

of collecting price data that are least 

burdensome, such as the use of 

electronic data collection via the 

Internet or an electronic spreadsheet; 

random sampling of vendors and/or 

WIC food items; and allowing vendors 

to submit only those prices that have 

changed or will change. 

Allowable Reimbursement Levels 

General Requirements 

Section 17(h)(11)(C) of the CNA 

requires State agencies to establish 

allowable reimbursement levels for 

supplemental foods for each vendor 

peer group, taking into consideration 

participant access in a geographic area. 

Allowable reimbursement levels ensure 

that payments to vendors in the peer 

group reflect competitive retail prices, 

and that the State agency does not 

reimburse a vendor for supplemental 

foods at a level that would make the 

vendor ineligible for authorization 

under its competitive price selection 

criteria. 

Since October 1, 2002, WIC 

regulations have required State agencies 

to establish price limitations on the 

amount they pay vendors. State agencies 

typically refer to the price limits as 

maximum values or not-to-exceed 

amounts for redeemed food instruments. 

State agencies currently establish these 

amounts in different ways. These 

include, but are not limited to, the use 

of a rolling average redemption price for 

each food instrument type; an average 

redemption price for each food 

instrument for a fixed period of time; 

the average of the highest prices charged 

by vendors in the peer group for a 

particular WIC food; the highest price 

charged by a vendor in the peer group 

for a particular food instrument type; 

and average prices charged by a selected 

group of the smallest vendors in the 

State increased by a designated percent. 

One State agency uses the prices that 

vendors bid for supplemental foods to 

establish a maximum reimbursement 

amount per food instrument type. FNS 

believes that basing maximum 

reimbursement levels on the highest 

prices charged by some or all vendors in 

a peer group does not effectively contain 

costs. While this rule allows State 

agencies to continue using different 

approaches to establish allowable 

reimbursement levels, it directs State 

agencies to choose among the more 

effective approaches. 

Because food price data available to 

State agencies can lag behind changes in 

the retail marketplace, many State 

agencies allow for price increases in 

setting allowable reimbursement limits 

in order to minimize the number of 

rejected food instruments. Under 

section 17(h)(11)(C)(ii) of the CNA, State 

agencies may continue the practice of 

factoring wholesale price fluctuations 

into the calculation of allowable 

reimbursement levels. Section 

246.12(h)(3)(viii) of the interim rule 

incorporates this provision. Section 

17(h)(11)(D) of the CNA also gives State 

agencies the option of exempting from 

competitive price criteria and allowable 

reimbursement levels pharmacies that 

supply only exempt infant formula and 

medical foods under the program and 

non-profit vendors that meet or are 

likely to meet the more than 50 percent 

criterion. This option also is reflected in 

§ 246.12(g)(4)(iv) and 246.12(h)(3)(viii) 

of the interim rule. 

Under § 246.12(g)(4)(iv) of this rule, a 

State agency that chooses to exempt a 

non-profit vendor from competitive 

price criteria and/or allowable 

reimbursement levels must have a 

compelling reason for doing so. The 

State agency must notify FNS, in 

writing, prior to granting this 

exemption. The State agency’s 

notification must indicate the reason for 

the exemption (e.g., the vendor is 

needed to ensure participant access), the 

benefits to the program of exempting the 

non-profit vendor from the competitive 

price criteria and/or allowable 

reimbursement levels, and how the 

State agency will establish an 

appropriate reimbursement level for the 

non-profit vendor. State agencies are not 

required to notify FNS of exemptions of 

non-profit health and/or human service 

agencies or organizations that provide 

supplemental foods to WIC participants. 

Specific Requirement 

Section 246.12(h)(3)(viii) of this rule 

requires the State agency to consider 

participant access in a geographic area 

in establishing allowable reimbursement 

levels. A State agency must set 

allowable reimbursement levels that 

allow WIC participants to purchase all 

of the foods prescribed on the food 

Federal Register / Vol. 70, No. 228 / Tuesday, November 29, 2005 / Rules and Regulations 71721 

instrument from any authorized vendor. 

This requirement does not mean that the 

State agency must print a statewide 

maximum reimbursement level on the 

food instrument or set maximum 

reimbursement levels based on the 

highest supplemental food prices among 

authorized vendors. Rather, the 

requirement to consider participant 

access makes this a priority in 

establishing allowable reimbursement 

levels. It works in tandem with the 

competitive price criteria requirement to 

contain costs and while meeting 

participants’ needs. 

Acceptable Approaches To Establishing 

and Using Allowable Reimbursement 

Levels 

1. Current Price Limitation Methods 

Under current regulations, State 

agencies use food instrument 

redemption procedures to ensure that 

each vendor is not paid more than the 

price limitations applicable to the 

vendor. The following examples 

illustrate how State agencies should link 

competitive price criteria and allowable 

reimbursement levels. Since they 

describe methods currently used by 

State agencies, the examples do not 

embody all of the requirements and 

recommendations of this interim rule 

(such as using standard deviations 

rather than percentages to define the 

competitive range). 

• Scenario #1: At authorization, a vendor’s 

price for each WIC food item may not exceed 

the average shelf prices of other authorized 

vendors in the peer group by more than five 

percent. The State agency sets the maximum 

payment for any food instrument at five 

percent above the average cost of the peer 

group for the specific food items on the food 

instrument, or at five percent above the 

vendor’s reported shelf prices, whichever is 

less. To allow for wholesale price 

fluctuations, the State agency sets food 

instrument not-to-exceed amounts in its 

redemption system at 110 percent above the 

average food instrument prices. It generates 

a monthly report that identifies all food 

instruments redeemed for prices between 105 

and 110 percent of the peer group’s average 

prices by food instrument type. The State 

agency follows up with the vendors after 

evaluating the information on these food 

instruments. 

• Scenario #2: The State agency authorizes 

any qualified vendor with prices at or below 

the average redemption amount for selected 

food instruments redeemed by the peer 

group. The State agency’s redemption system 

sets the maximum allowable reimbursement 

level for each type of WIC check and for each 

peer group based on a statistical formula that 

uses the average redemption prices of 

vendors in the peer group during the 

preceding three months, known as a rolling 

average. Maximum allowable reimbursement 

levels do not include an inflation factor. If 

the price on a food instrument exceeds the 

maximum allowable reimbursement level, 

the State agency pays the vendor the 

maximum allowable reimbursement amount. 

2. Printing Maximum Reimbursement 

Amounts on Food Instruments 

Currently, some State agencies print 

maximum allowable reimbursement (or 

not-to-exceed) amounts on all of their 

food instruments; some print maximum 

amounts on most, but not all food 

instruments; others do not print 

maximum amounts on any food 

instruments. Under this rule, State 

agencies may continue using any of 

these approaches as long as printed 

maximum reimbursement amounts do 

not prohibit the State agency from 

applying the allowable reimbursement 

levels established for each peer group, 

which may be lower than the printed 

maximum. State agencies that print 

statewide not-to-exceed amounts on 

food instruments should notify vendors 

in the vendor agreement, vendor 

handbook, and training sessions, that 

they will be held to a peer group 

maximum reimbursement level that is 

linked to the competitive price criteria 

applied to the vendor at authorization. 

3. Calculating Average Payments per 

Food Instrument 

If a State agency authorizes above-50- 

percent vendors, it must ensure that 

average payments per food instrument 

to such vendors do not exceed average 

payments per food instrument to 

comparable vendors. When calculating 

average payments per food instrument, 

the State agency must include either all 

food instruments redeemed by all 

authorized vendors or a representative 

sample (constructed using appropriate 

sampling techniques) of the redeemed 

food instruments. To calculate the 

average payments per food instrument, 

a State agency should add the 

redemption amounts for all redeemed 

food instruments of the same type and 

divide the total by the number of food 

instruments of that type. If the State 

agency does not use pre-determined 

types of food instruments, it should 

calculate the average payment to above50-percent vendors and regular vendors 

for each food item or distinct 

combination of foods prescribed on the 

food instrument. For comparison 

purposes, the State agency may 

calculate average payments per food 

instrument for above-50-percent 

vendors and comparable groups of 

regular vendors. 

Cost Containment Certification 

If a State agency elects to authorize 

any above-50-percent vendors, section 

17(h)(11)(E) of the CNA requires the 

State agency to demonstrate to FNS that 

its competitive price criteria and 

allowable reimbursement levels do not 

result in average payments per food 

instrument to these vendors that are 

higher than average payments per food 

instrument to comparable vendors that 

do not meet the more than 50 percent 

criterion. Accordingly, § 246.12(g)(4)(vi) 

of the rule requires a State agency that 

authorizes above-50-percent vendors to 

submit to FNS every three years 

information which indicates that the 

State agency has an effective 

methodology for establishing 

competitive price criteria and allowable 

reimbursement levels. The information 

provided by the State agency will 

include data on the average payments 

per food instrument to above-50-percent 

vendors as compared to regular vendors, 

submitted in accordance with guidance 

developed by FNS. 

If FNS determines, based on its 

review of the information provided by 

the State agency and any other relevant 

data, that the requirements of 

§ 246.12(g)(4)(vi) have been met, FNS 

will certify that the State agency’s 

competitive price criteria and allowable 

reimbursement levels do not result in 

higher average payments per food 

instrument for above-50-percent 

vendors than for other comparable 

vendors. If the State agency’s 

methodology for establishing 

competitive price criteria and allowable 

reimbursement levels fails to meet the 

requirements in § 246.12(g)(4)(i) of the 

interim rule, FNS will disapprove the 

State agency’s request to authorize 

above-50-percent vendors. 

Limitation on Private Rights of Action 

As required by section 17(h)(11)(F) of 

the CNA, the competitive pricing 

provisions of this interim rule do not 

create a private right of action. 

Individuals do not have the right to seek 

administrative or judicial redress for the 

standards set by the State agency with 

respect to vendor selection criteria and 

cost containment provisions. Section 

246.12(g)(4)(vii) of this interim rule 

reflects this limitation on the private 

rights of action. 

State Plan 

Section 203(e)(10)(B) of Public Law 

108–265 amends section 17(f) of the 

CNA to require a State agency to include 

in the State Plan a description of its 

vendor peer group system, competitive 

price criteria, and allowable 

reimbursement levels that demonstrates 

that the State agency is in compliance 

with the cost containment provisions in 

section 17(h)(11) of the CNA. 

71722 Federal Register / Vol. 70, No. 228 / Tuesday, November 29, 2005 / Rules and Regulations 

Accordingly, § 264.4 of the interim rule 

incorporates this requirement. 

In § 246.4(a)(14)(xv) of the interim 

rule, the State Plan also must include 

information on non-profit above-50- 

percent vendors that the State agency 

has exempted from competitive price 

criteria and allowable reimbursement 

levels under § 246.12(g)(4)(iv); a 

justification and documentation 

supporting the State agency’s request for 

an exemption from the vendor peer 

group requirement in § 246.12(g)(4), if 

applicable; and, if the State agency 

authorizes any above-50-percent 

vendors, information required by FNS to 

determine whether the State agency’s 

vendor cost containment system meets 

the requirements in § 246.12(g)(4)(i). 

List of Subjects in 7 CFR Part 246 

Food assistance programs, Food 

donations, Grant programs—Social 

programs, Infants and children, 

Maternal and child health, Nutrition 

education, Public assistance programs, 

WIC, Women. 

■ Accordingly, 7 CFR part 246 is 

amended as follows: 

PART 246—SPECIAL SUPPLEMENTAL 

NUTRITION PROGRAM FOR WOMEN, 

INFANTS AND CHILDREN 

■ 1. The authority citation for part 246 

continues to read as follows: 

Authority: 42 U.S.C. 1786. 

■ 2. In § 246.2: 

■ a. Add in alphabetical order the 

definitions of Above-50-percent 

vendors, Food sales, and Vendor peer 

group system; and 

■ b. Remove the reference 

‘‘§ 246.12(g)(3)’’ from the definition of 

Vendor selection criteria and add in its 

place the reference ‘‘§ 246.12(g)(3) and 

(g)(4)’’. 

The additions read as follows: 

§ 246.2 Definitions. 

Above-50-percent vendors means 

vendors that derive more than 50 

percent of their annual food sales 

revenue from WIC food instruments, 

and new vendor applicants expected to 

meet this criterion under guidelines 

approved by FNS. 

* * * * * 

Food sales means sales of all Food 

Stamp Program eligible foods intended 

for home preparation and consumption, 

including meat, fish, and poultry; bread 

and cereal products; dairy products; 

fruits and vegetables. Food items such 

as condiments and spices, coffee, tea, 

cocoa, and carbonated and 

noncarbonated drinks may be included 

in food sales when offered for sale along 

with foods in the categories identified 

above. Food sales do not include sales 

of any items that cannot be purchased 

with food stamp benefits, such as hot 

foods or food that will be eaten in the 

store. 

* * * * * 

Vendor peer group system means a 

classification of authorized vendors into 

groups based on common characteristics 

or criteria that affect food prices, for the 

purpose of applying appropriate 

competitive price criteria to vendors at 

authorization and limiting payments for 

food to competitive levels. 

* * * * * 

■ 3. In § 246.4: 

■ a. Remove the reference 

‘‘§ 246.12(g)(3)’’ and from paragraph 

(a)(14)(ii) and add in its place the 

reference ‘‘§ 246.12(g)(3) and (g)(4)’’. 

■ b. Revise the heading and the first 

sentence of paragraph (a)(14)(x); and 

■ c. Add new paragraphs (a)(14)(xv) and 

(a)(14)(xvi). 

The revision and additions read as 

follows: 

§ 246.4 State plan. 

(a) * * * 

(14) * * * 

(x) Infant formula cost containment. 

A description of any infant formula cost 

containment system.* * * 

* * * * * 

(xv) Vendor cost containment. A 

description of the State agency’s vendor 

peer group system, competitive price 

criteria, and allowable reimbursement 

levels that demonstrates that the State 

agency is in compliance with the cost 

containment provisions in 

§ 246.12(g)(4); information on non-profit 

above-50-percent vendors that the State 

agency has exempted from competitive 

price criteria and allowable 

reimbursement levels in 

§ 246.12(g)(4)(iv); a justification and 

documentation supporting the State 

agency’s request for an exemption from 

the vendor peer group requirement in 

§ 246.12(g)(4), if applicable; and, if the 

State agency authorizes any above-50- 

percent vendors, information required 

by FNS to determine whether the State 

agency’s vendor cost containment 

system meets the requirements in 

§ 246.12(g)(4)(i). 

(xvi) Other cost containment systems. 

A description of any other food cost 

containment systems (such as juice and 

cereal rebates and food item 

restrictions). 

* * * * * 

■ 4. In § 246.12: 

■ a. Revise paragraph (g)(1); 

■ b. Remove paragraph (g)(3)(i) and 

redesignate paragraphs (g)(3)(ii) through 

(g)(3)(iv) as paragraphs (g)(3)(i) through 

(g)(3)(iii); 

■ c. Redesignate paragraphs (g)(4) 

through (g)(8) as paragraphs (g)(5) 

through (g)(9), and add a new paragraph 

(g)(4); and 

■ d. Add six sentences to the end of 

paragraph (h)(3)(viii). 

The revision and additions read as 

follows: 

§ 246.12 Food delivery systems. 

* * * * * 

(g) * * * 

(1) General. The State agency must 

authorize an appropriate number and 

distribution of vendors in order to 

ensure the lowest practicable food 

prices consistent with adequate 

participant access to supplemental 

foods and to ensure effective State 

agency management, oversight, and 

review of its authorized vendors. 

* * * * * 

(4) Vendor selection criteria: 

competitive price. The State agency 

must establish a vendor peer group 

system and distinct competitive price 

criteria and allowable reimbursement 

levels for each peer group. The State 

agency must use the competitive price 

criteria to evaluate the prices a vendor 

applicant charges for supplemental 

foods as compared to the prices charged 

by other vendor applicants and 

authorized vendors, and must authorize 

vendors selected from among those that 

offer the program the most competitive 

prices. The State agency must consider 

a vendor applicant’s shelf prices or the 

prices it bids for supplemental foods, 

which may not exceed its shelf prices. 

In establishing competitive price criteria 

and allowable reimbursement levels, the 

State agency must consider participant 

access by geographic area. 

(i) Vendors that meet the above-50- 

percent criterion. Vendors that derive 

more than 50 percent of their annual 

food sales revenue from WIC food 

instruments, and new vendor applicants 

expected to meet this criterion under 

guidelines approved by FNS, are 

defined as above-50-percent vendors. 

Each State agency annually must 

implement procedures approved by FNS 

to identify authorized vendors and 

vendor applicants as either above-50- 

percent vendors or regular vendors. The 

State agency must receive FNS 

certification of its vendor cost 

containment system under section 

246.12(g)(4)(vi) prior to authorizing any 

above-50-percent vendors. The State 

agency that chooses to authorize any 

above-50-percent vendors: 

(A) Must distinguish these vendors 

from other authorized vendors in its 

peer group system or its alternative cost 

Federal Register / Vol. 70, No. 228 / Tuesday, November 29, 2005 / Rules and Regulations 71723 

containment system approved by FNS 

by establishing separate peer groups for 

above-50-percent vendors or by placing 

above-50-percent vendors in peer 

groups with other vendors and 

establishing distinct competitive price 

selection criteria and allowable 

reimbursement levels for the above-50- 

percent vendors; 

(B) Must reassess the status of new 

vendors within six months after 

authorization to determine whether or 

not the vendors are above-50-percent 

vendors, and must take necessary 

follow-up action, such as terminating 

vendor agreements or reassigning 

vendors to the appropriate peer group; 

(C) Must compare above-50-percent 

vendors’ prices against the prices of 

vendors that do not meet the above-50- 

percent criterion in determining 

whether the above-50-percent vendors 

have competitive prices and in 

establishing allowable reimbursement 

levels for such vendors; and 

(D) Must ensure that the prices of 

above-50-percent vendors do not inflate 

the competitive price criteria and 

allowable reimbursement levels for the 

peer groups or result in higher total food 

costs if program participants transact 

their food instruments at above-50- 

percent vendors rather than at other 

vendors that do not meet the above-50- 

percent criterion. To comply with this 

requirement, the State agency must 

compare the average cost of each type of 

food instrument redeemed by above-50- 

percent vendors against the average cost 

of the same type of food instrument 

redeemed by regular vendors. The 

average cost per food instrument must 

be weighted to reflect the relative 

proportion of food instruments 

redeemed by each category of vendors 

in the peer group system. The State 

agency must compute statewide average 

costs per food instrument at least 

quarterly to monitor compliance with 

this requirement. If average payments 

per food instrument for above-50- 

percent vendors exceed average 

payments per food instrument to regular 

vendors, then the State agency must 

take necessary action to ensure 

compliance, such as adjusting payment 

levels, recouping excess payments, or 

terminating vendor agreements with 

above-50-percent vendors whose prices 

are least competitive and that are not 

needed to ensure participant access. 

Where EBT systems are in use, it may 

be more appropriate to compare prices 

of individual WIC food items to ensure 

that average payments to above-50- 

percent vendors do not exceed average 

payments for the same food item to 

comparable vendors. If FNS determines 

that a State agency has failed to ensure 

that above-50-percent vendors do not 

result in higher costs to the program 

than if participants transact their food 

instruments at regular vendors, FNS 

will establish a claim against the State 

agency to recover excess food funds 

expended and will require remedial 

action. 

(ii) Implementing effective peer 

groups. The State agency’s methodology 

for establishing a vendor peer group 

system must include the following: 

(A) At least two criteria for 

establishing peer groups, one of which 

must be a measure of geography, such 

as metropolitan or other statistical areas 

that form distinct labor and products 

markets, unless the State agency 

receives FNS approval to use a single 

criterion; 

(B) Routine collection and monitoring 

of vendor shelf prices at least every six 

months following authorization; and 

(C) Assessment of the effectiveness of 

the peer groupings and competitive 

price criteria at least every three years 

and modification, as necessary, to 

enhance system performance. The State 

agency may change a vendor’s peer 

group whenever the State agency 

determines that placement in an 

alternate peer group is warranted. 

(iii) Subsequent price increases. The 

State agency must establish procedures 

to ensure that a vendor selected for 

participation in the program does not, 

subsequent to selection, increase prices 

to levels that would make the vendor 

ineligible for authorization. 

(iv) Exceptions to competitive price 

criteria. The State agency may except 

from the competitive price criteria and 

allowable reimbursement levels 

pharmacy vendors that supply only 

exempt infant formula and/or WICeligible medical foods, and non-profit 

vendors for which more than 50 percent 

of their annual revenue from food sales 

consists of revenue derived from WIC 

food instruments. A State agency that 

elects to exempt non-profit vendors 

from competitive price criteria and/or 

allowable reimbursements levels must 

notify FNS, in writing, at least 30 days 

prior to the effective date of the 

exemption. The State agency’s 

notification must indicate the reason for 

the exemption, including whether the 

vendor is needed to ensure participant 

access, why other vendors that are 

subject to competitive price criteria and 

allowable reimbursement levels cannot 

provide the required supplemental 

foods, the benefits to the program of 

exempting the non-profit vendor from 

the competitive price criteria and/or 

allowable reimbursement levels, the 

criteria the State agency used to assess 

the competitiveness of the non-profit 

vendor’s prices, and how the State 

agency will determine the 

reimbursement level for the non-profit 

vendor. This notification requirement 

does not apply to State agency contracts 

and agreements with non-profit health 

and/or human service agencies or 

organizations. 

(v) Exemptions from the vendor peer 

group system requirement. With prior 

written approval from FNS, a State 

agency may use a vendor cost 

containment approach other than a peer 

group system if it meets certain 

conditions. A State agency that obtains 

an exemption from the peer group 

requirement still must establish 

competitive pricing criteria for vendor 

selection and allowable reimbursement 

levels. An exemption from the peer 

group requirement would remain in 

effect until the State agency no longer 

meets the conditions on which the 

exemption was based, until FNS revokes 

the exemption, or for three years, 

whichever occurs first. During the 

period of the exemption, the State 

agency must provide annually to FNS 

documentation that it either authorizes 

no above-50-percent vendors, or that 

such vendors’ redemptions continue to 

represent less than five percent of total 

WIC redemptions, depending on the 

terms of the exemption. The conditions 

for obtaining an exemption from the 

vendor peer group system are as 

follows: 

(A) The State agency chooses not to 

authorize any vendors that derive more 

than 50 percent of their revenue from 

food sales from WIC food instruments, 

and the State agency demonstrates to 

FNS that establishing a vendor peer 

group system would be inconsistent 

with efficient and effective operation of 

the program, or that its alternative cost 

containment system would be as 

effective as a peer group system; or 

(B) The State agency determines that 

food instruments redeemed by vendors 

that meet the above-50-percent criterion 

comprise less than five percent of the 

total WIC redemptions in the State in 

the fiscal year prior to a fiscal year in 

which the exemption is effective; and 

the State agency demonstrates to FNS 

that its alternative vendor cost 

containment system would be as 

effective as a vendor peer group system 

and would not result in higher costs if 

program participants redeem food 

instruments at vendors that meet the 

above-50-percent criterion rather than at 

vendors that do not meet this criterion. 

(vi) Cost containment certification. If 

a State agency elects to authorize any 

above-50-percent vendors, the State 

agency must submit information, in 

accordance with guidance provided by 

71724 Federal Register / Vol. 70, No. 228 / Tuesday, November 29, 2005 / Rules and Regulations 

FNS, to demonstrate that its competitive 

price criteria and allowable 

reimbursement levels do not result in 

average payments per food instrument 

to these vendors that are higher than 

average payments per food instrument 

to comparable vendors that are not 

above-50-percent vendors. To calculate 

average payments per food instrument, 

the State agency must include either all 

food instruments redeemed by all 

authorized vendors or a representative 

sample of the redeemed food 

instruments. The State agency must add 

the redemption amounts for all 

redeemed food instruments of the same 

type and divide the sum by the number 

of food instruments of that type. If the 

State agency does not designate food 

instruments by type, it must calculate 

the average payment for each distinct 

combination of foods prescribed on the 

food instrument. The State agency may 

calculate average payments per food 

instrument type for groups of vendors 

that meet the above-50-percent criterion 

and comparable vendors, or the State 

agency may calculate average payments 

for each food instrument type for each 

vendor. State agencies with EBT 

systems must compare the average cost 

of each WIC food purchased by 

participants at above-50-percent 

vendors with the average cost of each 

food purchased from comparable 

vendors. If FNS determines, based on its 

review of the information provided by 

the State agency and any other relevant 

data, that the requirements in this 

paragraph have been met, FNS will 

certify that the State agency’s 

competitive price criteria and allowable 

reimbursement levels established for 

above-50-percent vendors do not result 

in higher average payments per food 

instrument (or higher costs for each WIC 

food item in EBT systems). If the State 

agency’s methodology for establishing 

competitive price criteria and allowable 

reimbursement levels fails to meet the 

requirement of this section regarding 

average food instrument payments to 

above-50-percent vendors, FNS will 

disapprove the State agency’s request to 

authorize above-50-percent vendors. At 

least every three years following initial 

certification, the State agency must 

submit information which demonstrates 

that it continues to meet the 

requirements of this section relative to 

average payments to above-50-percent 

vendors. FNS may require annual 

updates of selected food instrument 

redemption data. 

(vii) Limitation on private rights of 

action. The competitive pricing 

provisions of this paragraph do not 

create a private right of action based on 

facts that arise from the impact or 

enforcement of these provisions. 

* * * * * 

(h) * * * 

(3) * * * 

(viii) * * * As part of the redemption 

procedures, the State agency must 

establish and apply limits on the 

amount of reimbursement allowed for 

food instruments based on a vendor’s 

peer group and competitive price 

criteria. In setting allowable 

reimbursement levels, the State agency 

must consider participant access in a 

geographic area and may include a 

factor to reflect fluctuations in 

wholesale prices. In establishing 

allowable reimbursement levels for 

above-50-percent vendors the State 

agency must ensure that 

reimbursements do not result in higher 

food costs than if participants transacted 

their food instruments at vendors that 

are not above-50-percent vendors, or in 

higher average payments per food 

instrument to above-50-percent vendors 

than average payments to comparable 

vendors. The State agency may make 

price adjustments to the purchase price 

on food instruments submitted by the 

vendor for redemption to ensure 

compliance with the allowable 

reimbursement level applicable to the 

vendor. A vendor’s failure to remain 

price competitive is cause for 

termination of the vendor agreement, 

even if actual payments to the vendor 

are within the maximum reimbursement 

amount. The State agency may exempt 

vendors that supply only exempt infant 

formula and/or WIC-eligible medical 

foods and non-profit above-50-percent 

vendors from the allowable 

reimbursement limits. 

* * * * * 

■ 5. In § 246.18, redesignate paragraphs 

(a)(1)(iii)(B) through (a)(1)(iii)(G) as 

paragraphs (a)(1)(iii)(C) through 

(a)(1)(iii)(H) and add a new paragraph 

(a)(1)(iii)(B) to read as follows: 

§ 246.18 Administrative review of State 

agency actions. 

(a) * * * 

(1) * * * 

(iii) * * * 

(B) The validity or appropriateness of 

the State agency’s vendor peer group 

criteria and the criteria used to identify 

vendors that are above-50-percent 

vendors or comparable to above-50- 

percent vendors; 

* * * * * 

Dated: November 22, 2005. 

Kate Coler, 

Deputy Under Secretary, Food, Nutrition, and 

Consumer Services. 

Note: This appendix will not be published 

in the Code of Federal Regulations. 

Appendix: Regulatory Impact Analysis 

1. Title: 7 CFR 246: Special Supplemental 

Nutrition Program for Women, Infants, and 

Children (WIC): Vendor Cost Containment 

2. Action: 

(a) Nature: Interim Rule 

(b) Need: This rule is needed to implement 

the vendor cost containment provisions of 

the Child Nutrition and WIC Reauthorization 

Act of 2004, Public Law 108–265. Overall, 

the WIC program must ensure that program 

foods are acquired at the most competitive 

prices consistent with ensuring reasonable 

program participant access. This rule 

requires WIC State agencies to operate 

vendor management systems that effectively 

contain food costs by ensuring that prices 

paid for supplemental foods are competitive. 

The rule also responds to data which indicate 

that WIC food expenditures increasingly 

include payments to a type of vendor whose 

prices are not governed by the market forces 

that affect most retail grocers. This rule 

incorporates new statutory requirements for 

State agencies to use in evaluating vendor 

applicants’ prices during the vendor 

selection process and when paying vendors 

for supplemental foods following 

authorization. 

(c) Affected Parties: The program affected 

by this rule is the Special Supplemental 

Nutrition Program for Women, Infants, and 

Children (WIC). The parties affected by this 

regulation are the USDA’s Food and 

Nutrition Service (FNS), State agencies that 

administer the WIC Program, and retail 

vendors that are authorized to accept WIC 

food instruments. 

Effects: The following analysis describes 

the potential economic impact of this interim 

final regulation. Due to the importance of 

keeping food costs competitive and using 

program funds to serve recipients as 

effectively as possible, in section 501(b) of 

Pub. L. 108–265, Congress provided authority 

to implement these changes on an interim 

final basis. The changes in this rule are 

significant to the costs or overall operations 

to the program. The potential effects of these 

changes are highlighted below. 

Discussion: Over the past five years, the 

Special Supplemental Nutrition Program for 

Women, Infants, and Children (WIC) has 

experienced an increase in the number of 

vendors whose prices are not governed by 

market forces, and as a result are generally 

higher than the prices of other authorized 

vendors. These stores, often referred to as 

‘‘WIC-only’’ stores, stock only WIC food 

items and serve only WIC customers; thus 

they operate outside the commercial retail 

market. Because WIC is a discretionary grant 

program, the continued growth of WIC-only 

stores could drive up food costs and 

compromise the program’s ability to respond 

to the nutritional needs of at-risk women and 

children, unless effective cost-containment 

Federal Register / Vol. 70, No. 228 / Tuesday, November 29, 2005 / Rules and Regulations 71725 

1 Data on the number, location and redemptions 

of WIC-only stores is reported to FNS annually in 

The Integrity Profile (TIP). 

2Pub. L. 108–447, Consolidated Appropriations 

Act, 2005. 

measures are instituted by State agencies. In 

addition, this rule is intended to cause 

greater focus on cost containment for WIC 

food from all sources with the expectation 

that it is likely to lead to food cost savings 

which can be used to serve more eligibles. 

Under the WIC retail food delivery system 

in most states, participants receive food 

instruments that they use to purchase 

specific food items that have been prescribed 

for them. They generally can purchase these 

items at any authorized retailer, regardless of 

the shelf price of these foods. As a result, 

participants are indifferent to the prices 

stores charge for WIC foods. In the past this 

has not been a problem for program costs, 

since to maintain a wide customer base, 

commercial retail food stores need to 

maintain competitive prices to maintain their 

business with price-sensitive non-WIC 

customers, usually the preponderance of 

their customers. The emergence and growth 

of WIC-only stores has been problematic 

because these stores are not constrained by 

the need to maintain a wide customer base; 

WIC participants are their customer base. The 

growth of these stores, an increase from about 

800 stores in 18 States in 2000 to over 1,200 

stores in 20 States in 2004, appears to have 

increased WIC food costs. It is estimated that 

in 2004 WIC-only vendors represented about 

2.5 percent of all WIC vendors but comprised 

nearly 12 percent of total WIC redemptions.1

While current WIC regulations have 

required all State agencies to use vendor 

authorization and reimbursement policies to 

control the costs paid to authorized vendors, 

FNS and Congress have become increasingly 

concerned that the WIC program cannot 

afford the prices charged by WIC-only stores. 

For example, FNS sent a letter to the State 

of California (the State with the most WIConly stores) imposing a temporary 

moratorium on the authorization of new WIC 

vendors in California unless the vendors 

have a history of competitive prices or are 

needed to ensure participant access to WIC 

foods. In the FY 2005 appropriations act for 

USDA, Congress prohibited all State agencies 

from authorizing any new stores that derive 

more than 50 percent of their annual food 

sales revenue from WIC food instruments, 

unless such stores are needed for participant 

access.2 Additionally, FNS sent a letter to all 

State Health Officers requesting them to 

review WIC vendor selection policies to 

ensure that only those vendors who offer 

competitive prices receive WIC 

authorization. In addition to concerns about 

WIC-only pricing, it is the intent of Congress 

and USDA that more competitive food 

pricing be achieved. 

The Child Nutrition and WIC 

Reauthorization Act of 2004 (Pub. L. 108–

265) included new legislative requirements 

to strengthen vendor cost containment by 

requiring State agencies to implement a 

vendor peer group system, competitive price 

criteria, and allowable reimbursement levels 

in a manner that ensures the WIC Program 

pays competitive prices for supplemental 

foods. This rule implements the vendor cost 

containment provisions of this Act. The main 

provisions of the rule can be grouped into 

three categories: peer group requirements for 

all vendors, requirements on vendors that 

derive more than 50 percent of their annual 

food sales revenue from WIC food 

instruments, and exemptions from the 

requirements of the rule. 

Competitive Price Requirements 

• For all vendors, State agencies are 

required to create peer groups, establish 

competitive price criteria for peer groups, 

and set allowable reimbursement levels for 

each peer group. Additionally, State agencies 

are required to collect and monitor shelf 

price data at least every 6 months and assess 

the effectiveness of peer groupings and 

competitive price criteria at least every three 

years. 

• Peer groups are required to be based on 

at least two criteria, one of which must be 

geography. The second peer group criterion 

is not specified and is left to the discretion 

of the State agency to decide. 

• State agencies must establish price 

criteria that (1) ensure prices charged by 

vendor applicants are competitive with 

prices charged by other vendors and (2) 

consider vendor’s shelf prices or vendor’s bid 

prices, which may not exceed shelf prices. 

State agencies must also consider participant 

access by geographic area in establishing 

competitive price criteria and establish 

procedures to ensure authorized vendors do 

not raise prices to levels that would make 

them ineligible for selection. 

• The rule requires State agencies to 

establish allowable reimbursement levels for 

each vendor peer group that ensure that 

payments to vendors in peer groups reflect 

competitive prices and ensure that no 

vendors receive reimbursement at a level that 

would make them ineligible for authorization 

under the competitive price criteria 

requirements. State agencies may include a 

factor to reflect wholesale price fluctuations 

and consider participant access in a 

geographic area in establishing such levels. 

Above-50-Percent Vendors 

• The rule contains additional provisions 

regarding vendors who derive more than 50 

percent of their food sales from WIC 

redemptions (above-50-percent vendors). 

State agencies must distinguish these 

vendors from other vendors in the peer group 

system—either by using separate peer groups 

or by using distinct competitive price criteria 

and allowable reimbursement levels for 

above-50-percent vendors that are grouped 

with regular vendors. 

• Moreover, State agencies must ensure 

that use of these vendors 1) does not result 

in higher food costs than if participants used 

regular vendors and 2) does not result in 

higher average payments per food instrument 

than if participants used comparable 

vendors. It interprets this requirement to 

mean that above-50-percent vendors must be 

cost neutral to the program, and that average 

payments to above-50-percent vendors for 

each type of redeemed food instrument may 

not exceed average payments to regular 

vendors for the same type of food 

instruments. 

Exemptions 

• Additionally, the rule allows for two 

types of exemptions from the requirements. 

State agencies can be exempt from the peer 

group system requirement and State agencies 

can exempt certain vendors from competitive 

price criteria and allowable reimbursement 

levels. 

Peer Group System Exemptions 

• To be exempted from the peer group 

system requirement, a State agency must 

elect not to authorize any above-50-percent 

vendors and demonstrate that compliance 

with the peer group system requirement is 

inconsistent with effective operation of the 

program or that an alternative cost 

containment system would be as effective. 

• Alternately, a State agency can also be 

exempt from the peer group system 

requirement if it derived less than 5 percent 

of its total WIC sales in the prior year from 

above-50-percent vendors and demonstrates 

that an alternative cost containment system 

would be as effective as a vendor peer group 

system and would not result in higher food 

costs if participants transact food instruments 

at above-50-percent vendors, rather than at 

other vendors. 

Exemptions From Competitive Price Criteria 

and Allowable Reimbursement Levels: 

• State agencies can exempt vendors from 

competitive price criteria and allowable 

reimbursement levels, if they are pharmacies 

that supply only exempt infant formula or 

medical foods, or if they are non-profit 

above-50-percent vendors or non-profit 

vendor applicants likely to meet the above50-percent criterion. 

Costs: This rule places new requirements 

on State agencies; therefore, the cost 

implications of this rule relate primarily to 

administrative burden for States agencies. 

These cost implications are partially 

dependent on the current practices of State 

agencies relative to the requirements of the 

rule. A discussion of these costs follows. 

Administrative Burden 

In order to comply with this rule, State 

agencies will need to make changes in their 

vendor cost containment systems. Some State 

agencies may already be in full or partial 

compliance with the rule, while others may 

demonstrate that they meet the conditions for 

an exemption from the vendor peer group 

requirement. For State agencies that are not 

already in full compliance, there may be 

costs associated with forming or restructuring 

peer groups, establishing competitive prices 

and allowable reimbursement levels for those 

peer groups, monitoring shelf prices, and 

evaluating payments to above-50-percent 

vendors. 

Peer Groups 

Under the new rule, State agencies will be 

required to establish peer groups that utilize 

at least two peer grouping criteria, one of 

which is geography. State agencies that 

already have peer groups that meet this 

requirement will incur no costs to comply 

with this provision of the regulation. 

71726 Federal Register / Vol. 70, No. 228 / Tuesday, November 29, 2005 / Rules and Regulations 

3All calculations in this document are based on 

89 State agencies, but it is important to note three 

State agencies currently use a direct distribution or 

home delivery system exclusively and could be 

exempt from the provisions set forth in this rule. 

Direct distribution and home delivery systems are 

also used in parts of an additional eight State 

agencies. 

4U.S. Department of Agriculture, Economic 

Research Service, Assessment of WIC CostContainment Practices: Final Report, by John A. 

Kirlin, Nancy Cole, and Christopher Logan. ERS 

project representative: Phil Kaufman. E–FAN No. 

(03–005) 342 pp, February 2003. 

Additionally, State agencies that already 

have peer groups of some type will incur 

fewer costs than State agencies that do not 

have any peer groups in place. Complete data 

about current practices used in all State 

agencies are not available, but the extent to 

which some State agencies use peer groups 

and how many will be affected by this 

provision can be gauged from data that 32 

State agencies provided FNS in September 

2004. The main findings from this data are 

displayed below in Table 1. 

TABLE 1.—CURRENT USE OF PEER GROUPS IN 32 STATE AGENCIES, AS REPORTED TO FNS IN SEPTEMBER 2004 

Number 

of State 

agencies 

Currently uses a peer group system ........................................................................................................................................................... 25 

Uses two or more criteria for peer groups ........................................................................................................................................... 22 

Geography is one of the peer group criteria ........................................................................................................................................ 12 

Peer groups are being developed ............................................................................................................................................................... 3 

Based on this data, it appears that as many 

as 77 of the 89 state agencies could incur 

some level of costs to develop peer groups 

consistent with this rule.3

Some of these State agencies may not have 

in-house resources to do the analysis 

necessary to group vendors into peer groups 

and would have to contract out. One State 

agency that has used an outside contractor 

paid about $130,000 for their peer group 

analysis, not including the cost of overtime 

in local agencies to gather the data necessary 

for the analysis. 

Evaluating Peer Groups 

In addition to developing peer groups, 

State agencies are also required to evaluate 

the effectiveness of these peer groups. The 

cost of doing so may depend on the 

availability and capability of staff in State 

agencies to evaluate the peer groups. 

Assuming that State agencies that currently 

have peer groups in place assess the 

effectiveness of their peer groups, evaluating 

peer groups will not result in any new costs. 

Based on the data provided above, up to 64 

State agencies could incur some level of cost 

to conduct statistical analysis to determine 

whether their peer groups are having the 

desired and expected effect. State agencies 

may not have the staff capabilities, time, and 

resources to do this analysis and may need 

to work with outside contractors to complete 

this work. 

Establishing Competitive Price Levels and 

Allowable Reimbursement Levels 

Additionally, the extent that State agencies 

currently use peer groups to determine 

competitive price criteria or allowable 

reimbursement levels will impact their costs. 

While many of the State agencies that 

provided data to FNS had peer group systems 

in place, these peer groups were not always 

utilized in the manner required in this rule. 

The majority of the reporting State agencies 

with peer groups did not use peer groups to 

determine competitive price criteria or 

allowable reimbursement levels in the 

manner specified in the rule (See Table 2). 

TABLE 2.—PEER GROUPS USED FOR COMPETITIVE PRICE LEVELS AND ALLOWABLE REIMBURSEMENT LEVELS AS

REPORTED BY 32 STATE AGENCIES IN SEPTEMBER 2004 

Number 

of State 

agencies 

Currently has a peer group system ............................................................................................................................................................. 25 

Peer group is used to set allowable reimbursement level ................................................................................................................... 14 

Peer group is used to determine competitive price criteria ................................................................................................................. 17 

Current peer group system is structured according to rule (i.e. one criteria is geography) ....................................................................... 12 

Peer group is used to set allowable reimbursement level ................................................................................................................... 8 

Peer group is used to determine competitive price criteria ................................................................................................................. 7 

This suggests that although many of the 

State agencies that have peer groups may not 

incur significant costs to establish peer group 

systems, they may incur additional costs to 

craft the use of these peer groups in 

compliance with the rule. Looking more 

closely at the State agencies with peer groups 

that are structured according to the rule (two 

criteria, one being geography) in Table 2, it 

appears that even some of these State 

agencies will incur some costs complying 

with this rule. 

The costs of complying will be composed 

of the staff time necessary to calculate the 

optimal competitive price level and 

allowable reimbursement levels for each peer 

group, the time required to disseminate this 

information to the vendors, and the time and 

effort required to enforce and monitor the 

application of these criteria. For State 

agencies that do not have the staff resources 

to assess and, if necessary, modify 

competitive price criteria and allowable 

reimbursement levels, this work will need to 

be contracted, which could pose a significant 

expense to State agencies. Any costs incurred 

will be higher during the start-up period, but 

other USDA-sponsored research suggests that 

the on-going administrative costs of costcontainment practices can be quite low on a 

per participant basis.4

Lastly, the stipulation that State agencies 

must set allowable reimbursement levels at 

the peer group level may cause more food 

instruments to be rejected for exceeding the 

allowable reimbursement levels. State 

agencies may need to develop new 

administrative procedures to manage these 

issues and may incur some administrative 

costs in doing so. 

Monitoring Shelf Prices 

In addition to stipulating how peer groups 

should be structured and utilized, the rule 

also specifies that State agencies must 

monitor shelf prices at least every six 

months. The cost impact of monitoring shelf 

prices every six months is dependent on 

current State monitoring practices. These 

practices are outlined below in Table 3. 

Federal Register / Vol. 70, No. 228 / Tuesday, November 29, 2005 / Rules and Regulations 71727 

5U.S. Department of Labor, Bureau of Labor 

Statistics. ‘‘May 2004 National Occupational and 

Employment Wage Estimates’’ and ‘‘Employer Costs 

for Employee Compensation, March 2005.’’

6U.S. Department of Labor, Bureau of Labor 

Statistics. ‘‘May 2004 National Occupational and 

Employment Wage Estimates’’ and ‘‘Employer Costs 

for Employee Compensation, March 2005.’’

TABLE 3.—SUMMARY OF STATE MONITORING OF VENDOR SHELF PRICES AS REPORTED TO FNS IN MAY 2005 

[57 Agencies responding, including 5 ITOs] 

Number of 

State 

agencies 

reporting 

Percent of 

State 

agencies 

reporting 

(percent) 

Frequency of Data Collection: 

Only at authorization .................................................................................................................................................... 4 7.0 

Annually ........................................................................................................................................................................ 5 8.8 

Semiannually ................................................................................................................................................................ 15 26.3 

Quarterly ....................................................................................................................................................................... 18 31.6 

Monthly ......................................................................................................................................................................... 5 8.8 

Other ............................................................................................................................................................................. 10 17.5 

Of the 57 State agencies that provided data 

to FNS, about 67 percent currently monitor 

shelf prices at least semiannually, if not more 

frequently. The requirements of the new rule 

will likely result in no significant change 

from costs that they currently incur. For the 

remaining 33 percent of State agencies and 

an unknown number of those for which FNS 

lacks data on frequency of shelf price 

collection, additional monitoring costs may 

be incurred. It is estimated that 89 State 

agencies and 45,000 vendors will be affected 

by this provision, incurring an estimated 

total of 90,178 burden hours annually. The 

majority of these burden hours (90,000) will 

be borne by vendors. Applying appropriate 

wage rates to these burden hours result in a 

cost of nearly $1.4 million for vendors and 

about $5,500 for State agencies.5

Evaluating Above-50 Percent-Vendors 

Beyond developing peer groups, State 

agencies will have to determine whether a 

vendor derives more than 50 percent of its 

annual food sales revenue from WIC food 

instruments. In order to determine whether a 

vendor is an above-50-percent vendor, State 

agencies are required to consider a vendor’s 

annual revenue from the food sales, defined 

in the rule as the sum of all payments 

received by the vendor for the sale of all 

foods that would be eligible items under the 

Food Stamp Program (FSP). Currently, WIC 

vendors are not required to report annual 

food sales to State agencies. It is unclear how 

many State agencies collect this data. State 

agencies that do not already collect this data 

will incur new costs in order to comply with 

this rule. Vendors also are likely to incur 

administrative costs to provide annual food 

sales data to State agencies. It is estimated 

that 89 State agencies and 45,000 vendors 

will be affected by this provision, incurring 

an estimated total of 45,178 burden hours to 

complete this task annually. Again, as above, 

the bulk of these costs will be incurred by 

vendors (45,000). Applying appropriate wage 

rates to these burden hours results in a cost 

of about $.7 million for vendors and about 

$5,500 for State agencies.6

For current vendors, once State agencies 

have data on the annual sales of all FSP 

eligible foods, they will need to calculate 

WIC redemptions as a percent of a vendor’s 

total food sales for the same period. If WIC 

redemptions are more than 50 percent of total 

food sales, the vendor is then deemed an 

above-50-percent vendor. The preamble of 

the rule states that as an initial step in this 

process, State agencies should compare each 

vendor’s WIC redemptions to FSP 

redemptions for the same period and for 

those vendors whose WIC redemptions 

exceed their FSP redemptions, conduct 

further assessment using the total amount of 

revenue obtained from the sale of FSP 

eligible foods. After evaluating the total 

revenue obtained from the sale of FSP 

eligible foods, the State agency should 

calculate WIC redemptions as a percent of 

total food sales and classify the vendor as an 

above-50-percent vendor if appropriate. 

To help States determine how many of 

these vendors might exist, FNS compared 

fiscal year 2004 WIC redemptions to annual 

Food Stamp (FS) redemptions as reported in 

the FS database (STARS). Stores in which 

WIC sales exceeded FS sales were identified 

as potentially being above-50-percent 

vendors. Table 4 displays how many of the 

over 42,000 WIC vendors that are also Food 

Stamp vendors appear to have WIC sales that 

exceed 50 percent of total annual food sales. 

TABLE 4.—NUMBER OF WIC AND FS AUTHORIZED VENDORS FOR WHICH WIC SALES MAY CONSTITUTE MORE THAN 50 

PERCENT OF TOTAL FOOD SALES, FY 2004 

Number of 

State 

agencies 

Percent of 

State 

agencies 

Number of 

vendors 

Percent of 

all vendors 

Potential Above-50-Percent WIC Vendors .............................................................................. 59 66.3% 5,177 11.5% 

Source: FNS Administrative Data. A listing of potential WIC and FS authorized above-50-percent vendors was generated by matching data reported to FNS in 2004 in The Integrity Profile (TIP) system and the FS STARS database. There are 89 State Agencies and about 45,000 WIC 

authorized vendors. 

This analysis shows that at least 59 of the 

89 WIC State agencies may have above-50- 

percent vendors. The total number of 

potential above-50-percent vendors identified 

through this match (5,177) is 11.5 percent of 

all vendors. However, while these stores may 

be above-50-percent WIC vendors because 

they have annual WIC sales that exceed FS 

sales, these stores may have non-WIC and 

non-FS sales that are larger than their WIC 

or FS sales, and so may not qualify as above50-percent vendors upon further 

investigation. 

In addition to these 5,177 vendors, there 

are about 3,000 additional WIC vendors that 

do not have FS authorization or that could 

not be matched with the FS authorization 

number in STARS. Most of the stores that 

states currently identify as WIC-only vendors 

fall into this category. Therefore, at least 

about 1,200 of these 3,000 stores may be 

above-50-percent vendors. 

Combining the information on potential 

above-50-percent vendors from FNS’ match 

of WIC and FSP authorized stores and the 

self-identified WIC-only vendors provides an 

estimate of how many vendors potentially 

have WIC redemptions that are more than 50 

percent of their total food sales. Currently, 

there are about 1,200 WIC-only vendors in 20 

71728 Federal Register / Vol. 70, No. 228 / Tuesday, November 29, 2005 / Rules and Regulations 

7September 2004 was deemed to be a 

representative month because there were no 

significant or unusual spikes in food prices during 

that month. 

State Agencies. Together, this means that 

about 6,400 vendors in 64 State agencies are 

potentially above-50-percent vendors, since 

all but 5 of the 20 State agencies with WIConly vendors had other stores that were 

potentially above-50-percent vendors. 

Consequently, between 1,200 and 8,200 

vendors could be identified as having WIC 

redemptions that are more than 50 percent of 

total food sales. 

State agencies must ask new vendor 

applicants if they expect to derive more than 

50 percent of their annual revenue from the 

sale of food items from transactions involving 

WIC food instruments. If the vendor 

applicant responds ‘‘yes’’, the State agency 

does not need to do any further verification 

and should treat this vendor as an above-50- 

percent vendor. The preamble specifies that 

all other vendor applicants should be 

assessed to determine whether they are likely 

to meet the more than 50 percent criteria. To 

do so, State agencies should calculate WIC 

redemptions as a percent of total food sales 

in any existing WIC-authorized stores owned 

by the vendor applicants, calculate the 

percentage of anticipated food sales by type 

of payment, request and review inventory 

invoices to determine if a variety of foods 

will be offered for sale on a continuous basis, 

and determine whether WIC authorization is 

necessary for the store to open for business. 

Since we do not have data on the number of 

stores that apply for WIC authorization in 

any given year, we cannot estimate the 

impact of this provision of the rule. 

State agencies will also have to determine 

how to place above-50-percent vendors in 

peer groups so that these vendors do not 

result in WIC paying more to these vendors 

than to comparable vendors. State agencies 

must develop and apply a definition of 

comparable vendors and may incur costs 

defending their application of comparable 

vendor criteria for the above-50-percent 

vendors. However, under the rule, neither the 

validity nor the appropriateness of the State 

agency’s vendor peer group criteria or the 

criteria used to identify above-50-percent 

vendors and comparable vendors would be 

subject to appeal by a vendor. 

The rule requires FNS to certify that the 

State agency’s competitive price criteria and 

allowable reimbursement levels do not result 

in higher average payments per food 

instrument for above-50-percent vendors 

than for other comparable vendors. This 

certification will entail reviewing 

information provided by the State agency and 

other relevant data to determine that the 

requirements have been met. FNS will need 

to do this potentially for at least 64 of the 

State agencies identified above, if not all 89 

State agencies, without additional resources. 

In summary, most of the administrative 

burden/costs of this rule will be incurred at 

the State level. As outlined above, some State 

agencies will be affected less than others 

because they already have a peer group 

system that is based on the criteria specified 

in the rule, while others may incur 

significant, one-time start up costs because 

they will need to develop peer groups, 

competitive price levels, and allowable 

reimbursement levels for the peer groups. 

Some vendors will incur administrative costs 

to provide State agencies with total food sales 

information annually and to submit shelf 

prices semiannually. Most of these costs are 

difficult to determine given the current data 

that we have, but it is important to note that 

many State agencies already do this work 

within their existing NSA funds and the NSA 

allocations will not change to provide 

additional funds to administer the program 

with these new requirements. 

Benefits: The WIC Program will benefit 

from the provisions of this rule by reducing 

unnecessary food expenditures, which 

increases the potential to serve more eligible 

women, infants, and children for the same 

cost. This rule should have the effect of 

ensuring that payments to vendors, 

particularly vendors that derive more than 50 

percent of their annual food sales from WIC 

food instruments, reflect competitive prices 

for WIC foods. 

To estimate the rule’s cost savings, FNS 

estimated the annual difference in food 

instrument redemption values between WIConly versus non-WIC-only stores. FNS 

reviewed redemption data from 12 State 

agencies that have 97 percent of the ‘‘WIConly’’ vendors. Since State agencies currently 

are in the process of identifying above-50- 

percent vendors (and thus do not have data 

available on such vendors), FNS relied on 

data on stores that stock only WIC food items 

and serve only WIC customers; these stores 

are primarily self-identified as WIC-only. 

State agencies provided data on their total 

food redemptions, WIC-only store food 

redemptions, the total number of vendors 

and number of WIC-only vendors, and the 

average redemption values of the five most 

frequently redeemed WIC food instruments 

in September 2004.7

Using these data, FNS examined the cost 

differential between the average redemption 

amounts for the five food instruments most 

frequently redeemed at non-WIC-only and 

WIC-only vendors (see column labeled ‘‘Ratio 

of Average Redemption Amounts of NonWIC-Only to WIC-Only Vendors’’ in Table 5 

below). By applying the average cost ratio for 

these five food instruments to all 

redemptions for WIC-only vendors, FNS 

determined what the redemptions would 

have been at WIC-only vendors if the prices 

were the same as those at non-WIC-only 

vendors. The resulting cost savings was about 

$6 million monthly, $75 million annually, or 

about $377 million (assuming no inflation) 

over the course of five years for the 12 States. 

Table 5 summarizes this analysis. 

It is also worth considering that the 

number of WIC-only stores had been growing 

rapidly before the California moratorium, the 

FY 2005 appropriations act, and Pub. L. 108–

265. It is reasonable to project that there 

could be substantially more of these highcost stores in the program absent these 

measures and this rule. If the number of 

stores continued to grow at the rate they were 

growing, the excess costs (and thus potential 

savings) could be far greater than what is 

estimated here. From this perspective, our 

cost savings estimate may be lower than what 

would occur if these limitations on the 

growth of WIC-only stores had not been 

imposed. 

TABLE 5.—POTENTIAL COST SAVINGS BY IMPLEMENTING RULE

[Dollars in millions] 

State 

Total redemptions 

(Sept. 2004) 

Estimated 

non-WIC-only 

redemptions 

(Sept. 2004) 

Estimated 

WIC-only redemptions 

(Sept. 2004) 

Ratio of average redemption 

amounts of 

non-WIConly to WIConly vendors 

Total redemptions if 

all at nonWIC-only 

level 

Monthly 

cost savings 

1 ........................................................................... $5.99 $5.73 $.26 .82 $5.94 $.05 

2 ........................................................................... 4.79 3.59 1.20 .75 4.50 .29 

3 ........................................................................... 97.33 66.47 30.86 .87 93.27 4.06 

4 ........................................................................... 18.53 16.40 2.13 .81 18.13 .40 

5 ........................................................................... 3.49 3.38 .11 .80 3.47 .02 

6 ........................................................................... 9.67 9.29 .38 .80 9.59 .08 

7 ........................................................................... 3.17 2.86 .31 1.19 3.23 ¥.06 

8 ........................................................................... 12.56 11.46 1.10 .67 12.20 .36 

9 ........................................................................... 4.51 4.14 .37 .78 4.43 .08 

10 ......................................................................... 43.51 37.49 6.02 .83 42.52 1.00 

Federal Register / Vol. 70, No. 228 / Tuesday, November 29, 2005 / Rules and Regulations 71729 

8State of Texas, Department of Health, Bureau of 

Nutrition Services, Retailer Peer Grouping Study for 

Competitive Pricing: Deliverable 3, NonCommercial Vendor Recommendations. Prepared by Burger, Carroll and Associates, December 30, 

2003. 

TABLE 5.—POTENTIAL COST SAVINGS BY IMPLEMENTING RULE—Continued 

[Dollars in millions] 

State 

Total redemptions 

(Sept. 2004) 

Estimated 

non-WIC-only 

redemptions 

(Sept. 2004) 

Estimated 

WIC-only redemptions 

(Sept. 2004) 

Ratio of average redemption 

amounts of 

non-WIConly to WIConly vendors 

Total redemptions if 

all at nonWIC-only 

level 

Monthly 

cost savings 

11 ......................................................................... 6.85 6.78 .07 .69 6.83 .02 

12 ......................................................................... 14.44 13.22 1.22 1.02 1.24 ¥.03 

Total ....................................................... $210.40 $167.59 $42.81 .................... $204.11 $6.27 

Source: States reported total redemptions to FNS and calculated non-WIC-only and WIC-only redemptions. All other figures calculated by FNS 

based on this and other data supplied by the States. 

This analysis assumes that September 2004 

is a representative month and can be used to 

calculate annual cost savings. It also assumes 

that the mix of items within each redemption 

and the rate of full versus partial 

redemptions are the same for both vendor 

types. However, there is some evidence that 

WIC-only stores require full redemption of 

vouchers, resulting in higher redemption 

values compared with other vendors. This 

could overstate the impact of the rule. This 

analysis also excludes State agencies with 

smaller numbers of WIC-only stores and does 

not account for any impact on other types of 

vendors, which would tend to make this 

estimate lower than what actual savings 

might be. To realize some level of savings, 

State agencies would need to develop 

effective peer group systems. As noted below, 

there is uncertainty about the degree to 

which State agencies will be able to develop 

such systems initially, given the data 

collection and analysis needed. 

Uncertainty: Because the vendor peer 

group provisions in the Child Nutrition and 

WIC Reauthorization Act of 2004 and this 

rule provide for some flexibility in 

implementation, and because there is a wide 

degree of variation in food prices and current 

vendor cost containment practices across 

State agencies, the impact of many of the 

provisions of this rule is uncertain. 

Uncertainties include the administrative 

burden State agencies will incur and the 

savings that can be realized nationally or in 

any State agency. The major uncertainties for 

administrative burden were discussed 

previously in the analysis; the following is a 

discussion of the uncertainties regarding 

program savings. 

Program Savings 

Peer Groups 

Three issues introduce uncertainty 

regarding the impact of peer groups, as 

defined in the rule, on program costs. These 

issues center on the requirements for 

including geography as one of the criteria, 

choosing a second peer group criteria, and 

establishing an effective peer group. These 

issues are outlined below. 

Peer groups must be based on two criteria, 

one of which is geography. A state-sponsored 

analysis of WIC peer group practices suggest 

that geography is an important criterion for 

defining peer groups, but the findings also 

suggest that the way geography is defined 

and applied also matters.8 For example, 

study findings show that in some cases, 

grouping geographic entities (i.e., cities and 

counties) by price level was more effective 

than relying on contiguous geographic 

groupings, such as administrative program 

areas or geographic regions. Additionally, 

rule of thumb definitions of geography, such 

as one major metropolitan area versus the 

rest of the State, may result in geographic 

peer groups that are too large and 

heterogeneous to be effective. Conversely, 

using the county as the measure of geography 

might result in peer groups that are too small 

and whose average price is influenced by the 

prices of a single outlying vendor. 

Additionally, the measure selected for the 

second peer group criterion could influence 

the effectiveness of the peer group structure. 

FNS’s preliminary analysis of redemption 

data in two large States suggests that 

measures of sales volume (number of 

registers, market share, amount of 

redemptions) seem to have a bigger effect on 

price than type of ownership (sole 

proprietorship, partnership, corporation), but 

that no one measure of sales volume is 

consistently the best measure to group 

vendors once broken down by geography. 

To examine different scenarios, FNS 

obtained data from two large State agencies 

and developed hypothetical peer groups 

based on geographic area, number of 

registers, and monthly redemption amounts 

for vendors. Four sets of hypothetical peer 

groups were developed. All four used the 

same geographic criterion for the first 

criterion. For two sets of peer groups, the 

second criterion was based on the number of 

registers. For the other two sets of peer 

groups, the second criterion was based on the 

WIC redemption amounts for the vendor. The 

peer groups were formed by analyzing the 

distribution of number of registers or amount 

of WIC redemptions and dividing the 

vendors such that the same number of 

vendors fell into each of the five groups. 

Average prices for each group were 

calculated and tested to ensure they were 

statistically different from each other. In each 

scenario below, the two types of peer groups 

are compared (number of registers versus 

WIC redemptions) based on the method used 

to calculate the groups. For scenario one, the 

peer groups were calculated excluding the 

WIC-only vendors in the State data file. For 

scenario two, the peer groups were calculated 

including all vendors in the file. Analysis on 

average price was calculated for all non-WIConly vendors since WIC-only vendors are 

most likely to be above-50-percent vendors 

and as such, could be put into separate peer 

groups under the rule. 

Tables 6 and 7 below compare the mean 

price for a food instrument using two 

different second criteria. For comparison 

purposes, only the range of categories in one 

geographic grouping is displayed here. 

TABLE 6.—SCENARIO 1, MEAN PRICE OF FOOD INSTRUMENT, GROUPINGS BASED ON NON-WIC ONLY VENDORS

2nd Peer 

group 

criterion 

Number of registers WIC redemption amounts 

Group 

Number of registers 

Mean price 

of food 

instrument 

WIC redemption amounts 

Mean price 

of food 

instrument 

1 ................... 1 to 3 ................................................................... $3.5316 Up to $3,835 ....................................................... $3.5404 

71730 Federal Register / Vol. 70, No. 228 / Tuesday, November 29, 2005 / Rules and Regulations 

TABLE 6.—SCENARIO 1, MEAN PRICE OF FOOD INSTRUMENT, GROUPINGS BASED ON NON-WIC ONLY VENDORS—

Continued 

2nd Peer 

group 

criterion 

Number of registers WIC redemption amounts 

Group 

Number of registers 

Mean price 

of food 

instrument 

WIC redemption amounts 

Mean price 

of food 

instrument 

2 ................... 4 to 7 ................................................................... 3.5116 $3,836 to $130,318 ............................................. 3.5172 

3 ................... 8 to 10 ................................................................. 3.3428 $130,319 to $1,943,825 ...................................... 3.3051 

4 ................... 11 to 12 ............................................................... 3.3368 $1,943,826 to $3,205,592 ................................... 3.3885 

5 ................... 13 or more ........................................................... 3.3082 $3,205,593 or more ............................................. 3.2293 

In scenario 1, all but one of the group 

averages are statistically equal, regardless of 

whether the number of registers or monthly 

WIC redemption amounts is used as the 

second peer group criterion. This result 

suggests that it would not matter which 

measure is used as the second criterion; both 

would have about the same outcome. But, 

when the same characteristics are applied to 

all vendors (scenario 2), the average prices in 

almost all of the categories are statistically 

different, indicating that the groupings are 

different from one another and may result in 

different outcomes. It is obviously difficult to 

definitively assess the effect of the peer 

groups when there is so much variation in 

how peer groups could be defined and how 

the vendors could be grouped. 

TABLE 7.—SCENARIO 2, MEAN PRICE OF FOOD INSTRUMENT, GROUPINGS BASED ON ALL VENDORS

2nd Peer 

group 

criterion 

Number of registers WIC redemption amounts 

Group 

Number of registers 

Mean price 

of food instrument WIC redemption amounts 

Mean price 

of food instrument 

1 ................... 1 to 2 ................................................................... $3.5418 Up to $5,628 ....................................................... $3.5395 

2 ................... 3 to 5 ................................................................... 3.5119 $5,628 to $80,442 ............................................... 3.5131 

3 ................... 6 to 9 ................................................................... 3.4337 $80,443 to $1,872,819 ........................................ 3.3539 

4 ................... 10 to 12 ............................................................... 3.3064 $1,872,820 to $2,973,459 ................................... 3.3669 

5 ................... 13 or more ........................................................... 3.3082 $2,973,460 or more ............................................. 3.2293 

Further, the rule provides State agencies 

considerable flexibility and few specific 

requirements for constructing peer groups. 

The rule focuses more on the intended 

outcome (i.e., cost neutrality of above-50- 

percent vendors) than on how State agencies 

achieve this outcome. FNS assumes that State 

agencies will perform sufficient analysis and 

will select the most effective criteria to 

contain vendor costs. The inability or failure 

of State agencies to do so could undermine 

or minimize the success of this rule. For 

example, State agencies will need to prevent 

peer groups from having wide price variation 

or non-normal distributions, or from being so 

large or so small that they are ineffective. 

Since State agencies could choose a 

strategy that is effective or ineffective for 

their particular needs and characteristics, 

and since an effective strategy for one State 

agency may not be an effective strategy for 

another State agency, the impact of the 

vendor peer group requirement on cost 

savings is uncertain. If implemented 

effectively, the peer group requirement as 

specified in the rule should ensure that 

above-50-percent vendors do not result in 

higher costs to the program than regular 

vendors. 

Establishing Competitive Price Criteria and 

Allowable Reimbursement Levels 

The degree to which cost savings can be 

achieved also depends on the effectiveness of 

a state’s method for assessing the prices of 

new vendor applicants relative to others in 

a peer group. Currently, many states either 

apply a percentage or a standard deviation 

measure to set a maximum competitive price 

criteria or a maximum reimbursement level. 

For example, some states may set their 

competitive price criteria at 5 percent above 

the average peer group price and others may 

set their competitive price criteria at 1 or 2 

standard deviations above the average peer 

group price. 

Either method could control costs 

effectively depending on the size of the peer 

group, the distribution of prices within that 

peer group and the percentage or number of 

standard deviations applied. For example, a 

standard deviation measure might be more 

effective in a peer group of a given size with 

a relatively small distribution of prices. But, 

a percentage might be more effective in a 

peer group with a relatively large 

distribution. Consequently, State agencies 

have been given flexibility to determine their 

competitive price criteria. 

2. Alternatives: This rule implements the 

vendor peer group provisions of the Child 

Nutrition and WIC Reauthorization Act of 

2004, which FNS believes is an effective 

means of controlling WIC food costs. While 

this Act mandates that States establish peer 

groups, competitive price criteria and 

allowable reimbursement levels and states 

that these requirements must result in the 

outcome of paying above-50-percent vendors 

no more than regular vendors, the Act does 

not specify particular criterion for peer 

groups or acceptable methods of setting 

competitive price criteria and allowable 

reimbursement levels. FNS considered 

mandating specific means of developing peer 

groups, competitive price criteria and 

allowable reimbursement levels in order to 

ensure that the outcome of this legislation 

was achieved. 

However, given States’ responsibility to 

manage WIC as a discretionary grant program 

and the varying market conditions in each 

state, FNS believes that states need flexibility 

to develop their own peer groups, 

competitive price criteria and allowable 

reimbursement levels. At the October 2004 

meeting that FNS convened to gain input for 

this rule, States indicated that they needed 

the ability to design cost containment 

practices that would be effective in their own 

markets and would ensure participant access. 

In addition, there is little information about 

the effectiveness of particular cost 

containment practices in the variety of 

markets represented by the 89 state agencies. 

Mandating more specific means of 

developing peer groups, competitive price 

criteria and allowable reimbursement levels 

could have unintended, negative 

consequences on participant access, food 

costs and administrative burden. 

As States gain experience and the results 

of their vendor cost containment practices 

become apparent, FNS may develop further 

regulations and guidance to improve 

achievement of the WIC vendor cost 

containment goals of the Child Nutrition and 

WIC Reauthorization Act of 2004. In the 

interim, FNS believes that the current rule 

will substantially accomplish the goal of the 

Act of containing food costs and ensuring 

that above-50-percent vendors do not result 

Federal Register / Vol. 70, No. 228 / Tuesday, November 29, 2005 / Rules and Regulations 71731 

in higher costs to the program than regular 

vendors. 

[FR Doc. 05–23365 Filed 11–28–05; 8:45 am] 

BILLING CODE 3410–30–P