[Federal Register Volume 63, Number 136 (Thursday, July 16, 1998)]
[Proposed Rules]
[Pages 38343-38347]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-18957]


 ========================================================================
 Proposed Rules
                                                 Federal Register
 ________________________________________________________________________
 
 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
 
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 

  Federal Register / Vol. 63, No. 136 / Thursday, July 16, 1998 / 
Proposed Rules  

[[Page 38343]]


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DEPARTMENT OF AGRICULTURE

Food and Nutrition Service

7 CFR Part 246

RIN 0584-AC55


Special Supplemental Nutrition Program for Women, Infants and 
Children (WIC): Requirements for and Evaluation of WIC Program Requests 
for Bids for Infant Formula Rebate Contracts

AGENCY: Food and Nutrition Service, USDA.

ACTION: Proposed rule.

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SUMMARY: At the time the current cost containment regulations were 
published in 1989, there were only minor differences in infant formula 
wholesale prices and few differences in types of infant formulas 
offered by manufacturers, i.e., milk-and soy-based infant formula. 
However, current wholesale prices vary considerably among manufacturers 
for similar formulas and several new infant formulas have emerged on 
the market over the last decade. Therefore, to reflect market changes 
in the infant formula industry and to optimize competition in the WIC 
Program's infant formula rebate contracts, this proposed rule would 
require WIC State agencies to award infant formula rebate contracts 
based on the lowest net price, allowing highest gross rebate as a basis 
of award only when retail prices of the different brands of infant 
formula vary, on average, by 5 percent or less. Additionally, this 
proposed rule would define the types and forms of infant formula that 
must be included in cost containment systems. It would also expand on 
conditions that must be met for the issuance of infant formulas not 
covered by rebate contracts.

DATES: To be assured of consideration, written comments on this rule 
must be received on or before September 14, 1998.

ADDRESSES: Comments may be mailed to Ronald J. Vogel, Acting Director, 
Supplemental Food Programs Division, Food and Nutrition Service, USDA, 
3101 Park Center Drive, Room 540, Alexandria, Virginia 22302, (703) 
305-2746. All written comments will be available for public inspection 
during regular business hours (8:30 a.m.-5:00 p.m., Monday through 
Friday) at the above address.

FOR FURTHER INFORMATION CONTACT: Deborah McIntosh, Chief, Program 
Analysis and Monitoring Branch, Supplemental Food Programs Division, 
Food and Nutrition Service, USDA, phone number (703) 305-2710.

SUPPLEMENTARY INFORMATION:

Executive Order 12866

    This rule has been reviewed by the Office of Management and Budget, 
and has been determined to be economically significant under Executive 
Order 12866, and major under the Small Business Regulatory Enforcement 
Fairness Act of 1996 (5 U.S.C. Chapter 8).

Regulatory Flexibility Act

    This rule has been reviewed with regard to the requirements of the 
Regulatory Flexibility Act (5 U.S.C. 601-612). Shirley R. Watkins, 
Under Secretary, Food, Nutrition and Consumer Services, has certified 
that this rule will not have a significant economic impact on a 
substantial number of small entities. This rule, if implemented, will 
help ensure that WIC State agencies will be able to serve the maximum 
number of eligible applicants possible within their grant levels 
provided by the Federal government by removing current regulatory 
ambiguities that have resulted in the proliferation of protests of 
infant formula rebate contract awards. This rule further defines 
evaluation procedures for WIC State agencies' infant formula rebate 
contracts. While some WIC local agencies and WIC vendors may be small 
entities, the changes proposed by this rule will not affect them.

Executive Order 12372

    The Special Supplemental Nutrition Program for Women, Infants and 
Children (WIC) is listed in the Catalog of Federal Domestic Assistance 
Programs under No. 10.557. For the reasons set forth in the final rule 
in 7 CFR 3015, Subpart V, and related Notice (48 FR 29115, June 24, 
1983), this program is included in the scope of Executive Order 12372 
which requires intergovernmental consultation with State and local 
officials.

Executive Order 12988

    This rule has been reviewed under Executive Order 12988, Civil 
Justice Reform. This rule is intended to have a preemptive effect with 
respect to any State or local laws, regulations, or policies which 
conflict with its provisions or which would otherwise impede its full 
implementation. This rule is not intended to have retroactive effect 
unless so specified in the ``Effective Dates'' paragraph of this 
preamble. Prior to any judicial challenge to the provisions of this 
rule or the applications of its provisions, all applicable 
administrative procedures must be exhausted.

Public Law 104-4

    Title II of the Unfunded Mandates Reform Act of 1995 (UMRA), Pub. 
L. 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, the 
Food and Nutrition Service generally must prepare a written statement, 
including a cost-benefit analysis, for proposed and final rules with 
``Federal mandates'' that may result in expenditures to State, local, 
or tribal governments, in the aggregate, or to 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 the Food and 
Nutrition Service to identify and consider a reasonable number of 
regulatory alternatives and adopt the least costly, more cost-effective 
or least burdensome alternative that achieves the objectives of the 
rule.
    This rule contains no Federal mandates (under the regulatory 
provisions of Title II of the UMRA) for State, local, and tribal 
governments or the private section of $100 million or more in any one 
year. Thus today's rule is not subject to the requirements of sections 
202 and 205 of the UMRA.

Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995, the Food 
and Nutrition Service is submitting for

[[Page 38344]]

public comment the changes in the information collection burden that 
would result from the adoption of the proposals in the 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 will 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 through the use of appropriate automated, 
electronic, mechanical, or other technological collection techniques or 
other forms of information technology.
    Comments may be sent to Laura Oliven, Desk Officer, Officer of 
Information and Regulatory Affairs, Office of Management and Budget 
(OMB), Washington, D.C. 20503 (a copy may also be sent to Deborah 
McIntosh at the address below). For further information, or for copies 
of the information collection, please contact Deborah McIntosh, Branch 
Chief, Program Analysis and Monitoring Branch, Supplemental Food 
Programs Division, Food and Nutrition Service, U.S. Department of 
Agriculture, 3101 Park Center Drive, Room 540, Alexandria, Virginia 
22302-1594.
    Comments and recommendations on the proposed information collection 
must be received by September 14, 1998. A comment to OMB is best 
assured of having its full effect if OMB receives it within 30 days of 
publication.
    Title: WIC Program Regulations.
    OMB Number: 0584-0043.
    Expiration Date: May 31, 1999.
    Type of Request: Revision of a currently approved collection.
    Abstract: This rule proposed would require documentation from a 
health care professional for any infant formula that is not covered by 
the State agency's infant formula rebate contract. Proposed 
documentation would include the following items: brand name of the 
formula prescribed; medical diagnosis warranting the prescribed 
formula; length of time the prescribed formula is medically required by 
the participant; and signature of the health care professional 
requesting the formula.
    Respondents: Licensed health care professionals.
    Estimated Number of Respondents: 16,000.
    Estimated Number of Responses per Respondent: One.
    Estimate of Burden: The proposed estimates of the reporting burden 
for information collections affected by this rule are detailed below.

----------------------------------------------------------------------------------------------------------------
            Licensed health care professional              Respondents     Frequ.       Hrs/Resp     Total Hrs. 
----------------------------------------------------------------------------------------------------------------
Proposed................................................       16,000             1          0.03           533 
----------------------------------------------------------------------------------------------------------------

    Estimated Total Annual Burden on Respondents: 533 hours.

Background on Infant Formula Cost Containment

    In response to rising food costs in the 1980's and the desire to 
use their food grants more efficiently, several WIC State agencies 
initiated infant formula rebate systems. In these early, voluntary 
infant formula rebate systems, a WIC State agency received rebate 
payments from one or more infant formula manufacturers based on: (1) 
the number of cans of their infant formula purchased with WIC funds by 
participants at retail outlets, or (2) the manufacturer's overall 
market share in the State.
    At the time, infant formula expenditures represented almost 40 
percent of all WIC food costs, making infant formula rebates an 
important cost-containment strategy. In fact, in fiscal year 1988, 
these rebate savings amounted to more than $30 million and grew to 
about $250 million in fiscal year 1989. Rebate savings escalated to 
$1.18 billion in fiscal year 1996, allowing the WIC Program to serve an 
additional 1.7 million participants. United States Department of 
Agriculture (The Department) figures show that nearly one out of every 
four WIC participants is supported with rebate savings. Without these 
savings, millions of low-income women, infants and children would not 
have the advantage of nutritious supplemental foods, nutrition 
education, and health care referrals provided by the WIC Program.

Legislative Background

    Building on the success of voluntary State infant formula rebate 
systems, Public Law 100-460, the Department's fiscal year 1989 
appropriations act required all WIC State agencies (except Indian State 
agencies with participation levels under 1,000) to explore the 
feasibility of cost-containment measures for infant formula and 
implement such measures where feasible. As a result of this mandatory 
legislative requirement, WIC State agencies with participation levels 
over 1,000 implemented infant formula cost-containment measures, 
primarily infant formula rebate systems. With the passage of the Child 
Nutrition and WIC Reauthorization Act of 1989 (section 123(a)(6) of 
Public Law 101-147), these cost containment requirements were made a 
permanent program feature. As a result, section 17(h)(8)(A) of the 
Child Nutrition Act of 1966 (42 U.S.C. 1786(h)(8)(A)) WIC State 
agencies are required to implement a competitive bidding system for the 
procurement of infant formula, or any other infant formula cost 
containment measure that yields savings equal to or greater than 
savings generated by a competitive bidding system. As defined in 
section 17(b)(17) of the Child Nutrition Act of 1966 (42 U.S.C. 1786 
(b)(17)), competitive bidding is a process by which a WIC State agency 
selects a single source offering the lowest price, as determined by the 
submission of sealed bids, for the product(s) for which bids are 
sought.
    Since the time when infant formula cost containment legislation was 
enacted, the infant formula industry has changed considerably. The 
manufacturers have changed and product lines have expanded. The 
Department believes that the current rebate regulations need to be 
updated to reflect these changes and should include provisions which 
accommodate future possible market dynamics. Therefore, this proposed 
rule addresses numerous major issues, discussed in detail below.

Lowest Net Price Cost of Infant Formula

    Competition is a critical factor in achieving the lowest possible 
price for infant formula. Without adequate competition, manufacturers 
may offer lower rebate bids and the WIC Program could experience a 
substantial increase in food package costs. It is imperative, 
therefore, that fair and open competition in the awarding of infant 
formula rebate contracts be a major policy objective of the national 
WIC Program.

[[Page 38345]]

    Current program regulations at 7 CFR section 246.16(k)(1) require 
WIC State agencies to evaluate infant formula rebate bids by one of two 
methods: (1) the lowest net wholesale cost, or (2) the highest rebate 
offered. However, because the current wholesale prices for various 
brands of infant formula differ considerably, manufacturers that have a 
significantly lower wholesale cost(s) are effectively placed at a 
competitive disadvantage in the bidding process if a WIC State agency 
evaluates bids based on the highest rebate offered. This competitive 
disadvantage was addressed by Congress in Public Law 104-180, the 
Department's fiscal year 1997 agriculture appropriations act and again 
in Public Law 105-86, the Department's fiscal year 1998 appropriations 
act. Both laws require State agencies to award infant formula rebate 
contracts on the basis of the lowest net price, unless the State agency 
demonstrates to the satisfaction of the Secretary that the weighted 
average retail price for different brands of infant formula in the 
State does not vary by more than 5 percent. ``Net price'' is defined in 
section 17(b)(20) of the Child Nutrition Act of 1966 (42 U.S.C. 
1786(b)(20)) and in section 246.2 of the program regulations as the 
difference between the manufacturer's wholesale price for infant 
formula and the rebate level or the discount offered by the 
manufacturer.
    When a WIC State agency evaluates bids based on the lowest net 
price per unit, the rebate offered by the manufacturer is subtracted 
from the manufacturer's wholesale price per unit. With this evaluation 
method, the manufacturer offering the lowest net price for infant 
formula wins the bid. This evaluation method recognizes the highest 
discount a manufacturer will provide.

New Requirement for Evaluating Rebate Bids

    This proposed rule would require in section 246.16(k)(1)(iv) that 
WIC State agencies evaluate bids for infant formula rebate contracts on 
the basis of the lowest net price, with one exception. A WIC State 
agency may evaluate the bids received based on the highest rebate 
earned if the WIC State agency demonstrates to the satisfaction of the 
Food and Nutrition Service prior to the bid solicitation that the 
weighted average retail price for different brands of iron-fortified, 
milk-based infant formula in the State vary by 5 percent or less. The 
retail price must include WIC and non-WIC vendors in the State. In 
these cases, the retail prices of all manufacturer's formulas are 
comparable and consequently, highest rebate would yield approximately 
the same benefit as lowest net price.

Vendor Controls

    There is concern among some WIC State agencies that if bids are 
evaluated by the lowest net price, the optimal rebate savings from the 
bid evaluation may not be realized by the WIC Program because the 
actual cost of infant formula depends on the vendor's retail price 
charged, less the rebate paid to the WIC State agency. For example, 
vendors who purchase one infant formula at a lower wholesale price than 
another do not invariably pass the savings on to their customers. As a 
result, such vendors charge a retail price for the infant formula that 
is approximately the same as for other formulas regardless of the 
wholesale cost. In such instances, the grocery store earns a larger 
profit on the formula with a lower wholesale cost. Consequently, some 
or all of the cost containment advantage of the rebate savings would be 
offset by the increased retail price. State agencies should be alert to 
these situations. The Department reminds State agencies that they may 
use WIC food price as a criteria when authorizing or reauthorizing 
vendor participation.

Definitions Pertaining to Infant Formula

    Compliance with the Federal Food, Drug and Cosmetic Act (FDC Act) 
ensures that all infant formulas sold in the U.S. are safe, effective 
and properly labeled. The Food and Drug Administration (FDA), U.S. 
Department of Health and Human Services (DHHS), is the Federal agency 
with the exclusive legal authority to set the standards for infant 
formula and to monitor the production of infant formulas in this 
country. This proposed rule would define infant formula and exempt 
infant formula as those terms used in the FDC Act and the FDA's 
implementing regulations. By cross referencing the requirements in the 
FDC Act and regulations, any changes to these requirements will 
automatically apply to the WIC regulations.
    Currently, the FDC Act defines infant formula as ``a food which 
purports to be or is represented for special dietary use solely as a 
food for infants by reason of its simulation of human milk or its 
suitability as a complete or partial substitute for human milk.'' The 
FDC Act defines exempt infant formula as an ``infant formula which is 
represented and labeled for use by an infant who (A) has an inborn 
error of metabolism, or a low birth weight, or (B) who otherwise has an 
unusual medical or dietary problem * * *'' and exempts such formulas 
from certain FDC Act requirements.

Types and Forms of Infant Formula Subject to Bid Requirement

    Section 17(h)(8)(A) of the Child Nutrition Act of 1966 requires WIC 
State agencies to use a competitive bidding system, or any other system 
that yields savings equal or greater, with respect to the procurement 
of infant formula. Current regulations at section 246.16(k) expand on 
the law, requiring most WIC State agencies to ``implement infant 
formula cost containment measures for each of the types and forms of 
infant formulas prescribed to the majority of participants, i.e., milk 
and soy-based iron fortified, liquid concentrate formulas, or whatever 
other types and forms of formula routinely prescribed.''
    As a result of the introduction of various infant formulas to the 
market, this proposed rule would clarify and expand what infant 
formulas must be included in each State agency's cost containment 
system.
    First, this proposed rule also would change the basis by which 
rebate contracts are evaluated by State agencies. To simplify the 
bidding process, section 246.16(k)(1)(i) will require that the bid 
evaluation process for infant formula rebates use as the common basis 
of bids only those offered for iron-fortified milk-based infant formula 
which meet the nutritional requirements of a Food Package I or II 
formula (section 246.10(c)(1)(i) and (2)) and can be routinely issued 
to the majority of generally healthy, full-term infants. However, 
rebates will be required for all non-exempt formulas produced by the 
manufacturer. While product lines vary somewhat among manufacturers, 
all manufacturers offer formulas to accommodate infants who cannot 
tolerate lactose. Thus, for bidding purposes, the estimated number of 
infants shall include all infants the State agency expects to 
participate less those who are breastfeeding or prescribed exempt 
formulas.
    This proposed rule would require each manufacturer awarded a WIC 
infant formula rebate contract to pay a rebate on any infant formula in 
its product line that is not an exempt formula that is issued by the 
WIC State agency. This rebate must yield the same percentage discount 
on the wholesale cost as the iron-fortified milk-based infant formula 
for which the manufacturer submitted a winning bid. For example, if the 
wholesale price for the iron-fortified milk-based infant formula is $2 
per can and the rebate is $1.50 per can (75% of the wholesale

[[Page 38346]]

price), the rebate for any other non-exempt infant formula (e.g., soy-
based formula) produced by the winning manufacturer would be 75 percent 
of the respective wholesale price of the other infant formula issued. 
The same infant formulas would be required to be included in any 
alternate cost containment system; the program regulations at section 
246.16(k)(2) concerning the comparative method of implementing a cost 
containment system would continue to require the alternative system to 
cover the identical types and forms of infant formula as in the 
competitive bidding system.
    This requirement does not obligate WIC State agencies to approve or 
issue all the types of infant formula covered in the contract. In fact, 
State agencies are encouraged to carefully limit the issuance of all 
alternative formulas under WIC Food Packages I and II to only those 
infants who have warranted nutritional needs that cannot be 
appropriately met by the iron-fortified milk-based infant formula upon 
which the bid was submitted. Limiting the issuance of formulas other 
than these is important to WIC State agencies for several reasons: 
manageability, ease of transition to another WIC contract formula 
manufacturer that has a different product line, and WIC vendor 
integrity.

Infant Formula Documentation Requirements

    This proposed rule also would revise existing language in section 
246.10 concerning a physician's determination of the need for a 
particular formula and documentation of that determination. Current WIC 
regulations state that a physician must authorize the issuance of any 
formula that does not meet the requirements of an iron-fortified infant 
formula as described in section 246.10(c)(1)(i). Examples of formulas 
that do not meet these requirements include low-iron infant formulas 
and many designed to meet the nutritional needs of infants with 
documented medical conditions. Questions have arisen about whether a 
medical prescription is required for documentation in these instances 
and whether someone other than a physician may make the determination 
in those State in which other health care professionals are authorized 
to write medical prescriptions. This proposed rule would make clear 
that the determination of the need for an alternate formula may be made 
by any health care professional authorized by State law to write 
medical prescriptions and that medical documentation must be issued by 
that health care professional before an alternate formula may be issued 
by WIC local agencies. This proposed rule would also strengthen medical 
documentation requirements. First, it would include all noncontract 
formulas among those formulas requiring medical documentation whether 
or not they comply with the requirements of an iron-fortified infant 
formula as described in section 246.10(c)(1)(i). This addition is 
intended to appropriately limit the issuance of noncontract infant 
formulas to those cases warranted for medical reasons so WIC State 
agencies can maximize their infant formula contract rebate savings to 
serve the greatest number of needy participants.
    Second, the proposed rule would clarify that all exempt infant 
formulas (i.e., those designed for use with infants who have special 
dietary needs or serious medical conditions) must be supported with 
medical documentation. This requirement is not new; however, because 
this proposed rule introduces the term ``exempt infant formula,'' the 
Department believes it will be helpful to include this new term in 
connection with existing medical documentation requirements.
    To summarize the medical documentation requirements, this proposed 
rule would require medical documentation for all noncontract infant 
formula. Medical documentation would continue to be required for low-
iron infant formula and for all exempt infant formulas.
    The Department encourages comments specifically regarding the 
requirement of medical documentation for all non-contract infant 
formula.

List of Subjects in 7 CFR Part 246

    Administrative practice and procedure, Civil rights, Food 
assistance programs, Food donations, Grant programs--health, Grant 
programs--social programs, Indians, Infants and children, Maternal and 
child health, Nutrition, Nutrition education, Penalties, Reporting and 
recordkeeping requirements, Public assistance programs, WIC, Women.

PART 246--SPECIAL SUPPLEMENTAL NUTRITION PROGRAM FOR WOMEN, INFANTS 
AND CHILDREN

    Accordingly, 7 CFR Part 246 is proposed to be amended as follows:
    1. The authority citation for part 246 continues to read as 
follows:

    Authority: 42 U.S.C. 1786.

    2. In section 246.2, the definitions of Exempt infant formula and 
Infant formula are added in alphabetical order to read as follows:


Sec. 246.2  Definitions

* * * * *
    Exempt infant formula means an infant formula that meets the 
requirements for an exempt formula under section 412(h) of the Federal 
Food, Drug and Cosmetic Act (21 U.S.C. 350a(h)) and the regulations at 
21 U.S.C. Parts 106 and 107.
* * * * *
    Infant formula means infant formula as defined in section 201(z) of 
the Federal Food, Drug and Cosmetic Act (21 U.S.C. 321(z)) and that 
meets the requirements for infant formula under section 412 of the 
Federal Food, Drug and Cosmetic Act (21 U.S.C. 321) and the regulations 
at 21 U.S.C. Part 106 and 107.
* * * * *
    3. In section 246.10:
    a. Sentences 1 through 4 in paragraph (c)(1)(i) are revised.
    b. The introductory text in paragraph (c)(3) is revised.
    The revisions read as follows:


Sec. 246.10  Supplemental foods

* * * * *
    (c) * * *
    (1) Food Package I--Infants 0 Through 3 Months. (i) Iron-fortified 
infant formula, which is a complete formula not requiring the addition 
of any ingredients other than water prior to being served in a liquid 
state, and which contains at least 10 milligrams of iron per liter of 
formula at standard dilution which supplies 67 kilocalories per 100 
milliliters; i.e., approximately 20 kilocalories per fluid ounce of 
formula at standard dilution. The State agency's contract brand of such 
iron-fortified formula shall be provided, unless a licensed health care 
professional authorized to write medical prescriptions under State law 
determines that the infant has a medical condition which dictates the 
use of other infant formula including, but not limited to, medical 
conditions which contraindicate the use of iron-fortified formula, 
metabolic disorders, inborn errors of amino acid metabolism, 
gastrointestinal disorders, malabsorption syndromes, and allergies. 
Provision of formula, other than the State agency's contract brand 
iron-fortified formula, shall be supported with medical documentation. 
This documentation shall be kept in the participant's certification 
file and shall include the: brand name of the formula prescribed; 
medical diagnosis warranting the prescribed formula; length of time the 
prescribed formula is medically required by the participant; and 
signature of the health care

[[Page 38347]]

professional requesting the formula. Low-calorie formulas may not be 
prescribed solely for the purpose of managing body weight of infants. * 
* *
* * * * *
    (3) Food Package III--Children/Women with Special Dietary Needs. 
Children and women with special dietary needs may receive the following 
supplemental foods if a licensed health care professional, authorized 
to write medical prescriptions under State law, determines that the 
participant has a medical condition which precludes or restricts the 
use of conventional foods and necessitates the use of a formula 
including, but not limited to, metabolic disorders, inborn errors of 
amino acid metabolism, gastrointestinal disorders, malabsorption 
syndrome and allergies. The supplemental foods described below are not 
authorized solely for the purpose of enhancing nutrient intake or 
managing body weight of children and women participants. Any formula 
issued shall be supported with a medical documentation. This 
documentation shall be kept in the participant's certification file and 
shall include at a minimum the: brand name of the formula prescribed; 
medical diagnosis warranting the prescription; length of time the 
prescribed formula is medically required by the participant; and 
signature of the health care professional requesting the formula.
* * * * *
    4. In section 246.16:
    a. The introductory text of paragraph (k) is revised.
    b. Paragraph (k)(1) is revised.
    c. The first sentence in paragraph (k)(2)(i)(A) is revised.
    The revisions read as follows:


Sec. 246.16  Distribution of funds.

* * * * *
    (k) Requirements for infant formula procurement. Unless granted a 
waiver under paragraph (l) of this section, all State agencies with 
retail food delivery systems (except Indian State agencies with 1000 or 
fewer participants in April of any fiscal year, which shall be exempted 
for the following fiscal year) shall implement an infant formula cost 
containment measure through one of the two methods cited below:
    (1) Single-supplier competitive method. The single-supplier 
competitive method is a solicitation of sealed competitive bids for 
rebates from infant formula manufacturers, as follows:
    (i) Invitations for bids shall be for each of the forms (e.g., 
concentrated liquid, powdered and ready-to-feed) of a single iron-
fortified, milk-based infant formula that:
    (A) Meets the requirements of an iron-fortified infant formula as 
described in Sec. 246.10(c)(1)(i);
    (B) Can be routinely issued to the majority of generally healthy, 
full-term infants.
    (ii) State agencies shall solicit bids based on an estimated total 
amount of infant formula it expects to issue. Such estimates shall be 
based on the current number of infant participants, excluding those 
infants exclusively breastfed and those issued an exempt infant 
formula. The estimated total amount of infant formula shall be 
expressed in terms of the proportion of each form of formula expected 
to be issued (e.g., concentrated liquid, powdered and ready-to-feed).
    (iii) Invitations for bid and contracts shall require the 
manufacturer to pay a rebate for any nonexempt infant formula the 
winning bidder produces that is issued by the State agency. The rebate 
for each of these other infant formulas shall yield the same percentage 
discount on the wholesale cost as the rebate for the infant formula 
described in paragraph (k)(1)(i) of this section.
    (iv) State agencies shall award the contract(s) as follows:
    (A) Based on the lowest net price for the infant formula described 
in paragraph (k)(1)(i) of this section; or
    (B) Based on the highest rebate, provided the State agency 
demonstrates to the satisfaction of FNS before issuing the invitation 
for bids that the weighted average retail prices for different brands 
of infant formula in the State that meet the requirements of paragraph 
(k)(1)(i) of this section vary by 5 percent or less. The weighted 
average retail price must take into account the proportion of each 
infant formula the State agency expects to issue and both authorized 
food vendors and stores which do not participate in the program in the 
State.
    (2) * * *
    (i) Food cost savings.
    (A) Single Supplier Competitive System. The State agency shall 
project food costs savings in the single-supplier competitive system 
based on the net wholesale price or highest rebate, as described in 
paragraph (k)(1)(v)(B) of this section, the total number of units of 
the specified types and forms of infant formula to be purchased under 
the program less the number of units of alternative brands anticipated 
to be prescribed by physicians and purchased by participants. * * *
* * * * *
    Dated: July 10, 1998.
Shirley R. Watkins,
Under Secretary, Food, Nutrition and Consumer Services.
[FR Doc. 98-18957 Filed 7-15-98; 8:45 am]
BILLING CODE 3410-30-U