[Federal Register Volume 65, Number 164 (Wednesday, August 23, 2000)]
[Rules and Regulations]
[Pages 51213-51229]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-21423]



 ========================================================================
 Rules and Regulations
                                                 Federal Register
 ________________________________________________________________________
 
 This section of the FEDERAL REGISTER contains regulatory documents 
 having general applicability and legal effect, most of which are keyed 
 to and codified in the Code of Federal Regulations, which is published 
 under 50 titles pursuant to 44 U.S.C. 1510.
 
 The Code of Federal Regulations is sold by the Superintendent of Documents. 
 Prices of new books are listed in the first FEDERAL REGISTER issue of each 
 week.
 
 ========================================================================
 

  Federal Register / Vol. 65, No. 164 / Wednesday, August 23, 2000 / 
Rules and Regulations  

[[Page 51213]]



DEPARTMENT OF AGRICULTURE

Food and Nutrition Service

7 CFR Part 246

RIN 0584-AB52


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

AGENCY: Food and Nutrition Service, USDA.

ACTION: Interim rule.

-----------------------------------------------------------------------

SUMMARY: This rule strengthens and simplifies current bidding 
requirements for using a single-supplier competitive system to provide 
a rebate for infant formulas. It also addresses new infant formula cost 
containment requirements which are needed due to recent changes in the 
infant formula industry. This rule also requires WIC State agencies to 
award infant formula rebate contracts based on the lowest net price, 
allowing the highest rebate as a basis of award only when the weighted 
average retail prices of the different brands of infant formula vary by 
5 percent or less. A proposed rule was published July 16, 1998 and as a 
result of comments received we are publishing an interim rule.

DATES: Effective Date: This rule is effective October 23, 2000.
    Implementation Date: This rule must be implemented by November 21, 
2000.
    Comment Date: To be assured of consideration, written comments on 
this rule must be postmarked on or before August 23, 2001. Since 
comments are being accepted simultaneously on several separate 
rulemakings, commenters on this interim rule are asked to label their 
comments ``Requirements for and Evaluation of WIC Program Bid 
Solicitations for Infant Formula Rebate Contracts.''

ADDRESSES: Comments may be mailed to Patricia M. Daniels, Director, 
Supplemental Food Programs Division, Food and Nutrition Service, USDA, 
3101 Park Center Drive, Room 540, Alexandria, Virginia 22302, phone 
number (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).

FOR FURTHER INFORMATION CONTACT: Patricia O'Kelley, Chief, Program 
Analysis and Monitoring Branch, Supplemental Food Programs Division, 
Food and Nutrition Service, USDA, phone number (703) 305-2710. An 
analysis package is available upon request at the above address.

SUPPLEMENTARY INFORMATION:

Background

    The Department's fiscal year 1989 appropriations act (Public Law 
100-460) 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 when feasible. Since that time, expenditures for infant 
formula have decreased from 40 percent of all WIC food costs to 
approximately 20 percent of all food costs in fiscal year 1997. Our 
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.
    A key component to the success of infant formula rebates is the 
requirement in section 17(h)(8)(A) of the Child Nutrition Act of 1966 
(42 U.S.C. 1786(h)(8)(A)) that WIC State agencies operating retail food 
delivery systems must use 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.
    However, the infant formula industry has changed considerably over 
the past several years. Today there are fewer infant formula 
manufacturers available to bid on infant formula rebate contracts, yet 
the product lines of infant formula have expanded along with the 
selection of packaging sizes offered. In addition, infant formula 
rebate contract awards are increasingly subject to protests and 
challenges for a variety of reasons. All of these changes have a 
potential negative effect on competition for WIC program infant formula 
rebate contracts.
    Another issue regarding competition is the way bids for infant 
formula rebate contracts are evaluated. Current program regulations 
allow State agencies to evaluate infant formula rebate contracts by the 
lowest net wholesale cost or highest rebate per unit of infant formula. 
However, recognizing that the former method results in a competitive 
disadvantage to infant formula manufacturers that have significantly 
lower wholesale prices, the Department's appropriations acts for fiscal 
years 1997 and 1998, Public Laws 104-180 and 105-86, respectively, 
along with the William F. Goodling Child Nutrition Reauthorization Act 
of 1998 (Public Law 105-336) for fiscal year 1999 and beyond, required 
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 of Agriculture that the weighted average 
retail price for different brands of infant formula in the State does 
not vary by more than 5 percent.
    Therefore, a proposed rule to amend 7 CFR Part 246 (63 FR 38343, 
July 16, 1998) was published which addressed not only the lowest net 
price requirement, but also the numerous issues reflecting infant 
formula industry changes. The rule also included provisions to 
accommodate future market dynamics.
    The proposed rule provided a 60-day comment period that ended on 
September 14, 1998. Twenty-nine comment letters were received on the 
proposed rule from the following sources: WIC State and local agencies, 
public interest groups, industry, and other Federal agencies. 
Approximately one-fourth of the comments were received after the 
comment period ended. However, because of the low number of comments 
received and because the late comments were similar to the ones 
received on time, we

[[Page 51214]]

considered all comments. In addition, WIC staff met with 
representatives from industry who expressed and reiterated their 
written comments on the proposed rule. We have given all comments 
careful consideration in the development of this interim rule and would 
like to thank all commenters who responded to the proposal.
    We have made many changes to the proposed rule as a result of the 
comments received which clarify current and existing proposed 
requirements. In addition, we have taken this opportunity to 
consolidate the cost containment requirements in a new section (7 CFR 
Sec. 246.16a), and to rewrite the provisions in a question and answer 
format in order to improve readability.
    In light of these changes and due to the complicated nature of 
infant formula rebate contracting, we have decided to publish this rule 
as an interim rule, rather than a final rule. This approach permits us 
to go forward with these long overdue improvements to the cost 
containment requirements while having the benefit of receiving 
additional comments based on experience gained during the 
implementation of this rule. We will accept comments until August 23, 
2001 in order to provide plenty of time for comments based on 
operational experience. We will consider the comments received on this 
interim rule in developing a final rule.
    As noted above, we have consolidated the cost containment 
requirements in a new section 246.16a. This required us to republish 
all of the requirements, even those that are otherwise unchanged. 
However, we ask that commenters focus on the substantive changes made 
by this rule and the issues addressed in this preamble when developing 
their comments.
    Although this rule takes effect October 23, 2000, these changes are 
not required to be implemented until November 21, 2000. This means that 
all bid solicitations issued on or after November 21, 2000 must comply 
with the requirements of this rule.
    The following is a discussion of each proposed provision, comments 
received, and an explanation of the provisions set forth in this 
interim rule and/or the our response.

A. Definitions

    The proposed rule defined ``infant formula'' and ``exempt infant 
formula'' to mean the same as they are defined in sections 201(z) and 
412 of the Federal Food, Drug, and Cosmetic Act (FDC Act 21 U.S.C. 
321(z) and 350a), and the Food and Drug Administration (FDA), U.S. 
Department of Health and Human Services implementing regulations (21 
CFR Parts 106 and 107).
    Commenters were in favor of cross-referencing the requirements in 
the FDC Act and regulations; therefore, no changes were made to the 
proposed definitions in the rule. However, some of the commenters 
pointed out that using additional undefined terms in the WIC 
regulations led to confusion. Therefore, to avoid confusion and to help 
clarify certain requirements, the interim rule includes three 
definitions in addition to the proposed definitions of infant formula 
and exempt infant formula, and amends one existing definition. The 
following is a summary of the new and modified definitions:
    Contract brand infant formula means all of infant formula (as 
defined in this rule) excluding exempt infant formulas, produced by the 
manufacturer that has been awarded the contract. However this rule, in 
section 246.16a(c)(1)(i), requires that State agencies issue 
solicitations which require bidders that do not produce a soy-based 
infant formula to subcontract with another manufacturer to provide it 
under the contract. In this case, any soy-based infant formula that is 
subcontracted is also considered a contract brand infant formula. In 
addition, this rule in section 246.16(a)(c)(1)(ii) allows a State 
agency to solicit separate bids for milk-based and soy-based infant 
formula. If a State agency elects to solicit separate bids, all 
relevant infant formulas issued under each contract are considered 
contract brand infant formulas. Finally, all new infant formulas that 
are introduced after a contract is awarded are also considered contract 
brand infant formulas. Such infant formulas must meet the definition of 
an ``infant formula''. See section D of this preamble for more detailed 
information regarding these requirements.
    Net price is defined in section 17(b)(20) of the Child Nutrition 
Act of 1966 (42 U.S.C. 1786(b)(20)) and section 246.2 of the current 
WIC regulations as the difference between the manufacturer's wholesale 
price for infant formula and the rebate level or the discount offered 
or provided by the manufacturer under a cost containment contract 
entered into with the pertinent State agency. In order to ensure that 
State agencies award contracts in a fair and consistent manner, this 
rule amends the definition of ``net price'' to clarify that the 
wholesale price is the lowest national wholesale price for a full 
truckload of infant formula. We discuss this change in more detail in 
Section I of the preamble.
    Non-contract brand infant formula means all brands of infant 
formulas, including exempt infant formula, that are not covered by a 
cost containment contract. If a State agency issues an infant formula 
or exempt infant formula that is not covered under the contract, it is 
considered a non-contract brand infant formula, does not generate a 
rebate, and requires medical documentation for its issuance.
    WIC-eligible medical foods means certain enteral products that are 
specifically formulated to provide nutritional support for individuals 
with a diagnosed medical condition when the use of conventional foods 
is precluded, restricted, or inadequate. Such WIC-eligible medical 
foods may be nutritionally complete or incomplete, but they must serve 
the purpose of a food, provide a source of calories and one or more 
nutrients, and be designed for enteral digestion via an oral or tube 
feeding.
    The current food package regulations use the term ``formula'' in 
some instances to mean just infant formula and in others to mean 
substitute products for infant formula. After publishing the proposed 
rule, we discovered that, in addition to incorporating the precise 
terms of ``infant formula'' and ``exempt infant formula'' into the WIC 
regulations, we also needed to define what FNS recognizes as allowable 
alternatives to these infant formulas, especially under Food Package 
III for women and children with special dietary needs.
    The inclusion of definitions for infant formula, exempt infant 
formula, and WIC-eligible medical foods in program regulations 
clarifies our historic interpretation of the types of products that may 
be used as substitutes, when medically warranted and documented, for 
iron-fortified infant formulas as specified under sections 246.10(c)(1) 
(in the case of infants 0 through 3 months) and 246.10(c)(2) (in the 
case of infants 4 through 12 months) or for conventional foods as 
specified under section 246.10(c)(3) (in the case of children and women 
with special dietary needs). In addition to the new definition, 
conforming changes are made to the food package requirements in 
sections 246.10(c)(1) and (3). As is currently the case, WIC-eligible 
medical foods may not be used for the sole function of enhancing 
nutrient intake or managing body weight without an underlying medical 
condition. Also, WIC-eligible medical foods must be supported with 
medical documentation.
    Readers are reminded that WIC-eligible medical foods and exempt 
infant formulas are permissible expenses under the Federal Medicaid 
statute and regulations and are also

[[Page 51215]]

reimbursable under some other health care programs. Accordingly, State 
agencies are encouraged to coordinate with other Federal, State, or 
local public agencies or with private agencies that operate programs 
that also provide or reimburse for WIC-eligible medical foods and/or 
exempt infant formula benefits to WIC participants in order to share 
the cost whenever possible.

B. Issuance of Kosher Infant Formula

    It has come to our attention that the proposed rule, as written, 
would disallow the issuance of certain types of kosher infant formula 
if the winning bidder does not offer kosher infant formula in its 
product line. This is because the proposed rule allows non-contract 
brand infant formula to be issued only with medical documentation. This 
was not an issue under the current regulations; if the winning bidder 
did not produce a suitable infant formula, the State agency could have 
issued a non-contract brand infant formula without medical 
documentation. As such, the proposed rule does not accommodate special 
needs for infant formula based on religious beliefs.
    It was not our intent to prevent the issuance of kosher and other 
types of infant formula to accommodate religious eating patterns. 
Therefore, section 246.10(c)(1)(iv) of this rule makes clear that local 
agencies may issue non-contract brand infant formulas to accommodate 
religious eating patterns. We would like to stress that this is the 
only reason non-contract brand infant formulas may be issued without 
medical documentation, as described below. In addition, any non-
contract infant formula issued to accommodate religious eating patterns 
must meet the infant formula requirements in section 246.10(c)(1).

C. Medical Documentation Requirements

    Current regulations at section 246.10(c)(1) require medical 
documentation for the issuance of any infant formula that does not meet 
the nutritional requirements of that section. The proposed rule would 
also have required medical documentation from a licensed health care 
professional authorized to write medical prescriptions under State law 
whenever the State agency issued any non-contract brand infant formula, 
even if it met the nutritional requirements of section 246.10(c)(1). 
The documentation required would have included the: brand name of the 
infant formula prescribed; medical diagnosis warranting the infant 
formula; length of time the infant formula is medically required by the 
participant; and signature of the health care professional requesting 
the infant formula. Medical documentation would not have been required 
for contract brand infant formulas that meet the nutritional 
requirements of section 246.10 (c)(1).
    A majority of the commenters supported this requirement, stating 
that such documentation is reasonable and is an important step toward 
ensuring that non-contract brand infant formulas are issued only when 
medically necessary. Therefore, this interim rule maintains the medical 
documentation requirements for the issuance of non-contract infant 
formula except as discussed in section B of this preamble. Commenters 
did, however, raise several concerns related to this requirement which 
are discussed below along with our response.
    Issue 1: Medical documentation requirements for soy-based infant 
formula. A number of commenters found the proposed rule confusing 
regarding whether medical documentation is required for contract brand 
soy-based infant formula.
    Department Response: We did not intend to mandate medical 
documentation for any contract brand infant formulas, including soy-
based infant formulas, as long as they meet the nutritional 
requirements in section 246.10(c)(1)(i). Therefore, the interim rule at 
section 246.10(c)(1)(i) clarifies that all such contract brand infant 
formulas may be issued without medical documentation. Exempt infant 
formulas, which are not considered to be contract brand infant 
formulas, continue to require medical documentation. The interim rule 
further clarifies at section 246.10(c)(1)(iii) that all non-contract 
brand infant formulas may be issued only with medical documentation. 
This clarification is also addressed in section 246.2 by defining 
contract and non-contract brand infant formulas.
    Issue 2: Limiting the issuance of infant formulas. Commenters 
suggested that regulatory language should be added that would limit the 
issuance of different types of contract brand infant formulas.
    Department Response: Requiring a rebate on the bidder's entire 
infant formula product line (except exempt infant formula) does not 
obligate State agencies to approve or issue all of the types of infant 
formulas produced by a manufacturer. In fact, the best impartial 
medical evidence strongly demonstrates that milk-based, lactose 
containing and soy-based, lactose-free infant formulas meet the 
nutritional needs of almost all infants. State agencies currently have 
the authority to limit the issuance of both contract brand infant 
formulas and non-contract brand infant formulas, and we strongly 
encourage State agencies to exercise this authority. However, to 
further emphasize this authority, the interim rule at section 
246.10(c)(1)(i) states that State agencies may choose to limit the 
types of contract brand infant formulas that are approved for issuance 
or may require medical documentation for contract brand infant 
formulas. This choice is also addressed in section 246.16a(c)(6).
    Issue 3: Role of the dietitian. Commenters were also concerned that 
due to the medical documentation requirement for non-contract brand 
infant formulas, dietitians (as opposed to health care professionals 
with prescription-writing authority) would be prevented from 
prescribing non-contract brand infant formulas. They stressed 
dietitians are in a better position to counsel parents, investigate 
infant formula problems, and make infant formula suggestions and are 
more accessible than physicians. In addition, dietitians are often more 
aware of the savings rebates provide to the WIC program, and thus would 
be judicious in ensuring that fewer clients use non-contract brand 
infant formulas.
    Department Response: We would like to emphasize that the role of 
the dietitian is critical in providing nutrition education not only to 
parents and/or caretakers, but also in relaying to the medical 
community the significant savings to the WIC program of using contract 
brand infant formulas. If there is not an infant formula in the 
contractor's product line that meets the infant's needs, dietitians are 
encouraged to work closely with the participant's health care providers 
who are authorized to make the necessary determinations for medical 
documentation. We believe requiring medical documentation only 
strengthens a dietitian's role in ensuring that the most suitable 
infant formula is issued without compromising an infant's nutritional 
needs. However, we continue to believe that permitting only health care 
professionals with prescription-writing authority to authorize non-
contract brands of infant formula will ensure that issuance occurs only 
in exceptional situations with minimal loss of rebate savings.
    Issue 4: Allowing medical documentation to be telephoned into 
clinics. Commenters indicated that the medical documentation 
requirement may place an infant's urgent nutritional and health needs 
at risk by delaying services. Commenters recommended

[[Page 51216]]

allowing medical documentation to be telephoned to the WIC clinic.
    Department Response: The interim rule at section 246.10(c)(1)(v)(B) 
allows medical documentation to be telephoned into a competent 
professional authority (CPA) at WIC clinics by a health care 
professional licensed by the State to write medical prescriptions. 
However, such verbal confirmation must promptly be transformed into 
written documentation by the CPA and kept on file at the WIC clinic. 
This method may only be used until written confirmation is received and 
only when absolutely necessary to prevent undue hardship to a 
participant or to prevent a delay in the provision of infant formula 
that would place the participant at increased nutritional risk. The 
local clinic must obtain written confirmation of the medical 
documentation within a reasonable amount of time after accepting the 
initial medical documentation by telephone (i.e., one or two weeks' 
time). The written documentation must be kept on file with the initial 
telephone documentation. The interim rule makes clear that medical 
documentation may be provided as an original written document, 
electronically or by facsimile.
    Issue 5: Filing of medical documentation. One commenter requested 
that State agencies be allowed to keep a hard copy of medical 
documentation on file but not necessarily in the participant's file. 
Otherwise, requiring medical documentation to be filed in a 
participant's file is difficult for a paperless system.
    Department Response: The interim rule at section 246.10(c)(1)(v)(B) 
makes allowances for paperless systems by requiring medical 
documentation to be kept on file at the WIC clinic, instead of 
requiring the documentation in the participant's certification file.

D. Soliciting Bids for Milk-based Infant Formula

    The proposed rule would have required State agencies to solicit and 
evaluate bids for a single milk-based infant formula only. We received 
several comments fully supporting this provision; however, many 
comments were received opposing this provision. See below for more 
detailed discussion on comments received and our response.
    Issue 1: Potential issues as a result of soliciting and evaluating 
bids for milk-based infant formula only. Several commenters pointed out 
that a manufacturer that produces only a milk-based infant formula 
could potentially win the contract because there is no requirement that 
bidders also produce a soy-based infant formula. In the current 
marketplace, this is not a problem because all infant formula 
manufacturers produce a soy-based infant formula. However, in the past 
not all infant formula manufacturers produced both a milk-based and 
soy-based infant formula. There is no way to predict what changes may 
occur in the future. For example, a manufacturer may enter the market 
that does not produce a soy-based infant formula or a current 
manufacturer may discontinue producing a soy-based infant formula. If 
such a manufacturer were to win a WIC infant formula rebate contract, 
medical documentation would be required for soy-based infant formula. 
As a result, because of the soy-based infant formula's non-contract 
status the State agency would be forced to pay the full retail price 
for this formula, thus eroding rebate savings.
    Several commenters also stated that evaluating bids only for a 
milk-based infant formula and then using that bid as a basis for 
calculating rebates on all of the winning bidder's other infant 
formulas would put a State agency at risk of selecting a bidder that 
does not necessarily offer the lowest total cost to the State. 
Commenters pointed out that the proposed rule did not consider the 
variances in wholesale prices between milk-based and soy-based infant 
formula. Commenters stated that the requirement limiting bids to a 
single milk-based infant formula would provide an immediate advantage 
to any manufacturer whose wholesale price relationship between its soy-
based and milk-based infant formulas is greatest relative to that for 
other manufacturers because the discount ratio would have less effect 
on the net price for its soy-based product. In fact, commenters stated 
that the requirement may encourage a manufacturer to change its infant 
formula prices in amounts that would provide a bidding advantage.
    Finally, there was concern that limiting bids to a milk-based 
infant formula would preclude a State agency from issuing separate 
solicitations for milk-based and soy-based infant formulas. Allowing 
separate solicitations enables new or smaller manufacturers with a 
limited product line of infant formula to bid and, as a result, opens 
the bidding to a larger number of competitors.
    Department Response: The interim rule addresses these concerns in 
two ways. Under the ``single solicitation'' option in section 
246.16a(c)(1)(i), the State agency must require any manufacturer who 
does not produce a soy-based infant formula to contract with another 
manufacturer to supply a soy-based infant formula. The winning bidder 
is required to pay a rebate on the contracted soy-based infant formula 
using the same percentage discount on wholesale price as the winning 
bidder is required to use for all other infant formulas it produces. 
This approach recognizes the commenters' point about ensuring the 
availability of soy-based infant formulas while maintaining the 
simplified bidding structure of the proposed rule. There will always be 
some variation between the estimates of the types and amounts of infant 
formulas that will be issued and the actual types and amounts issued. 
The unpredictability is further exacerbated when new types of infant 
formula are introduced. Taking bids for a single milk-based infant 
formula strikes a balance between simplifying the bidding process 
without sacrificing rebate savings.
    However, we do agree that uncoupled bids can increase competition 
in some instances. Accordingly, section 246.16a(c)(1)(ii) permits the 
State agency to issue a separate solicitation for a soy-based infant 
formula. This solicitation would be in addition to the milk-based 
infant formula solicitation. This approach is commonly called an 
``uncoupled bid.'' Many State agencies have used the uncoupled bid 
approach when soliciting bids for infant formula rebate contracts. In 
fact, we have encouraged this approach as a way of allowing all infant 
formula manufacturers an opportunity to bid and, as a result, 
increasing competition.
    This option results in two contracts with potentially different 
manufacturers. The winning bidder for the milk-based infant formulas 
contract must provide a rebate on all the milk-based infant formula it 
produces, except exempt infant formulas. The winning bidder for the 
soy-based infant formula must provide a rebate on all the soy-based 
infant formulas it produces, except exempt infant formulas.
    Issue 2: Types of infant formulas vary between bidding 
manufacturers. One commenter pointed out that the proposed rule did not 
consider that the types of infant formula vary between bidding 
manufacturers. For example, all infant formula manufacturers do not 
offer a milk-based lactose-free infant formula. Consequently, the 
number of units on which rebates are demanded and the total amount of 
rebates required are different for each bidder--again, leaving State 
agencies at risk of selecting a bidder that does not necessarily offer 
the lowest cost to the State.

[[Page 51217]]

    Department Response: We acknowledge that the types and forms of 
infant formula issued will vary depending on which manufacturer is 
awarded the contract. However, the best medical evidence indicates that 
almost all infants nutritional needs can be met by the milk-based, 
lactose-containing and soy-based contract brand of infant formulas. (As 
discussed above, the winning bidder would be required to provide a soy-
based infant formula.) Further, accounting for the various types and 
forms of infant formula available to State agencies by manufacturer 
during the bid evaluation process would be a burdensome task that may 
itself result in an uncompetitive solicitation process. Therefore, in 
the interest of streamlining the solicitation process and ensuring the 
continued viability of the competitive bidding process, this interim 
rule requires the winning bidder to supply and provide a rebate on all 
infant formula it produces that are issued by the State agency, except 
exempt infant formulas.

E. Use of Composite Rebate

    A few commenters pointed out that there are some State agencies 
that use a generic food instrument that allows participants to purchase 
either a milk-based infant formula or a soy-based infant formula. These 
State agencies evaluate bids based on a composite rebate for both 
infant formulas, which enables them to invoice one rebate for both 
products. Commenters stated their current data systems do not include a 
method for tracking milk-based and soy-based infant formulas 
separately. In addition, segregating infant formula by type on the food 
instrument would require extensive computer system changes. As such, 
the requirement complicates the process of issuance, redemption, and 
rebate bidding.
    Department Response: While we strongly encourage State agencies to 
identify the type of infant formula prescribed on the food instrument, 
it was never our intent to prevent State agencies from using a generic 
food instrument for infant formula. Under this interim rule State 
agencies may continue to issue a generic instrument that allows 
participants to purchase more than one type of infant formula. However, 
these State agencies must still request and evaluate bids for only a 
milk-based infant formula (unless a State agency elects to issue 
separate bid solicitations). After a winning bidder is selected, the 
State agency must determine the rebate for the soy-based infant formula 
based on the rebate bid for the milk-based infant formula (or use the 
winning rebate for soy-based infant formula if the State agency elects 
to issue separate bid solicitations). The State agency must then 
determine a composite rebate for the generic food instruments using the 
rebate amounts established for the milk-based and soy-based infant 
formulas under the contract(s) and the projected usage rate for each 
type purchased with the generic food instruments.

F. Requiring a Rebate for all Infant Formula Produced by the 
Manufacturer

    The proposed rule would have required the bid solicitations and 
contracts to require that the winning bidder pay a rebate for any 
infant formula it produces that is issued by the State agency.
    Just over half of the commenters opposed this provision. Supporters 
stated the requirement would ensure that no manufacturer has an 
advantage in the bidding process because it offers more types of infant 
formula than its competitors. This interim rule retains the requirement 
in section 246.16a(c)(1). See below for further discussion of the 
comments.
    Issue 1: Perception of across-the-board endorsement of infant 
formulas. Commenters opposing the requirement indicated that it may 
give the perception of an across-the-board endorsement of infant 
formulas by the WIC program by providing a marketing opportunity for 
manufacturers. State agencies are currently under considerable pressure 
from manufacturers to approve their brands of infant formula. There is 
concern that if a rebate is required for all infant formulas produced 
by the winning bidder, it will be very difficult to limit the issuance 
of these other types of infant formulas. Other opponents also stated 
that requiring a rebate on all infant formulas produced by the winning 
bidder would create an impression that the State agency is not 
maximizing its food dollars if it does not issue an infant formula that 
generates a rebate.
    Department Response: As stated earlier in this preamble, the 
interim rule codifies the current authority which allows State agencies 
to limit the types of infant formulas that are issued. Thus, if State 
agencies do not wish to endorse particular infant formulas, they may 
elect to exclude such formulas from their approved supplemental food 
list.
    Issue 2: Administrative burden for State agencies. State agencies 
were also concerned that requiring a rebate on all infant formulas 
produced by the winning bidder would cause confusion among staff, 
participants, vendors, and the medical community, which may lead to 
conflicts, non-compliance and lower rebates.
    Department Response: We envision that after a contractor is 
selected, State agencies will identify the infant formulas in the 
contractor's product line it will approve for issuance and establish 
the rebate to be paid on each of these infant formulas. This is the 
only information that needs to be provided to WIC clinics, health care 
providers, and vendors and is no different than the process used by 
State agencies today. If a new infant formula is introduced into the 
winning bidder's product line or the State agency decides to add more 
types of infant formulas to its approved list, the State agency need 
only calculate the rebate for the additional infant formula, notify the 
affected parties in the WIC community, and bill the manufacturer 
accordingly when and if that infant formula is issued.
    Issue 3: Concerns regarding on which infant formulas a rebate 
should be paid. Several of the comments we received that opposed the 
requirement that the winning bidder must pay a rebate on all infant 
formula it produces were centered on difficulties with who should 
determine which infant formulas require a rebate. Several commenters 
indicated that State agencies should be allowed to specify in the bid 
solicitation the items it seeks to procure (e.g., a milk-based infant 
formula and at least one lactose-free infant formula).
    On the other hand, one infant formula manufacturer stated that 
within the two categories of milk-based and soy-based infant formulas, 
each prospective bidder should be allowed to identify its own list of 
potential infant formulas that would be covered by the contract (i.e., 
the ``contract brand infant formulas'') at the time of bid submission. 
This would allow bidders an option to exclude from its list any of its 
infant formulas with a particularly high cost base.
    A second manufacturer believed that manufacturers should not be 
obligated to provide rebates on any infant formula other than one milk-
based lactose containing and one soy-based infant formula. The 
commenter elaborated that if a manufacturer is willing to supply other 
infant formulas at its own option and the State agency approved such 
infant formulas, these formulas should then be included in the contract 
and should yield the same percentage discount on the wholesale cost as 
the products they replace. However, if a manufacturer is unwilling to 
pay a rebate on other infant formulas it produces and other 
manufacturers have equivalents of such formulas, then issuance of any 
of these formulas should be on a non-discriminatory basis and

[[Page 51218]]

should be subject to the medical documentation requirement.
    Department Response: Allowing State agencies to specify in the bid 
solicitation the types of infant formula requiring a rebate could 
eliminate from bidding some manufacturers who do not offer certain 
types of infant formula. Conversely, we believe that if infant formula 
manufacturers were able to pick which infant formulas would receive a 
rebate, it would be impossible to equitably assess competing bids. Both 
bidding options are inconsistent with our effort to streamline the 
solicitation process and to maximize full and open competition among 
manufacturers.
    Issue 4: Discourages manufacturers from developing new products and 
packaging. One infant formula manufacturer stated that given the large 
percentage of total U.S. infants served by the WIC program, imposing a 
rebate on yet undeveloped infant formulas may create a disincentive for 
a manufacturer to develop a new or better infant formula(s). 
Manufacturers may also reduce rebates to allow for the added cost of an 
advanced product, thereby increasing the chance it will lose the bid. 
In this case, WIC participants might not receive that manufacturer's 
advanced product and the successful bid price for a less advanced 
product could be higher. They further state that manufacturers might 
also withdraw from the bidding process and focus on only non-WIC 
business. For example, the manufacturer's research could center on 
exempt infant formulas or on product packaging that is not appropriate 
for the WIC program.
    Conversely, a second infant formula manufacturer asserted that the 
rule encourages innovation and competition because it minimizes any bid 
evaluation inequities. The commenter further stated that removing such 
inequities gives manufacturers greater incentives to offer new and/or 
improved products in the United States.
    Department Response: In the past, State agencies that have approved 
for issuance new infant formulas, with and without a rebate and/or 
medical documentation, have witnessed an increase in the issuance of 
these new infant formulas--some as high as 7 percent or more. These new 
products continue to gain popularity and we anticipate new products 
will continue to be introduced. This requirement enables State agencies 
to issue a solicitation that is competitive while ensuring a rebate is 
paid on any infant formula in the winning bidder's product line. The 
medical documentation requirement prevents a State agency from 
unnecessarily issuing any non-contract brand infant formula.

G. Clarification of Percentage Discount Rebate

    The proposed rule would have required the rebate paid on any infant 
formula to yield the same percentage discount on its wholesale cost as 
the rebate for the infant formula for which a bid was submitted.
    Issue: Most of the comments received centered on the need for 
clarification. Specifically, several commenters believed that the rule 
should be revised to clarify that bidders are not required to offer the 
same discount on different physical forms of infant formula (e.g., 
powdered versus concentrated liquid). In addition, commenters requested 
clarification as to how the percentage discount is to be applied to a 
new infant formula introduced after the contract is implemented. 
Comments were also received questioning whether the percentage discount 
applies to a manufacturer's prices as of the bid opening date, the 
commencement date of the contract, or after each wholesale price 
increase or decrease during the contract term.
    Department Response: The interim rule clarifies in section 
246.16a(c)(2) that different bids may be submitted for each of the 
physical forms of the milk-based infant formula for which bids are 
being sought. Section 246.16a(c)(5) then makes clear that in 
calculating the rebates for other types of infant formula, the 
percentage discount to be used will depend on the physical form of the 
infant formula.
    For example, if the rebate offered for the concentrated liquid form 
of the milk-based infant formula is 80 percent of the wholesale price, 
then the rebate required to be paid for a soy-based infant formula in 
concentrated liquid form, or any other concentrated liquid infant 
formulas in the bidder's product line, will be 80 percent of its 
wholesale price. The same calculation approach holds true for infant 
formulas in powdered and ready-to-feed forms.
    Clarifications also were added to the interim rule in response to 
commenters' confusion regarding when the discount percentage and 
resultant rebates are established for each of the infant formula types 
in the bidder's infant formula product line. The interim rule clarifies 
at section 246.16a(c)(5) (i) and (ii) that the discount percentages and 
rebates must be based on the wholesale prices in effect on the date of 
the bid opening. If a new infant formula product is introduced during 
the term of the contract, the rebate required for the new product must 
be calculated using the wholesale price of the new infant formula at 
the time it is approved for issuance by the State agency.
    Currently, all State agencies with competitively-bid infant formula 
rebate contracts require an inflationary provision ensuring the net 
cost remain constant. In order to preserve the net cost, this interim 
rule requires at section 246.16a(c)(5)(iv) that all rebate contracts 
must include an inflation provision to adjust for price changes 
subsequent to the date of the bid opening. State agencies may require 
either a cent-for-cent increase in the rebate amounts whenever there is 
a change in the wholesale price for infant formula or another method 
established by the State agency in the bid solicitation.

H. Participation Data and Infant Formula Usage Rates

    The proposed rule would have required State agencies to solicit 
bids based on the estimated total amount of infant formula it expects 
to issue (by physical form) based on the current number of infant 
participants, excluding those exclusively breastfed and those issued 
exempt infant formula. The comments received generally supported this 
requirement; however, several commenters relayed concerns which are 
summarized below along with our comments.
    Issue: Several commenters suggested that State agencies be allowed 
to use actual participation and usage rates, rather than estimates.
    Department Response: It was not our intention to have State 
agencies use anything but the most current infant participation 
available. We believe that due to the fairly stable levels of 
participation, as compared to past years, a State agency's most current 
participation figures available give potential bidders the best data 
for evaluating the amount of infant formula it will be required to 
provide under the contract. Therefore, this rule does not permit State 
agencies to use estimates, such as projected participation, to 
establish infant formula usage data.
    The interim regulation clarifies this requirement at sections 
246.16a(c) (3) and (4). Section 246.16a(c)(3) requires State agencies 
to use the most recent available participation data and usage rates in 
evaluating bids, and section 246.16a(c)(4) requires State agencies to 
provide the same data to bidders. The word ``estimate'' has been 
removed to avoid confusion, as neither of these figures are estimates 
but instead are actual data based on program operation. The rule 
requires that infant participation data include at least 6

[[Page 51219]]

months of the most recent average infant participation information.
    We expect that given the wide range of infant formulas that will be 
available under each contract, only a small portion of infant formula 
will be issued as non-contract brand infant formula. This is why all 
infants, except those exclusively breastfed and those issued exempt 
infant formulas, must be included in the participation data.
    We would like to stress that even though bids are solicited for 
milk-based infant formula only, all types of infant formulas, 
(including soy-based and milk-based lactose-free infant formulas) 
issued to infants must be included in the infant formula usage rates. 
For example, if a State agency issued a total of 1,000 units of 
concentrated liquid infant formula a month (excluding exempt infant 
formula), the usage rate must include all possible types of infant 
formula that were issued in the form of concentrated liquid infant 
formula, including both contract and non-contract brand infant formula 
issuance under its current contract. The same approach must be applied 
for calculating the usage rates for powdered and ready-to-feed infant 
formula.
    All bidders should be reminded that participant data and infant 
formula usage rates provided include all types of infant formula the 
State agency currently uses, except exempt infant formula. At the same 
time, we strongly encourage State agencies to provide their latest 
invoice information, or comparable information, that categorizes the 
infant formula usage data by type and form. Providing this data ensures 
all bidders have the same information as the current contractor has to 
base bids on.
    The exception to the above is when a State agency elects to solicit 
separate bids for milk-based and soy-based infant formulas. In this 
case, participation data and usage rates must be calculated the same as 
above, but broken out by milk-based infant formula (including all types 
of milk-based infant formula except exempt infant formula) and soy-
based infant formula.

I. Lowest Net Price

    All but one commenter supported the requirement to award contracts 
based on the lowest net price for infant formula. This requirement is 
dictated by statute; therefore, the interim rule retains the lowest net 
price requirement in section 246.16a(c)(3). However, as explained in 
this preamble in the definitions section, there was some confusion 
among commenters regarding the term ``net price'' which is summarized 
below.
    Issue 1: Several commenters stated that if bids are to be evaluated 
on the basis of lowest net price, it would improve consistency if the 
basis for the wholesale price is defined. Other commenters asked for 
clarification in determining the lowest net price. As one manufacturer 
explained, manufacturers bracket their wholesale prices based on 
subdivisions of a full truckload, and the ``full truckload price'' is 
simply the best, or lowest, price they offer to retail and wholesale 
outlets. However, different manufacturers base their wholesale prices 
on different truckload weights due primarily to variations in packaging 
size and weight, and different trucking equipment used to ship product. 
What matters is that each manufacturer's best full truckload price 
bracket be used when evaluating bids. Otherwise, bid evaluations may 
not be evaluated in a fair and consistent manner.
    Department Response: In order to clarify the requirement of 
awarding a contract based on the lowest net price this rule amends the 
current definition of ``net price.'' State agencies must use a 
consistent measurement of a common denominator to evaluate all rebates 
in order to ensure contracts are evaluated in a fair and consistent 
manner. As such, this rule requires State agencies to use the lowest 
national wholesale price for a full truckload of the infant formula on 
which a bid is submitted when evaluating bids and establishing rebates 
for the manufacturer's full product line. This requirement is reflected 
in the definition of net price in section 246.2 and in sections 
246.16a(c)(3) and 246.16a(c)(5) which describe how to award contracts 
and to calculate rebates for infant formulas.
    Issue 2: One commenter opposing this provision expressed concern 
that evaluating bids based on the lowest net price using wholesale 
prices prevents State agencies from recognizing a State agency's true 
cost of infant formula. The commenter explained that retailers purchase 
infant formula at different wholesale price tiers depending on the 
quantity of product purchased, which affects the retail cost of infant 
formula. As such, the rule should permit a State agency to identify a 
wholesale pricing level used in evaluating bids that is consistent with 
the unique characteristics of that State agency. A second commenter, 
asking for clarification of net price, stated that because 
manufacturers have different wholesale prices depending upon the 
quantity they deliver and the geographic area, the net price should be 
based on the quantity most commonly delivered to vendors participating 
in the WIC Program.
    Department Response: It would be impractical to exactly capture 
wholesale cost actually paid by vendors or to use retail pricing. 
Therefore, this rule includes in the definition of net price the 
national wholesale price for a full truck of infant formula. This 
definition ensures consistency and simplifies the bidding process. 
State agencies should recognize that the national wholesale price 
catalog is used only as a tool in evaluating bids and setting rebate 
amounts. Infant formula manufacturers do not, and may not, by law, act 
in concert to influence retail prices for infant formula to retailers. 
Therefore, they, as a group, have no control over the price that is 
charged for the infant formula sold by WIC vendors and cannot be held 
accountable for retail prices charged. On the other hand, the actual 
price that retailers charge for infant formula falls under the domain 
of State-agency-managed WIC vendor cost controls. In fact, to promote 
efficiency and contain costs, the William F. Goodling Child Nutrition 
Reauthorization Act of 1998 (Public Law 105-336) requires WIC State 
agencies to consider the prices a store charges for authorized 
supplemental foods as compared to the prices that other stores charge 
when selecting vendors.

J. Retail Prices at WIC and Non-WIC Retailers

    The proposed rule would have allowed a State agency to evaluate 
bids by the highest rebate instead of lowest net price if the State 
agency could demonstrate that the weighted average retail prices for 
different brands of infant formula in the State vary by 5 percent or 
less. The retail prices were to reflect both authorized WIC vendors and 
stores that do not participate in the WIC program.
    Issue: Many commenters disagreed with the requirement of including 
non-WIC stores when demonstrating the differences and/or similarities 
in retail prices. It was remarked that a number of WIC State agencies 
currently consider price practices in determining whether a vendor can 
participate in the WIC program. However, allowing such State agencies 
to consider pricing practices of non-WIC stores could enable a State 
agency to demonstrate that retail prices do not vary by more than 5 
percent in the State while the prices of WIC vendors do vary by more 
than 5 percent. Commenters also stated that obtaining price information 
from non-WIC stores would be a difficult task and a burden on State 
agencies.
    Department Response: As a result of the comments received, the 
interim rule at section 246.16a(c)(3)(ii) modifies the

[[Page 51220]]

highest rebate option to give State agencies the option to evaluate 
infant formula prices at only authorized WIC vendors or at both WIC 
vendors and stores that do not participate in the WIC program. State 
agencies using retail price information from WIC vendors only may find 
it more difficult to present a compelling argument demonstrating a 
price differential of less than 5 percent. State agencies are also 
reminded that price information must be approved by FNS before 
soliciting bids using an evaluation method of highest rebates offered.

K. Variance in Unit Sizes of Powdered Infant Formula

    Some commenters pointed out that powdered infant formula no longer 
comes in a single standard unit size. One commenter also wrote that 
although the food package regulations state the maximum amounts of 
infant formula in dry ounces, not all powdered infant formulas 
reconstitute at the same rate. That commenter suggested basing rebates 
on reconstituted ounces of infant formula. These commenters questioned 
how State agencies should account for differences in the unit size and 
reconstitution rates when evaluating rebate bids.
    The proposed rule, at section 246.16(k)(1)(ii), required bids to be 
solicited based on an estimated total amount of infant formula the 
State agency expected to issue; however, the proposed rule was silent 
on how to account for differing unit sizes when evaluating rebate bids. 
As discussed in the Background section of this preamble, the infant 
formula industry has changed considerably over the past several years. 
Over the past decade, there have been numerous changes in both the 
packaging and formulation of infant formulas and it is impossible to 
predict future changes.
    Currently, the liquid concentrate and ready-to-feed milk-based 
lactose containing infant formula is available in the same unit size, 
regardless of the manufacturer. However, the three primary infant 
formula manufacturers currently offer milk-based lactose powder in six 
different unit sizes ranging from 12 ounces to 32 ounces not including 
single packet sizes. Of the six unit sizes offered for milk-based 
powder, there is no common size among those three manufacturers.
    The current variations in unit sizes for powdered infant formulas 
create a dilemma for State agencies when evaluating bids because the 
unit size dictates how many units a State agency can issue to a WIC 
infant without exceeding the Federal maximum monthly allowance of 8 
pounds or 128 dry ounces of powdered infant formula. Consequently, the 
total number of units of powdered infant formula that can be issued 
each month depends upon the brand. The table below illustrates how 
differences in unit sizes for powdered infant formula can affect 
monthly issuance rates and identifies the total dry ounces of powdered 
product that can be issued each month for each of the current unit 
sizes most commonly issued.

------------------------------------------------------------------------
                                    Total number of
                                   units issued each    Yield per total
 Current unit sizes for powdered     month without      number of units
 milk-based  lactose containing      exceeding the     issued monthly &
         infant formulas           federal allowance  resulting issuance
                                   of 128 oz./8 lbs.       shortage
------------------------------------------------------------------------
12 dry oz.......................  10 units..........  120 dry oz. (8 oz.
                                                       short).
14.1 dry oz.....................  9 units...........  126.9 dry oz. (1.1
                                                       oz. short).
16 dry oz.......................  8 units...........  128 dry oz. (no
                                                       shortage) .
------------------------------------------------------------------------

    Currently, many State agencies evaluate rebate bids for powdered 
infant formula based on the total number of units of infant formula a 
bidder is able to provide under the contract without exceeding the 
Federal maximum monthly allowance of 128 dry ounces of powdered 
product. The smaller the unit size, the greater is the number of units 
needed to provide up to the Federal maximum monthly allowance. However, 
this method fails to recognize that State agencies already have the 
flexibility to provide up to the Federal maximum monthly infant formula 
averaged over the participant's certification period. It also fails to 
take into account further potential changes in unit sizes.
    In this interim rule, as well as the proposed rule, we are seeking 
to simplify the bid evaluation process and to set forth standards that 
will take into account future changes in the infant formula industry, 
such as changes in unit size. Unfortunately, we cannot address the 
issue of differing reconstitution rates in this rulemaking. However, we 
can simplify the bidding process by requiring the bid evaluation to be 
made on a standardized number of units of infant formula among bidders. 
Therefore, this interim rule requires at section 246.16a(c)(3) that 
State agencies evaluate bids for a standardized number of units of 
infant formula equal to the total maximum allowable amount number of 
ounces in the infant formula package at section 246.10(c)(1)(vi), 
rather than the maximum number of units that could be issued in a 
single month due to unit size limitations and State agency issuance 
practices.
    This standardized number of units of infant formula to be bid upon 
must contain the equivalent maximum allowable number of ounces of each 
physical form of infant formula that could be issued to all infants 
under section 246.10(c)(1)(vi). Since rebate bids are typically made on 
a per unit basis, it is necessary to convert the maximum allowable 
number of ounces of each physical form needed to serve all infants into 
a number of units needed to serve all infants. In order to do so a 
State agency would first calculate the total number of ounces needed by 
physical form by multiplying the total number of infants expected to 
use each physical form of infant formula (based on the most recent 
available participation and usage data) by the maximum allowable number 
of ounces for each physical form (e.g., 128 ounces of powdered). Next, 
the number of units needed to provide the maximum number of ounces of 
infant formula would be calculated by dividing the total number of 
ounces calculated by physical form by the number of ounces in the size 
of the unit being bid. If the number of units calculated is not a whole 
number, the number would be rounded down to the nearest unit. To 
calculate the total cost of each bid the State agency would then 
multiply the per unit net cost (rebate offered minus wholesale price) 
by the number of units needed to provide the maximum amount of infant 
formula allowed.
    The following is an example of a bid calculation of the 
standardized number of units in a State agency using the single 
solicitation method. The example assumes the bids are evaluated by 
lowest net price, and the most recent available participation and usage 
data show the State agency issued powdered infant formula to 290 
infants, liquid concentrate to 1,000 infants, and ready-to-feed to 10 
infants per month.

[[Page 51221]]



--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                             (E)
                                (B)  Max.     (C)  Avg.                 Standardized                                              (I)
  (A)  Unit size & physical      issuance      monthly      (D)  Total    number of   (F)  Whole-  (G)  Rebate    (H)  Net   Standardized  (J)  Net cost
             form               per infant      infant     oz. for bid   units  D/A       sale       per unit     Cost Per     number of         H*I
                                  (oz.)*    participation       B*C      (16, 14.1,     cost***                  Unit  F-G   units column
                                              by form**                    12 oz.)                                                 E
--------------------------------------------------------------------------------------------------------------------------------------------------------
16 oz. powder, or............          128           290        37,120         2,320  ...........  ...........  ...........         2,320  .............
14.1 oz.. powder, or.........          128           290        37,120         2,633  ...........  ...........  ...........         2,633  .............
12 oz. powder................          128           290        37,120         3,093  ...........  ...........  ...........         3,093  .............
13 oz. liq. concentrate......          403         1,000       403,000        31,000  ...........  ...........  ...........        31,000  .............
32 oz. RTF...................          806            10         8,060           252  ...........  ...........  ...........           252  .............
--------------------------------------------------------------------------------------------------------------------------------------------------------
    Total monthly cost.......  ...........  .............  ...........  ............  ...........  ...........  ...........  ............  $
--------------------------------------------------------------------------------------------------------------------------------------------------------
*Allowed under Section 246.10(c)(1)(vi) of regulations.
**Excludes only infants exclusively breastfed and issued nonexempt infant formula.
***Lowest national wholesale cost per unit for a full truckload of infant formula.

    As noted above, this evaluation method is consistent with an 
issuance option WIC State agencies currently have to average the amount 
of infant formula issued over the participant's certification period. 
We are developing guidance that will clarify how under current WIC 
regulations State agencies can better accommodate the wide variances in 
both container size and multi-unit packaging configurations of infant 
formulas, exempt infant formulas and WIC-eligible medical foods. State 
agencies that elect to make accommodations to their monthly issuance of 
infant formula due to the unit size limitations of its contract infant 
formula ensure infants are prescribed an amount of infant formula that 
best meets their needs.

L. Responsive and Responsible Bidders/Full and Open Competition

    Several commenters relayed concern about the dependence upon a 
single manufacturer that may not be able to perform the contract 
requirements. Specific concerns raised were the ramifications of an 
interruption of infant formula supply due to a manufacturer's inability 
to perform the job. One State agency relayed that the cost of replacing 
a contractor goes well beyond the cost of infant formula. Several 
commenters requested us to explore procurement and contract management 
policies which would prevent an unreliable entity from winning a 
contract and, thus, ensuring a bidder that is capable of performing 
under the contract wins.
    Department Response: Section 17(h)(8)(A)(i) of the Child Nutrition 
Act of 1966 (42 U.S.C. 1786(h)(8)(A)(i)) requires State agencies 
subject to the infant formula cost containment requirements to use 
competitive bidding or another method that yields equal or better 
savings. ``Competitive bidding'' is defined as, among other things, 
selecting the bidder ``offering the lowest price'' (42 U.S.C. 
1786(b)(17)).
    We have consistently taken the position that the competitive 
bidding requirement encompasses both the concepts of requiring that the 
winning bidder must be responsive and responsible and that the bid 
solicitation must be conducted in a manner to maximize full and open 
competition. As a result, we have said that technical requirements are 
appropriate only if they do not unnecessarily limit competition.
    One provision that has caused confusion on this point is the 
requirement in current section 246.16(n)(2) that prohibits State 
agencies from issuing bid solicitations or entering into rebate 
contracts which exclude from consideration in the bidding evaluation 
any infant formula manufacturer that is in compliance with the Federal 
Food, Drug, and Cosmetic Act. This provision is based on a requirement 
in section 17(f)(15) of the Child Nutrition Act of 1966 (42 U.S.C. 
1786(F)(15)) which requires companies supplying infant formula to the 
WIC program to register with the Secretary of Health and Human Services 
under the Federal Food, Drug, and Cosmetic Act and to certify to the 
State Health Department that it is in compliance with that Act and the 
related regulations. (There is a parallel regulatory provision 
concerning the registration and certification in section 246.10(f) of 
the current regulations.) Some have read the provision at section 
246.16(n)(2) as meaning that no bidder may be precluded from bidding or 
contract award if it meets the FDA registration requirement. If read 
strictly, this requirement could be interpreted to mean that even a 
bidder that submits a nonresponsive bid may not be precluded from being 
awarded a contract if the bidder presents the lowest net price.
    It was not our intent to totally exclude technical information from 
the bid evaluation process. We recognize the place that technical 
specifications have in competitive bidding situations. In fact, section 
246.16a(c) of this interim rule requires State agencies to solicit bids 
from infant formula manufacturers to not only provide a rebate for 
infant formula, but to also supply such formula. However, we must also 
bear in mind the extremely small number of infant formula manufacturers 
and the highly regulated infant formula industry. In addition, care 
must be taken to ensure that any technical requirements do not 
unnecessarily limit competition in violation of the statutory 
requirement for competitive bidding.
    As a result, this interim rule includes two provisions. The first 
(in section 246.16a(c)(3)) makes clear that the contract must be 
awarded only to a responsive and responsible bidder. To be responsive, 
a bidder must submit a bid that conforms to the solicitation. To be 
responsible, a bidder must meet the eligibility requirements under the 
applicable statute and regulations and any additional technical 
requirements set forth in the bid solicitation. Any information 
required to be submitted under a technical requirement must be capable 
of being evaluated objectively on a yes/no or pass/fail basis.
    As we have previously advised, State agencies can address their 
concerns about possible performance problems by including appropriate 
contract provisions in their bid solicitations. For example, a State 
agency could include a clause that requires the winning bidder to pay a 
rebate on another brand of similar infant formula issued to 
participants in the event the contract manufacturer's infant formula is 
unavailable to WIC vendors for a specified period of time (e.g., 5 
days).
    The second provision, in section 246.16a(c), makes clear that 
maximizing ``full and open'' competition is an integral part of 
competitive bidding. The interim rule also removes the confusing and 
somewhat duplicative provision relating to FDA registration currently 
at section 246.16(n)(2) and includes

[[Page 51222]]

instead a cross reference to the FDA registration/certification 
requirement in section 246.10(f).
    We would also like to emphasize that procurement requirements in 7 
CFR 3016.36(a) still pertain to State agencies, whereby a State agency 
may follow the same policies and procedures it uses for State 
procurements. However, if State agency policies and procedures are in 
conflict with Federal requirements such as those in this rule, Federal 
requirements supersede State requirements.

M. Alternative Cost Containment System and National Bid Solicitation 
and Selection

    One commenter pointed out that the proposed rule failed to make 
conforming amendments to the requirements for bid evaluation under the 
comparative method (section 246.16(j)(2)(i)) and under the National Bid 
Solicitation and Selection (section 246.16(o)). This rule amends these 
provisions to be consistent with the participation and infant formula 
usage data required by this rule for the single-supplier competitive 
system and the lowest net price/highest rebate requirements. These 
provisions are moved to section 246.16a(d) and (k), respectively.

N. Implementation Time Frames

    We have taken this opportunity to update the implementation time 
frames for infant formula cost containment systems. WIC regulations 
currently in effect mandate that State agencies must have an infant 
formula cost containment system in effect as of March 15, 1990, and no 
later than November 10, 1990. The interim rule clarifies that all WIC 
State agencies (except Indian State agencies operating a retail food 
delivery system with fewer than 1,000 participants), must continuously 
operate a cost containment system in accordance with section 246.16a. 
This rule also makes conforming changes to the State Plan requirements 
in section 246.4(a)(14)(x).

O. Miscellaneous Regulation Citations

    We have also taken this opportunity to update certain regulation 
citations in section 246.4.

Executive Order 12866

    This rule has been determined to be economically significant and 
was reviewed by the Office of Management and Budget under Executive 
Order 12866.

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 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 significantly.

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. 
Prior to any judicial challenge to the provisions of this rule or the 
applications of its provisions, all applicable administrative 
procedures must be exhausted.

Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995, the 
information collection and recordkeeping requirements included in 
Section 246.10(c)(1)(i) of this interim final rule have been approved 
by the Office of Management and Budget (OMB) under control number 0584-
0043.

Public Law 104-4

    Title II of the Unfunded Mandated Reform Act of 1995 (UMRA), Public 
Law 104-4, establishes requirements for Federal agencies to assess the 
effects of their regulatory actions on State, local, and tribal 
governments and the private sector. Under 202 of the UMRA, FNS 
generally must prepare a written statement, including a cost-benefit 
analysis, for proposed and final rules with ``Federal mandates'' that 
may result in expenditures 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 FNS 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 sector 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.

List of Subjects in 7 CFR Part 246

    Administrative practice and procedure, Civil rights, Food 
assistance programs, Food and Nutrition Service, 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.


    Accordingly, 7 CFR Part 246 is amended as follows:

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

    1. The authority citation for part 246 continues to read as 
follows:

    Authority: 42 U.S.C. 1786.


    2. In Sec. 246.2:
    a. add the definitions of Contract brand infant formula, Exempt 
infant formula, Infant formula, Non-contract brand infant formula, and 
WIC-eligible medical foods in alphabetical order; and
    b. revise the definition of Net price. 
    The additions and revision read as follows:


Sec. 246.2  Definitions.

* * * * *
    Contract brand infant formula means all infant formulas (except 
exempt infant formulas) produced by the manufacturer awarded the infant

[[Page 51223]]

formula cost containment contract. If under a single solicitation the 
manufacturer subcontracts for soy-based infant formula, then all soy-
based infant formulas covered by the subcontract are also considered 
contract brand infant formulas (see Sec. 246.16a(c)(1)(i)). If a State 
agency elects to solicit separate bids for milk-based and soy-based 
infant formulas, all infant formulas issued under each contract are 
considered the contract brand infant formula (see 
Sec. 246.16a(c)(1)(ii)). For example, all of the milk-based infant 
formulas issued by a State agency that are produced by the manufacturer 
that was awarded the milk-based contract are considered contract brand 
infant formulas. Similarly, all of the soy-based infant formulas issued 
by a State agency that are produced by the manufacturer that was 
awarded the soy-based contract are also considered to be contract brand 
infant formulas. Contract brand infant formulas also include all infant 
formulas (except exempt infant formulas) introduced after the contract 
is awarded.
* * * * *
    Exempt infant formula means an infant formula that meets the 
requirements for an exempt infant formula under section 412(h) of the 
Federal Food, Drug, and Cosmetic Act (21 U.S.C. 350a(h)) and the 
regulations at 21 CFR parts 106 and 107.
* * * * *
    Infant formula means a food that meets the definition of an infant 
formula in section 201(z) of the Federal Food, Drug, and Cosmetic Act 
(21 U.S.C. 321(z)) and that meets the requirements for an infant 
formula under section 412 of the Federal Food, Drug, and Cosmetic Act 
(21 U.S.C. 350a) and the regulations at 21 CFR parts 106 and 107.
* * * * *
    Net price means the difference between an infant formula 
manufacturer's lowest national wholesale price per unit for a full 
truckload of infant formula and the rebate level or the discount 
offered or provided by the manufacturer under an infant formula cost 
containment contract.
    Non-contract brand infant formula means all infant formula, 
including exempt infant formula, that is not covered by an infant 
formula cost containment contract awarded by that State agency.
* * * * *
    WIC-eligible medical foods means certain enteral products that are 
specifically formulated to provide nutritional support for individuals 
with a diagnosed medical condition, when the use of conventional foods 
is precluded, restricted, or inadequate. Such WIC-eligible medical 
foods may be nutritionally complete or incomplete, but they must serve 
the purpose of a food, provide a source of calories and one or more 
nutrients, and be designed for enteral digestion via an oral or tube 
feeding. WIC-eligible medical foods include many, but not all, products 
that meet the definition of medical food in Section 5(b)(3) of the 
Orphan Drug Act (21 U.S.C. 360ee(b)(3)).


    3. In Sec. 246.4, revise paragraph (a)(14)(xi) to read as follows:


Sec. 246.4  State plan.

    (a) * * *
    (14) * * *
    (xi) A description of any cost containment system. A State agency 
must submit a State Plan or Plan amendment if it is attempting to 
structure and justify a system that is not a single-supplier 
competitive bidding system for infant formula in accordance with 
Sec. 246.16a(d); is requesting a waiver for an infant formula cost 
containment system under Sec. 246.16a(e); or, is planning to change or 
modify its current system or implement a system for the first time. The 
amendment must be submitted at least 90 days before the proposed 
effective date of the system change. The plan amendment must include 
documentation for requests for waivers based on interference with 
efficient or effective program operations; a cost comparison analysis 
conducted under Sec. 246.16a(d)(2); and a description of the proposed 
cost containment system. If FNS disputes supporting plan amendment 
documentation, it will deem the Plan amendment incomplete under this 
paragraph (a), and will provide the State agency with a statement 
outlining disputed issues within 15 days of receipt of the Plan 
amendment. The State agency may not enter into any infant formula cost 
containment contract until the disputed issues are resolved and FNS has 
given its consent. If necessary, FNS may grant a postponement of 
implementation of an infant formula cost containment system under 
Sec. 246.16a(f). If at the end of the postponement period issues remain 
unresolved the State agency must proceed with a cost containment system 
judged by FNS to comply with the provisions of this part. If the State 
agency does not comply, it will be subject to the penalties set forth 
in Sec. 246.16a(i).
* * * * *

    4. In Sec. 246.10:
    a. revise paragraph (c)(1)(i);
    b. redesignate paragraph (c)(1)(ii) as paragraph (c)(1)(vi) and add 
a heading;
    c. add four new paragraphs (c)(1)(ii) through (c)(1)(v);
    d. revise paragraph (c)(2)(i); and
    e. revise paragraph (c)(3) introductory text and paragraph 
(c)(3)(i).
    The revisions and additions read as follows:


Sec. 246.10  Supplemental foods.

* * * * *
    (c) * * *
    (1) Food Package I--Infants 0 Through 3 Months. (i) Iron-fortified 
infant formula--requirements and routine issuance. Except as specified 
in paragraphs (c)(1)(iii) through (c)(1)(v) of this section, local 
agencies must issue a contract brand infant formula that meets the 
requirements of paragraph (c)(1)(i) of this section. The supplemental 
food for this food package is an iron-fortified infant formula that is 
not an exempt infant formula. The iron-fortified infant formula must be 
nutritionally complete, not requiring the addition of any ingredients 
other than water prior to being served in a liquid state. It also must 
contain at least 10 milligrams of iron per liter at standard dilution 
and supply 67 kilocalories per 100 milliliters (i.e., approximately 20 
kilocalories per fluid ounce of infant formula) at standard dilution. 
Medical documentation is not required for any contract brand infant 
formula authorized for issuance by the State agency, including the soy-
based contract brand of infant formula. However, the State agency may 
require medical documentation for any contract brand infant formula 
even though it meets these requirements and may decide that some 
contract brand infant formulas may not be issued under any 
circumstances.
    (ii) Physical forms. Local agencies must issue all WIC formulas 
(WIC formula means all infant formulas, including exempt infant 
formulas, and WIC-eligible medical foods) in concentrated liquid or 
powdered physical forms. Ready-to-feed WIC formulas may be authorized 
when the competent professional authority determines and documents that 
the participant's household has an unsanitary or restricted water 
supply or poor refrigeration, the participant or person caring for the 
participant may have difficulty in correctly diluting concentrated 
forms or reconstituting powdered forms, or the WIC formula is only 
available in ready-to-feed form.
    (iii) WIC formulas requiring medical documentation. Local agencies 
may issue the following WIC formulas, but only with medical 
documentation:

[[Page 51224]]

    (A) Any contract brand infant formula that does not meet the 
requirements of paragraph (c)(1)(i) of this section (e.g., low-iron, 
low-calorie, or high-calorie infant formulas);
    (B) Any non-contract brand infant formula (even if it meets the 
requirements for an iron-fortified infant formula in paragraph 
(c)(1)(i) of this section);
    (C) Any exempt infant formula; and
    (D) any WIC-eligible medical food.
    (iv) Religious eating patterns exception. Local agencies may issue 
a non-contract brand infant formula that meets the requirements of 
paragraph (c)(1)(i) of this section without medical documentation in 
order to meet religious eating patterns. However, if the non-contract 
brand infant formula does not meet the requirements of paragraph 
(c)(1)(i) of this section, medical documentation must be provided. 
Documentation of the basis of the substitution must be kept on file at 
the local clinic.
    (v) Medical documentation. (A) Determination. For purposes of this 
food package, medical documentation means a determination by a licensed 
health care professional authorized to write medical prescriptions 
under State law. A licensed health care professional must make a 
medical determination that an infant has a medical condition that 
dictates the use of the following: a contract brand infant formula that 
does not meet the requirements of paragraph (c)(1)(i) of this section; 
a non-contract brand infant formula; an exempt infant formula; or a 
WIC-eligible medical food. These conditions include, but are not 
limited to: those that contraindicate the use of iron-fortified infant 
formula, metabolic disorders, inborn errors of amino acid metabolism, 
gastrointestinal disorders, malabsorption syndromes, and food 
allergies. Low-calorie WIC formulas may not be issued solely for the 
purpose of managing body weight.
    (B) Technical requirements. Medical documentation must include the 
brand name of the WIC formula prescribed; medical diagnosis warranting 
the issuance of WIC formula; length of time the prescribed WIC formula 
is medically required by the participant; and signature or name (if the 
initial medical documentation was received by telephone) of the 
requesting health care professional. Medical documentation may be 
provided as an original written document, electronically, or by 
facsimile. Medical documentation also may be provided by telephone to a 
competent professional authority who must promptly document the 
information which must be kept on file at the local clinic. However, 
this method may only be used until written confirmation is received and 
only when absolutely necessary on an individual participant basis to 
prevent undue hardship to a participant or to prevent a delay in the 
provision of infant formula that would place the participant at 
increased nutritional risk. The local clinic must obtain written 
confirmation of the medical documentation within a reasonable amount of 
time (i.e., one or two weeks' time) after accepting the initial medical 
documentation by telephone. The written documentation must be kept on 
file with the initial telephone documentation.
    (vi) Quantities and types of supplemental foods.***
    (2) Food Package II--Infants 4 through 12 months. (i) Infant 
formula as specified in paragraphs (c)(1)(i) through (c)(1)(v) of this 
section.
* * * * *
    (3) Food Package III--Children/Women with Special Dietary Needs. 
Local agencies may issue this food package to women and children only 
with medical documentation. The supplemental foods in Food Package III 
are set forth in paragraphs (c)(3)(i) through (c)(3)(iv) of this 
section. For purposes of this food package, medical documentation means 
a determination by a licensed health care professional authorized to 
write medical prescriptions under State law that the child or woman has 
a medical condition that dictates the use of a WIC formula (WIC formula 
means all infant formulas, including exempt infant formulas, and WIC-
eligible medical foods) because the use of conventional foods is 
precluded or restricted. These medical conditions include, but are not 
limited to, metabolic disorders, inborn errors of amino acid 
metabolism, gastrointestinal disorders, malabsorption syndromes and 
food allergies. This food package may not be issued solely for the 
purpose of enhancing nutrient intake or managing body weight. Medical 
documentation for WIC formulas must meet the technical requirements 
described in paragraph (c)(1)(v)(B) of this section.
    (i) WIC formulas (i.e., an infant formula, exempt infant formula, 
or WIC-eligible medical food).
* * * * *


Sec. 246.16  [Amended]


    5. In Sec. 246.16:
    a. In Sec. 246.16, remove paragraphs (j) through (p).
    6. Add a new Sec. 246.16a to read as follows:


Sec. 246.16a  Infant formula cost containment.

    (a) Who must use cost containment procedures for infant formula? 
All State agencies must continuously operate a cost containment system 
for infant formula that is implemented in accordance with this section 
except:
    (1) State agencies with home delivery or direct distribution food 
delivery systems;
    (2) Indian State agencies with 1,000 or fewer participants in April 
of any fiscal year, which are exempt for the following fiscal year;
    (3) State agencies granted a waiver under paragraph (e) of this 
section; and
    (4) State agencies granted a postponement under paragraph (f) of 
this section.
    (b) What cost containment procedures must be used? State agencies 
must use either a single-supplier competitive system as outlined in 
paragraph (c) of this section, or an alternative cost containment 
system as outlined in paragraph (d) of this section.
    (c) What is the single-supplier competitive system? Under the 
single-supplier competitive system, a State agency solicits sealed bids 
from infant formula manufacturers to supply and provide a rebate for 
infant formulas. The State agency must conduct the procurement in a 
manner that maximizes full and open competition consistent with the 
requirements of this section.
    (1) How must a State agency structure the bid solicitation? (i) 
Single solicitation. Under the single solicitation system, the State 
agency's bid solicitation must require the winning bidder to supply and 
provide a rebate on all infant formulas it produces that the State 
agency chooses to issue, except exempt infant formulas. Rebates must 
also be paid on any new infant formulas that are introduced after the 
contract is awarded. The solicitation must require bidders that do not 
produce a soy-based infant formula to subcontract with another 
manufacturer to supply a soy-based infant formula under the contract. 
In this case, the bid solicitation must require that the winning bidder 
pay the State agency a rebate on the soy-based infant formula supplied 
by the subcontractor that is issued by the State agency. The bid 
solicitation must require all rebates (including those for soy-based 
infant formula supplied by a subcontractor) to be calculated in 
accordance with paragraph (c)(5) of this section. All of these infant 
formulas are called contract brand infant formulas.
    (ii) Separate solicitations. Under the separate solicitation 
system, a State agency issues two bid solicitations. The

[[Page 51225]]

first solicitation must require the winning bidder to supply and 
provide a rebate on all milk-based infant formulas it produces that the 
State agency chooses to issue, except exempt infant formulas. Rebates 
must also be paid on any new milk-based infant formulas that are 
introduced by the manufacturer after the contract is awarded. These 
infant formulas are considered to be contract brand infant formulas. 
The second bid solicitation must require the winning bidder to supply 
and provide a rebate on all soy-based infant formulas it produces that 
the State agency chooses to issue. Rebates must also be paid on any new 
soy-based infant formulas that are introduced by the manufacturer after 
the contract is awarded. These infant formulas are also considered to 
be contract brand infant formulas.
    (2) On what types and physical forms of infant formula must bids be 
solicited? The bid solicitation must require bidders to specify a 
rebate for each of the types and physical forms of infant formulas 
specified in the following chart. These rebates apply proportionally to 
other infant formulas produced by the winning bidder(s) (see paragraph 
(c)(5) of this section). For purposes of this section the infant 
formula on which bids are solicited is the primary contract brand 
infant formula.

------------------------------------------------------------------------
                                Physical forms of      Infant formula
    Type of infant formula        infant formula        requirements
------------------------------------------------------------------------
 (i) For a single solicitation, the solicitation must require bidders to
               specify a rebate amount for the following:
------------------------------------------------------------------------
A single milk-based infant      Concentrated       Meets requirements
 formula (primary contract       liquid,            under Sec.
 brand infant formula);          powdered, and      246.10(c)(1)(i) and
 bidders must specify the        ready-to-feed.     suitable for routine
 brand name of the milk-based                       issuance to the
 infant formula for which the                       majority of
 rebate is being specified.                         generally healthy,
                                                    full-term infants.
------------------------------------------------------------------------
 (ii) For separate solicitations, the solicitation must require bidders
              to specify a rebate amount for the following:
------------------------------------------------------------------------
(A) A single milk-based infant  Concentrated       Meets requirements
 formula (primary milk-based     liquid,            under Sec.
 contract brand infant           powdered, and      246.10(c)(1)(i) and
 formula); bidders must          ready-to-feed.     suitable for routine
 specify the brand name of the                      issuance to the
 milk-based infant formula for                      majority of
 which the rebate is being                          generally healthy,
 specified.                                         full-term infants.
------------------------------------------------------------------------
(B) A single soy-based infant   Concentrated       Meets requirements
 formula (primary soy-based      liquid,            under Sec.
 contract brand infant           powdered, and      246.10(c)(1)(i).
 formula); bidders must          ready-to-feed.
 specify the brand name of the
 soy-based infant formula for
 which the rebate is being
 specified.
------------------------------------------------------------------------

    (3) How are contracts awarded? A State agency must award the 
contract(s) to the responsive and responsible bidder(s) offering the 
lowest total monthly net price for infant formula or the highest 
monthly rebate (subject to paragraph (c)(3)(ii) of this section) for a 
standardized number of units of infant formula. The State agency must 
calculate the lowest net price using the lowest national wholesale cost 
per unit for a full truckload of the infant formula on the date of the 
bid opening.
    (i) Calculating the standardized number of units of infant formula. 
The State agency must specify a standardized number of units (e.g., 
cans) of infant formula by physical form (e.g., concentrated liquid, 
powdered, and ready-to-feed) to be bid upon. The standardized number of 
units must contain the equivalent of the total number of ounces by 
physical form needed to give the maximum allowance to the average 
monthly number of infants using each form. The number of infants does 
not include infant participants who are exclusively breastfed and those 
who are issued exempt infant formula. The average monthly number of 
infant using each physical form must be based on at least 6 months of 
the most recent participation and issuance data. In order to calculate 
the standardized number of units of infant formula by form to be bid 
upon, the average monthly number of infants using each physical form is 
multiplied by the maximum monthly allowable number of ounces for each 
form (as allowed under Sec. 246.10(c)(1)(vi)), and divided by the 
corresponding unit size (i.e., number of ounces per unit being bid). In 
order to compare bids, total cost is calculated by multiplying this 
standardized number of units by the net price for each physical form. 
Alternative calculations that arrive at a mathematically equivalent 
result are acceptable.
    (ii) Determining the lowest total monthly net price or highest 
rebate. To determine the lowest total monthly net price a State agency 
must multiply the net price per unit by the established standardized 
amount of infant formula to be bid upon as calculated in paragraph 
(c)(3)(i) of this section. If the bid evaluation is based on highest 
rebate offered, the State agency must multiply the rebate offered by 
the established amount of infant formula to be bid upon as calculated 
in paragraph (c)(3)(i) of this section.
    (iii) Highest rebate limitation. Before issuing the bid 
solicitation, a State agency that elects to evaluate bids by highest 
rebate must demonstrate to FNS' satisfaction that the weighted average 
retail prices for different brands of infant formula in the State vary 
by 5 percent or less. The weighted average retail price must take into 
account the prices charged for each type and physical form of infant 
formula by authorized vendors or, if a State agency elects, it may 
include stores that do not participate in the WIC program in the State. 
The State agency must also base calculations on the proportion of each 
type and physical form of infant formula the State agency issues based 
on the data provided to bidders pursuant to paragraph (c)(4) of this 
section.
    (4) What data must be provided to bidders? The State agency must 
provide as part of the bid solicitation the participation and infant 
formula usage data and the standardized number of ounces by physical 
form of infant formula to be used in evaluating bids as described in 
paragraph (c)(3) of this section. The State agency must notify bidders 
that the participation and infant formula usage data does not 
necessarily reflect the actual issuance and redemption that will occur 
under the contract.
    (5) How is the rebate to be calculated on all other contract brand 
infant formulas? All bids must specify the rebates offered by each 
bidder for the

[[Page 51226]]

primary contract brand infant formula(s). After the contract is 
awarded, the State agency must calculate the percentage discount for 
all other contract brand infant formulas (i.e., all other infant 
formulas produced by the bidder other than exempt infant formulas) 
approved for issuance by the State agency. The State agency must use 
the following method in calculating the rebates:
    (i) Calculation of percentage discounts. Rebates for contract brand 
infant formulas, other than the primary contract brand infant 
formula(s) for which bids were received, must be calculated by first 
determining the percentage discount for each physical form (e.g., 
concentrated liquid, powdered, and ready-to-feed) of the primary 
contract brand infant formula(s). The percentage discount must be 
calculated by dividing the rebate for the primary contract brand infant 
formula by the manufacturer's lowest national wholesale price per unit, 
as of the date of the bid opening, for a full truckload of the primary 
contract infant formula. The percentage discounts must be used to 
determine the rebate for all other contract brand infant formulas 
approved for issuance by the State agency.
    (ii) Calculation of rebate amount. The rebate for each type and 
form of all other contract brand infant formulas must be calculated by 
multiplying the percentage discount by the manufacturer's lowest 
national wholesale price per unit, as of the date of the bid opening, 
for a full truckload of the other contract brand infant formula. The 
percentage discount used for each of the other contract brand infant 
formulas depends on the physical form of the infant formula. For 
example, if the percentage discount provided for the primary contract 
brand powdered infant formula is 80 percent of its wholesale price, the 
same percentage discount must be applied to all other contract brand 
powdered infant formulas. The rebate for any types or forms of contract 
brand infant formulas that are introduced during the contract period 
must be calculated using the wholesale prices of these new contract 
brand infant formulas at the time the infant formulas are approved for 
issuance by the State agency.
    (iii) Calculation of rebates during contract term. The rebates 
resulting from the application of the percentage discount must remain 
the same throughout the contract period except for the inflation 
adjustments required in paragraph (c)(5)(iv) of this section.
    (iv) Inflation provisions. Bid solicitations must require the 
manufacturer to adjust for price changes subsequent to the bid opening. 
The inflation provision may require either a cent-for-cent increase in 
the rebate amounts whenever there is any change in the lowest national 
wholesale price for a full truckload of the particular infant formula, 
or may require another equally effective cost adjustment mechanism for 
inflation as established by the State agency in the bid solicitation.
    (6) Does a State agency have to approve the issuance of all 
contract brand infant formulas? No, the State agency may choose to 
approve for issuance, in addition to the primary contract brand infant 
formula(s), none, some, or all of the winning bidder's other infant 
formula(s). In addition, the State agency may require medical 
documentation before issuing any contract brand infant formula (see 
Sec. 246.10(c)(1)(i)) and must require medical documentation before 
issuing any WIC formula covered by Sec. 246.10(c)(1)(iii).
    (d) What is an alternative cost containment system? Under an 
alternative cost containment system, a State agency elects to implement 
an infant formula cost containment system of its choice. The State 
agency may only implement an alternative system if such a system 
provides a savings equal to or greater than a single-supplier 
competitive system. A State agency must conduct a cost comparison 
demonstrating such savings as described in paragraphs (d)(1) and (d)(2) 
of this section.
    (1) How must the State agency structure the bid solicitation? The 
State agency must solicit bids simultaneously using the single-supplier 
competitive system described in paragraph (c) of this section and the 
alternative cost containment system(s) the State agency has selected. 
The State agency may prescribe standards of its choice for the 
alternative cost containment system(s), provided that conditions 
established for each system addressed in the bid solicitation include 
identical bid specifications for the contract period length and the 
types and forms of infant formula(s) to be included in the systems. In 
addition, the alternative cost containment system must cover the types 
and forms of infant formulas routinely issued to the majority of 
generally healthy, full-term infants. The State agency must use the 
procedure outlined in paragraph (d)(2) of this section in conducting a 
cost comparison to determine which system offers the greatest savings 
over the entire contract period specified in the bid solicitation.
    (2) How does the State agency conduct the cost comparison? (i) 
Establishing infant formula cost containment savings. (A) Savings under 
the single-supplier competitive system. The State agency must project 
food cost savings in the single-supplier competitive system based on 
the lowest monthly net price or highest monthly rebate, as described in 
paragraph (c)(3) of this section.
    (B) Savings under an alternative cost containment system. The State 
agency must project food cost savings under alternative cost 
containment systems based on the lowest monthly net cost or highest 
monthly rebate, as described in paragraph (c)(3) of this section. Food 
cost savings must be based on the standardized amount of infant formula 
expected to be issued as calculated for a single-supplier competitive 
system, prorated by the percentage of anticipated total infant formula 
purchases attributable to each manufacturer. The State agency must use 
the aggregate market share of the manufacturers submitting bids in 
calculating its cost savings estimate.
    (C) General. In establishing the potential food cost savings under 
each system, the State agency must take into consideration in its 
estimate of savings any inflation factors which would affect the amount 
of savings over the life of the contract. Further, the State agency 
must not subtract any loss of payments which would occur under the 
terms of a current contract as a result of any State agency action to 
be effective after expiration of the contract.
    (ii) Nutrition services and administration cost adjustment. The 
State agency must deduct from the food cost savings projected for each 
system under this paragraph (d) the nutrition services and 
administration costs associated with developing and implementing--but 
not operating--each cost containment system. This includes any 
anticipated costs for modifying its automated data processing system or 
components of its food delivery system(s), and of training 
participants, local agencies, vendors, and licensed health care 
professionals on the purpose and procedures of the new system. For 
contracts of two years or less, such costs must be proportionately 
distributed over at least a two year period. The State agency must not 
deduct any costs associated with procurement. The State agency must 
itemize and justify all nutrition services and administration cost 
adjustments as necessary and reasonable for the development and 
implementation of each system.
    (iii) Final cost comparison. The State agency must calculate the 
food costs

[[Page 51227]]

savings and deduct the appropriate nutrition services and 
administration costs for each system for which bids were received. The 
State agency must implement the single-supplier competitive system, 
unless its comparative cost analysis shows that, over the length of the 
contract stipulated in the bid solicitation, an alternative cost 
containment system offers savings at least equal to, or greater than, 
those under the competitive single-supplier system. If the comparative 
cost analysis permits selection of the alternative cost containment 
system and the State agency wishes to implement that system, it must 
first submit a State Plan amendment with the calculations and 
supporting documentation for this cost analysis to FNS for approval. 
Only after the calculations are approved by FNS may the State agency 
award the contract or contracts under the alternative cost containment 
system.
    (e) How does a State agency request a waiver of the requirement for 
a single-supplier competitive system? A State agency which, after 
completing the cost comparison in paragraphs (d)(2)(i) through 
(d)(2)(iii) of this section, is required to implement the single-
supplier competitive cost containment system for infant formula 
procurement, may request a waiver from FNS to permit it to implement an 
alternative system. State agencies must support all waiver requests 
with documentation in the form of a State Plan amendment as required 
under Sec. 246.4(a)(14)(xi) and may submit such requests only in either 
of the following circumstances:
    (1) The difference between the single-supplier competitive system 
and the alternative cost containment system is less than 3 percent of 
the savings anticipated under the latter system and not more than 
$100,000 per annum.
    (2) The single-supplier competitive system would be inconsistent 
with the efficient or effective operation of the program. Examples of 
justifications FNS will not accept for a waiver, include, but are not 
limited to: preservation of participant preference for otherwise 
nutritionally equivalent infant formulas; maintenance of health care 
professionals' prerogatives to prescribe otherwise nutritionally 
equivalent infant formulas for non-medical reasons; potential loss of 
free or otherwise discounted materials to WIC clinics and other health 
care facilities; potential inability of a manufacturer selected in 
accordance with applicable State procurement procedures to supply 
contractually-specified amounts of infant formula; and the possibility 
of interrupted infant formula supplies to retail outlets as a 
consequence of entering into a contract with a single manufacturer.
    (f) How does a State agency request a postponement of the 
requirement for a continuously operated cost containment system for 
infant formula? A State agency may request a postponement of the 
requirement to continuously operate a cost containment system for 
infant formula that has been implemented in accordance with this 
section. However, a State agency may only request a postponement when 
it has taken timely and responsible action to implement a cost 
containment system before its current system expires but has been 
unable to do so due to procurement delays, disputes with FNS concerning 
cost containment issues during the State Plan approval process or other 
circumstances beyond its control. The written postponement request must 
be submitted to FNS before the expiration of the current system. The 
postponement period may be no longer than 120 days. If a postponement 
is granted, the State agency may extend, renew or otherwise continue an 
existing system during the period of the postponement.
    (g) May a State agency implement cost containment systems for other 
supplemental foods? Yes, when a State agency finds that it is 
practicable and feasible to implement a cost containment system for any 
WIC food other than infant formula, the State agency must fully 
implement that system in accordance with the time frames established by 
the State agency and notification must be given to FNS by means of the 
State agency's State Plan.
    (h) What are the implementation time frames for Indian State 
agencies that lose their exemption from the infant formula cost 
containment requirement? If an Indian State agency operating a retail 
food delivery system expands its program participation above 1000 and 
thereby loses its exemption from the requirements of paragraph (a) of 
this section regarding the method of cost containment for infant 
formula, then the Indian State agency must begin compliance with 
paragraph (a) of this section in accordance with time frames 
established by FNS.
    (i) What are the penalties for failure to comply with the cost 
containment requirements? Any State agency that FNS determines to be 
out of compliance with the cost containment requirements of this part 
must not draw down on or obligate any Program grant funds, nor will FNS 
make any further Program funds available to such State agency, until it 
is in compliance with these requirements.
    (j) What provisions are prohibited to be included in cost 
containment contracts? A State agency may not issue bid solicitations 
or enter into contracts which:
    (1) Prescribe conditions that would void, reduce the savings under 
or otherwise limit the original contract if the State agency solicited 
or secured bids for, or entered into, a subsequent cost containment 
contract to take effect after the expiration of the original contract;
    (2) Does not include the registration and certification 
requirements in Sec. 246.10(f); or
    (3) Require infant formula manufacturers to submit bids on more 
than one of the systems specified in the invitation for bids.
    (k) What are the requirements for the national cost containment bid 
solicitation and selection for infant formula? FNS will solicit and 
select bids for infant formula rebates on behalf of State agencies with 
retail food delivery systems based on the following guidelines:
    (1) FNS will solicit bids and select the winning bidder(s) for 
infant formula cost containment contracts only if two or more State 
agencies with retail food delivery systems request FNS to conduct bid 
solicitation and selection on their behalf. FNS will conduct the bid 
solicitation and selection process only and will not award or enter 
into any infant formula cost containment contract on behalf of the 
individual State agencies. Each State agency will individually award 
and enter into infant formula cost containment contract(s) with the 
winning bidder(s). State agencies must obtain the rebates directly from 
the infant formula manufacturer(s). FNS will conduct the bid 
solicitation in accordance with this paragraph (k) and the competitive 
bidding procurement procedures of the State agency with the highest 
infant participation in the bid group on whose behalf bids are being 
solicited. Any bid protests and contractual disputes are the 
responsibility of the individual State agencies to resolve.
    (2) FNS will make a written offer to all State agencies to conduct 
bid solicitation and selection on their behalf at least once every 12 
months. FNS will send State agencies a copy of the draft Request for 
Rebates when making the offer to State agencies. Only State agencies 
that provide the information required by this paragraph (k)(2) in 
writing, signed by a responsible State agency official, by certified 
mail, return receipt requested or by hand delivery with evidence of 
receipt within 15 days of receipt of the offer will be included

[[Page 51228]]

in the national bid solicitation and selection process. Each interested 
State agency must provide:
    (i) A statement that the State agency requests FNS to conduct bid 
solicitation and selection on its behalf;
    (ii) A statement of the State agency's minimum procurement 
procedures applicable to competitive bidding (as defined in Sec. 246.2) 
for infant formula cost containment contracts and supporting 
documentation;
    (iii) A statement of any limitation on the duration of infant 
formula cost containment contracts and supporting documentation;
    (iv) A statement of any contractual provisions required to be 
included in infant formula cost containment contracts by the State 
agency;
    (v) The most recent available average monthly number of infant 
participants less those infant participants who are exclusively 
breastfed and those who are issued exempt infant formula. The average 
monthly participation level must be based on at least 6 months of 
participation data.
    (vi) Infant formula usage rates by type (e.g., milk-based or soy-
based), form (e.g., concentrated, powdered, ready-to-feed), container 
size, and supporting documentation;
    (vii) A statement of the termination date of the State agency's 
current infant formula cost containment contract; and
    (viii) Any other related information that FNS may request.
    (3) If FNS determines that the number of State agencies making the 
request provided for in paragraph (k)(2) of this section so warrants, 
FNS may, in consultation with such State agencies, divide such State 
agencies into more than one group and solicit bids for each group. 
These groups of State agencies are referred to as ``bid groups''. In 
determining the size and composition of the bid groups, FNS will, to 
the extent practicable, take into account the need to maximize the 
number of potential bidders so as to increase competition among infant 
formula manufacturers and the similarities in the State agencies' 
procurement and contract requirements (as provided by the State 
agencies in accordance with paragraphs (k)(2)(ii), (k)(2)(iii) and 
(k)(2)(iv) of this section). FNS reserves the right to exclude a State 
agency from the national bid solicitation and selection process if FNS 
determines that the State agency's procurement requirements or 
contractual requirements are so dissimilar from those of the other 
State agencies in any bid group that the State agency's inclusion in 
the bid group could adversely affect the bids.
    (4) For each bid group formed pursuant to paragraphs (k)(2) and 
(k)(3) of this section, FNS will use for soliciting bids the 
competitive bidding procurement procedures of the State agency in the 
group with the highest infant participation. To the extent not 
inconsistent with the requirements of this paragraph (k), FNS will use 
that set of procedures in soliciting the bids for that bid group of 
State agencies. FNS will notify each State agency in the bid group of 
the choice and provide them each a copy of the procurement procedures 
of the chosen State agency. Each State agency must provide FNS a 
written statement, signed by a responsible State agency official, by 
certified mail, return receipt requested or by hand delivery with 
evidence of receipt stating whether that State agency is legally 
authorized to award an infant formula cost containment contract 
pursuant to that set of procedures within 10 days of the receipt of the 
notification. If the State agency determines it is not legally 
authorized to award an infant formula cost containment contract 
pursuant to those procedures, that State agency may not continue in 
that round of the national bid solicitation and selection.
    (5) At a minimum, in soliciting bids FNS will address the 
following:
    (i) Unless FNS determines that doing so would not be in the best 
interest of the Program, bids will be solicited for either:
    (A) A single contract for each State agency under which the winning 
bidder will be required to supply and provide rebates on all infant 
formulas produced by that manufacturer (except exempt infant formulas) 
that are issued by the State agency. If that manufacturer does not 
produce a soy-based infant formula, the winning bidder will be required 
to subcontract with another manufacturer for a soy-based infant formula 
and the winning bidder will be required to pay a rebate on the soy-
based infant formula; or
    (B) Two separate contracts for each State agency. Under the first 
contract, the winning bidder will supply and provide a rebate on all 
the milk-based infant formulas the winning bidder produces (except 
exempt infant formulas) that are issued by the State agency and under 
the second contract the winning bidder will supply and provide a rebate 
on all the soy-based infant formulas the winning bidder produces 
(except exempt infant formulas) that are issued by the State agency.
    (ii) The infant formula cost containment contract(s) to be entered 
into by the State agencies and infant formula manufacturers must 
provide for a constant net price for infant formula for the full term 
of the infant formula cost containment contract(s).
    (iii) The duration of the infant formula cost containment contracts 
for each bid group will be determined by FNS in consultation with the 
State agencies. The term will be for a period of not less than 2 years, 
unless the law applicable to a State agency regarding the duration of 
infant formula cost containment contracts is more restrictive than this 
paragraph (k)(5)(iii). In such cases, the term of the contract for only 
that State agency will be for one year, with the option provided to the 
State agency to extend the contract for a specified number of 
additional years (to be determined by FNS in consultation with the 
State agency). The date on which the individual State agencies' current 
infant formula cost containment contracts terminate may vary, so the 
infant formula cost containment contracts awarded by the State agencies 
within a bid group may begin on different dates.
    (iv) FNS will not prescribe conditions that are prohibited under 
paragraph (j) of this section.
    (v) FNS will solicit bids for rebates only from infant formula 
manufacturers. FNS may limit advertising to contacting in writing each 
infant formula manufacturer which has registered with the Secretary of 
Health and Human Services under the Federal Food, Drug, and Cosmetic 
Act (21 U.S.C. 321 et seq.).
    (6) FNS will select the winning bidder(s). The winning bidder(s) 
will be the responsive and responsible bidder(s) meeting the 
specifications and all bid terms and conditions which offers the lowest 
net price weighted to take into account infant formula usage rates and 
infant participation. In all instances the winning bidder(s) will be 
those which singly or in combination yield the greatest aggregate 
savings based on the net price weighted to take into account the infant 
formula usage rates. To break a tie between 2 equally low bids, FNS 
will select the bidder to be awarded the infant formula cost 
containment contract by a drawing by lot limited to the bidders which 
submitted those bids.
    (7) Once FNS has conducted bid selection, a State agency may 
decline to award the infant formula cost containment contract(s) only 
if the State agency determines that awarding the contract(s) would not 
be in the best interests of its Program, taking into account whether 
the national bid solicitation and selection would achieve a lower 
aggregate savings.

[[Page 51229]]

    (8) As soon as practicable after selecting the winning bid(s), FNS 
will notify the affected State agencies in writing of the bid results, 
including the name(s) of the winning bidder(s). If a State agency 
chooses to request approval to decline to award the infant formula cost 
containment contract(s) in accordance with paragraph (k)(7) of this 
section, it must notify FNS in writing, signed by a responsible State 
agency official, together with supporting documentation, by certified 
mail, return receipt requested or by hand delivery with evidence of 
receipt within 10 days of the State agency's receipt of this 
notification of bid results.
    (9) If FNS approves any State agency's request to decline to award 
the infant formula cost containment contract(s) in accordance with 
paragraphs (k)(7) and (k)(8) of this section, FNS will notify the 
bidders of the decision. If two or more State agencies remain in the 
group, FNS will require the bidders to indicate in writing whether they 
wish to withdraw or modify their bids within 5 days of receipt of this 
notification. FNS will again permit State agencies to decline to award 
the infant formula cost containment contract(s) in accordance with 
paragraphs (k)(7) and (k)(8) of this section. If FNS approves these 
additional State agency requests to decline contract awards, FNS may 
conduct a resolicitation of bids in accordance with this paragraph (k).

    Dated: August 10, 2000.
Shirley R. Watkins,
Under Secretary, Food, Nutrition and Consumer Services.
[FR Doc. 00-21423 Filed 8-22-00; 8:45 am]
BILLING CODE 3410-13-U