WIC aims to protect the health of low-income women, infants, and young children who are at nutritional risk by providing nutritious foods to supplement diets, information on healthy eating, and referrals to health care at no charge to participants. Permanently established in 1974, WIC serves more than 8 million participants each month, including women who are pregnant, postpartum, or breastfeeding; infants under the age of 1; and children under the age of 5, the largest category of participants. To participate in the program, eligible applicants must meet income guidelines, be deemed nutritionally at risk by a health professional (e.g., having a poor diet, low weight, or anemia), and must apply in the state in which they reside. In fiscal year 2005, the federal government spent over $5 billion on WIC. WIC is not an entitlement program that allows every eligible individual to participate; rather, it is a federal discretionary grant program for which Congress authorizes a specific amount of funds each year. At the federal level, WIC is administered by FNS, which provides grants to WIC state agencies for food and for nutrition services and administration. The nutrition services and administration grant covers the cost of certifying participants and determining nutrition risks; providing outreach and nutrition education services, including breastfeeding promotion; and printing vouchers and administering the food delivery system. FNS also determines WIC program policy and guidance, provides technical assistance to the WIC state agencies and sponsors research on program issues. In turn, WIC state agencies operate the program through thousands of local agencies and clinic sites. The 90 WIC state agencies include 50 state health departments, as well as those of the District of Columbia, 34 Indian Tribal Organizations, and five U.S. territories (Northern Mariana, American Samoa, Guam, Puerto Rico, and the Virgin Islands). In most WIC state agencies, WIC participants receive vouchers to purchase supplemental food in appropriate amounts tailored to their health needs from authorized retail stores, known as vendors in the WIC program. Vouchers prescribe food that is high in nutrients found to be lacking in a participant’s diet, such as milk, cereal, and eggs, and are adapted from a set of federally established food packages that differ according to participant type (e.g., infants or pregnant woman). Each WIC state agency designs its own vouchers and usually issues vouchers that contain a combination of WIC food items. For example, one frequently used voucher contains eggs, juice, cereal, cheese, milk, and beans. However, some vouchers contain only one food item, such as formula or cereal. (See app. IV.) Most participants receive multiple vouchers each month for all of the food they are prescribed. However they may not use the voucher to purchase items that are not listed on it. Figure 1 shows a sample voucher for food items from California’s WIC state agency. VALID FOR WIC APPROVED FOOD ONLY. AUTHORIZED SIGNATURE (SIGN AT PURCHASE) “FIRST DAY USE.” NOT VALID IF ALTERED. The kind of food tht ce prchased with vocher The mont of food prticipnt cn prchase with vocher (Prticipnt cn prchase only p to thi mont) The ctual price of prchase with vocher (cashier fill in t checkond) Unlike some other food assistance program models, WIC vouchers do not provide an incentive for program participants to consider vendor prices for supplemental foods. For example, the Food Stamp and WIC Farmers’ Market Nutrition Programs generally provide electronic benefits or coupons that are used like cash at grocery stores or through farmers, and which encourage participants to make cost-conscious decisions regarding food choices. In contrast, because WIC participants purchase supplemental foods with vouchers that prescribe the type and quantity of foods a participant may receive, regardless of the prices charged by vendors to the WIC program, WIC participants are not price sensitive, that is, participants do not have an incentive to purchase their food benefit from lower-priced vendors. The approximately 45,000 vendors in the WIC program accept vouchers and exchange them for cash payment—or redemption—from their WIC state agency. Vendors are subject to price limitations, often in the form of an overall maximum, not-to-exceed amount for each voucher, determined by WIC state agencies. As shown in figure 1, a state may clearly print the not-to-exceed amount for the total amount charged on the voucher. Like other retail grocery stores, WIC vendors sell to participants small quantities of food items that they typically purchase from manufacturers, wholesalers, or, on occasion, other retailers. The methods that grocery stores use to purchase food items are important business practices, because the cost of buying goods for resale is the largest single expense for an average grocery store, according to Food Marketing Institute research. Through regulation and program guidance, FNS provides broad oversight to WIC state agencies on cost containment and vendor management. FNS provides the food grant that state agencies use to reimburse vendors for redeemed vouchers, gathers program integrity data, supports upgrades to states’ management information systems, and sponsors research on vendor management issues. Because federal legislation grants primary responsibility for WIC vendor management to the WIC state agencies, WIC state agencies have considerable flexibility in designing and implementing their vendor management systems. FNS regulations require that WIC state agencies’ vendor management systems include six areas of activity: authorization and reauthorization—The authorization process begins with a vendor’s application and an on-site visit by WIC state agency staff to verify the information provided in the application. Authorized vendors must enter into a written agreement, which may be reauthorized, usually every 1-3 years. training—WIC state agencies train vendor staff on the purpose of the WIC program and program procedures such as accepting vouchers from participants at the point of sale. representative monitoring—State agencies are required to conduct routine monitoring visits of at least 5 percent of their vendors annually to observe vendor and participant transactions and collect shelf prices to ensure they are within the required state limits. voucher review and redemption—State agencies are required to develop and implement an edit system of the vouchers turned in for redemption to detect noncompliance with program regulations. The redeemed-voucher review includes checking that charges for food items do not go over the not-to-exceed payment amount for vouchers, set by the state, and other edits such as transactions or redemptions outside of valid dates. high-risk vendor monitoring—WIC state agencies identify high-risk vendors through on-site monitoring visits or through the redemption system and must investigate a minimum of 5 percent of vendors meeting high-risk criteria, such as high rates of redemption at or near the not-to-exceed payment amount for vouchers. sanctions—State agencies may impose sanctions ranging from fines to disqualification on vendors that violate program requirements or may impose a civil money penalty when a disqualification would result in inadequate participant access. A temporarily disqualified vendor may reapply after the disqualification period has expired. In the past few years, the WIC program has initiated significant changes in vendor management practices to contain costs and maximize the number of eligible women, infants, and children that can receive benefits. Prior to fiscal year 2004, FNS characterized authorized WIC vendors that participate in the program as: retail grocery stores—vendors that commonly stock a variety of foods, including supplemental WIC foods, and serve a wide variety of customers, referred to as regular WIC vendors in this report; WIC-only vendors—vendors that stock only WIC-approved food and accept only WIC vouchers; military commissaries—vendors located on military installations and designed for military families; and pharmacies—vendors that only provide infant formula, exempt infant formula, or WIC-eligible medical foods. The Child Nutrition and WIC Reauthorization Act of 2004 established new cost containment provisions designed, in part, to ensure that the WIC program is not charged more for the same supplemental food items provided in exchange for vouchers that participants might use at WIC-only vendors instead of at regular WIC vendors. These cost containment provisions require state agencies to implement a vendor peer group system that groups stores according to similar characteristics, such as vendor size and geographic location, in a manner that ensures that the WIC program pays all authorized vendors competitive prices for supplemental foods. FNS expects to complete certification of states’ plans for cost containment by September 2006. One cost containment provision created a new category of vendors referred to as above 50 percent vendors, which include any vendor whose revenue from the sale of WIC supplemental food is more than half of its annual revenue from food sales. In addition, the Act prohibited above 50 percent vendors from providing any incentive items, such as free diapers, detergent, baby strollers, or bicycles, to participants unless the incentives are of nominal value or were obtained at no cost. On November 29, 2005, USDA issued an interim rule, effective on December 29, 2005, that incorporated the cost containment provisions of the Act into program regulations that are applicable to WIC state agencies. To help ensure that vendors’ prices are competitive, these regulations require states to collect and review vendors’ shelf prices at least every 6 months after authorization. The regulations also require state agencies to compare the average cost of each type of food instrument redeemed by WIC-only vendors against the average cost of the same type of food instrument redeemed by regular vendors. In December of 2005, attorneys representing an association of WIC-only vendors and three food companies, the plaintiffs, filed an action in federal district court for the District of Columbia to stop implementation of FNS’s regulations. Arguing that the regulations were contrary to the Act and to congressional intent, the plaintiffs asserted that the cost containment provisions concerning above-50-percent vendors would reduce their WIC reimbursements to a level that would be unsustainable. In describing services that WIC-only vendors offered WIC participants, the plaintiffs characterized WIC-only vendors as small businesses and acknowledged that their cost of doing business was higher than that of large stores, referred to as box stores, that purchased food in high volume at discount prices. The plaintiffs estimated that WIC-only vendors’ prices were about 8 to 15 percent higher than prices charged at box stores, on average. On February 23, 2006, the court dismissed the case, finding that the cost containment provisions of the interim rule were consistent with the plain language and purpose of the Act. Recent initiatives suggest that more changes to the WIC program are forthcoming. In 2003, FNS developed a plan to transform WIC from its paper-based food benefit delivery system to an electronic benefits transfer system. Through pilot projects in many states that are still under way, FNS is working toward a national model that is both technically and financially viable for implementation of EBT by 2008. In addition, in 2004 the Institute of Medicine (IOM) began examining WIC food packages to determine if modification could help participants eat a healthier diet. In its 2005 report, IOM recommended revisions to the food packages that match current dietary guidance for infants and young children, encourage consumption of fruits and vegetables, emphasize whole grains, lower saturated fat, and appeal to diverse populations. Since 1999, WIC-only vendors have increased in number, with concentrated growth in a few states, but their share of the national WIC market stayed small in comparison to the share of regular WIC vendors during an average month in 2004. The number of WIC-only vendors nationwide tripled from 1999 to 2004, and the number of states with WIC- only vendors also grew over this period. Notwithstanding these increases, in 2004 the majority of WIC-only vendors were located in California, Texas, and Florida, and nearly half of all WIC-only vendors operated in a few metropolitan areas within these states. Nationwide, WIC-only vendors still accounted for about 3 percent of all WIC vendors in 2004 and generated about 6 percent of business in the WIC market during an average month that year, compared to regular WIC vendors’ predominant market share. On a store-by-store basis, however, WIC-only vendors’ redemption value was greater, on average, than regular WIC vendors’ during this period. The 1,180 WIC-only vendors in operation at any point during 2004 were three times the number in business at any point in 1999 (see fig. 2). Just as the total number of WIC-only vendors has increased, the number of states with WIC-only vendors has grown in recent years. Of the 50 states and the District of Columbia, 15 had WIC-only vendors in 2004, an increase from 12 in 1999 (see table 1). Even with the increase in recent years in both total WIC-only vendors and the number of states with such vendors, in 2004 most WIC-only vendors were located in three states, and nearly half operated in three metropolitan areas. Figure 3 shows that, at the national level, 84 percent of all WIC-only vendors operated in California, Texas, or Florida. Moreover, approximately one out of every two WIC-only vendors nationwide operated in Los Angeles, California; Riverside, California; or Miami, Florida. In contrast, each of the remaining states with WIC-only vendors accounted for less than 7 percent of total WIC-only vendors in 2004. The total number of WIC-only vendors in operation at any point in 2005 is not yet available, but may be lower than the 1,180 reported for 2004. For example, WIC state agency officials in Texas and Florida have indicated that the number of WIC-only vendors in their respective states decreased after 2004. Both WIC state agencies continued to monitor and occasionally disqualify WIC-only vendors. At the same time, Texas WIC agency officials have indicated that a number of WIC-only vendors went out of business. Moreover, because the Consolidated Appropriations Act of 2005 prohibited states from authorizing additional WIC-only vendors after December 8, 2004, WIC state agencies could not replace WIC-only vendors that departed the program with new WIC-only vendors during much of fiscal year 2005. Notwithstanding the increase in the number of WIC-only vendors in recent years, WIC-only vendors have remained a fraction of total WIC vendors. Nationally, the share of all WIC vendors accounted for by WIC-only vendors increased from approximately 1 percent in 1999 to about 3 percent in 2004 (see fig. 4). During the same period, the number of regular WIC vendors in operation at any point changed only slightly, from 43,712 in 1999 to 43,463 in 2004. However, in California, Texas, and Florida, WIC- only vendors have accounted for a larger proportion of all WIC vendors than in the nation as a whole. At the same time, these three states were home to nearly one-third of all WIC participants nationwide. Nationally, as their numbers might suggest, WIC-only vendors had the smaller share of the WIC market during an average month in 2004, but on a store-by-store basis, they redeemed about twice as much as regular WIC vendors. Whereas regular WIC vendors accounted for 94 percent of business in the WIC market, or about $784 million on an average monthly basis in 2004, WIC-only vendors redeemed about $47 million, or 6 percent of all WIC redemptions. However, WIC-only vendors nationwide redeemed nearly $40,000 per vendor during an average month that year, about twice the average monthly amount from WIC as regular WIC vendors that participated in the program (see fig. 5). Because these data represent simply the average monthly payments received per vendor from WIC state agencies, differences between WIC- only vendors’ redemptions and those of regular WIC vendors could signify that a vendor type charges higher prices for WIC food, but could also reflect the number of participants that shop at each vendor type; the probability that a participant selected all or only part of the food items on a voucher; the amount of WIC business volume conducted, on average, by WIC-only and regular WIC vendors; or all of these practices. For example, a WIC-only vendor that serves a far greater number of WIC participants than a regular WIC vendor would tend to have higher redemptions for the same WIC items even if both vendors’ prices for those items were comparable. At the state level, the three states with the most WIC-only vendors also produced the majority of total WIC-only vendor business volume during an average month in 2004. Though the average monthly redemptions per WIC- only vendor in California, Texas, and Florida fell below the high of nearly $64,000 per vendor in Oklahoma, the three states accounted for 90 percent of all WIC-only redemptions during that period (see fig. 6). WIC-only and regular WIC vendors generally employed different business and marketing practices, largely in response to the two different customer groups they served and the nature of the markets they faced. Because WIC participants are not required by the WIC program to consider retail prices, vendors that served only WIC participants competed for their business by emphasizing customer service, which participants seemed to value. On the other hand, regular WIC vendors served non-WIC consumers as well as WIC participants. Because these non-WIC consumers are considered price sensitive, regular WIC vendors competed for their business based on price and competitors’ behavior. These differences in customer base also affected decisions on where to locate stores and how to advertise. WIC- only stores tended to locate near WIC clinics, while regular WIC vendors considered their broader customer base when choosing locations. Also, WIC-only vendors used community-based media and word-of-mouth to advertise, while regular WIC vendors were more likely to use mass media. Finally, WIC-only and regular WIC vendors used similar food purchasing practices, because the cost of food purchased for resale by vendors is related more to the quantity of food purchased than the type of vendor purchasing the food. Both WIC-only and regular WIC vendors were able to lower the average cost of food purchased for resale when they bought in volume, according to WIC state agency officials. WIC-only vendors employed a business model that allowed them to emphasize customer service for program participants rather than price, while regular WIC vendors focused on attracting a broader customer base by offering competitive prices. These differences have likely evolved because WIC shoppers need not be price sensitive. WIC-only vendors attracted WIC participants, who were not price sensitive, by emphasizing customer service. Because WIC participants were not price sensitive, they responded to non-price inducements, like service, which they valued. As a result, they might take advantage of the service offered by WIC-only vendors, even if their prices were somewhat higher. In comparison, regular WIC vendors more often used price reductions to appeal to a broad customer base, most of whom were price-sensitive shoppers, according to WIC state agency officials. Although WIC-only vendors did not compete on the basis of price, WIC- only vendors did compete with other WIC-only and regular WIC vendors on the basis of customer service, a central feature of their business model, according to WIC state officials. WIC-only vendors typically organized their stores in ways that emphasized service to their WIC participant customers. Because WIC-only vendors stocked only WIC-approved items (see fig. 7), they eliminated the need for WIC participants to identify WIC- eligible foods. Moreover, WIC-only vendors often kept food behind a counter, and employees gathered and bagged the WIC items customers requested, according to most WIC state agency officials we interviewed and our observations during site visits. (see fig. 8) As a result, customers did not need to spend time finding products in store aisles or face the risk or stigma of selecting an unauthorized food item and creating a delay in the checkout line. Several state officials thought that this feature of WIC- only vendors’ business model was a prime attraction for WIC participants. Some state officials told us they believe the customer service features of WIC-only vendors’ business model, together with their use of only one or two checkout points, their limited customer floor area, and their location in low-income neighborhoods, would reduce their operating expenses. However, we were unable to obtain the data needed to confirm these views. Few WIC-only vendors used price-based incentives such as buy-one-get- one-free specials, sale items, or discount cards to attract WIC customers. Because WIC participants purchase items with vouchers and are not price sensitive, price discounts would not induce them to go to a store with lower prices. However, for this same reason, WIC-only vendors would not risk losing WIC customers, even if their prices were higher. In the past, WIC-only vendors also have given away food and non-food items, called incentives, to attract customers. For example, WIC-only vendors gave away strollers and diapers in California and North Carolina, cash in Arkansas, and gift certificates in Georgia, according to WIC state agency officials. Because WIC-only vendors’ main source of revenue was the WIC benefit, paid for by the WIC program, offering such incentives raised concerns about the use of federal funds. However, several WIC state agency officials noted that the use of incentives by WIC-only vendors has decreased as a result of rule changes required by the Child Nutrition and WIC Reauthorization Act of 2004. In fact, the WIC state officials we spoke with in California, North Carolina, and Arkansas said that WIC-only vendors no longer give away most of the items they provided in the past. None of the WIC-only vendors we observed on our site visits provided such incentives, with the exception of one in California that gave customers a small amount of free produce for purchasing a certain quantity of food items. In contrast to WIC-only vendors, the retail grocers that we define as regular WIC vendors targeted the population at large and did not focus on customer service, according to WIC state agency officials. Regular WIC vendors served WIC participants, but their largest group of customers was non-WIC consumers, who are price sensitive. For the most part, regular WIC vendors targeted their business practices on their non-WIC customers and set prices in response to this group. The regular WIC vendors we observed on our site visits provided examples of their business practices that contrast with those of WIC-only vendors. Of the 12 regular WIC vendors we visited, none gathered the WIC food items listed on the voucher for WIC customers and only 3 had food items authorized by the WIC program placed together on an aisle shelf to assist participants in finding the items on their vouchers. Having to search store aisles and shelves for the correct food type, brand, and size listed on their voucher can make shopping for WIC food items at regular WIC vendors challenging or uncomfortable for WIC participants. WIC state officials told us that regular WIC vendors’ marketing practices are price-based, that is, they competed in the market based on price and their competitors’ behavior. Regular WIC vendors commonly use buy-one- get-one-free specials, sale items, discount cards, and other price-based incentives to attract a broad client base that is price sensitive. Since the rule changes required by the Child Nutrition and WIC Reauthorization Act of 2004, regular WIC vendors, who have sources of revenue other than federal funds from their broad customer base, continue to provide higher- priced incentives to attract customers, according to several of the WIC state agency officials and WIC vendor employees whom we interviewed. Despite these differences, WIC-only vendors and regular WIC vendors used some similar business or marketing practices that did not involve price-based incentives. For example, both employed checkout staff who spoke one or more languages other than English, according to the majority of WIC state agency officials interviewed, a practice we observed on our site visits. In addition, both vendor types in several states organized community outreach activities, ranging from baby clothes exchanges to barbecues. WIC-only vendors are often located in places readily accessible to WIC participants. All WIC state agency officials we interviewed stated that WIC-only vendors tend to locate their stores as close to WIC clinics as possible (see fig. 9), and several officials indicated that WIC-only vendors may also operate in low-income neighborhoods—geographic areas that are often one and the same. In contrast, WIC state agency officials told us that regular WIC vendors typically make their location decisions based on their entire customer population, not just WIC participants. While WIC state agencies consider participant access when authorizing regular WIC vendors, they need not ensure that the vendor will be located near a WIC clinic. WIC-only vendors generally advertise with publicity flyers, word-of-mouth, and community-based media. WIC officials in all seven states reported that WIC-only vendors tend to use publicity flyers to publicize their stores; figure 10 presents an example of this type of advertisement. Further, word- of-mouth is the most important advertising practice for some WIC-only vendors. In addition to using flyers and word-of-mouth, some WIC-only vendors in Alabama, Florida, and North Carolina advertise in local newspapers, and a few WIC-only vendors in California and North Carolina promote their stores via radio. In addition, most of the WIC-only vendors we visited post signs indicating that they accept vouchers. In California, the majority of the WIC-only vendors we visited post signs indicating that the stores accept vouchers. In Texas and Florida, several stores have replaced the name of the store in the marquee over the front door with statements such as “WIC Checks Accepted Here” (see fig. 11). In contrast to WIC-only vendors, which used community-based media, regular WIC vendors typically advertised to a broad client base through mass media such as newspapers, television, radio, and billboards, according to most WIC agency officials and regular WIC vendor employees interviewed. However, most of the regular WIC vendors that we visited do not post signs indicating that they participate in the WIC program, even though most WIC state agency officials whom we interviewed said that they provide regular WIC vendors with a state-authorized sign indicating that the store accepts vouchers. Although their marketing and advertising practices differ, WIC state officials told us that WIC-only and regular WIC vendors use similar food- purchasing practices. Wholesalers tend to offer WIC-only and regular WIC vendors lower prices for higher volume purchases, according to a majority of WIC state agency officials interviewed. Some vendors have lowered food-purchasing costs by expanding the number of outlets they operate or forming consortia to buy in greater volume. For example, one WIC-only vendor in California operates a chain of 49 outlets. A few WIC-only chains in California and Florida have become wholesalers themselves because they are large enough to purchase food directly from manufacturers. WIC state agency officials in two states indicated that WIC vendors increase the amount of food purchased by forming a consortium with other vendors. For example, several WIC-only vendors in Florida purchase food collectively to earn volume discounts from wholesalers. In contrast to WIC vendors that form consortia or are large enough to purchase independently from wholesalers or manufacturers, some small WIC vendors—including both WIC-only and regular WIC vendors— purchase food for resale from other retail sources. The small WIC vendors may not have the room to store large amounts of goods or may not be able to buy on credit from wholesalers. Although several WIC state agency officials said that buying from other retailers leads to higher costs, a few officials noted that WIC vendors with a small purchasing capacity may in fact pay less by buying food from other large retailers, such as Wal-Mart or Costco, instead of from wholesalers. Even though WIC vendors can reduce their average food-purchasing costs by buying food in greater volume, existing data did not permit us to determine the relationship between food-purchasing costs and retail food prices. The retail price for food items reflects numerous store-operating expenses in addition to the cost of buying food for resale—such as employee salaries, rent, and insurance—and a decrease in average food- purchasing costs over time does not necessarily result in a reduction in other business costs. If the market share of WIC-only vendors had doubled in California, Texas, and Florida, either program participation would have decreased by about 3 percent—about 136,000 participants—or program expenditures would have increased by about 3 percent—about $50 million—in those states, according to our scenario estimates using conditions present in 2004. These changes would have occurred because the average value of all food vouchers redeemed by WIC-only vendors in 2004 was higher than the average value of all food vouchers redeemed at regular WIC vendors. However, even though the change would be a similar 3 percent of 2004 levels across all three states, the reasons for the size of the change differ among the states, depending on WIC-only vendors’ market share and the difference in WIC-only and regular WIC vendors’ average voucher value. Because the average value of all food vouchers we calculated did not specify either the price or quantity of individual items that make up the voucher, we could not determine whether the prices for individual items at WIC-only vendors were higher than at regular WIC vendors. At a minimum, data on both the price a vendor charges for individual food items and the quantity purchased by participants are needed to make price comparisons. The number of participants that could have been served would have decreased if the WIC-only vendors’ market share increased while holding total WIC food expenditures constant at 2004 levels, according to our first scenario. As shown in table 2, if redemptions at WIC-only vendors had doubled in each state, the decrease in the number of participants that could be served would be 136,202, or about 3 percent of 2004 levels for the three states. Because the average value of all food vouchers redeemed by WIC-only vendors in all three states in 2004 was higher than the average value of all food vouchers redeemed by regular WIC vendors, more funds would have been needed to reimburse WIC-only vendors than regular WIC vendors for the same number of vouchers. As a result, when the number of food vouchers redeemed by WIC-only vendors increased and program expenditures were held constant in our scenario estimate, fewer food vouchers could be issued and fewer participants could be served. This constraint was reflected in our analysis by a reduction in the number of vouchers redeemed by regular WIC vendors. Even though the size of the decrease in program participation would be a similar 3 percent of 2004 levels across all three states, the reasons for the size of the decrease differ among the states. Two key factors would affect the size of the decrease in each state: (1) the size of WIC-only vendors’ share of the total WIC vendor market and (2) the difference between the average value of food vouchers redeemed by WIC-only and by regular WIC vendors. As shown in table 3, in California, WIC-only vendors’ market share was 41.46 percent in 2004, and the difference in the average value of food vouchers redeemed by WIC-only and regular WIC vendors was $0.87. Because WIC-only vendors’ market share is 41 percent in California, doubling their market share means that WIC-only vendors would account for most of the WIC market in that state. Conversely, in Texas and Florida, redemptions at WIC-only vendors accounted for a smaller market share than in California in 2004—8 percent in Texas and 13 percent in Florida. The difference between the average value of food vouchers redeemed at WIC-only and regular WIC vendors in 2004, however, was higher than in California—$9.83 in Texas and $4.42 in Florida. Therefore, although WIC-only vendors accounted for a larger portion of the WIC vendor market in California than in Texas and Florida, the smaller difference in WIC-only and regular WIC vendors’ food voucher values would have helped counteract the overall effect of an increase in California WIC-only vendors’ market share. Conversely, the smaller market share held by WIC-only stores in Texas and Florida would have partially offset the overall effect of the larger difference in average food voucher value in those two states. We acknowledge that we could have increased the market share held by WIC-only vendors in Texas and Florida in 2004 further in our scenario analysis. However, our analysis is based on the relative market shares and the corresponding differences in average food voucher values in 2004. Over time, the differences in average food voucher values as well as the market share held by WIC-only vendors could increase or decrease with corresponding implications for program resources. Program expenditures would increase if the market share of WIC-only vendors grew and all else remained the same, including the overall number of food vouchers redeemed by both WIC-only and regular WIC vendors in 2004. As shown in table 4, if redemptions at WIC-only stores doubled in each state, program expenditures would increase by about $50 million, or 3 percent above the three states’ 2004 levels. As discussed previously, the size of WIC-only vendors’ share of t See appendix IV for the range of vouchers in California, Texas, and Florida that we analyzed. The total WIC vendor market and the difference between the average value of food vouchers redeemed by WIC-only and by regular WIC vendors in part explain why the changes for the three states are similar. Although our two scenario estimates are based on the best available data concerning WIC-only vendors’ contributions to expenditures and participation, they are illustrative only and have limitations. Because food item price data and quantities of food items purchased were not available, we were unable to construct analyses that would have isolated the effect of actual prices charged by WIC-only and regular vendors on program expenditures or participation. For example, some food vouchers in our data were composed of a single item, but most of them contained multiple food items, such as milk, cheese, and cereal. Because most of the vouchers contained several types of WIC food and allowable quantities for each food item, the value of an individual voucher was not the price a vendor charged for an individual food item. The value of an individual food voucher was the sum of the price of each food item on the voucher times the quantity purchased. As a result, the difference in value between WIC- only and regular WIC vouchers could be due to differences in prices for individual items or differences in the quantities redeemed or both. For example, if some participant customers of regular WIC vendors select only a portion of the food items on a voucher, regular WIC vendors’ average redemption value would be lower than WIC-only vendors’, if their WIC customers received all of the items on the voucher. As a result, without these data, we could not attribute with certainty the changes in WIC program participation and expenditures we identified to WIC-only vendors’ prices. The growth in the number of WIC-only vendors in recent years, combined with our finding that individual WIC-only vendors generally had more than twice the business volume of regular WIC vendors in an average month in 2004, suggest that WIC-only vendors’ share of the WIC retail market was increasing before the 2004 legislation. Although in some states the number of WIC-only vendors has not grown, in others the number has grown quickly and the future effect of the new cost containment requirements on this growth is not known. Our scenario analyses suggest that continued WIC-only vendor growth could have resulted in either fewer participants being served or higher program costs. Moreover, given the current program model that focuses on ensuring participants receive prescribed foods without having to consider the costs of the commodities, participants would likely continue to take advantage of the customer service and convenient location offered by WIC-only vendors, even if prices are higher. The lack of price and quantity data needed to explain the higher monthly average redemptions of WIC-only vendors and the higher average value of vouchers redeemed by WIC-only vendors leaves important questions unanswered. We could not determine how WIC-only and regular WIC vendors’ prices differ. Our study was a first attempt to develop a national picture of WIC-only vendors, to inform policy initiatives and practice. However, absent a systematic analysis of vendor-level data, it is difficult to determine with more certainty how changes in market share between WIC- only and regular WIC vendors would affect WIC program expenditures. The lack of price and quantity data on WIC food purchases also has broader program implications. Although WIC state agencies have used routine and high-risk vendor monitoring and voucher review to promote accountability, for the most part they authorize and reimburse their WIC- only and regular WIC vendors without knowing precisely which prescribed foods were purchased and in what quantities, what price the program was being charged for food, and whether participants were receiving the whole food package or only part of it. Collecting these data under the current system would be costly and burdensome to states. Under the new interim rule, WIC state agencies are required to collect vendors’ shelf price data but not the actual price charged the program or the quantity purchased. However, two recent developments in the WIC program—the implementation of electronic benefits transfer and the redesign of the WIC food package to include fruit and vegetables—may lead to changes in the WIC voucher and present WIC state agencies the opportunity to collect price and quantity data during the WIC transaction in a cost-effective way. This information could be used to determine whether the prices that both WIC-only and regular WIC vendors charge the program are reasonable and to analyze the effects of WIC vendors’ prices on program expenditures with greater certainty. To assist WIC state agencies in more effectively monitoring WIC vendors’ redemption practices, in implementing the new cost containment requirements, and in analyzing program expenditures, we recommend that the Secretary of Agriculture require, if collection of more detailed information on WIC food purchases is cost-effective through EBT implementation, that WIC state agencies collect data on both the price and the quantity of each WIC food item purchased, especially in each state that authorizes WIC-only vendors. We provided a draft of this report to the U.S. Department of Agriculture for review and comment. On June 14 and 16, 2005, FNS officials provided us with their oral comments. The officials generally agreed that our methodology was reasonable, given data constraints, and did not dispute our findings on the recent growth of WIC-only vendors, the business model differences between WIC-only and regular WIC vendors, and the likely effect on the WIC program of further growth of WIC-only vendors’ market share based on 2004 data. However, they raised several concerns. They asked us to make clear that the 2004 data we used to determine the growth in the number of WIC-only vendors preceded the current moratorium on approving new WIC-only vendors, and the data we used to calculate the effect of additional growth on the program were gathered before the full implementation of new cost containment provisions. These provisions, enacted when the program was reauthorized in 2004, are intended to help ensure that the program pays competitive prices to all authorized vendors. We incorporated additional references to these recent changes where appropriate. FNS officials also commented on our finding that although the average value of all vouchers redeemed by WIC-only vendors in our three states in 2004 was higher than that of vouchers redeemed by regular WIC vendors in these states, we could not determine with certainty whether prices charged by WIC-only vendors are higher than those charged by regular WIC vendors because we could not disaggregate price from quantity at the level of purchase. Officials acknowledged the ongoing challenges in collecting these data for foods provided under the WIC program. However, they expressed concern that this finding would be misinterpreted to mean there is no price difference between WIC-only and regular WIC vendors, and our finding on the likely effect on the program of continued growth of WIC-only vendors under 2004 conditions would be overlooked. We made some minor technical revisions to our report wording to clarify our findings and the limitations of available data on prices charged by WIC vendors. Further, in the draft these officials read, we recommended that FNS consider conducting a small-scale study to better understand how WIC- only vendor prices and operations contribute to program expenditures. Officials did not believe this study would be necessary or cost-effective because of the difficulty in collecting price and quantity data on WIC purchases under the current paper-based system, and because program regulations already require monitoring of shelf prices and redemption data as a component of their vendor management. We understand that USDA has limited funds available for research, with multiple demands on these funds. Since the cornerstones of the new legislative requirements are that prices at above-50-percent vendors should be competitive with those charged by regular vendors and that vendors that derive more than 50 percent of their revenue from WIC food instruments do not result in higher food costs to the program than do other vendors, officials are hopeful that the new cost containment provisions will ensure the program pays competitive prices to all vendors. However, the cost containment provisions are complex and entail significant changes for some states. We believe it is important for FNS to closely monitor implementation of cost containment provisions to help ensure that program costs are in fact contained as intended. Moreover, as long as the program is structured so that participants need not pay attention to price, and given the current lack of available information on whether participants are actually receiving their prescribed foods and at what price, we believe FNS should proactively take advantage of all cost-effective ways of gathering data that will help contain costs and ensure the program is meeting its overall goals. In response, we have removed our recommendation for further study and further clarified our recommendation for additional data collection on the price and quantity of WIC food items purchased under a new EBT system. FNS also made additional technical comments, which we have incorporated where appropriate. As arranged with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after the date of this letter. At that time, we will send copies to the Secretary of Agriculture, relevant congressional committees, and other interested parties. We also will make copies available to others upon request. In addition, the report will be made available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7215 or fagnonic@gao.gov. Contact points for our Office of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff that made major contributions to this report are listed in appendix V. This appendix discusses in detail our methodology for determining whether the vendors authorized by the Special Supplemental Nutrition Program for Women, Infants and Children (WIC) that are known as WIC- only vendors contribute more to WIC program expenditures than do regular WIC vendors. The study was framed around three questions: (1) what is known about WIC-only vendors’ growth and their share of the WIC market in recent years? (2) To what extent do the business and marketing practices of WIC-only and regular WIC vendors differ?(3) What would WIC-only vendors’ contribution to WIC program expenditures have been if their market share increased? Because existing research on WIC-only vendors consisted of a few single- state studies or analyses of a small number of individual states, we sought to develop a national picture. To ensure comparability of costs and business practices, we focused on the WIC retail vendor market, excluding Mississippi, which operates a direct distribution system, and Vermont, which uses a home food delivery system. To prevent potential duplication of data, we limited the study to the geographically contiguous states, omitting the 32 Indian Tribal Organizations that authorize many of same vendors authorized by the geographic WIC state agencies in which they reside. Given the large size of the WIC retail vendor population, we used existing data sources for our national-level analyses of WIC-only vendors’ growth and market share. Because WIC food instrument and redemption systems are unique to each state, we focused our analyses of WIC-only vendors’ contribution to program expenditures at the state level, concentrating on California, Texas, and Florida, the states that authorize 84 percent of WIC-only vendors. To examine WIC-only and regular WIC vendors’ business and marketing practices, we relied on the experience of WIC state agency officials who have managed a substantial number of WIC-only vendors, including officials from seven states that had authorized 10 or more WIC-only vendors in fiscal year 2004. We used separate sources of data for each study question, including national-level administrative data for the entire WIC vendor population, state-level administrative data for every WIC food instrument redeemed in fiscal year 2004, telephone interviews with WIC state agency directors and vendor management staff, and on-site observations and interviews at WIC- only and regular WIC vendor establishments. Before deciding to use the administrative data, we conducted a thorough data reliability assessment of each data base, including a review of the data collection and reporting system that produced the data, guidance on variable definitions and measures provided to entities that reported the data, and steps the Food and Nutrition Service (FNS) or the WIC state agencies took to ensure data reliability. Once we received the administrative data files, GAO’s methodologists conducted electronic tests to check for the accuracy and completeness of individual data elements. We discuss our testing procedures and steps we took to mitigate any data limitations below, as part of the methodology for each study question. On the basis of these efforts, we believe the data are sufficiently reliable for our purposes. We conducted a descriptive analysis of WIC-only vendors’ growth and market share, a scenario analysis of WIC-only vendors’ potential contribution to WIC program expenditures, and a comparative analysis of WIC-only and regular WIC vendors’ business and marketing practices. To determine what is known about WIC-only vendors in recent years, we gathered various federal and other data sources. We collected copies of FNS’s The Integrity Profile (TIP) for federal fiscal years 1999 through 2004. TIP is a database that includes information on all vendors authorized to provide food benefits under the WIC program at any point during a fiscal year. For each vendor entry, TIP identifies vendor type, location, and WIC redemption amounts, among other data. TIP data is provided by 90 WIC state agencies, representing all 50 states, the District of Columbia, Indian Tribal Organizations (ITOs), and U.S. territories. WIC state agencies submit electronic data to FNS on an annual basis in accordance with instructions provided by FNS. To complement information provided by TIP, we conducted a literature search to compile a list of all research conducted on WIC-only vendors in recent years, but found that few such studies exist. As a result, our analysis focused largely on TIP. As one step in our data reliability assessment process, we evaluated the integrity of TIP data. This procedure revealed two primary limitations. First, TIP does not report the actual date when a vendor enters or exits the WIC program; rather, it only indicates whether a vendor was authorized by a WIC state agency at any point during a fiscal year. As a result, TIP likely overstates the number of vendors in operation on any given date. For example, the number of WIC vendors in operation on the first day of a particular fiscal year—October 1—is probably less than the number reported by TIP for the same fiscal year, as TIP includes all WIC vendors for that fiscal year that were authorized as of October 1, in addition to all vendors that entered the program after that date. Thus, we could not calculate a percentage-based growth rate from year to year using TIP. Instead, we could only calculate the total number of WIC vendors of a specific type in operation for at least 1 day during a particular fiscal year. The second limitation we identified was that national TIP redemption data did not meet GAO’s data reliability standards, based upon information provided by FNS. Although FNS had requested that WIC state agencies submit average monthly redemption data for all WIC vendors during fiscal years 1999-2003, FNS officials determined subsequently that not all WIC state agencies had followed these instructions. FNS officials concluded that some WIC state agencies had submitted redemption data in formats other than average monthly amounts, such as annual or quarterly figures, but they were uncertain about the time period used by any particular WIC state agency in reporting redemption data. In recognition of this problem, for fiscal year 2004, FNS requested that WIC state agencies specify the time period that their redemption figures covered when submitting TIP data. FNS then annualized all redemption figures not submitted as annual amounts by multiplying the figures that were other than annual by the appropriate number of months. However, this process may have resulted in overstated redemption figures for certain WIC vendors in fiscal year 2004, as FNS annualized the redemption figures for all WIC vendors that did not have annual redemption amounts—including those vendors that were not authorized to participate in WIC for the entire fiscal year. As a result of these issues, we determined that we could not use FNS’s national TIP data to report trends in redemption amounts over time, or to calculate average annual redemption amounts by vendor type for any particular fiscal year. However, because FNS had requested that WIC state agencies specify the time period used in reporting redemption data for fiscal year 2004, we concluded that we could use the original state data files from that year to calculate average monthly redemption figures. We converted redemption figures for all WIC-only and regular WIC vendors with valid redemption data into average monthly redemption amounts for any state that reported redemptions in a form other than monthly (see table 5 for these other time periods reported by states to FNS for fiscal year 2004). For example, for any state that reported redemption amounts using quarterly figures, we divided each WIC vendor’s redemption total by three to create an average monthly figure. In converting redemption amounts, we excluded vendors that were not authorized to participate in the WIC program but that were sometimes included in the state files. When such vendors appeared, they were clearly identified as being unauthorized. In addition to eliminating specific analysis procedures due to data reliability issues, we narrowed the focus of our analyses to certain geographic areas and WIC vendor types. Because TIP includes data from ITOs and U.S. territories in addition to the 50 states and the District of Columbia, some WIC vendors may have been listed in more than one state agency TIP file. For example, both a state and an ITO located within that state may have authorized, and thus included in their data file submitted to FNS, the same WIC vendor. To eliminate these potential data-reporting redundancies, our analysis of TIP focused exclusively on the 50 states and the District of Columbia. Concerning our vendor focus, TIP includes some vendor types and additional food delivery systems that are not directly comparable to WIC-only vendors. The noncomparable vendor types include military commissaries, usually located on military installations, and pharmacies, which often only provide infant formula and WIC-eligible medical foods. In addition, some state agencies authorize other food delivery systems, such as home food delivery and direct distribution. We eliminated from our analysis these noncomparable vendors and alternate food delivery systems, and defined our total WIC vendor population as consisting entirely of WIC-only vendors and regular WIC vendors. Our findings are the result of two primary analyses. First, we generated frequency statistics concerning the number and location of WIC-only vendors and regular WIC vendors for fiscal years 1999 through 2004, and used geographic information system (GIS) software to map the location of WIC-only vendors in fiscal year 2004. Second, using the original state data we received from FNS’s regional offices for fiscal year 2004, we analyzed average monthly WIC redemption amounts by vendor type, both nationally and by state. To identify WIC-only and regular WIC vendors’ business and marketing practices, we used two data collection strategies: group telephone interviews with WIC state agency directors, vendor management staff, and local agency staff that participate in vendor monitoring in selected states, and site visits to three of the states selected for telephone interviews. We developed criteria and selected states and officials for the telephone interviews and the site visits. Because we were relying on WIC state officials’ experience managing their WIC-only and regular WIC vendors to identify their business and marketing practices, we selected states for the telephone interviews that had authorized a substantial number of WIC-only vendors and specified 10 as the minimum number of vendors. Using TIP data for fiscal year 2004 to determine the number of vendors in operation, we selected states that had at least 10 WIC-only vendors that year. During fiscal year 2004, the number of WIC-only vendors in the 16 states that authorized them varied from 1 to 715, but eight states—California, Texas, Florida, North Carolina, Arkansas, Alabama, Georgia, and Louisiana—had 10 or more. We treated Puerto Rico as a separate case and, because of Hurricane Katrina, excluded Louisiana, leaving seven states for interviews. To select telephone interview respondents, we asked the WIC state agency director to identify staff who had observed WIC-only and regular WIC vendors’ business and marketing practices directly through representative monitoring and compliance investigations. To ensure that we visited establishments with a range of key characteristics, we selected states for site visits from among those with the greatest number of WIC-only vendors—California, Texas, and Florida. We selected vendor establishments to visit in consultation with the WIC state agency director. Our selection criteria included urban and rural locations, years in operation, food price range, and vendor size, measured by WIC redemption volume. The California and Texas WIC state agencies provided us with a list of vendors from which we chose vendors according to our selection criteria. The Florida WIC state agency provided us with a list of vendors that met our criteria. We visited four WIC-only and four regular WIC vendors in each of the three states. We developed an interview guide with a standard set of questions for the telephone interviews and data collection instruments for the site visits. As a first step, we compiled a list of business and marketing practices from an interview with WIC state agency directors and vendor managers; interviews with representatives of vendor associations, such as the National Grocers Association, the Gulf Coast Retailers Association, and the California Independent Grocers Association; and existing studies of WIC-only vendors. These practices include selling shelf space to manufacturers; location of stores near clinics or military bases; advertising methods such as announcing weekly specials in newspaper ads or placing flyers on windshields in parking lots; incentives offered to participants at no cost, such as strollers, diapers, and bicycles; reduced price offers, such as buy one item, get one free; and transportation for participants to and from the vendor’s establishment. For the telephone interviews, we converted the list of practices to a separate set of questions about WIC- only and regular WIC vendors. The site visit data collection instruments covered the same topics as the telephone instrument to permit comparisons of the information provided by WIC state agency staff and our observations of vendor establishments and interviews with store managers. However, the site visit instrument was designed with fixed- response questions in a checklist format to facilitate completion during observation. To complement the observational and interview data, we obtained digital cameras and, with the WIC vendors’ permission, took interior and exterior photographs of the vendor establishments we visited. For all of the seven states we interviewed by telephone, we prepared a state-level table that synthesized the interview responses separately by vendor type and key business and marketing practice categories. We also prepared summary tables that further aggregated the business and marketing practice data within vendor type for each state. We used the summary tables to make cross-state comparisons. For the site visit interview responses, we created a matrix to summarize key findings on store characteristics, illustrative price data, and selected business and marketing practices. In order to assess WIC-only vendors’ contribution to WIC program food expenditures, if their market share increased, we developed two scenarios, based on available data for 2004 (the latest data available). In these scenarios we asked: Scenario 1: What would have happened to the number of food vouchers that could have been issued and the number of WIC participants that could have been served in 2004, if we increased the number of food vouchers redeemed at WIC-only vendors while holding program food expenditures constant at fiscal year 2004 levels? Scenario 2: What would have happened to program food expenditures in 2004 if we increased the number of food vouchers redeemed at WIC- only vendors while program expenditures were not held constant and the number of food vouchers issued to program participants remained at the 2004 level? We obtained copies of administrative data files from WIC state agencies’ management information systems in California, Texas, and Florida. These data included information on every food voucher that had actually been redeemed—that is, submitted for payment and paid—in these states. The unit of measure in our data was the value of a redeemed food voucher, and the data consisted of values for more than 100 million vouchers. Using these data, we could determine the actual number of food vouchers redeemed at WIC-only and regular WIC vendors for each of the three states, as well as the average value of all food vouchers redeemed at WIC- only and regular WIC vendors in each state. For example, figure 12 depicts the information available on three representative food vouchers and how we combined the values for these individual vouchers (e.g., $17.95, $13.07, and $12.55) to determine the average value of all vouchers redeemed (e.g., $14.52). We did this for all vouchers for WIC-only and regular WIC vendors in California, Texas, and Florida. Even though we were able to calculate the average value of all redeemed food vouchers for WIC-only and regular WIC vendors, we were not able to determine whether prices for individual food items were higher at WIC- only vendors than at regular WIC vendors. In order to answer that type of detailed question, we would have needed additional information that was not available because of the way data are collected by the states. Specifically, we would have needed the price of the individual food items listed on the voucher and the quantity of each food item purchased, in addition to the total redeemed value. Figure 13 shows hypothetical vouchers from two vendors that include the type of information that would have been needed for such an analysis. It specifies that 2 gallons of milk were purchased at $3.57 per gallon for a total expenditure of $7.14. However, the data files we received did not contain either the price or the quantity purchased for individual vouchers. Without information on the quantity and price of the items on food vouchers, WIC participants would not know the value of the items they received and could not be price sensitive. WIC agencies would also not be able to determine the prices of the items they redeemed or whether participants received the total quantity of products specified on the voucher. Without this information, it is difficult to know why average redemption values differ. Figure 13 illustrates why it is important to know the quantity actually redeemed by the participant. For example, as shown in voucher 1 in the figure, the participant received the full quantity of food specified on the voucher. The average value of all items is $17.95. In voucher 2, the average value of the voucher at $14.00 is less expensive. The participant, however, did not buy eggs or cheese and did not receive the full quantity of food specified on the voucher. If the voucher represents a prescription designed to fulfill shortfalls in the participant’s nutritional needs, the partial fulfillment suggests that although the average value of voucher 2 is less than in voucher 1, the actual delivery of the food has not been achieved. Voucher 2 in figure 13 also demonstrates why it is necessary to know the price of individual items on the voucher. Without this information, it is not possible to know whether the prices at one vendor are higher than prices at another vendor. In voucher 2, the total value of the voucher is less than in voucher 1, yet the price charged for a gallon of milk is significantly higher. Use of the average value of the voucher of $14.00 clearly does not prove that prices at the second vendor are less than prices at the first vendor with the higher average value of $17.95. In addition, it is important to collect the actual price of the sales transaction—collected at the point of sale—rather than a shelf price. This is because the price listed on the shelf may not be the actual price of the transaction. For example, if milk is being sold as a loss leader at the vendor represented by voucher 1, it is possible that the price on the shelf is actually $7.00 per gallon even though the price on the voucher is $3.57 per gallon. We also would have needed information on such things as the size and location of stores to further determine why prices and average values may have varied between WIC-only and regular WIC vendors in the states. To answer the questions presented in these two scenarios, we used the following equation for the sum of WIC-only and regular WIC retail vendor food expenditures: 1) (program food expenditures for WIC-only vendors) + (program food expenditures for regular WIC vendors) = total WIC program food expenditures, or: 2) qx + qx = Fq x = program food expenditures for WIC-only vendors where q= number of vouchers redeemed by WIC-only vendors x = average value of vouchers redeemed by WIC-only vendors qx = program food expenditures for regular WIC vendors where q = number of vouchers redeemed by regular WIC vendors x= average value of vouchers redeemed by regular WIC vendors ) equaled $13.15. Conversely, the number of vouchers redeemed by regular WIC vendors (q) equaled 40,745,000, the average value of vouchers redeemed (x) equaled $12.28. Total WIC program food expenditures for California for fiscal year 2004 (F ) equaled $880,096,000. These data can be used in the formula to obtain the following: 3) (28,866,000* $13.15) + (40,745,000 * $12.28) = $880,096,000In the first scenario, we wanted to see how participation would change in California, Texas, and Florida in 2004 if the number of vouchers redeemed at WIC-only vendors increased while holding total WIC program food expenditures constant at 2004 levels. We did this by increasing the number of vouchers redeemed at WIC-only vendors in the states in 2004 by a hypothetical 10, 20, 30, 50, and 100 percent. Because we increased the number of food vouchers redeemed at WIC-only vendors, and do not allow total WIC program food expenditures to increase, the total number of vouchers for WIC-only and regular WIC vendors that can be issued depends, in part, on whether the average value of redeemed vouchers is higher for WIC-only vendors. If the average value is higher, fewer food vouchers could be issued under this scenario and thus fewer participants could be served. This would be reflected in our scenario by a reduction in the number of vouchers redeemed by regular WIC vendors. We calculated this change in the number of vouchers redeemed by regular WIC vendors by using equation 2a, which is equation 2 transformed. We calculated the number of vouchers that would have been redeemed at regular WIC vendors q for each hypothetical increase. All else was held constant at 2004 levels. 2a.) q = ((F xw/)/x ) + q x = F q x = (F x) q = ((F - q x)/x ) scenario results for California are presented in table 7. In the case of a 100 percent increase in WIC-only vendor redemptions, we increased the number of WIC-only redemptions from the actual value in 2004— 28,866,000 by a hypothetical 100 percent to 57,732,000. The resulting number of redemptions for regular WIC vendors, as calculated in formula 2a, decreased from the 2004 value of 40,745,000 to 9,827,000. All else—the average value of redeemed vouchers for WIC-only ($13.15) and regular WIC vendors ($12.28), as well as total WIC program food expenditures ($880,096,000)—is held constant. This decline in the number of vouchers redeemed at regular WIC vendors results from the restriction in the analysis of keeping total WIC program food expenditures constant at 2004 levels. This decline occurs because according to our calculations based on all food vouchers for the state, the average value of food vouchers redeemed at WIC-only vendors is somewhat higher than the average value at regular WIC vendors. We calculated the number of participants who might be affected by the change in the scenario. We did this by adding together the number of vouchers redeemed at WIC-only and regular WIC vendors in 2004 and under each hypothetical increase in the scenario for each of the three states. For example, in California, a total of 69,611,000 vouchers were redeemed in 2004 (table 6). As shown in table 7, for a doubling in the number of vouchers redeemed by WIC-only vendors, we estimated a total of 67,560,000 vouchers. In the absence of more specific information on participation, we simply divided the total number of vouchers redeemed by the average number of vouchers redeemed per participant for each of the states. For example, in California we estimated 32.69 vouchers per participant. We used that information to estimate that there were 2,130,000 participants in 2004, (69,611,000 / 32.69). Conversely, as shown in table 8, if the redemptions of vouchers by WIC-only vendors doubled, we estimated that 2,067,000 participants (67,559,000 / 32.69) would be affected. As shown in table 8, in California, the difference between the number of participants in 2004 and the estimated number of participants if WIC-only vendor redemptions increased 100 percent (2,067,000-2,130,000) indicated a decline of 63,000 participants that could be served. In California, this represented about 3 percent of the number of participants in 2004, ((63,000 / 2,130,000)*100). In the second scenario, we wanted to see how expenditures that had been held constant in the previous scenario would have to change in order to maintain the level of program participation constant at 2004 levels when the market share of WIC-only vendors increased. As in the previous scenario, we increased the number of redeemed food vouchers for WIC- only vendors (q) by a hypothetical 10, 20, 50, and 100 percent. While keeping the total number of vouchers redeemed constant at 2004 levels, we again used equation 2a to calculate the number of redeemed vouchers for regular WIC vendors (q). We allowed total expenditures to increase (FWIC-only vendors account for a much smaller share of the WIC market in Texas and Florida than in California. In Texas, for example a doubling of the WIC-only vendors’ market share would result in an increase in the number of food vouchers redeemed from 1.8 million to 3.6 million—with the number of food vouchers redeemed at regular WIC vendors decreasing from 20.9 million to 18.3 million. For Florida, the doubling of WIC-only vendors’ market share would result in an increase in the number of food vouchers redeemed from 1.6 million to 3.1 million—with the number of food vouchers redeemed at regular WIC vendors decreasing from 10.6 million to 8.7 million. In all the states, the average value of vouchers redeemed at WIC-only vendors was higher than the average value of vouchers redeemed at regular WIC vendors. The value for California was calculated as $13.15, while the value for regular WIC was $12.28, with a difference of $0.87 between the two types of vendors. In Texas, the average value of vouchers redeemed at WIC-only vendors was calculated to be $31.55, while the value for regular WIC vendors was $21.72—a difference of $9.83. In Florida, WIC-only voucher redemptions averaged $22.92 in value, while the value for regular WIC was $18.50—a difference of $4.42. In addition, according to our analysis, the average value of vouchers redeemed at regular WIC vendors was lowest in California, at $12.28, followed by Florida at $18.50 and Texas at $21.72. The difference in the average value of vouchers redeemed should be treated with a great deal of caution. Because we used the average value of all food vouchers in our analysis without knowing the price or quantity of the individual food items that made up the vouchers, we could not determine if the higher average value meant that prices for individual food items were higher at WIC-only vendors. As described earlier, the data represent the average value of the vouchers, not prices for specific food items. These data do not enable us to make price comparisons between the two types of vendors. In addition, this analysis does not allow us to determine why the average values in vouchers redeemed may be higher. To do that, we would need enough data on the costs vendors incurred in obtaining the food items as well as an understanding of the factors affecting those costs, such as store size, store location, marketing conditions and business practices, and any other factors affecting food item prices, to identify the factors affecting voucher values. The results of our calculation of the decline in the number of participants due to the increase in WIC-only vendors’ market share are presented in table 10. The number of redemptions as reported to us by each of the states was 33 per participant in California, 16 in Texas, and 18 in Florida. The decline in the number of participants ranged from less than 1 percent for a 10 percent increase in the number or redemptions at WIC-only vendors to about 3 percent for a 100 percent increase. The results of our analysis for scenario 2 are shown in table 11. Expenditures for WIC-only vendors in California increased from $380 million for a 10 percent increase to $759 million for a doubling of their market share. Expenditures changed by $2.5 million for the 10 percent increase to $25 million for a 100 percent increase in WIC-only market share. In Texas, program food expenditures in the scenario increased from $1.8 million to $17.8 million, while expenditures increased from $689,000 to $6.9 million in Florida. In all three states the increase represented from less than 1 percent to about 3 percent of 2004 values. The scenarios presented are based on the best data available at the time of the analysis. The results, however, are illustrative and leave unanswered some fundamental questions, including whether WIC-only vendors charge higher prices for food items and if so why the prices would be higher and what is the overall effect on total program food expenditures and participation. In order to more fully answer these questions, we would have to know more about the actual prices and quantities of individual food items on the redemption vouchers. Any price comparison would have to be for similar products of similar quantity and quality. In addition, we would also have to know the factors that may be influencing prices. This would include such things as the costs for obtaining the product, as well as the difference between that cost and price. In addition, even if price differences exist, certain factors affecting the store’s costs—the size of the store, the location of the store, and the general market structure in which the store operates—may help explain the price differences. In the case of the WIC market, the role of the program itself cannot be ignored; for example, that participants are not price sensitive. Thus to fully understand the price difference between WIC-only and regular WIC vendors, we would need not only additional data but a different framework of analysis that would allow us to hold various factors constant while changing others. This type of detailed analysis would require significant resources to gather the data and, in addition, would probably be limited in scale to cover local rather than national WIC markets. The figure below shows the average monthly redemptions per WIC-only vendor and the number of these vendors in the 15 states (including the District of Columbia) with them in fiscal year 2004. The figures below show the most frequently used vouchers for WIC-only and WIC regular vendors as well as the state total. We defined “most frequently” used as those that accounted for more than 1 percent of the total. The figures indicate that both WIC-only and regular vendors are redeeming the same type of vouchers. Kay Brown,(Assistant Director), Sara Edmondson, (AIC), Carol Bray, Casey Hanewall, Avani Locke, Luann Moy, Jennifer Popovic, Mark Ramage, Tovah Rom, and Dan Schwimer also made significant contributions to this report.

Summary: The Special Supplemental Nutrition Program for Women, Infants and Children (WIC), authorizes retail grocers, called regular WIC vendors, to provide the food benefit. Recently, some states have seen an increase in vendors called WIC-only vendors, who stock only WIC food and accept only WIC vouchers. Both vendor types accept WIC vouchers in exchange for a cash payment, or redemption, from WIC state agencies with U.S. Department of Agriculture (USDA) grant funds. To determine what effect WIC-only vendors' growth would have on program expenditures, in the absence of recent cost containment legislation, Congress asked GAO (1) what is known about WIC-only vendors' growth and their share of the WIC market in recent years, (2) to what extent do WIC-only and regular WIC vendors differ, and (3) what would WIC-only vendors' contribution to WIC program expenditures have been, if their market share increased. GAO analyzed national WIC vendor data, interviewed WIC state officials about vendors' business practices, and analyzed redemption data from California, Texas and Florida. The number of WIC-only vendors has tripled since 1999, with growth concentrated in a few states. However, WIC-only vendors' share of the national WIC market was relatively small compared to that of regular WIC vendors in 2004. Nationally, WIC-only vendors increased in number from 394 in 1999 to 1,180 in 2004, but 84 percent of these vendors are in California, Texas, and Florida. Despite their growth, WIC-only vendors accounted for 3 percent of all WIC vendors nationwide, and their market share, that is, their percentage of all WIC redemptions nationally, was on average 6 percent in 2004. Because of limitations in the data, we were unable to calculate annual growth rates or analyze changes in market share over time. WIC-only and regular WIC vendors generally employed different business and marketing practices, largely in response to the two different customer groups they served, according to WIC state agency officials. Because WIC participants are not required to consider retail prices, WIC-only vendors competed for participants' business by emphasizing customer service, which participants seemed to value. On the other hand, regular WIC vendors served non-WIC consumers as well as WIC participants. Because these non-WIC consumers are price sensitive, regular WIC vendors competed for their business based on price and competitors' behavior. An important difference in these approaches was that because WIC participants were not price sensitive, they might choose the service offered by WIC-only vendors, regardless of price. Finally, WIC-only and regular WIC vendors used similar food purchasing practices, because the cost of food purchased for resale is related more to the volume purchased than to the type of vendor purchasing the food. Both WIC-only and regular WIC vendors were able to lower the average cost of food purchased for resale when they bought in volume, according to WIC state agency officials. If WIC-only vendors' market share in 2004 had doubled in California, Texas, and Florida, either about 3 percent--about 136,000--fewer participants could have been served in each state, or program food expenditures would have increased about 3 percent--about $50 million--according to our scenario estimates. The average value of all vouchers redeemed by WIC-only vendors in 2004 was higher than the average value of all vouchers redeemed at regular WIC vendors. Thus, if the number of vouchers redeemed by WIC-only vendors had increased and state food expenditures remained at 2004 levels, fewer vouchers could have been issued, and fewer participants served. Conversely, if the number of vouchers issued remained at 2004 levels, the higher average value of vouchers redeemed at WIC-only vendors would have resulted in increased program expenditures. However, the price and quantity of the individual food items that make up the vouchers were not available to us; therefore we could not determine if the higher average value of vouchers meant that prices for individual food items were higher at WIC-only vendors. Making price comparisons would require food item price and quantity data for both WIC-only and regular WIC vendors, at a minimum.