[Federal Register Volume 70, Number 228 (Tuesday, November 29, 2005)]
[Rules and Regulations]
[Pages 71708-71731]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-23365]



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Part III





Department of Agriculture





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Food and Nutrition Service



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7 CFR Part 246



Special Supplemental Nutrition Program for Women, Infants and Children 
(WIC): Vendor Cost Containment; Interim Rule

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

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DEPARTMENT OF AGRICULTURE

Food and Nutrition Service

7 CFR Part 246

RIN 0584-AD71


Special Supplemental Nutrition Program for Women, Infants and 
Children (WIC): Vendor Cost Containment

AGENCY: Food and Nutrition Service, USDA.

ACTION: Interim rule.

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SUMMARY: This interim rule amends the regulations governing the Special 
Supplemental Nutrition Program for Women, Infants and Children (WIC) to 
strengthen vendor cost containment. The rule incorporates into program 
regulations new legislative requirements that affect the selection, 
authorization, and reimbursement of retail vendors. These requirements 
are contained in the Child Nutrition and WIC Reauthorization Act of 
2004, enacted on June 30, 2004. The rule reflects the statutory 
provisions that require State agencies to implement a vendor peer group 
system, competitive price criteria, and allowable reimbursement levels 
in a manner that ensures that the WIC Program pays authorized vendors 
competitive prices for supplemental foods. It also requires State 
agencies to ensure that vendors that derive more than 50 percent of 
their annual food sales revenue from WIC food instruments do not result 
in higher food costs to the program than do other vendors. The intent 
of these provisions is to maximize the number of eligible women, 
infants, and children served with available Federal funding.

DATES: Effective Date: This rule is effective December 29, 2005.
    Implementation Date: State agencies must implement the provisions 
of this rule no later than December 30, 2005.
    Comment Date: To be assured of consideration, comments on this 
interim rule must be received by the Food and Nutrition Service (FNS) 
on or before November 29, 2006.

ADDRESSES: FNS invites interested persons to submit comments on this 
interim rule. Comments may be submitted by any of the following 
methods:
     Mail: Send comments to Patricia Daniels, Director, 
Supplemental Food Programs Division, Food and Nutrition Service, USDA, 
3101 Park Center Drive, Room 528, Alexandria, Virginia 22302, (703) 
305-2746.
     Web Site: Go to http://www.fns.usda.gov/wic. Follow the 
online instructions for submitting comments through the link at the 
Supplemental Food Programs Division Web site.
     E-Mail: Send comments to [email protected]. Include 
Docket ID Number 0584-AD71, Vendor Cost Containment Interim Rule, in 
the subject line of the message.
     Federal eRulemaking Portal: Go to http://www.regulations.gov. Follow the online instructions for submitting 
comments.
    All comments submitted in response to this interim rule will be 
included in the record and will be made available to the public. Please 
be advised that the substance of the comments and the identities of the 
individuals or entities submitting the comments will be subject to 
public disclosure. All written submissions will be available for public 
inspection at the address above during regular business hours (8:30 
a.m. to 5 p.m.), Monday through Friday.
    FNS also plans to make the comments publicly available by posting a 
copy of all comments on the FNS Web site at http://www.fns.usda.gov/wic.

FOR FURTHER INFORMATION CONTACT: Debra Whitford, Chief of the Policy 
and Program Development Branch, Supplemental Food Programs Division, at 
the address indicated above or at (703) 305-2746, during regular 
business hours (8:30 a.m.-5 p.m.), Monday through Friday.

SUPPLEMENTARY INFORMATION: 

Executive Order 12866

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

Regulatory Impact Analysis

    As required for all rules that have been designated as Significant 
by the Office of Management and Budget, a Regulatory Impact Analysis 
was developed for the WIC Vendor Cost Containment Interim Rule. A 
complete copy of the Impact Analysis appears in the appendix to this 
rule.

Need for Action

    This action is needed to implement the vendor cost containment 
provisions of the Child Nutrition and WIC Reauthorization Act of 2004, 
Public Law 108-265. The rule requires WIC State agencies to operate 
vendor management systems that effectively contain food costs by 
ensuring that prices paid for supplemental foods are competitive. The 
rule also responds to data which indicate that WIC food expenditures 
increasingly include payments to a type of vendor whose prices are not 
governed by the market forces that affect most retail grocers. As a 
result, the prices charged by these vendors tend to be higher than 
those of other retail grocery stores participating in the program. To 
ensure that the program pays competitive prices, this rule codifies the 
new statutory requirements for State agencies to use in evaluating 
vendor applicants' prices during the vendor selection process and when 
paying vendors for supplemental foods following authorization.
    While the Child Nutrition and WIC Reauthorization Act mandates that 
States establish peer groups, competitive price criteria and allowable 
reimbursement levels and states that these requirements must result in 
the outcome of paying above-50-percent vendors no more than regular 
vendors, the Act does not specify particular criteria for peer groups 
or acceptable methods of setting competitive price criteria and 
allowable reimbursement levels. FNS considered mandating specific means 
of developing peer groups, competitive price criteria and allowable 
reimbursement levels in order to ensure that the outcome of this 
legislation was achieved. However, given State agencies' responsibility 
to manage WIC as a discretionary grant program, the varying retail food 
market conditions in each State, and the wide variations in current 
vendor cost containment systems operated by State agencies, FNS 
believes that State agencies need flexibility to develop their own peer 
groups, competitive price criteria and allowable reimbursement levels.
    Thus, the rule gives State agencies flexibility to design cost 
containment practices that would be effective in their own markets and 
would ensure adequate participant access. In addition, there is little 
information about the effectiveness of particular cost containment 
practices in the variety of markets represented by the 89 State 
agencies. Mandating more specific means of developing peer groups, 
competitive price criteria and allowable reimbursement levels could 
have unintended, negative consequences on participant access, food 
costs and administrative burden.
    As State agencies gain experience and the results of their vendor 
cost containment practices become apparent, FNS may develop further 
regulations and guidance to improve WIC vendor cost containment. In the 
interim, FNS believes that the current rule will substantially 
accomplish the goal of the Act of containing food costs and ensuring 
that above-50-percent vendors

[[Page 71709]]

do not result in higher costs to the program than regular vendors.
    As noted previously, FNS believes that State agencies need 
flexibility to develop their own peer groups, competitive price 
criteria and allowable reimbursement levels. Given State agencies' 
responsibility to manage WIC as a discretionary grant program, the 
varying retail food market conditions in each State, the wide 
variations in current vendor cost containment systems operated by State 
agencies, the limited amount of information about the effectiveness of 
particular cost containment practices in the variety of markets 
represented by the 89 State agencies, and the need to minimize 
administrative burden, this is the most appropriate approach for the 
interim final rule.
    In order to better assess the effectiveness of specific cost 
containment strategies, FNS will be collecting and analyzing data from 
State agencies, in anticipation of issuing a final rule. This will 
enable the agency to analyze the effect of particular vendor peer group 
systems, competitive price criteria, and allowable reimbursement levels 
on WIC food prices, participant access, the vendor community and a 
range of other measures. FNS will also be collecting information on 
administrative burden associated with the new requirements. This will 
enable FNS to identify and consider a reasonable number of regulatory 
alternatives when considering the final rule and adopt the most cost-
effective or least burdensome alternative that achieves the objectives 
of the rule. While we expect the final rule to be promulgated within 
three years, it is important that sufficient time be allowed to assess 
the impacts of this interim final rule before moving to alter any of 
its provisions.

Benefits

    The WIC Program will benefit from the provisions of this rule by 
reducing unnecessary food expenditures, which increases the potential 
to serve more eligible women, infants, and children for the same cost. 
The rule should have the effect ensuring that payments to vendors, 
particularly vendors that derive more than 50 percent of their annual 
food sales revenue from WIC food instruments reflect competitive prices 
for WIC foods. Currently, the WIC Program pays vendors whose food sales 
consist primarily of WIC transactions substantially more for 
supplemental foods than it pays other authorized vendors. Under this 
rule, State agencies that choose to authorize these vendors will 
demonstrate that payments to them do not exceed the competitive prices 
paid to other vendors. FNS conservatively estimates that implementation 
of the rule will result in a cost savings of approximately $75 million 
annually.

Costs

    In order to comply with this rule, State agencies will need to make 
one-time changes in their vendor cost containment systems. Some State 
agencies may already be in full or partial compliance with the rule, 
while others may demonstrate that they meet the conditions for an 
exemption from the vendor peer group system requirement. Many State 
agencies, particularly those that choose to authorize vendors that rely 
predominantly on WIC food instruments for food sales revenue, will 
incur additional costs and administrative burden to achieve compliance 
with its provisions. These costs are associated with establishing or 
restructuring vendor peer groups, revising competitive price criteria 
and allowable reimbursement levels for those peer groups, collecting 
and monitoring vendor shelf prices for supplemental foods, and 
evaluating payments to vendors. Variations in State agency vendor 
management systems and staffing resources make it difficult to derive a 
cost estimate. State agencies will not receive additional funds to 
administer the program with these new requirements.
    Some WIC vendors, particularly smaller stores that are not also 
authorized by the Food Stamp Program, may incur costs to compile data 
on their total annual food sales. State agencies will require this data 
in order to determine, as required by law, whether a vendor derives 
more than 50 percent of their total annual food sales revenue from WIC 
food instruments.

Regulatory Flexibility Act

    This rule has been reviewed with regard to the requirements of the 
Regulatory Flexibility Act (5 U.S.C. 601-612). FNS does not believe 
this rule will have a significant economic impact on a substantial 
number of small entities. With the high degree of State flexibility 
allowable under this rule, small entities will be impacted differently 
in each State depending upon how that State chooses to meet the 
requirements set forth here. It is therefore not feasible to accurately 
estimate the rule's impact on small entities. As FNS is concerned about 
these impacts, we plan to collect data on the implementation of this 
interim final rule and the options States select in order to better 
assess the impact for the final rulemaking and the Final Regulatory 
Flexibility Analysis and publish it for comments.
    In fulfilling the intent of the Child Nutrition and WIC 
Reauthorization Act of 2004, the rule may have a significant economic 
impact on a small number of vendors that have been authorized to 
participate in the WIC Program. These vendors tend to be smaller 
grocery stores that serve WIC participants exclusively or 
predominantly, have a large volume of WIC transactions, and are not 
subject to the retail market forces that keep food prices at 
competitive levels. In accordance with the law, the rule requires that 
State agencies implement effective competitive price criteria in 
selecting and reimbursing vendors, including assurance that payments to 
vendors that derive more than 50 percent of their annual food sales 
revenue from WIC food instruments do not result in higher food costs to 
the program than other vendors. Only those vendors that are able to 
meet competitive pricing requirements will be able to continue 
participating in the program. Currently FNS estimates that between 
three and four percent of the approximately 45,000 authorized vendors 
will need to make changes in the prices that they offer the WIC Program 
in order to be deemed competitive.

Public Law 104-4

    Title II of the Unfunded Mandates Reform Act of 1995 (UMRA), Public 
Law 104-4, establishes requirements for Federal agencies to assess the 
effects of their regulatory actions on State, local and tribal 
governments and the private sector. Under section 202 of the UMRA, FNS 
generally must prepare a written statement, including a cost benefit 
analysis, for proposed and final rules with ``Federal mandates'' that 
may result in expenditures by State, local or tribal governments, in 
the aggregate, or the private sector, of $100 million or more in any 
one year. When such a statement is needed for a rule, section 205 of 
the UMRA generally requires FNS to identify and consider a reasonable 
number of regulatory alternatives and adopt the most cost-effective or 
least burdensome alternative that achieves the objectives of the rule.
    This interim rule contains no Federal mandates (under the 
provisions of Title II of the UMRA) for State, local and tribal 
governments or the private sector of $100 million or more in any one 
year. Thus, the rule is not subject to the requirements of sections 202 
and 205 of the UMRA.

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Executive Order 12372

    The Special Supplemental Nutrition Program for Women, Infants and 
Children (WIC) is listed in the Catalog of Federal Domestic Assistance 
under 10.557. For the reasons set forth in the final rule in 7 CFR part 
3015, subpart V and related Notice (48 FR 29115), this program is 
included in the scope of Executive Order 12372, which requires 
intergovernmental consultation with State and local officials.

Federalism Summary Impact Statement

    Executive Order 13132 requires Federal agencies to consider the 
impact of their regulatory actions on State and local governments. 
Where such actions have federalism implications, agencies are directed 
to provide a statement for inclusion in the preamble to the regulations 
describing the agency's considerations in terms of the following three 
categories called for under section (6)(b)(2)(B) of Executive Order 
13132.

Prior Consultation With State Officials

    State agencies have expressed concerns and shared information 
regarding implementation of the new vendor cost containment legislative 
requirements. Because the WIC Program is a State-administered, 
federally funded program, our regional offices have formal and informal 
discussions with State agencies on an ongoing basis regarding program 
implementation and policy issues. This arrangement allows State 
agencies to raise questions and provide comments that form the basis 
for many of the implementation detail decisions in this and other WIC 
Program rules. Following the enactment of Public Law 108-265, several 
regional offices convened meetings with State WIC staff that included 
discussion of the vendor cost containment provisions of this law. As a 
result of these meetings, FNS continues to receive State agency 
requests for policy guidance on the vendor cost containment 
requirements. These questions have helped us make the rule responsive 
to State agency concerns.
    In addition, in October 2004, the Supplemental Food Programs 
Division (SFPD) convened a meeting of WIC State agency representatives, 
USDA headquarters and regional office staff, and an outside expert on 
competitive pricing systems, to obtain more information on State 
agencies' current vendor cost containment systems. During the meeting, 
participants identified salient issues that State agencies are likely 
to confront in implementing the new competitive pricing requirements. 
Following the meeting, FNS received input from additional State 
agencies on their current competitive pricing policies, as well as from 
representatives of retail grocers.

Nature of Concerns and the Need To Issue This Rule

    State agencies have inquired about the intent of the vendor cost 
containment provisions, particularly as amended by Public Law 108-265. 
They have asked whether these provisions require State agencies to 
improve the effectiveness of their competitive pricing systems, or 
whether they primarily address the competitiveness of prices charged by 
a comparatively small number of stores that derive their revenue from 
WIC food instruments predominantly and that generally charge higher 
prices than other authorized vendors. State agencies also have 
requested clarification of the term ``comparable vendors;'' guidance on 
how to determine a vendor's revenue from food sales; criteria for 
developing effective vendor peer groups and for obtaining an exemption 
from the vendor peer group requirement; and criteria for identifying, 
grouping, and setting allowable reimbursement levels for stores that 
are likely to derive more than 50 percent of their annual revenue from 
food sales from WIC transactions. Some State agencies have expressed 
concern over the potential cost of implementing changes to their 
automated systems for editing and payment of WIC food instruments. Many 
have indicated that the regulations should allow them maximum 
flexibility to define the competitive pricing approaches that best suit 
their individual circumstances.

Extent to Which We Will Meet Those Concerns

    FNS has considered the impact of this interim rule on WIC State and 
local agencies. This rule makes changes required by law that became 
effective October 1, 2004. Through the rulemaking process, FNS has 
attempted to balance the need for State agencies to meet the new 
competitive pricing requirements against the administrative challenges 
that State agencies are likely to encounter in meeting them. These 
challenges include the commitment of adequate resources to configuring 
vendor peer groups and allowable reimbursement methodologies, ongoing 
monitoring of vendors' prices, and maintaining competitive pricing over 
time.
    There is limited information available on proven competitive 
pricing approaches. Variations in State agency vendor populations, 
geography, and other characteristics also preclude the use of a 
standardized approach. Therefore, this rule sets forth principles to 
guide State agency efforts, while allowing State agencies the 
flexibility to meet the legislative requirements through a variety of 
acceptable approaches. The inclusion of competitive pricing principles 
in this interim rule responds to State agency requests for criteria for 
developing effective peer groups and allowable reimbursement levels, so 
that foods can be purchased at the lowest prices consistent with 
maintaining adequate participant access to vendors.

Executive Order 12988

    This rule has been reviewed under Executive Order 12988, Civil 
Justice Reform, and is intended to have preemptive effect with respect 
to any State or local laws, regulations or policies which conflict with 
its provisions, otherwise impede its full implementation, or result in 
any delay of implementation of provisions beyond the statutory 
implementation date established in the Child Nutrition and WIC 
Reauthorization Act of 2004, Public Law 108-265. Section 203(e)(10) of 
Public Law 108-265 amends section 17(h) of the Child Nutrition Act of 
1966 by adding the new paragraph 17(h)(11) which specifies that the 
State agencies shall comply with the provisions of the paragraph not 
later than 18 months after the date of enactment. Since the amendment 
was enacted on June 30, 2004, State agencies must be in compliance by 
December 30, 2005. This rule is not intended to have retroactive effect 
unless so specified in the DATES paragraph of this preamble. Prior to 
any judicial challenge to the provisions of this rule or the 
application of its provisions, all applicable administrative procedures 
must be exhausted.

Civil Rights Impact Analysis

    FNS has reviewed this interim rule in accordance with Departmental 
Regulation 4300-4, ``Civil Rights Impact Analysis,'' to identify and 
address any major civil rights impacts the rule might have on 
minorities, women, and persons with disabilities. FNS has determined 
that the rule's intent and provisions will not adversely affect access 
to WIC services by eligible persons. All data available to FNS indicate 
that protected individuals have the same opportunity to participate in 
the WIC Program as non-protected individuals. FNS specifically 
prohibits State and local government agencies that administer the WIC 
Program from engaging in actions that discriminate based on race, 
color, national origin, sex, age or disability. Section 246.8 of the 
WIC regulations (7

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CFR part 246) indicates that Department of Agriculture regulations on 
non-discrimination (7 CFR parts 15, 15a and 15b) and FNS instructions 
ensure that no person shall on the grounds of race, color, national 
origin, age, sex, or disability, be excluded from participation in, be 
denied benefits of, or be otherwise subjected to discrimination under 
the Program.
    Discrimination in any aspect of program administration is 
prohibited by Department of Agriculture regulations on non-
discrimination (7 CFR parts 15, 15a, and 15b), the Age Discrimination 
Act of 1975 (Pub. L. 94-135), the Rehabilitation Act of 1973 (Pub. L. 
93-112, section 504), and title VI of the Civil Rights Act of 1964 (42 
U.S.C. 2000d). Enforcement action may be brought under any applicable 
Federal law. Title VI complaints shall be processed in accordance with 
7 CFR part 15. Where State agencies have options, and they choose to 
implement a particular provision, they must implement it in such a way 
that it complies with the Sec.  246.8 of the WIC regulations.

Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (44 U.S.C. Chap. 35; see 5 CFR 
1320) requires that the Office of Management and Budget (OMB) approve 
all collections of information by a Federal agency before they can be 
implemented. Respondents are not required to respond to any collection 
of information unless it displays a current valid OMB control number. 
This interim rule contains new information collections that are subject 
to review and approval by the Office of Management and Budget. FNS is 
submitting for public comment the information collection burden that 
would result from the implementation of the provisions in this rule.
    Comments are invited on: (a) Whether the proposed collection of 
information is necessary for the proper performance of the functions of 
the agency, including whether the information shall have practical 
utility; (b) the accuracy of the agency's estimate of the burden of the 
proposed collection of information, including the validity of the 
methodology and assumptions used; (c) ways to enhance the quality, 
utility, and clarity of the information to be collected; and (d) ways 
to minimize the burden of the collection of information on those who 
are to respond, including use of appropriate automated, electronic, 
mechanical, or other technological collection techniques or other forms 
of information technology.
    Comments may be sent to Debra R. Whitford, Chief, Policy and 
Program Development Branch, Supplemental Food Programs Division, Food 
and Nutrition Service, U.S. Department of Agriculture, 3101 Park Center 
Drive, Room 522, Alexandria, Virginia 22302. Comments may also be 
submitted via the FNS Web site at http://www.fns.usda.gov/wic, by 
following the online instructions. In all cases, please label your 
comments as ``Proposed Collection of Information: WIC Vendor Cost 
Containment Interim Rule.'' All written comments will be open for 
public inspection at the office of the Food and Nutrition Service 
during regular business hours (8:30 a.m. to 5 p.m. Monday through 
Friday) at 3101 Park Center Drive, Room 522, Alexandria, Virginia 
22302. All responses to this notice will be summarized and included in 
the request for OMB approval. All comments will be a matter of public 
record.
    OMB Number: 0584-0043.
    Expiration Date: March 31, 2007.
    Type of Request: Revision of a currently approved collection.
    Abstract: The information collection and reporting burden 
associated with this interim rule meets new vendor cost containment 
requirements contained in the Child Nutrition and WIC Reauthorization 
Act of 2004, Public Law 108-265. These requirements affect the 
selection, authorization, and reimbursement of WIC vendors. The rule 
requires State agencies to report on a number of factors so that FNS 
can meet the goals of effectively containing food costs by ensuring 
that the WIC Program pays competitive prices for WIC foods and 
providing guidance to State agencies on best competitive pricing 
practices. These include new State Plan components, collection of 
information to identify vendors that derive more than 50 percent of 
their food sales revenue from WIC food instruments, and collection of 
vendor shelf prices for WIC foods. FNS deems this information 
collection and reporting burden to be necessary in order to fulfill the 
legislative requirements and ensure State agency compliance with the 
interim rule.
    Section 246.4(a)(14)(xv) is a new section on vendor cost 
containment. It requires a State agency to include in the State Plan a 
description of the vendor peer group system and allowable reimbursement 
levels that demonstrates that the State agency is in compliance with 
WIC cost containment provisions. The vendor peer group description will 
include the criteria used to classify vendors into groups, the number 
and types of vendors in each peer group, identification of peer groups 
with vendors that derive more than 50 percent of their annual food 
sales revenue from WIC food instruments and comparable vendor peer 
groups, and the competitive price criteria and maximum reimbursement 
levels applicable to each peer group. The State Plan also must include 
the information specified in Sec.  246.12(g)(4)(iv) of the interim rule 
on non-profit vendors that the State agency plans to exempt from the 
competitive price criteria and allowable reimbursement levels that are 
applicable to other vendors. State agencies seeking an exemption from 
the vendor peer group requirement based on the conditions stated in 
Sec.  246.12(g)(4)(v) of the interim rule must submit a justification 
with documentation supporting their request. The justification will 
consist largely of a detailed description of how the State agency's 
alternative vendor cost containment system operates, with shelf price 
and/or redemption data to demonstrate that the system is as effective 
as a vendor peer group system. Under Sec.  246.12(g)(4)(vi) of the 
rule, State agencies that authorize vendors that derive more than 50 
percent of their annual food sales revenue from WIC food instruments 
must describe their methodology for ensuring that average payments per 
food instrument to such vendors do not exceed average payments per food 
instrument to comparable vendors in order to obtain vendor cost 
containment certification. To demonstrate that their competitive price 
criteria and allowable reimbursement levels meet regulatory 
requirements, State agencies will provide the following data for 
selected food instruments redeemed by vendors that derive more than 50 
percent of their annual food sales from WIC food instruments and 
regular vendors: The number of food instruments redeemed; average food 
instrument redemption amounts and standard deviations by peer group; 
and the average variance in redemption amounts; the total dollar amount 
of WIC redemptions by peer group; and statewide weighted average 
redemption prices to demonstrate whether vendors that derive more than 
50 percent of their annual food sales from WIC food instruments 
resulted in higher costs than would have occurred if participants had 
used other vendors. State agencies using EBT systems must make similar 
comparisons between the prices paid to vendors that derive more than 50 
percent of their annual food sales revenue from WIC food instruments 
and the prices paid to comparable vendors. FNS will require annual 
updating of selected food

[[Page 71712]]

instrument redemption data.--874 hours
    Section 246.12(g)(4)(i) requires a State agency to collect annual 
food sales data from authorized vendors and vendor applicants in order 
to identify the vendors that derive, or that may be expected to derive, 
more than 50 percent of their food sales revenue from WIC food 
instruments. A State agency that elects to authorize vendors that meet 
the above-50-percent criterion must identify these vendors annually 
using a methodology approved by FNS. A State agency that chooses not to 
authorize such vendors must use an approved methodology to identify 
vendor applicants that would be expected to meet the more than 50 
percent criterion if authorized.--45,178 hours.
    Section 246.12(g)(4)(ii)(B) requires State agencies to collect the 
shelf prices for WIC-approved foods from authorized retail vendors 
twice annually. In meeting this requirement, a State agency may limit 
data collection to prices that have changed from a vendor's previous 
submission. A State agency also may collect prices from a random sample 
of authorized vendors and/or for selected supplemental foods.--90,178 
hours.
    Respondents: WIC State agencies and vendors.
    Estimated Number of Respondents: 89 State agencies and 45,000 
vendors.
    Estimate of Burden: Estimates of the information collection and 
reporting burden contained in this interim rule are detailed below.

                                        Estimated Annual Reporting Burden
----------------------------------------------------------------------------------------------------------------
                                                                                         Estimated
                                          Estimated                                       average     Estimated
        Section of interim rule           number of      Data collections or reports       burden       annual
                                         respondents          required annually          hours per      burden
                                                                                          response      hours
----------------------------------------------------------------------------------------------------------------
246.4(a)(14)(xv)
     Description of vendor peer           89  1...............................            4          356
     group system and allowable
     reimbursement levels; average
     redemption amounts for selected
     food instruments.
     Notification of exemption             5  1...............................            1            5
     of non-profit vendors.
     Request for exemption from           30  1--every three years............            8           80
     vendor peer group requirement.
     Information required for             65  1--every three years............            8          173
     certification of vendor cost        ...........  1...............................  ...........  ...........
     containment system and to monitor            65                                              4          260
     ongoing compliance with
     certification requirements.
246.12(g)(4)(i)........................           89  1...............................            2          178
                                              45,000  1...............................            1       45,000
246.12(g)(4)(ii)(B)....................           89  2...............................            1          178
                                              45,000  2...............................            1       90,000
                                                                                                    ------------
    Burden hours due to program changes  ...........  ................................  ...........      136,230
Total adjustments *....................  ...........  ................................  ...........          203
Currently Approved WIC Reporting and     ...........  ................................  ...........    2,817,091
 Recordkeeping Burden Hours.
Total Proposed WIC Reporting and         ...........  ................................  ...........   2,953,524
 Recordkeeping Burden Hours.
----------------------------------------------------------------------------------------------------------------
* Adjustments are due to an increase in the number of State agencies from 88 to 89.

    FNS also plans an information collection to assess the impact of 
this regulation on State agencies at a later time.

Government Paperwork Elimination Act

    FNS is committed to compliance with the Government Paperwork 
Elimination Act (GPEA), which requires Government agencies to provide 
the public the option of submitting information or transacting business 
electronically to the maximum extent possible. This interim rule 
encourages WIC State agencies to collect data from retail vendors using 
electronic methods.

Good Cause Determination

    As discussed above, section 203(e)(10) of the Child Nutrition and 
WIC Reauthorization Act of 2004, Public Law 108-265, contained 
provisions that significantly impact vendor cost containment in the WIC 
Program, particularly the costs of vendors that derive more than 50 
percent of their food sales revenue from WIC food instruments. Section 
501 of Public Law 108-265 requires that guidance to implement section 
203(e)(10) of the law be issued as soon after the date of enactment as 
practicable, and authorizes the issuance of interim final regulations. 
Therefore, Under Secretary Eric M. Bost has determined, in accordance 
with 5 U.S.C. 553(b), that prior notice and comment would be 
unnecessary, and that good cause exists for making this rule effective 
without first publishing a proposed rule.

Background

    Retail vendors make a major contribution to the success of the WIC 
Program by providing supplemental foods to program participants as an 
extension of their normal business practices. FNS recognizes that State 
agencies must balance multiple objectives when authorizing vendors, 
i.e., they must ensure adequate participant access to supplemental 
foods; maintain effective program management within available 
administrative resources; and pay reasonable food costs. Therefore, 
State agencies have broad authority to authorize only those vendors 
needed to best serve these objectives. Since WIC is best served if 
foods are purchased for the lowest prices, while maintaining reasonable 
access for program participants, this authority includes eliminating 
vulnerability to excessive food payments by applying competitive price 
methods during and following vendor selection, so the State agency can 
serve the maximum number of participants with limited funding.
    Major amendments to the WIC Program regulations governing food 
delivery systems were last published on December 29, 2000, at 65 FR 
83248. These amendments, referred to as the WIC Food Delivery Systems 
Rule, established mandatory vendor selection, training, and monitoring 
requirements to strengthen State agency vendor management systems and 
prevent abuse of the program. The WIC Food Delivery

[[Page 71713]]

Systems Rule implemented provisions of the William F. Goodling Child 
Nutrition Reauthorization Act of 1998, Public Law 105-336 (which 
amended the Child Nutrition Act of 1966, 42 U.S.C. 1786), that required 
State agencies to identify high-risk vendors, conduct compliance buys 
on high-risk vendors, and consider food prices in the selection of 
vendors. State agencies were required to implement the provisions of 
the WIC Food Delivery Systems Rule no later than October 1, 2002.
    The use of a price criterion in the vendor selection process has 
been a critical first step in ensuring that the WIC Program pays 
competitive prices for supplemental foods. Appropriate application of 
this criterion, coupled with price limitations on the amount that the 
State agency will pay vendors subsequent to authorization, is essential 
to successful food cost containment. The WIC Food Delivery Systems Rule 
authorized State agencies to make price adjustments to the purchase 
price on food instruments submitted by the vendor for redemption to 
ensure compliance with the price limitations applicable to the vendor.
    The Child Nutrition and WIC Reauthorization Act of 2004 (Pub. L. 
108-265) amended the Child Nutrition Act of 1966 (CNA) to reinforce and 
strengthen the use of competitive price criteria and price limitations 
for vendor cost containment. It expanded the competitive pricing 
requirement of the WIC Food Delivery Systems Rule to address the 
application of competitive pricing methods to vendors that derive their 
revenue from food sales predominantly, if not exclusively, from WIC 
food instruments. The prices that such stores (often referred to as 
``WIC-only stores'') charge for supplemental foods are generally higher 
than prices of other authorized retailers. Recent trends showing an 
annual increase in the number of WIC-only stores and in the percentage 
of the total WIC redemptions that they receive were a primary factor in 
the development of the vendor cost containment provisions of Public Law 
108-265. Congress intended that the authorization of WIC-only stores 
should not result in higher food costs than if program participants 
used their food instruments in regular grocery stores.
    Section 203(e)(10) of Public Law 108-265 amended section 17(h)(11) 
of the CNA to address the emergence of such vendors in the WIC Program 
because of their potential adverse impact on the future cost of the 
program particularly if these trends continue. The vendor cost 
containment provisions of this interim rule will promote sound 
stewardship of taxpayer dollars; help ensure that the WIC Program 
continues to rely on market forces to contain food costs; and protect 
the program's ability to serve the greatest number of eligible women, 
infants, and children.

Overview of the New Vendor Cost Containment Requirements

    In accordance with section 203(e)(10) of Public Law 108-265, this 
interim rule requires State agencies to implement competitive pricing 
systems that foster financial integrity and the most efficient use of 
their food funds. When State agencies craft these systems properly, 
they will not pay higher prices than necessary for supplemental foods. 
While State agencies have the discretion to determine many of the 
details of their competitive pricing approaches, section 203(e)(10) of 
Public Law 108-265 now requires them to establish a vendor peer group 
system, and competitive price criteria and allowable reimbursement 
levels for each vendor peer group. Previously, the use of peer groups 
in competitive pricing systems was optional under Sec.  246.12(g)(4)(i) 
of the WIC regulations.
    This rule also implements new legislative requirements for State 
agencies that choose to authorize for-profit vendors that derive more 
than 50 percent of their revenue from food sales from WIC food 
instruments. It requires State agencies to ensure that vendors that 
meet, and vendor applicants that are expected to meet, the more than 50 
percent criterion are cost neutral to the program. (Note: This preamble 
will refer to vendors that meet or are expected to meet the more than 
50 percent criterion as ``above-50-percent vendors.'') The first cost 
neutrality requirement in section 203(e)(10) of Public Law 108-265 is 
that payments to above-50-percent vendors may not result in higher food 
costs than if program participants purchased their WIC foods at regular 
vendors. The second cost neutrality requirement is that average 
payments per food instrument to above-50-percent vendors may not be 
higher than average payments per food instrument to comparable vendors. 
Comparable vendors cannot be other vendors that meet the above-50-
percent criterion.
    To achieve the cost neutrality requirements, section 203(e)(10) of 
Public Law 108-265 requires State agencies that authorize above-50-
percent vendors to distinguish between these vendors and regular 
vendors when establishing vendor peer groups, competitive price 
criteria, and allowable reimbursement levels. In determining 
competitive prices for WIC foods and establishing allowable 
reimbursement levels, State agencies would be required to compare 
above-50-percent vendors with regular vendors, i.e., vendors that set 
their prices based on market forces and that compete for non-WIC 
customers. Since the WIC Program receives a finite amount of funding 
annually to serve as many participants as this funding allows, it is 
necessary for each State agency to implement a system that ensures 
foods are acquired at the most economical cost consistent with 
participant access needs. Clearly, reducing the costs to the program of 
vendors that have historically charged high prices for supplemental 
foods is imperative. Consistent with section 203(e)(10) of Public Law 
108-265, this rule reflects the fact that State agencies have clear 
authority not to authorize any above-50-percent vendors.
    As set forth in section 203(e)(10) of Public Law 108-265, this rule 
allows FNS to exempt a State agency, under certain conditions, from the 
requirement to establish a vendor peer group system. It would also 
allow State agencies to exempt from competitive price criteria and 
allowable reimbursement levels pharmacies that supply only exempt 
infant formula or medical foods under the program; non-profit vendors 
that derive more than 50 percent of their revenue from food sales from 
WIC food instruments; and non-profit vendor applicants that are likely 
to meet the above-50-percent criterion.

Implementation of This Interim Rule

    Section 203(e)(10) of Public Law 108-265 requires State agencies to 
implement the provisions included in this interim rule by December 30, 
2005. Therefore, State agencies must take all steps that are necessary, 
including compliance with any applicable State rulemaking or 
legislative requirements, in order to establish policies to comply with 
the requirements of this rule by December 30, 2005. To facilitate 
implementation of the interim rule, this preamble addresses comments 
and questions that State agencies have presented regarding the 
requirements to establish vendor peer groups, competitive price 
criteria, and allowable reimbursement levels. This preamble also 
discusses criteria for developing effective vendor peer groups and for 
obtaining an exemption from the vendor peer group requirement. It also 
clarifies the meaning of key concepts, such as ``comparable vendors,'' 
and describes appropriate ways to identify above-50-percent vendors.
    This preamble recognizes that applying competitive pricing 
techniques to contain food costs remains a

[[Page 71714]]

challenge for some State agencies. Recently, several State agencies 
have conducted formal analyses of their competitive pricing systems 
and, as a result, are in the process of planning or implementing 
changes to enhance system performance. FNS believes that State agencies 
will continue learning and adopting more efficient ways of containing 
food costs through competitive pricing systems. Therefore, this 
preamble offers principles to assist State agencies in assessing the 
performance of their competitive pricing systems as they make 
modifications to comply with the mandatory changes covered by this 
interim rule.

Vendor Peer Group System

General Requirement

    Section 203(e)(10)(A) of Public Law 108-265 added section 
17(h)(11)(A) to the CNA to require each State agency to establish a 
vendor peer group system, except in certain circumstances. This interim 
rule incorporates the legislative requirement into Sec.  246.12(g)(4) 
of the WIC regulations. A vendor peer group system is a means of 
classifying authorized vendors into groups based on common 
characteristics that affect food prices. The purpose of peer groups is 
to facilitate the application of competitive price criteria at vendor 
authorization and during the food instrument redemption process. When a 
vendor peer group system is properly constructed, the prices that 
vendors within a peer group charge for WIC foods will be more similar 
internally than they are to the prices charged by other peer groups; 
and the peer group system should account for most of the food price 
variations. A State agency that did not have a vendor peer group system 
at the time Public Law 108-265 was enacted in June 2004 must implement 
such a system by December 30, 2005.
    Many State agencies already have a vendor peer group system. The 
structure and use of peer groups varies widely. Vendor peer groups are 
often established based on a combination of two factors--vendor size 
and vendor location. Vendor size may be determined through a variety of 
factors, such as total business volume, WIC business volume, square 
footage of store, number of cash registers (or point of sale devices), 
or type of store (e.g., supermarket, grocery store, convenience store, 
military commissary, nonprofit co-op, or pharmacy). Vendor location is 
often divided into geographic categories, such as urban, suburban, and 
rural, which may also include a number of subcategories within the 
State. Some State agencies use three criteria in establishing peer 
groups.
    Some State agencies use peer groups to set the competitive price 
range for WIC foods, assess whether a vendor applicant's prices are 
competitive, and to establish maximum reimbursement levels for WIC food 
instruments. Others use vendor peer groups to assess the 
competitiveness of a vendor applicant's prices, but they do not limit 
reimbursements based on a vendor's peer group. Instead, these State 
agencies apply a single statewide maximum reimbursement level for each 
food instrument type to all peer groups. Section 246.12(g)(4) of the 
interim rule, in implementing section 17(h)(11)(A)(i) of the CNA, 
clarifies that a State agency must establish competitive price criteria 
and allowable reimbursement levels that are applicable to each peer 
group.
    Because characteristics of the retail grocery marketplace vary from 
State to State, this interim rule continues to allow State agencies 
broad latitude in establishing peer groups. To ensure that vendor peer 
group systems continue to be effective, Sec.  246.12(g)(4)(ii) of this 
rule requires State agencies to assess their peer groupings at least 
every three years and to modify them as necessary. It also indicates 
that a State agency may change the peer group into which it places a 
vendor whenever it determines that such action is warranted.

Specific Requirements

    Section 17(h)(11)(A)(III) of the CNA requires a State agency that 
chooses to authorize for-profit vendors that derive or are expected to 
derive more than 50 percent of their annual revenue from food sales 
from WIC food instruments to distinguish between the above-50-percent 
vendors and regular retail vendors for cost containment purposes. 
Accordingly, Sec.  246.12(g)(4)(i) of this rule requires a State agency 
that chooses to authorize any above-50-percent vendors to distinguish 
between these vendors and regular vendors in its peer group system. In 
meeting this requirement, a State agency may establish separate peer 
groups for above-50-percent vendors or place them in peer groups with 
regular vendors, but establish distinct competitive price criteria and 
allowable reimbursement levels for the above-50-percent vendors within 
the peer groups. Both approaches require a State agency to compare the 
prices of above-50-percent vendors against the prices of regular retail 
vendors for vendor selection and reimbursement purposes. A State 
agency's vendor peer group system must meet this requirement unless the 
State agency chooses not to authorize any above-50-percent vendors.
    In the past, State agencies that authorized a specific type of 
vendor known as WIC-only stores have tended to place them into separate 
peer groups where their prices were compared with other WIC-only 
stores. This practice generally has resulted in the payment of higher 
prices to WIC-only vendors than to regular retail vendors. In many 
instances, payment of higher prices to WIC-only vendors was unnecessary 
because other competitively-priced vendors were accessible to WIC 
participants. In implementing this rule, a State agency that authorizes 
any above-50-percent vendors would be required to determine whether it 
is more effective, from a cost containment perspective, to group them 
with regular retail vendors than by themselves, and if so, how to group 
them with regular vendors without inflating the peer group's prices.
    Some State agencies have expressed the view that grouping above-50-
percent vendors with regular vendors would increase a State agency's 
ability to monitor their prices; provide an incentive for such vendors 
to offer competitive prices; and help a State agency hold them to the 
same pricing standard as regular retail vendors. State agency arguments 
against this approach include the likelihood that the prices of above-
50-percent vendors would be too high to allow them to be grouped with 
regular vendors. State agencies also thought that above-50-percent 
vendors would skew the average prices for the peer group. Section 
246.12(g)(4)(i) of this interim rule states that State agencies must 
ensure that the prices of above-50-percent vendors do not inflate the 
competitive price criteria and allowable reimbursement levels 
applicable to each peer group.
    When a State agency assigns above-50-percent vendors to a peer 
group with regular vendors, it must use the prices of the regular 
vendors within the peer group to establish the competitive price 
criteria and allowable reimbursement level for the above-50-percent 
vendors. If a State agency assigns above-50-percent vendors to separate 
peer groups, the State agency may not reimburse them at a higher level 
than that for peer groups consisting of comparable regular vendors.
    In identifying vendors that are comparable to above-50-percent 
vendors, the State agency must consider geographic area; however, the 
State agency has the discretion to determine how much weight to give to 
geographic considerations. The State agency may interpret comparability 
differently for regular retail vendors than for above-50-percent 
vendors. For example, a State

[[Page 71715]]

agency might determine that geographic location and number of cash 
registers adequately define peer groups for regular vendors, but that 
it must utilize an additional criterion, such as WIC sales volume, to 
identify stores that are comparable to the above-50-percent vendors.

Identifying Above-50-Percent Vendors

    In order to comply with requirements of section 17(h)(11)(A)(III) 
of the CNA with regard to above-50-percent vendors, Sec.  
246.12(g)(4)(i) of this interim rule requires each State agency to 
determine on an annual basis whether any authorized vendors meet the 
more than 50 percent criterion and whether each new vendor applicant is 
expected to meet it. In making its determination, the State agency 
would be required to consider a vendor's annual revenue from the sale 
of food items. Under this rule, revenue from the sale of food items 
means the sum of all payments (including, cash, Food Stamp Program and 
WIC redemptions, and credit/debit transactions) received by the vendor 
for the sale of foods that can be purchased under the Food Stamp 
Program (FSP). Currently, there is no standard definition of ``food 
sales'' used in the retail food industry. Since approximately 85 
percent of current WIC vendors are authorized by the Food Stamp 
Program, most vendors are familiar with the eligible food items and 
there would be a consistent definition of food sales between WIC and 
the FSP. Vendors that utilize scanning equipment during the checkout 
process are able to flag foods that are eligible for purchase with food 
stamp benefits and, thus, to capture the total sales amount.
    Eligible food sales include sales of foods intended for home 
preparation and consumption, including meat, fish, and poultry; bread 
and cereal products; dairy products; and fruits and vegetables. Items 
such as condiments and spices, coffee, tea, cocoa, and carbonated and 
noncarbonated drinks may be included in food sales when they are 
offered for sale along with the abovementioned foods. Items that cannot 
be purchased using food stamp benefits include, but are not limited to, 
hot foods and food that will be eaten in the store. This rule does not 
require that a vendor be authorized by the Food Stamp Program.
    State agencies must use the following approach to identify above-
50-percent vendors. State agencies may use additional methods, if 
approved by FNS.
1. Current Vendors
    To determine whether a currently authorized vendor meets the more 
than 50 percent criterion, the State agency must calculate WIC 
redemptions as a percent of the vendor's total foods sales for the same 
period. If WIC redemptions are more than 50 percent of the total food 
sales, the vendor must be deemed to be an above-50-percent vendor. As 
an initial step in identifying above-50-percent vendors, the State 
agency should compare each vendor's WIC redemptions to FSP redemptions 
for the same period. If more than one WIC State agency authorizes a 
particular vendor, then each State agency must obtain and add the WIC 
redemptions for each State agency that authorizes the vendor to derive 
the total WIC redemptions. Most WIC vendors also have FSP authorization 
and, consequently, have FSP redemptions. If FSP redemptions exceed WIC 
redemptions, no further assessment would be required. The vendor 
clearly would not be an above-50-percent vendor.
    For vendors whose WIC redemptions exceed their FSP redemptions, 
further assessment would be required. The State agency should ask these 
vendors to provide the total amount of revenue obtained from the sale 
of foods that could be purchased using food stamp benefits. The State 
agency should request documentation (such as tax documents or other 
verifiable documentation) to support the amount of food sales claimed 
by the vendor. After evaluating the documentation received from the 
vendor, the State agency must calculate WIC redemptions as a percent of 
total food sales and classify the vendor as meeting or not meeting the 
more than 50 percent criterion.
    For vendors that are not authorized by the FSP, the State agency 
should clarify the types of foods that may be included in food sales, 
using the list of eligible and ineligible food items that applies to 
FSP retailers. The State agency should request and evaluate verifiable 
documentation on the store's revenue from food sales and classify the 
vendor as appropriate.
2. Vendor Applicants
    As part of the vendor application process, the State agency must 
ask vendor applicants whether they expect to derive more than 50 
percent of their annual revenue from the sale of food items from 
transactions involving WIC food instruments. This question applies 
whether or not the State agency chooses to authorize above-50-percent 
vendors. Vendor applicants include a new store location for any 
ownership entity that currently has a WIC authorized store, as well as 
an entirely new vendor applicant. If the vendor applicant's answer is 
``yes,'' no further assessment would be necessary. The State agency 
would treat this vendor as likely to meet the more than 50 percent 
criterion, if the vendor were authorized.
    The State agency would further assess all other vendor applicants 
using the following indicators to determine whether they would be 
expected to meet the more than 50 percent criterion if authorized. 
First, the State agency must calculate WIC redemptions as a percent of 
total food sales in existing WIC-authorized stores owned by the vendor 
applicant. Secondly, the State agency must calculate or request from 
the vendor applicant the percentage of anticipated food sales by type 
of payment, i.e., cash, FSP, WIC, and credit/debit card. Thirdly, the 
State agency must request and review inventory invoices to determine if 
the vendor will offer for sale on a continuous basis a variety of 
meats, poultry or fish; breads or cereals; vegetables or fruits; and 
dairy products. Fourthly, the State agency must determine whether WIC 
authorization is required in order for the store to open for business. 
To the extent possible, the State agency should validate information 
received from the vendor applicant against other data sources.
    Use of the percent of anticipated food sales by payment type 
provides information on WIC as a percentage of total food sales. Having 
a variety of foods other than supplemental foods would indicate that 
the vendor has or expects to have non-WIC sales. If the vendor is 
already operating a viable business without WIC transactions, this 
might indicate that the vendor will not be dependent upon WIC as a 
primary source of revenue. These indicators should provide the State 
agency with sufficient information on which to base its assessment of a 
vendor applicant. At its discretion, the State agency may use 
additional data sources and methodologies.
    The State agency must maintain documentation indicating the basis 
for its determination as to whether a current vendor or vendor 
applicant meets or is expected to meet the more than 50 percent 
criterion. Section 246.12(g)(4)(i) of the interim rule requires the 
State agency to assess the accuracy of its determination within six 
months of authorizing the new vendor to determine whether the vendor 
should have been authorized, and/or to ensure that the State agency is 
applying the appropriate competitive price criteria

[[Page 71716]]

and allowable reimbursement level to the new vendor. If necessary, the 
State agency would terminate the vendor agreement or reassign the 
vendor to the appropriate peer group based on this assessment.

Acceptable Vendor Peer Group Methodologies

    Structuring an effective vendor peer group system involves an 
ongoing process of monitoring the prices vendors charge for 
supplemental foods and adjusting the peer groups as needed for better 
cost containment. FNS believes State agencies should not view peer 
groups as permanent or fixed designations; rather, they should be 
prepared to modify the vendor peer group structure when needed based on 
price data (i.e., shelf prices, bid prices, food instrument redemption 
data, and market surveys) and other information.
    For example, a State agency that fails to distinguish between 
different types of vendors (e.g., chain stores, large independent 
stores, and small neighborhood grocery stores) in a particular 
geographic area might be overlooking pricing variations or 
characteristics that are apparent when these vendors are further 
classified by type or size of store. While a State agency might find it 
easier to manage peer groups constructed solely on the basis of 
geographic location, creating peer groups that further differentiate 
between vendors could improve cost containment by allowing the State 
agency to replace a single high allowable reimbursement level for a 
geographic area with several lower allowable reimbursement levels 
tailored to the prices of each subgroup of vendors in the area. A State 
agency should consider the effectiveness of such alternative approaches 
in implementing a vendor peer group system.
    Available information on the effective design of vendor peer groups 
for cost containment purposes suggests that State agencies could 
benefit from applying two principles to this process.
1. Peer Group Criteria
    A State agency should use a sufficient number of criteria to 
differentiate between vendors and account for variations in price. 
Criteria used by one State agency may not have the same effect when 
used by another State agency. Available data suggest that State 
agencies benefit from using geographic location as a criterion in 
establishing peer groups, and that the use of two or more criteria is 
preferable to using a single criterion. Therefore, Sec.  
246.12(g)(4)(ii) of the interim rule requires a State agency to use at 
least two criteria in establishing peer groups, one of which must be a 
measure of geographic location. Under Sec.  246.12(g)(4)(ii), a State 
agency may receive FNS approval to use a single criterion to establish 
vendor peer groups. FNS approval will be based on a State agency's 
demonstration that the use of a single criterion significantly accounts 
for variations in prices among vendors, and that using a second 
criterion would not further contain food costs. The State agency's peer 
group criteria, including its criteria for identifying above-50-percent 
vendors and vendors that are comparable to above-50-percent vendors, 
are not subject to administrative review under Sec.  246.18(a)(1)(iii) 
of the interim rule. The public has an opportunity to comment on these 
criteria as part of the State Plan process; thus interested parties 
should use this process to provide input. FNS must review and approve 
peer group-related criteria as part of the State Plan process.
2. Periodic Assessment of Peer Group Structure
    To ensure that vendor peer groups remain effective, Sec.  
246.12(g)(4)(ii) of this interim rule requires the State agency to 
assess its peer groupings at least every three years and make 
adjustments as necessary. This process would include using statistical 
methods to verify the appropriateness of the peer group criteria and 
the methodology for establishing competitive price. The State agency is 
encouraged to work with its vendor advisory group in this process.

Exemptions From Peer Group Requirements

    In accordance with section 17(h)(11)(A)(ii) of the CNA, the interim 
rule (Sec.  246.12(g)(4)(v)) establishes two conditions under which FNS 
may grant a State agency an exemption from the peer group requirements. 
The first condition applies to a State agency that elects not to 
authorize any above-50-percent vendors. The State agency must 
demonstrate to FNS that establishing a vendor peer group system would 
be inconsistent with efficient and effective operation of the program, 
or that its alternative cost containment system would be as effective 
as a peer group system.
    The second condition for an exemption applies to a State agency 
that authorizes above-50-percent vendors. The WIC redemptions of above-
50-percent vendors authorized by the State agency must be less than 
five percent of the State agency's total WIC redemptions (dollars) in 
the year preceding a year in which the exemption is effective. By law, 
the State agency must demonstrate that its alternative vendor cost 
containment system would be as effective as a vendor peer group system 
and would not result in higher costs if program participants transact 
their food instruments at above-50-percent vendors rather than at 
regular vendors.
1. Request for Exemption
    A State agency that believes it meets either of the conditions for 
an exemption may request from FNS an exemption from the vendor peer 
group system requirement. A State agency proposing an alternative cost 
containment system must support its request with a detailed description 
of the alternative cost containment system, including documentation 
that compares the potential costs and benefits of a peer group system 
with the costs and benefits of the State agency's alternative cost 
containment system. Justifications based solely on insufficient time or 
resources to implement a vendor peer group system would not be 
acceptable. If the State agency elects to authorize any above-50-
percent vendors, the State agency's alternative cost containment system 
justification must include a detailed description of how the State 
agency will establish competitive price criteria and allowable 
reimbursement levels for above-50-percent vendors as compared to 
regular vendors. The justification must include the average payments 
that the State agency would make to above-50-percent vendors and to 
regular vendors for either the standard food packages or the most 
frequently issued food instrument types for women, infants, and 
children.
    Rather than presenting an alternative cost containment system, a 
State agency that elects not to authorize any above-50-percent vendors 
may request an exemption from the vendor peer group system requirement 
by providing a detailed explanation of why implementation of a peer 
group system would be inconsistent with the efficient and effective 
operation of the program in the State. The State agency's explanation 
might address such factors as the number of WIC participants served, 
the degree of variability in food prices and types of vendors, the 
number of vendors authorized, the State agency's average food package 
costs, and previous experience with a vendor peer group system.
    If the State agency seeks an exemption because payments to above-
50-percent vendors comprise less than five percent of total WIC 
redemptions, the State

[[Page 71717]]

agency's submission to FNS must also include redemption data. The data 
must include the total dollar amount of all WIC redemptions and the 
dollar amount and percentage of WIC redemptions attributable to above-
50-percent vendors in the fiscal year preceding the year for which an 
exemption is sought.
    FNS will review the information submitted by the State agency and 
determine whether the State agency qualifies for an exemption. A State 
agency that obtains an exemption from the peer group requirement still 
must establish competitive pricing criteria for vendor selection and 
allowable reimbursement levels.
2. Term of Exemption
    An exemption from the peer group requirement would remain in effect 
until the State agency no longer meets the conditions in Sec.  
246.12(g)(4)(v) on which the exemption was based (e.g., redemptions to 
above-50-percent vendors comprise more than five percent of the total 
annual WIC redemptions); until FNS notifies the State agency that it 
has revoked the exemption for cause; or for three years, whichever 
occurs first. During the period of the exemption, the State agency must 
provide to FNS annually documentation that it either authorizes no 
above-50-percent vendors or that such vendors' redemptions continue to 
represent less than five percent of total WIC redemptions, depending on 
the terms of the exemption.

Competitive Pricing

General Requirement

    The use of price criteria in vendor authorization and 
reauthorization is a primary mechanism in vendor cost containment. In 
accordance with section 17(h)(11)(B) of the CNA, Sec.  246.12(g)(4) of 
this rule requires the State agency to establish competitive price 
criteria for each peer group for the selection of vendors for 
participation in the program. Competitive price criteria allow the 
State agency to determine whether the prices charged by a vendor 
applicant are competitive with prices charged by other vendors. In 
determining whether a vendor applicant's prices are competitive, the 
State agency is required to consider either the vendor's shelf prices 
or the prices the vendor bid for supplemental foods, which may not 
exceed the vendor's shelf prices.
    The competitive pricing requirement in section 17(h)(11)(B) of the 
CNA largely restates the requirement established by section 203(l) of 
the Goodling Act (Pub. L. 105-336) and implemented through the WIC Food 
Delivery Rule at Sec.  246.12(g)(3)(i). WIC regulations, as amended by 
the WIC Food Delivery Rule, require the State agency to apply a 
competitive price criterion during the vendor selection process by 
comparing the prices a vendor applicant charges for supplemental foods 
to the prices charged by other vendor applicants and authorized 
vendors. State agencies have implemented this provision in different 
ways. For example, some use historical data, such as average prices of 
redeemed food instruments, to establish dollar limits against which 
they evaluate a vendor applicant's prices. Other State agencies use the 
prices for WIC food items submitted by a vendor applicant to calculate 
the amount the applicant would charge for a standard combination of WIC 
foods or for selected WIC food packages. They then compare this result 
with what other vendor applicants and currently authorized vendors in 
the same peer group would charge for the same foods or food packages. 
Some State agencies apply multiple criteria when assessing the 
competitiveness of a vendor applicant's prices, for example, requiring 
a vendor's prices to be within a certain percentage of the average food 
instrument redemption prices of authorized vendors in its peer group 
and within a certain percentage of the average retail price for 
individual WIC foods.
    The competitive price range also varies among State agencies. State 
agencies that compare a vendor applicant's prices against an average 
redemption price for selected food instruments or against average 
prices for individual WIC foods have allowed the applicant's prices to 
exceed the peer group average by amounts ranging from 5 percent to 30 
percent. In addition, State agencies differ regarding whether they 
consider factors such as transportation costs or current wholesale 
costs of WIC foods when assessing a vendor applicant's prices.
    Under this interim rule State agencies retain flexibility in 
establishing competitive price selection criteria. FNS encourages State 
agencies, in implementing this rule, to re-examine the standards that 
they use to assess the prices of vendor applicants and currently 
authorized vendors to determine if they are paying competitive prices 
for supplemental foods. In this process, State agencies should ensure 
that they are paying the lowest prices for WIC foods by authorizing 
vendors whose prices fall at the lower end of the State agency's 
competitive range and that are needed to ensure participant access to 
WIC foods. Section 246.12(g)(1) of the WIC regulations has been amended 
to clarify the cost containment emphasis in addition to authorizing an 
appropriate number and distribution of vendors in order to ensure 
participant access to supplemental foods and effective State agency 
management, oversight, and review of its authorized vendors. This 
requirement, in combination with the competitive pricing requirement, 
should enable the State agency to select a vendor population that is 
manageable both administratively and from a cost perspective.

Specific Requirements

    In accordance with section 17(h)(11)(B) of the CNA, this interim 
rule requires State agencies to establish and apply appropriate 
competitive price criteria in keeping with several specific 
requirements.
1. Participant Access
    Under Sec.  246.12(g)(4) of this rule, the State agency must 
consider participant access by geographic area in establishing 
competitive price criteria. This means that the State agency may not 
deny authorization to a vendor that is needed to ensure participant 
access to supplemental foods because that vendor's prices do not meet 
the competitive price criteria for the vendor's peer group. The 
assumption is that there are no alternative vendors in the area with 
prices that meet the State agency's competitive price selection 
criteria and that, bearing in mind where participants typically shop, 
there is no other practical way to provide WIC foods. In such 
instances, FNS would encourage the State agency to negotiate with the 
vendor, if possible, to secure lower prices for WIC participants than 
the prices the vendor charges other customers. The authorization of 
vendors whose prices exceed the competitive price selection criteria, 
but that are needed for participant access, should be the exception and 
not the rule. The State agency has sole discretion to make participant 
access determinations. The validity or appropriateness of the State 
agency's participant access criteria and the State agency's participant 
access determinations are not subject to appeal (Sec.  
246.18(a)(1)(iii)(B)).
2. Vendors that Meet the More-than-50-Percent Criterion
    If a State agency chooses to authorize above-50-percent vendors, 
Sec.  246.12(g)(4)(i) of the interim rule requires the State agency to 
establish distinct competitive price selection criteria for such 
vendors. To comply

[[Page 71718]]

with the competitive pricing requirement in section 17(h)(11)(B) of the 
CNA, the State agency would not necessarily have to achieve lower 
program costs when food instruments are transacted at above-50-percent 
vendors, rather than at regular retail vendors. The State agency would, 
however, be required to demonstrate to FNS that its competitive price 
criteria and allowable reimbursement levels for above-50-percent 
vendors do not result in average payments per food instrument that are 
higher than average payments per food instrument to comparable vendors 
that do not meet the more-than-50-percent criterion. In addition, 
competitive price criteria may not result in higher total food costs if 
participants use their food instruments at above-50-percent vendors 
rather than at regular vendors. This means that the total payments to 
above-50-percent vendors for supplemental foods may not exceed the 
total amount that the State agency would have paid to regular vendors 
for the same types and quantities of supplemental foods.
    To determine whether a State agency is meeting the requirement that 
above-50-percent vendors do not result in higher food costs than 
regular vendors, the State agency must compare the average cost per 
food instrument redeemed at above-50-percent vendors to the average 
cost per food instrument redeemed at regular vendors. The State agency 
must compute statewide average redemption amounts for each type of food 
instrument redeemed or for each distinct combination of foods on 
redeemed food instruments, depending on whether or not the State agency 
uses standardized food instrument types. The average cost per food 
instrument must be weighted to reflect the relative proportion of food 
instruments redeemed by each vendor peer group.
    By using a weighted average, the State agency takes into account 
the frequency with which vendors redeem food instruments of varying 
redemption amounts. If a State agency makes more payments to vendors 
that offer the lowest prices for WIC foods, a weighted average will 
reflect this fact more than a simple average. The weighted average 
correlates with WIC participants' shopping patterns by giving the most 
weight to redemption prices of stores with the largest number of WIC 
transactions. The following charts display the weighted average 
redemption amounts for an infant formula food instrument (type ABC) 
redeemed by regular vendors and above-50-percent vendors.
    Chart 1: Weighted Average Redemption Amounts for Regular Vendors

                        Chart 1.--Weighted Average Redemption Amounts for Regular Vendors
----------------------------------------------------------------------------------------------------------------
                                                                   Average      Number and percent of
                                                                 redemption         redeemed food
                      Peer group number                            amount       instruments  Type ABC    Weight
                                                                (dollars)  FI ------------------------
                                                                  Type ABC        Number        %
----------------------------------------------------------------------------------------------------------------
1............................................................         $ 81.51        8,481       0.82      0.008
2............................................................          111.56       54,748       4.99      0.050
3............................................................          113.89      217,684      21.01      0.210
4............................................................          110.93      758,175      73.18      0.732
                                                                              --------------
    Total....................................................  ..............    1,036,088     100.00      1.000
 
Weighted average redemption amount...................................................................    $113.66
------------------------------------------------------------------------------------------------------
Simple average of all 1,036,088 redemption amounts...................................................    $108.26
------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------


                   Chart 2.--Weighted Average Redemption Amounts for Above-50-Percent Vendors
----------------------------------------------------------------------------------------------------------------
                                                                   Average      Number and percent of
                                                                 redemption         redeemed food
                      Peer group number                            amount       instruments  Type ABC    Weight
                                                                (dollars)  FI ------------------------
                                                                  Type ABC        Number        %
----------------------------------------------------------------------------------------------------------------
1............................................................         $130.68           43       0.03      0.000
2............................................................          128.94          513       0.34      0.003
3............................................................          125.09       10,242       6.82      0.068
4............................................................          127.96      139,314      92.81      0.928
                                                                              --------------
    Total....................................................  ..............      150,112     100.00     1.000
Weighted average redemption amount...................................................................   $128.38
Simple average of all 150,112 redemption amounts.....................................................    $127.35
----------------------------------------------------------------------------------------------------------------

    The weighted average redemption amounts for food instrument type 
ABC shown in the preceding charts were calculated using a standard 
statistical formula. (The formula derives the weighted average by 
multiplying each food instrument redemption amount by the corresponding 
weight, adding these individual sums, and dividing this total by the 
sum of the weights used in the calculation.) In Chart 1 the weighted 
average redemption amount of $113.66 for food instrument ABC redeemed 
by regular vendors is $5.40 more than the simple average redemption 
amount of $108.26. The weighted average more accurately reflects the 
cost of these food instruments to the State agency than does the simple 
average. The weighted average indicates that the State agency paid 
substantially more food

[[Page 71719]]

instruments at higher redemption prices than at lower prices. In Chart 
2 the weighted average redemption amount of $128.38 for food instrument 
ABC redeemed by above-50-percent vendors exceeds the simple average 
redemption amount by $1.03. In this instance the difference between the 
simple average and the weighted average cost of food instrument ABC is 
not as large as it was for the same food instrument redeemed by regular 
vendors because 93 percent of the food instruments were redeemed by 
vendors in the same peer group. There was also less variation in the 
individual food instrument redemption amounts. The weighted average 
captures the impact of this redemption pattern.
    Charts 1 and 2 show the disparity in payments for infant formula 
made to regular vendors and above-50-percent vendors. When State 
agencies implement competitive price criteria and allowable 
reimbursement levels as required in this interim rule, weighted average 
redemption amounts of food instruments redeemed by above-50-percent 
vendors should not exceed weighted average redemption amounts for the 
same food instruments redeemed by regular vendors. In general, for 
above-50-percent vendors to not result in higher costs to the program 
than regular vendors, the State agency's payments to these vendors 
should resemble payments to regular vendors in dollar amount and 
distribution among peer groups. A State agency that consistently 
reimburses above-50-percent vendors at or near the highest food 
instrument redemption amounts, while reimbursing most regular vendors 
at lower levels, would have difficulty meeting the cost neutrality 
requirement that above-50-percent vendors not result in higher costs to 
the program than regular vendors. If the average food instrument cost 
for above-50-percent vendors does not exceed the average food 
instrument cost for all regular vendors, then the State agency has 
assurance that above-50-percent vendors do not cost the program more 
than regular vendors. The average food instrument cost for above-50-
percent vendors need not be less than that for regular vendors. The 
average costs may be equal or statistically equivalent.
    A State agency must monitor average redemption amounts at least 
quarterly, and more frequently for newly-authorized above-50-percent 
vendors, and if necessary adjust payment levels, recoup excess 
payments, or take other actions to ensure compliance. Appropriate 
action may include terminating vendor agreements with above-50-percent 
vendors whose prices are least competitive, unless a vendor is needed 
to ensure participant access to WIC foods. If FNS determines that a 
State agency has failed to meet the requirements in Sec.  
246.12(g)(4)(i)(A) to ensure that above-50-percent vendors do not 
result in higher costs to the program than if participants redeem their 
food instruments at regular vendors, FNS will establish a claim against 
the State agency to recover excess food funds expended and will require 
appropriate remedial action.
3. Maintaining Competitive Prices After Authorization
    In amending section 17(h)(11) of the CNA, Public Law 108-265 
retained the requirement that State agencies establish procedures to 
ensure that a retail store selected for participation in the WIC 
Program does not increase its prices subsequent to selection to levels 
that would make the store ineligible for selection. Section 
246.12(g)(4)(iii) of the interim rule contains this legislative 
requirement, which also applies to State agencies under current 
regulations. To meet the requirement, the State agency must hold 
authorized vendors accountable for maintaining prices at a level 
consistent with the selection criteria applied to the vendors at 
authorization. For example, if a vendor's prices must be within a 
certain range of the peer group's average shelf prices in order for the 
vendor to be authorized, then the vendor's prices must remain within 
this range subsequent to authorization. By using competitive price 
criteria to establish allowable payment levels for redeemed food 
instruments, State agencies can ensure that vendors remain eligible for 
selection. They also avoid excessive payments for food instruments with 
prices that are below a statewide not-to-exceed amount, but outside of 
the competitive price range for the vendor's peer group. A vendor's 
failure to remain price competitive is cause for termination of the 
vendor agreement, even if actual payments to the vendor are within the 
not-to-exceed amount. One example of a failure to remain price 
competitive would occur if a vendor, or vendors, raised the price for a 
WIC food with no basis in wholesale price or handling costs.
    Currently, State agencies use different approaches to monitor the 
food prices of vendors subsequent to redemption. Some are more rigorous 
than others, particularly in terms of whether the State agency reviews 
shelf prices or redemption data to assess a vendor's continued 
compliance with the competitive price selection criteria, and the 
action the State agency takes if it determines that a vendor is not 
meeting the competitive price selection criteria. Some State agencies 
require authorized vendors to submit shelf price surveys at regular 
intervals during the year; others collect price data during store 
visits. Some State agencies collect price data on all WIC foods; others 
collect price data only on selected foods and/or from a subset of 
authorized vendors. At least one State agency monitors prices on a 
monthly basis to determine if vendors still meet selection criteria; 
others have no clearly defined protocol for assessing continued 
compliance with competitive price criteria. State agencies with EBT 
systems can monitor prices of individual WIC foods using data scanned 
into the system at the point of sale. State agencies vary in the extent 
to which they monitor wholesale price fluctuations and can anticipate 
and estimate the impact of these fluctuations on WIC food prices and 
food instrument redemption amounts.

Acceptable Competitive Price Selection Methodologies

    State agencies are acutely aware of the staff time and other costs 
involved in administering their vendor cost containment system. They 
look for ways to streamline procedures and reduce the level of effort 
and paperwork required for vendor selection, without compromising the 
system's effectiveness. Investing careful and thoughtful effort in 
improving the selection of vendors based on competitive price can yield 
substantial cost savings. Some ways to enhance current competitive 
price selection approaches are outlined in this section.
1. Standards for Evaluating Vendors' Prices
    Setting appropriate quantitative standards for determining whether 
a vendor's prices are competitive is critical. The State agency 
develops these standards by reviewing the prices of applicant and 
authorized vendors and price data from the larger retail marketplace. 
The standards should not be so flexible or loose that no vendor is 
denied authorization; rather they should influence vendor participation 
by allowing the State agency to differentiate between store prices. 
Allowing a small range of variation in prices produces a better 
standard than allowing a wide range of variation. State agency 
standards preferably should be expressed in terms of the number of 
standard deviations above the mean redemption amount (or other amount 
used for determining competitive price), rather than as a percentage, 
unless the percentage is linked to the standard deviation.

[[Page 71720]]

2. Linking Competitive Price Determinations to Participant Access 
Requirements
    Authorizing a sufficient number of vendors in appropriate locations 
throughout the State is critical to competitive price selection. 
Although a State agency is not required to limit the number of vendors 
it will authorize, it has the authority to do so and should use 
information on the number of vendors required to ensure participant 
access to WIC foods when establishing competitive prices. For example, 
if a State agency has 100 vendor applicants, including currently 
authorized vendors in a particular geographic area, but only needs 80 
vendors to ensure participant access, then the State agency should 
determine competitive prices based on the 80 stores with the lowest 
prices. The State agency need not authorize the twenty additional 
stores. However, if the State agency has the administrative resources 
to manage the additional vendors, it may choose to give these vendors 
the opportunity to submit new price lists for consideration.
    Some State agencies can improve their methodologies for determining 
competitive price by improving their participant access criteria, 
including participant-to-vendor ratios. Having participant-to-vendor 
ratios that are too low could result in a State agency authorizing 
higher-priced stores for participant access reasons. If enough of these 
higher-priced stores are authorized in a geographic area, they will 
inflate the competitive price criteria used to select and reimburse 
vendors. Having a high participant-to-vendor ratio, that is based on a 
realistic assessment of the capacity of vendors to serve WIC 
participants, could increase competition for WIC authorization and 
result in more competitive prices.
    When a particular vendor (or small number of vendors) that is 
needed to ensure participant access has prices that are higher than the 
State agency's competitive price criteria, the State agency should 
treat this vendor as an exception, and exclude the vendor's prices from 
its calculation of competitive price criteria in order to avoid raising 
the competitive range for all vendors.
3. Monitoring Shelf Prices After Authorization
    At least every six months following authorization, the State agency 
must collect and review vendors' shelf prices. FNS believes that State 
agencies should not rely on redemption data alone to ensure that 
vendors have not, subsequent to authorization, raised their prices to a 
level that would exceed the competitive price selection criteria under 
which they were authorized. Monitoring of shelf prices should help the 
State agency interpret changes in average redemption amounts of food 
instruments. A State agency could also use shelf price data to detect 
partial redemptions and possible overcharging.
    In monitoring prices, the State agency should observe the overall 
rate of increase in prices within and between peer groups, and whether 
any vendors have increased their prices at a higher rate than other 
vendors in their peer group during the monitoring period. State 
agencies should identify methods of collecting price data that are 
least burdensome, such as the use of electronic data collection via the 
Internet or an electronic spreadsheet; random sampling of vendors and/
or WIC food items; and allowing vendors to submit only those prices 
that have changed or will change.

Allowable Reimbursement Levels

General Requirements

    Section 17(h)(11)(C) of the CNA requires State agencies to 
establish allowable reimbursement levels for supplemental foods for 
each vendor peer group, taking into consideration participant access in 
a geographic area. Allowable reimbursement levels ensure that payments 
to vendors in the peer group reflect competitive retail prices, and 
that the State agency does not reimburse a vendor for supplemental 
foods at a level that would make the vendor ineligible for 
authorization under its competitive price selection criteria.
    Since October 1, 2002, WIC regulations have required State agencies 
to establish price limitations on the amount they pay vendors. State 
agencies typically refer to the price limits as maximum values or not-
to-exceed amounts for redeemed food instruments. State agencies 
currently establish these amounts in different ways. These include, but 
are not limited to, the use of a rolling average redemption price for 
each food instrument type; an average redemption price for each food 
instrument for a fixed period of time; the average of the highest 
prices charged by vendors in the peer group for a particular WIC food; 
the highest price charged by a vendor in the peer group for a 
particular food instrument type; and average prices charged by a 
selected group of the smallest vendors in the State increased by a 
designated percent. One State agency uses the prices that vendors bid 
for supplemental foods to establish a maximum reimbursement amount per 
food instrument type. FNS believes that basing maximum reimbursement 
levels on the highest prices charged by some or all vendors in a peer 
group does not effectively contain costs. While this rule allows State 
agencies to continue using different approaches to establish allowable 
reimbursement levels, it directs State agencies to choose among the 
more effective approaches.
    Because food price data available to State agencies can lag behind 
changes in the retail marketplace, many State agencies allow for price 
increases in setting allowable reimbursement limits in order to 
minimize the number of rejected food instruments. Under section 
17(h)(11)(C)(ii) of the CNA, State agencies may continue the practice 
of factoring wholesale price fluctuations into the calculation of 
allowable reimbursement levels. Section 246.12(h)(3)(viii) of the 
interim rule incorporates this provision. Section 17(h)(11)(D) of the 
CNA also gives State agencies the option of exempting from competitive 
price criteria and allowable reimbursement levels pharmacies that 
supply only exempt infant formula and medical foods under the program 
and non-profit vendors that meet or are likely to meet the more than 50 
percent criterion. This option also is reflected in Sec.  
246.12(g)(4)(iv) and 246.12(h)(3)(viii) of the interim rule.
    Under Sec.  246.12(g)(4)(iv) of this rule, a State agency that 
chooses to exempt a non-profit vendor from competitive price criteria 
and/or allowable reimbursement levels must have a compelling reason for 
doing so. The State agency must notify FNS, in writing, prior to 
granting this exemption. The State agency's notification must indicate 
the reason for the exemption (e.g., the vendor is needed to ensure 
participant access), the benefits to the program of exempting the non-
profit vendor from the competitive price criteria and/or allowable 
reimbursement levels, and how the State agency will establish an 
appropriate reimbursement level for the non-profit vendor. State 
agencies are not required to notify FNS of exemptions of non-profit 
health and/or human service agencies or organizations that provide 
supplemental foods to WIC participants.

Specific Requirement

    Section 246.12(h)(3)(viii) of this rule requires the State agency 
to consider participant access in a geographic area in establishing 
allowable reimbursement levels. A State agency must set allowable 
reimbursement levels that allow WIC participants to purchase all of the 
foods prescribed on the food

[[Page 71721]]

instrument from any authorized vendor. This requirement does not mean 
that the State agency must print a statewide maximum reimbursement 
level on the food instrument or set maximum reimbursement levels based 
on the highest supplemental food prices among authorized vendors. 
Rather, the requirement to consider participant access makes this a 
priority in establishing allowable reimbursement levels. It works in 
tandem with the competitive price criteria requirement to contain costs 
and while meeting participants' needs.

Acceptable Approaches To Establishing and Using Allowable Reimbursement 
Levels

1. Current Price Limitation Methods
    Under current regulations, State agencies use food instrument 
redemption procedures to ensure that each vendor is not paid more than 
the price limitations applicable to the vendor. The following examples 
illustrate how State agencies should link competitive price criteria 
and allowable reimbursement levels. Since they describe methods 
currently used by State agencies, the examples do not embody all of the 
requirements and recommendations of this interim rule (such as using 
standard deviations rather than percentages to define the competitive 
range).

     Scenario #1: At authorization, a vendor's price for 
each WIC food item may not exceed the average shelf prices of other 
authorized vendors in the peer group by more than five percent. The 
State agency sets the maximum payment for any food instrument at 
five percent above the average cost of the peer group for the 
specific food items on the food instrument, or at five percent above 
the vendor's reported shelf prices, whichever is less. To allow for 
wholesale price fluctuations, the State agency sets food instrument 
not-to-exceed amounts in its redemption system at 110 percent above 
the average food instrument prices. It generates a monthly report 
that identifies all food instruments redeemed for prices between 105 
and 110 percent of the peer group's average prices by food 
instrument type. The State agency follows up with the vendors after 
evaluating the information on these food instruments.
     Scenario #2: The State agency authorizes any qualified 
vendor with prices at or below the average redemption amount for 
selected food instruments redeemed by the peer group. The State 
agency's redemption system sets the maximum allowable reimbursement 
level for each type of WIC check and for each peer group based on a 
statistical formula that uses the average redemption prices of 
vendors in the peer group during the preceding three months, known 
as a rolling average. Maximum allowable reimbursement levels do not 
include an inflation factor. If the price on a food instrument 
exceeds the maximum allowable reimbursement level, the State agency 
pays the vendor the maximum allowable reimbursement amount.
2. Printing Maximum Reimbursement Amounts on Food Instruments
    Currently, some State agencies print maximum allowable 
reimbursement (or not-to-exceed) amounts on all of their food 
instruments; some print maximum amounts on most, but not all food 
instruments; others do not print maximum amounts on any food 
instruments. Under this rule, State agencies may continue using any of 
these approaches as long as printed maximum reimbursement amounts do 
not prohibit the State agency from applying the allowable reimbursement 
levels established for each peer group, which may be lower than the 
printed maximum. State agencies that print statewide not-to-exceed 
amounts on food instruments should notify vendors in the vendor 
agreement, vendor handbook, and training sessions, that they will be 
held to a peer group maximum reimbursement level that is linked to the 
competitive price criteria applied to the vendor at authorization.
3. Calculating Average Payments per Food Instrument
    If a State agency authorizes above-50-percent vendors, it must 
ensure that average payments per food instrument to such vendors do not 
exceed average payments per food instrument to comparable vendors. When 
calculating average payments per food instrument, the State agency must 
include either all food instruments redeemed by all authorized vendors 
or a representative sample (constructed using appropriate sampling 
techniques) of the redeemed food instruments. To calculate the average 
payments per food instrument, a State agency should add the redemption 
amounts for all redeemed food instruments of the same type and divide 
the total by the number of food instruments of that type. If the State 
agency does not use pre-determined types of food instruments, it should 
calculate the average payment to above-50-percent vendors and regular 
vendors for each food item or distinct combination of foods prescribed 
on the food instrument. For comparison purposes, the State agency may 
calculate average payments per food instrument for above-50-percent 
vendors and comparable groups of regular vendors.

Cost Containment Certification

    If a State agency elects to authorize any above-50-percent vendors, 
section 17(h)(11)(E) of the CNA requires the State agency to 
demonstrate to FNS that its competitive price criteria and allowable 
reimbursement levels do not result in average payments per food 
instrument to these vendors that are higher than average payments per 
food instrument to comparable vendors that do not meet the more than 50 
percent criterion. Accordingly, Sec.  246.12(g)(4)(vi) of the rule 
requires a State agency that authorizes above-50-percent vendors to 
submit to FNS every three years information which indicates that the 
State agency has an effective methodology for establishing competitive 
price criteria and allowable reimbursement levels. The information 
provided by the State agency will include data on the average payments 
per food instrument to above-50-percent vendors as compared to regular 
vendors, submitted in accordance with guidance developed by FNS.
    If FNS determines, based on its review of the information provided 
by the State agency and any other relevant data, that the requirements 
of Sec.  246.12(g)(4)(vi) have been met, FNS will certify that the 
State agency's competitive price criteria and allowable reimbursement 
levels do not result in higher average payments per food instrument for 
above-50-percent vendors than for other comparable vendors. If the 
State agency's methodology for establishing competitive price criteria 
and allowable reimbursement levels fails to meet the requirements in 
Sec.  246.12(g)(4)(i) of the interim rule, FNS will disapprove the 
State agency's request to authorize above-50-percent vendors.

Limitation on Private Rights of Action

    As required by section 17(h)(11)(F) of the CNA, the competitive 
pricing provisions of this interim rule do not create a private right 
of action. Individuals do not have the right to seek administrative or 
judicial redress for the standards set by the State agency with respect 
to vendor selection criteria and cost containment provisions. Section 
246.12(g)(4)(vii) of this interim rule reflects this limitation on the 
private rights of action.

State Plan

    Section 203(e)(10)(B) of Public Law 108-265 amends section 17(f) of 
the CNA to require a State agency to include in the State Plan a 
description of its vendor peer group system, competitive price 
criteria, and allowable reimbursement levels that demonstrates that the 
State agency is in compliance with the cost containment provisions in 
section 17(h)(11) of the CNA.

[[Page 71722]]

Accordingly, Sec.  264.4 of the interim rule incorporates this 
requirement.
    In Sec.  246.4(a)(14)(xv) of the interim rule, the State Plan also 
must include information on non-profit above-50-percent vendors that 
the State agency has exempted from competitive price criteria and 
allowable reimbursement levels under Sec.  246.12(g)(4)(iv); a 
justification and documentation supporting the State agency's request 
for an exemption from the vendor peer group requirement in Sec.  
246.12(g)(4), if applicable; and, if the State agency authorizes any 
above-50-percent vendors, information required by FNS to determine 
whether the State agency's vendor cost containment system meets the 
requirements in Sec.  246.12(g)(4)(i).

List of Subjects in 7 CFR Part 246

    Food assistance programs, Food donations, Grant programs--Social 
programs, Infants and children, Maternal and child health, Nutrition 
education, Public assistance programs, WIC, Women.

0
Accordingly, 7 CFR part 246 is amended as follows:

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

0
1. The authority citation for part 246 continues to read as follows:

    Authority: 42 U.S.C. 1786.


0
2. In Sec.  246.2:
0
a. Add in alphabetical order the definitions of Above-50-percent 
vendors, Food sales, and Vendor peer group system; and
0
b. Remove the reference ``Sec.  246.12(g)(3)'' from the definition of 
Vendor selection criteria and add in its place the reference ``Sec.  
246.12(g)(3) and (g)(4)''.
    The additions read as follows:


Sec.  246.2  Definitions.

    Above-50-percent vendors means vendors that derive more than 50 
percent of their annual food sales revenue from WIC food instruments, 
and new vendor applicants expected to meet this criterion under 
guidelines approved by FNS.
* * * * *
    Food sales means sales of all Food Stamp Program eligible foods 
intended for home preparation and consumption, including meat, fish, 
and poultry; bread and cereal products; dairy products; fruits and 
vegetables. Food items such as condiments and spices, coffee, tea, 
cocoa, and carbonated and noncarbonated drinks may be included in food 
sales when offered for sale along with foods in the categories 
identified above. Food sales do not include sales of any items that 
cannot be purchased with food stamp benefits, such as hot foods or food 
that will be eaten in the store.
* * * * *
    Vendor peer group system means a classification of authorized 
vendors into groups based on common characteristics or criteria that 
affect food prices, for the purpose of applying appropriate competitive 
price criteria to vendors at authorization and limiting payments for 
food to competitive levels.
* * * * *

0
3. In Sec.  246.4:
0
a. Remove the reference ``Sec.  246.12(g)(3)'' and from paragraph 
(a)(14)(ii) and add in its place the reference ``Sec.  246.12(g)(3) and 
(g)(4)''.
0
b. Revise the heading and the first sentence of paragraph (a)(14)(x); 
and
0
c. Add new paragraphs (a)(14)(xv) and (a)(14)(xvi).
    The revision and additions read as follows:


Sec.  246.4  State plan.

    (a) * * *
    (14) * * *
    (x) Infant formula cost containment. A description of any infant 
formula cost containment system.* * *
* * * * *
    (xv) Vendor cost containment. A description of the State agency's 
vendor peer group system, competitive price criteria, and allowable 
reimbursement levels that demonstrates that the State agency is in 
compliance with the cost containment provisions in Sec.  246.12(g)(4); 
information on non-profit above-50-percent vendors that the State 
agency has exempted from competitive price criteria and allowable 
reimbursement levels in Sec.  246.12(g)(4)(iv); a justification and 
documentation supporting the State agency's request for an exemption 
from the vendor peer group requirement in Sec.  246.12(g)(4), if 
applicable; and, if the State agency authorizes any above-50-percent 
vendors, information required by FNS to determine whether the State 
agency's vendor cost containment system meets the requirements in Sec.  
246.12(g)(4)(i).
    (xvi) Other cost containment systems. A description of any other 
food cost containment systems (such as juice and cereal rebates and 
food item restrictions).
* * * * *

0
4. In Sec.  246.12:
0
a. Revise paragraph (g)(1);
0
b. Remove paragraph (g)(3)(i) and redesignate paragraphs (g)(3)(ii) 
through (g)(3)(iv) as paragraphs (g)(3)(i) through (g)(3)(iii);
0
c. Redesignate paragraphs (g)(4) through (g)(8) as paragraphs (g)(5) 
through (g)(9), and add a new paragraph (g)(4); and
0
d. Add six sentences to the end of paragraph (h)(3)(viii).
    The revision and additions read as follows:


Sec.  246.12  Food delivery systems.

* * * * *
    (g) * * *
    (1) General. The State agency must authorize an appropriate number 
and distribution of vendors in order to ensure the lowest practicable 
food prices consistent with adequate participant access to supplemental 
foods and to ensure effective State agency management, oversight, and 
review of its authorized vendors.
* * * * *
    (4) Vendor selection criteria: competitive price. The State agency 
must establish a vendor peer group system and distinct competitive 
price criteria and allowable reimbursement levels for each peer group. 
The State agency must use the competitive price criteria to evaluate 
the prices a vendor applicant charges for supplemental foods as 
compared to the prices charged by other vendor applicants and 
authorized vendors, and must authorize vendors selected from among 
those that offer the program the most competitive prices. The State 
agency must consider a vendor applicant's shelf prices or the prices it 
bids for supplemental foods, which may not exceed its shelf prices. In 
establishing competitive price criteria and allowable reimbursement 
levels, the State agency must consider participant access by geographic 
area.
    (i) Vendors that meet the above-50-percent criterion. Vendors that 
derive more than 50 percent of their annual food sales revenue from WIC 
food instruments, and new vendor applicants expected to meet this 
criterion under guidelines approved by FNS, are defined as above-50-
percent vendors. Each State agency annually must implement procedures 
approved by FNS to identify authorized vendors and vendor applicants as 
either above-50-percent vendors or regular vendors. The State agency 
must receive FNS certification of its vendor cost containment system 
under section 246.12(g)(4)(vi) prior to authorizing any above-50-
percent vendors. The State agency that chooses to authorize any above-
50-percent vendors:
    (A) Must distinguish these vendors from other authorized vendors in 
its peer group system or its alternative cost

[[Page 71723]]

containment system approved by FNS by establishing separate peer groups 
for above-50-percent vendors or by placing above-50-percent vendors in 
peer groups with other vendors and establishing distinct competitive 
price selection criteria and allowable reimbursement levels for the 
above-50-percent vendors;
    (B) Must reassess the status of new vendors within six months after 
authorization to determine whether or not the vendors are above-50-
percent vendors, and must take necessary follow-up action, such as 
terminating vendor agreements or reassigning vendors to the appropriate 
peer group;
    (C) Must compare above-50-percent vendors' prices against the 
prices of vendors that do not meet the above-50-percent criterion in 
determining whether the above-50-percent vendors have competitive 
prices and in establishing allowable reimbursement levels for such 
vendors; and
    (D) Must ensure that the prices of above-50-percent vendors do not 
inflate the competitive price criteria and allowable reimbursement 
levels for the peer groups or result in higher total food costs if 
program participants transact their food instruments at above-50-
percent vendors rather than at other vendors that do not meet the 
above-50-percent criterion. To comply with this requirement, the State 
agency must compare the average cost of each type of food instrument 
redeemed by above-50-percent vendors against the average cost of the 
same type of food instrument redeemed by regular vendors. The average 
cost per food instrument must be weighted to reflect the relative 
proportion of food instruments redeemed by each category of vendors in 
the peer group system. The State agency must compute statewide average 
costs per food instrument at least quarterly to monitor compliance with 
this requirement. If average payments per food instrument for above-50-
percent vendors exceed average payments per food instrument to regular 
vendors, then the State agency must take necessary action to ensure 
compliance, such as adjusting payment levels, recouping excess 
payments, or terminating vendor agreements with above-50-percent 
vendors whose prices are least competitive and that are not needed to 
ensure participant access. Where EBT systems are in use, it may be more 
appropriate to compare prices of individual WIC food items to ensure 
that average payments to above-50-percent vendors do not exceed average 
payments for the same food item to comparable vendors. If FNS 
determines that a State agency has failed to ensure that above-50-
percent vendors do not result in higher costs to the program than if 
participants transact their food instruments at regular vendors, FNS 
will establish a claim against the State agency to recover excess food 
funds expended and will require remedial action.
    (ii) Implementing effective peer groups. The State agency's 
methodology for establishing a vendor peer group system must include 
the following:
    (A) At least two criteria for establishing peer groups, one of 
which must be a measure of geography, such as metropolitan or other 
statistical areas that form distinct labor and products markets, unless 
the State agency receives FNS approval to use a single criterion;
    (B) Routine collection and monitoring of vendor shelf prices at 
least every six months following authorization; and
    (C) Assessment of the effectiveness of the peer groupings and 
competitive price criteria at least every three years and modification, 
as necessary, to enhance system performance. The State agency may 
change a vendor's peer group whenever the State agency determines that 
placement in an alternate peer group is warranted.
    (iii) Subsequent price increases. The State agency must establish 
procedures to ensure that a vendor selected for participation in the 
program does not, subsequent to selection, increase prices to levels 
that would make the vendor ineligible for authorization.
    (iv) Exceptions to competitive price criteria. The State agency may 
except from the competitive price criteria and allowable reimbursement 
levels pharmacy vendors that supply only exempt infant formula and/or 
WIC-eligible medical foods, and non-profit vendors for which more than 
50 percent of their annual revenue from food sales consists of revenue 
derived from WIC food instruments. A State agency that elects to exempt 
non-profit vendors from competitive price criteria and/or allowable 
reimbursements levels must notify FNS, in writing, at least 30 days 
prior to the effective date of the exemption. The State agency's 
notification must indicate the reason for the exemption, including 
whether the vendor is needed to ensure participant access, why other 
vendors that are subject to competitive price criteria and allowable 
reimbursement levels cannot provide the required supplemental foods, 
the benefits to the program of exempting the non-profit vendor from the 
competitive price criteria and/or allowable reimbursement levels, the 
criteria the State agency used to assess the competitiveness of the 
non-profit vendor's prices, and how the State agency will determine the 
reimbursement level for the non-profit vendor. This notification 
requirement does not apply to State agency contracts and agreements 
with non-profit health and/or human service agencies or organizations.
    (v) Exemptions from the vendor peer group system requirement. With 
prior written approval from FNS, a State agency may use a vendor cost 
containment approach other than a peer group system if it meets certain 
conditions. A State agency that obtains an exemption from the peer 
group requirement still must establish competitive pricing criteria for 
vendor selection and allowable reimbursement levels. An exemption from 
the peer group requirement would remain in effect until the State 
agency no longer meets the conditions on which the exemption was based, 
until FNS revokes the exemption, or for three years, whichever occurs 
first. During the period of the exemption, the State agency must 
provide annually to FNS documentation that it either authorizes no 
above-50-percent vendors, or that such vendors' redemptions continue to 
represent less than five percent of total WIC redemptions, depending on 
the terms of the exemption. The conditions for obtaining an exemption 
from the vendor peer group system are as follows:
    (A) The State agency chooses not to authorize any vendors that 
derive more than 50 percent of their revenue from food sales from WIC 
food instruments, and the State agency demonstrates to FNS that 
establishing a vendor peer group system would be inconsistent with 
efficient and effective operation of the program, or that its 
alternative cost containment system would be as effective as a peer 
group system; or
    (B) The State agency determines that food instruments redeemed by 
vendors that meet the above-50-percent criterion comprise less than 
five percent of the total WIC redemptions in the State in the fiscal 
year prior to a fiscal year in which the exemption is effective; and 
the State agency demonstrates to FNS that its alternative vendor cost 
containment system would be as effective as a vendor peer group system 
and would not result in higher costs if program participants redeem 
food instruments at vendors that meet the above-50-percent criterion 
rather than at vendors that do not meet this criterion.
    (vi) Cost containment certification. If a State agency elects to 
authorize any above-50-percent vendors, the State agency must submit 
information, in accordance with guidance provided by

[[Page 71724]]

FNS, to demonstrate that its competitive price criteria and allowable 
reimbursement levels do not result in average payments per food 
instrument to these vendors that are higher than average payments per 
food instrument to comparable vendors that are not above-50-percent 
vendors. To calculate average payments per food instrument, the State 
agency must include either all food instruments redeemed by all 
authorized vendors or a representative sample of the redeemed food 
instruments. The State agency must add the redemption amounts for all 
redeemed food instruments of the same type and divide the sum by the 
number of food instruments of that type. If the State agency does not 
designate food instruments by type, it must calculate the average 
payment for each distinct combination of foods prescribed on the food 
instrument. The State agency may calculate average payments per food 
instrument type for groups of vendors that meet the above-50-percent 
criterion and comparable vendors, or the State agency may calculate 
average payments for each food instrument type for each vendor. State 
agencies with EBT systems must compare the average cost of each WIC 
food purchased by participants at above-50-percent vendors with the 
average cost of each food purchased from comparable vendors. If FNS 
determines, based on its review of the information provided by the 
State agency and any other relevant data, that the requirements in this 
paragraph have been met, FNS will certify that the State agency's 
competitive price criteria and allowable reimbursement levels 
established for above-50-percent vendors do not result in higher 
average payments per food instrument (or higher costs for each WIC food 
item in EBT systems). If the State agency's methodology for 
establishing competitive price criteria and allowable reimbursement 
levels fails to meet the requirement of this section regarding average 
food instrument payments to above-50-percent vendors, FNS will 
disapprove the State agency's request to authorize above-50-percent 
vendors. At least every three years following initial certification, 
the State agency must submit information which demonstrates that it 
continues to meet the requirements of this section relative to average 
payments to above-50-percent vendors. FNS may require annual updates of 
selected food instrument redemption data.
    (vii) Limitation on private rights of action. The competitive 
pricing provisions of this paragraph do not create a private right of 
action based on facts that arise from the impact or enforcement of 
these provisions.
* * * * *
    (h) * * *
    (3) * * *
    (viii) * * * As part of the redemption procedures, the State agency 
must establish and apply limits on the amount of reimbursement allowed 
for food instruments based on a vendor's peer group and competitive 
price criteria. In setting allowable reimbursement levels, the State 
agency must consider participant access in a geographic area and may 
include a factor to reflect fluctuations in wholesale prices. In 
establishing allowable reimbursement levels for above-50-percent 
vendors the State agency must ensure that reimbursements do not result 
in higher food costs than if participants transacted their food 
instruments at vendors that are not above-50-percent vendors, or in 
higher average payments per food instrument to above-50-percent vendors 
than average payments to comparable vendors. The State agency may make 
price adjustments to the purchase price on food instruments submitted 
by the vendor for redemption to ensure compliance with the allowable 
reimbursement level applicable to the vendor. A vendor's failure to 
remain price competitive is cause for termination of the vendor 
agreement, even if actual payments to the vendor are within the maximum 
reimbursement amount. The State agency may exempt vendors that supply 
only exempt infant formula and/or WIC-eligible medical foods and non-
profit above-50-percent vendors from the allowable reimbursement 
limits.
* * * * *

0
5. In Sec.  246.18, redesignate paragraphs (a)(1)(iii)(B) through 
(a)(1)(iii)(G) as paragraphs (a)(1)(iii)(C) through (a)(1)(iii)(H) and 
add a new paragraph (a)(1)(iii)(B) to read as follows:


Sec.  246.18  Administrative review of State agency actions.

    (a) * * *
    (1) * * *
    (iii) * * *
    (B) The validity or appropriateness of the State agency's vendor 
peer group criteria and the criteria used to identify vendors that are 
above-50-percent vendors or comparable to above-50-percent vendors;
* * * * *

    Dated: November 22, 2005.
Kate Coler,
Deputy Under Secretary, Food, Nutrition, and Consumer Services.

    Note: This appendix will not be published in the Code of Federal 
Regulations.

Appendix: Regulatory Impact Analysis

    1. Title: 7 CFR 246: Special Supplemental Nutrition Program for 
Women, Infants, and Children (WIC): Vendor Cost Containment
    2. Action:
    (a) Nature: Interim Rule
    (b) Need: This rule is needed to implement the vendor cost 
containment provisions of the Child Nutrition and WIC 
Reauthorization Act of 2004, Public Law 108-265. Overall, the WIC 
program must ensure that program foods are acquired at the most 
competitive prices consistent with ensuring reasonable program 
participant access. This rule requires WIC State agencies to operate 
vendor management systems that effectively contain food costs by 
ensuring that prices paid for supplemental foods are competitive. 
The rule also responds to data which indicate that WIC food 
expenditures increasingly include payments to a type of vendor whose 
prices are not governed by the market forces that affect most retail 
grocers. This rule incorporates new statutory requirements for State 
agencies to use in evaluating vendor applicants' prices during the 
vendor selection process and when paying vendors for supplemental 
foods following authorization.
    (c) Affected Parties: The program affected by this rule is the 
Special Supplemental Nutrition Program for Women, Infants, and 
Children (WIC). The parties affected by this regulation are the 
USDA's Food and Nutrition Service (FNS), State agencies that 
administer the WIC Program, and retail vendors that are authorized 
to accept WIC food instruments.
    Effects: The following analysis describes the potential economic 
impact of this interim final regulation. Due to the importance of 
keeping food costs competitive and using program funds to serve 
recipients as effectively as possible, in section 501(b) of Pub. L. 
108-265, Congress provided authority to implement these changes on 
an interim final basis. The changes in this rule are significant to 
the costs or overall operations to the program. The potential 
effects of these changes are highlighted below.
    Discussion: Over the past five years, the Special Supplemental 
Nutrition Program for Women, Infants, and Children (WIC) has 
experienced an increase in the number of vendors whose prices are 
not governed by market forces, and as a result are generally higher 
than the prices of other authorized vendors. These stores, often 
referred to as ``WIC-only'' stores, stock only WIC food items and 
serve only WIC customers; thus they operate outside the commercial 
retail market. Because WIC is a discretionary grant program, the 
continued growth of WIC-only stores could drive up food costs and 
compromise the program's ability to respond to the nutritional needs 
of at-risk women and children, unless effective cost-containment

[[Page 71725]]

measures are instituted by State agencies. In addition, this rule is 
intended to cause greater focus on cost containment for WIC food 
from all sources with the expectation that it is likely to lead to 
food cost savings which can be used to serve more eligibles.
    Under the WIC retail food delivery system in most states, 
participants receive food instruments that they use to purchase 
specific food items that have been prescribed for them. They 
generally can purchase these items at any authorized retailer, 
regardless of the shelf price of these foods. As a result, 
participants are indifferent to the prices stores charge for WIC 
foods. In the past this has not been a problem for program costs, 
since to maintain a wide customer base, commercial retail food 
stores need to maintain competitive prices to maintain their 
business with price-sensitive non-WIC customers, usually the 
preponderance of their customers. The emergence and growth of WIC-
only stores has been problematic because these stores are not 
constrained by the need to maintain a wide customer base; WIC 
participants are their customer base. The growth of these stores, an 
increase from about 800 stores in 18 States in 2000 to over 1,200 
stores in 20 States in 2004, appears to have increased WIC food 
costs. It is estimated that in 2004 WIC-only vendors represented 
about 2.5 percent of all WIC vendors but comprised nearly 12 percent 
of total WIC redemptions.\1\
---------------------------------------------------------------------------

    \1\ Data on the number, location and redemptions of WIC-only 
stores is reported to FNS annually in The Integrity Profile (TIP).
---------------------------------------------------------------------------

    While current WIC regulations have required all State agencies 
to use vendor authorization and reimbursement policies to control 
the costs paid to authorized vendors, FNS and Congress have become 
increasingly concerned that the WIC program cannot afford the prices 
charged by WIC-only stores. For example, FNS sent a letter to the 
State of California (the State with the most WIC-only stores) 
imposing a temporary moratorium on the authorization of new WIC 
vendors in California unless the vendors have a history of 
competitive prices or are needed to ensure participant access to WIC 
foods. In the FY 2005 appropriations act for USDA, Congress 
prohibited all State agencies from authorizing any new stores that 
derive more than 50 percent of their annual food sales revenue from 
WIC food instruments, unless such stores are needed for participant 
access.\2\ Additionally, FNS sent a letter to all State Health 
Officers requesting them to review WIC vendor selection policies to 
ensure that only those vendors who offer competitive prices receive 
WIC authorization. In addition to concerns about WIC-only pricing, 
it is the intent of Congress and USDA that more competitive food 
pricing be achieved.
---------------------------------------------------------------------------

    \2\ Pub. L. 108-447, Consolidated Appropriations Act, 2005.
---------------------------------------------------------------------------

    The Child Nutrition and WIC Reauthorization Act of 2004 (Pub. L. 
108-265) included new legislative requirements to strengthen vendor 
cost containment by requiring State agencies to implement a vendor 
peer group system, competitive price criteria, and allowable 
reimbursement levels in a manner that ensures the WIC Program pays 
competitive prices for supplemental foods. This rule implements the 
vendor cost containment provisions of this Act. The main provisions 
of the rule can be grouped into three categories: peer group 
requirements for all vendors, requirements on vendors that derive 
more than 50 percent of their annual food sales revenue from WIC 
food instruments, and exemptions from the requirements of the rule.

Competitive Price Requirements

     For all vendors, State agencies are required to create 
peer groups, establish competitive price criteria for peer groups, 
and set allowable reimbursement levels for each peer group. 
Additionally, State agencies are required to collect and monitor 
shelf price data at least every 6 months and assess the 
effectiveness of peer groupings and competitive price criteria at 
least every three years.
     Peer groups are required to be based on at least two 
criteria, one of which must be geography. The second peer group 
criterion is not specified and is left to the discretion of the 
State agency to decide.
     State agencies must establish price criteria that (1) 
ensure prices charged by vendor applicants are competitive with 
prices charged by other vendors and (2) consider vendor's shelf 
prices or vendor's bid prices, which may not exceed shelf prices. 
State agencies must also consider participant access by geographic 
area in establishing competitive price criteria and establish 
procedures to ensure authorized vendors do not raise prices to 
levels that would make them ineligible for selection.
     The rule requires State agencies to establish allowable 
reimbursement levels for each vendor peer group that ensure that 
payments to vendors in peer groups reflect competitive prices and 
ensure that no vendors receive reimbursement at a level that would 
make them ineligible for authorization under the competitive price 
criteria requirements. State agencies may include a factor to 
reflect wholesale price fluctuations and consider participant access 
in a geographic area in establishing such levels.

Above-50-Percent Vendors

     The rule contains additional provisions regarding 
vendors who derive more than 50 percent of their food sales from WIC 
redemptions (above-50-percent vendors). State agencies must 
distinguish these vendors from other vendors in the peer group 
system--either by using separate peer groups or by using distinct 
competitive price criteria and allowable reimbursement levels for 
above-50-percent vendors that are grouped with regular vendors.
     Moreover, State agencies must ensure that use of these 
vendors 1) does not result in higher food costs than if participants 
used regular vendors and 2) does not result in higher average 
payments per food instrument than if participants used comparable 
vendors. It interprets this requirement to mean that above-50-
percent vendors must be cost neutral to the program, and that 
average payments to above-50-percent vendors for each type of 
redeemed food instrument may not exceed average payments to regular 
vendors for the same type of food instruments.

Exemptions

     Additionally, the rule allows for two types of 
exemptions from the requirements. State agencies can be exempt from 
the peer group system requirement and State agencies can exempt 
certain vendors from competitive price criteria and allowable 
reimbursement levels.

Peer Group System Exemptions

     To be exempted from the peer group system requirement, 
a State agency must elect not to authorize any above-50-percent 
vendors and demonstrate that compliance with the peer group system 
requirement is inconsistent with effective operation of the program 
or that an alternative cost containment system would be as 
effective.
     Alternately, a State agency can also be exempt from the 
peer group system requirement if it derived less than 5 percent of 
its total WIC sales in the prior year from above-50-percent vendors 
and demonstrates that an alternative cost containment system would 
be as effective as a vendor peer group system and would not result 
in higher food costs if participants transact food instruments at 
above-50-percent vendors, rather than at other vendors.

Exemptions From Competitive Price Criteria and Allowable 
Reimbursement Levels:

     State agencies can exempt vendors from competitive 
price criteria and allowable reimbursement levels, if they are 
pharmacies that supply only exempt infant formula or medical foods, 
or if they are non-profit above-50-percent vendors or non-profit 
vendor applicants likely to meet the above-50-percent criterion.
    Costs: This rule places new requirements on State agencies; 
therefore, the cost implications of this rule relate primarily to 
administrative burden for States agencies. These cost implications 
are partially dependent on the current practices of State agencies 
relative to the requirements of the rule. A discussion of these 
costs follows.

Administrative Burden

    In order to comply with this rule, State agencies will need to 
make changes in their vendor cost containment systems. Some State 
agencies may already be in full or partial compliance with the rule, 
while others may demonstrate that they meet the conditions for an 
exemption from the vendor peer group requirement. For State agencies 
that are not already in full compliance, there may be costs 
associated with forming or restructuring peer groups, establishing 
competitive prices and allowable reimbursement levels for those peer 
groups, monitoring shelf prices, and evaluating payments to above-
50-percent vendors.

Peer Groups

    Under the new rule, State agencies will be required to establish 
peer groups that utilize at least two peer grouping criteria, one of 
which is geography. State agencies that already have peer groups 
that meet this requirement will incur no costs to comply with this 
provision of the regulation.

[[Page 71726]]

Additionally, State agencies that already have peer groups of some 
type will incur fewer costs than State agencies that do not have any 
peer groups in place. Complete data about current practices used in 
all State agencies are not available, but the extent to which some 
State agencies use peer groups and how many will be affected by this 
provision can be gauged from data that 32 State agencies provided 
FNS in September 2004. The main findings from this data are 
displayed below in Table 1.

 Table 1.--Current Use of Peer Groups in 32 State Agencies, as Reported
                        to FNS in September 2004
------------------------------------------------------------------------
                                                               Number of
                                                                 State
                                                                agencies
------------------------------------------------------------------------
Currently uses a peer group system...........................         25
    Uses two or more criteria for peer groups................         22
    Geography is one of the peer group criteria..............         12
Peer groups are being developed..............................          3
------------------------------------------------------------------------

    Based on this data, it appears that as many as 77 of the 89 
state agencies could incur some level of costs to develop peer 
groups consistent with this rule.\3\
---------------------------------------------------------------------------

    \3\ All calculations in this document are based on 89 State 
agencies, but it is important to note three State agencies currently 
use a direct distribution or home delivery system exclusively and 
could be exempt from the provisions set forth in this rule. Direct 
distribution and home delivery systems are also used in parts of an 
additional eight State agencies.
---------------------------------------------------------------------------

    Some of these State agencies may not have in-house resources to 
do the analysis necessary to group vendors into peer groups and 
would have to contract out. One State agency that has used an 
outside contractor paid about $130,000 for their peer group 
analysis, not including the cost of overtime in local agencies to 
gather the data necessary for the analysis.

Evaluating Peer Groups

    In addition to developing peer groups, State agencies are also 
required to evaluate the effectiveness of these peer groups. The 
cost of doing so may depend on the availability and capability of 
staff in State agencies to evaluate the peer groups. Assuming that 
State agencies that currently have peer groups in place assess the 
effectiveness of their peer groups, evaluating peer groups will not 
result in any new costs. Based on the data provided above, up to 64 
State agencies could incur some level of cost to conduct statistical 
analysis to determine whether their peer groups are having the 
desired and expected effect. State agencies may not have the staff 
capabilities, time, and resources to do this analysis and may need 
to work with outside contractors to complete this work.

Establishing Competitive Price Levels and Allowable Reimbursement 
Levels

    Additionally, the extent that State agencies currently use peer 
groups to determine competitive price criteria or allowable 
reimbursement levels will impact their costs. While many of the 
State agencies that provided data to FNS had peer group systems in 
place, these peer groups were not always utilized in the manner 
required in this rule. The majority of the reporting State agencies 
with peer groups did not use peer groups to determine competitive 
price criteria or allowable reimbursement levels in the manner 
specified in the rule (See Table 2).

  Table 2.--Peer Groups Used for Competitive Price Levels and Allowable
 Reimbursement Levels as Reported by 32 State Agencies in September 2004
------------------------------------------------------------------------
                                                               Number of
                                                                 State
                                                                agencies
------------------------------------------------------------------------
Currently has a peer group system............................         25
    Peer group is used to set allowable reimbursement level..         14
    Peer group is used to determine competitive price                 17
     criteria................................................
Current peer group system is structured according to rule             12
 (i.e. one criteria is geography)............................
    Peer group is used to set allowable reimbursement level..          8
    Peer group is used to determine competitive price                  7
     criteria................................................
------------------------------------------------------------------------

    This suggests that although many of the State agencies that have 
peer groups may not incur significant costs to establish peer group 
systems, they may incur additional costs to craft the use of these 
peer groups in compliance with the rule. Looking more closely at the 
State agencies with peer groups that are structured according to the 
rule (two criteria, one being geography) in Table 2, it appears that 
even some of these State agencies will incur some costs complying 
with this rule.
    The costs of complying will be composed of the staff time 
necessary to calculate the optimal competitive price level and 
allowable reimbursement levels for each peer group, the time 
required to disseminate this information to the vendors, and the 
time and effort required to enforce and monitor the application of 
these criteria. For State agencies that do not have the staff 
resources to assess and, if necessary, modify competitive price 
criteria and allowable reimbursement levels, this work will need to 
be contracted, which could pose a significant expense to State 
agencies. Any costs incurred will be higher during the start-up 
period, but other USDA-sponsored research suggests that the on-going 
administrative costs of cost-containment practices can be quite low 
on a per participant basis.\4\
---------------------------------------------------------------------------

    \4\ U.S. Department of Agriculture, Economic Research Service, 
Assessment of WIC Cost-Containment Practices: Final Report, by John 
A. Kirlin, Nancy Cole, and Christopher Logan. ERS project 
representative: Phil Kaufman. E-FAN No. (03-005) 342 pp, February 
2003.
---------------------------------------------------------------------------

    Lastly, the stipulation that State agencies must set allowable 
reimbursement levels at the peer group level may cause more food 
instruments to be rejected for exceeding the allowable reimbursement 
levels. State agencies may need to develop new administrative 
procedures to manage these issues and may incur some administrative 
costs in doing so.

Monitoring Shelf Prices

    In addition to stipulating how peer groups should be structured 
and utilized, the rule also specifies that State agencies must 
monitor shelf prices at least every six months. The cost impact of 
monitoring shelf prices every six months is dependent on current 
State monitoring practices. These practices are outlined below in 
Table 3.

[[Page 71727]]



Table 3.--Summary of State Monitoring of Vendor Shelf Prices as Reported
                           to FNS in May 2005
               [57 Agencies responding, including 5 ITOs]
------------------------------------------------------------------------
                                                              Percent of
                                                   Number of     State
                                                     State     agencies
                                                   agencies    reporting
                                                   reporting   (percent)
------------------------------------------------------------------------
Frequency of Data Collection:
    Only at authorization.......................           4         7.0
    Annually....................................           5         8.8
    Semiannually................................          15        26.3
    Quarterly...................................          18        31.6
    Monthly.....................................           5         8.8
    Other.......................................          10        17.5
------------------------------------------------------------------------

    Of the 57 State agencies that provided data to FNS, about 67 
percent currently monitor shelf prices at least semiannually, if not 
more frequently. The requirements of the new rule will likely result 
in no significant change from costs that they currently incur. For 
the remaining 33 percent of State agencies and an unknown number of 
those for which FNS lacks data on frequency of shelf price 
collection, additional monitoring costs may be incurred. It is 
estimated that 89 State agencies and 45,000 vendors will be affected 
by this provision, incurring an estimated total of 90,178 burden 
hours annually. The majority of these burden hours (90,000) will be 
borne by vendors. Applying appropriate wage rates to these burden 
hours result in a cost of nearly $1.4 million for vendors and about 
$5,500 for State agencies.\5\
---------------------------------------------------------------------------

    \5\ U.S. Department of Labor, Bureau of Labor Statistics. ``May 
2004 National Occupational and Employment Wage Estimates'' and 
``Employer Costs for Employee Compensation, March 2005.''
---------------------------------------------------------------------------

Evaluating Above-50 Percent-Vendors

    Beyond developing peer groups, State agencies will have to 
determine whether a vendor derives more than 50 percent of its 
annual food sales revenue from WIC food instruments. In order to 
determine whether a vendor is an above-50-percent vendor, State 
agencies are required to consider a vendor's annual revenue from the 
food sales, defined in the rule as the sum of all payments received 
by the vendor for the sale of all foods that would be eligible items 
under the Food Stamp Program (FSP). Currently, WIC vendors are not 
required to report annual food sales to State agencies. It is 
unclear how many State agencies collect this data. State agencies 
that do not already collect this data will incur new costs in order 
to comply with this rule. Vendors also are likely to incur 
administrative costs to provide annual food sales data to State 
agencies. It is estimated that 89 State agencies and 45,000 vendors 
will be affected by this provision, incurring an estimated total of 
45,178 burden hours to complete this task annually. Again, as above, 
the bulk of these costs will be incurred by vendors (45,000). 
Applying appropriate wage rates to these burden hours results in a 
cost of about $.7 million for vendors and about $5,500 for State 
agencies.\6\
---------------------------------------------------------------------------

    \6\ U.S. Department of Labor, Bureau of Labor Statistics. ``May 
2004 National Occupational and Employment Wage Estimates'' and 
``Employer Costs for Employee Compensation, March 2005.''
---------------------------------------------------------------------------

    For current vendors, once State agencies have data on the annual 
sales of all FSP eligible foods, they will need to calculate WIC 
redemptions as a percent of a vendor's total food sales for the same 
period. If WIC redemptions are more than 50 percent of total food 
sales, the vendor is then deemed an above-50-percent vendor. The 
preamble of the rule states that as an initial step in this process, 
State agencies should compare each vendor's WIC redemptions to FSP 
redemptions for the same period and for those vendors whose WIC 
redemptions exceed their FSP redemptions, conduct further assessment 
using the total amount of revenue obtained from the sale of FSP 
eligible foods. After evaluating the total revenue obtained from the 
sale of FSP eligible foods, the State agency should calculate WIC 
redemptions as a percent of total food sales and classify the vendor 
as an above-50-percent vendor if appropriate.
    To help States determine how many of these vendors might exist, 
FNS compared fiscal year 2004 WIC redemptions to annual Food Stamp 
(FS) redemptions as reported in the FS database (STARS). Stores in 
which WIC sales exceeded FS sales were identified as potentially 
being above-50-percent vendors. Table 4 displays how many of the 
over 42,000 WIC vendors that are also Food Stamp vendors appear to 
have WIC sales that exceed 50 percent of total annual food sales.

  Table 4.--Number of WIC and FS Authorized Vendors for Which WIC Sales May Constitute More Than 50 Percent of
                                            Total Food Sales, FY 2004
----------------------------------------------------------------------------------------------------------------
                                                               Number of    Percent of
                                                                 State        State      Number of    Percent of
                                                                agencies     agencies     vendors    all vendors
----------------------------------------------------------------------------------------------------------------
Potential Above-50-Percent WIC Vendors......................          59        66.3%        5,177       11.5%
----------------------------------------------------------------------------------------------------------------
Source: FNS Administrative Data. A listing of potential WIC and FS authorized above-50-percent vendors was
  generated by matching data reported to FNS in 2004 in The Integrity Profile (TIP) system and the FS STARS
  database. There are 89 State Agencies and about 45,000 WIC authorized vendors.

    This analysis shows that at least 59 of the 89 WIC State 
agencies may have above-50-percent vendors. The total number of 
potential above-50-percent vendors identified through this match 
(5,177) is 11.5 percent of all vendors. However, while these stores 
may be above-50-percent WIC vendors because they have annual WIC 
sales that exceed FS sales, these stores may have non-WIC and non-FS 
sales that are larger than their WIC or FS sales, and so may not 
qualify as above-50-percent vendors upon further investigation.
    In addition to these 5,177 vendors, there are about 3,000 
additional WIC vendors that do not have FS authorization or that 
could not be matched with the FS authorization number in STARS. Most 
of the stores that states currently identify as WIC-only vendors 
fall into this category. Therefore, at least about 1,200 of these 
3,000 stores may be above-50-percent vendors.
    Combining the information on potential above-50-percent vendors 
from FNS' match of WIC and FSP authorized stores and the self-
identified WIC-only vendors provides an estimate of how many vendors 
potentially have WIC redemptions that are more than 50 percent of 
their total food sales. Currently, there are about 1,200 WIC-only 
vendors in 20

[[Page 71728]]

State Agencies. Together, this means that about 6,400 vendors in 64 
State agencies are potentially above-50-percent vendors, since all 
but 5 of the 20 State agencies with WIC-only vendors had other 
stores that were potentially above-50-percent vendors. Consequently, 
between 1,200 and 8,200 vendors could be identified as having WIC 
redemptions that are more than 50 percent of total food sales.
    State agencies must ask new vendor applicants if they expect to 
derive more than 50 percent of their annual revenue from the sale of 
food items from transactions involving WIC food instruments. If the 
vendor applicant responds ``yes'', the State agency does not need to 
do any further verification and should treat this vendor as an 
above-50-percent vendor. The preamble specifies that all other 
vendor applicants should be assessed to determine whether they are 
likely to meet the more than 50 percent criteria. To do so, State 
agencies should calculate WIC redemptions as a percent of total food 
sales in any existing WIC-authorized stores owned by the vendor 
applicants, calculate the percentage of anticipated food sales by 
type of payment, request and review inventory invoices to determine 
if a variety of foods will be offered for sale on a continuous 
basis, and determine whether WIC authorization is necessary for the 
store to open for business. Since we do not have data on the number 
of stores that apply for WIC authorization in any given year, we 
cannot estimate the impact of this provision of the rule.
    State agencies will also have to determine how to place above-
50-percent vendors in peer groups so that these vendors do not 
result in WIC paying more to these vendors than to comparable 
vendors. State agencies must develop and apply a definition of 
comparable vendors and may incur costs defending their application 
of comparable vendor criteria for the above-50-percent vendors. 
However, under the rule, neither the validity nor the 
appropriateness of the State agency's vendor peer group criteria or 
the criteria used to identify above-50-percent vendors and 
comparable vendors would be subject to appeal by a vendor.
    The rule requires FNS to certify that the State agency's 
competitive price criteria and allowable reimbursement levels do not 
result in higher average payments per food instrument for above-50-
percent vendors than for other comparable vendors. This 
certification will entail reviewing information provided by the 
State agency and other relevant data to determine that the 
requirements have been met. FNS will need to do this potentially for 
at least 64 of the State agencies identified above, if not all 89 
State agencies, without additional resources.
    In summary, most of the administrative burden/costs of this rule 
will be incurred at the State level. As outlined above, some State 
agencies will be affected less than others because they already have 
a peer group system that is based on the criteria specified in the 
rule, while others may incur significant, one-time start up costs 
because they will need to develop peer groups, competitive price 
levels, and allowable reimbursement levels for the peer groups. Some 
vendors will incur administrative costs to provide State agencies 
with total food sales information annually and to submit shelf 
prices semiannually. Most of these costs are difficult to determine 
given the current data that we have, but it is important to note 
that many State agencies already do this work within their existing 
NSA funds and the NSA allocations will not change to provide 
additional funds to administer the program with these new 
requirements.
    Benefits: The WIC Program will benefit from the provisions of 
this rule by reducing unnecessary food expenditures, which increases 
the potential to serve more eligible women, infants, and children 
for the same cost. This rule should have the effect of ensuring that 
payments to vendors, particularly vendors that derive more than 50 
percent of their annual food sales from WIC food instruments, 
reflect competitive prices for WIC foods.
    To estimate the rule's cost savings, FNS estimated the annual 
difference in food instrument redemption values between WIC-only 
versus non-WIC-only stores. FNS reviewed redemption data from 12 
State agencies that have 97 percent of the ``WIC-only'' vendors. 
Since State agencies currently are in the process of identifying 
above-50-percent vendors (and thus do not have data available on 
such vendors), FNS relied on data on stores that stock only WIC food 
items and serve only WIC customers; these stores are primarily self-
identified as WIC-only. State agencies provided data on their total 
food redemptions, WIC-only store food redemptions, the total number 
of vendors and number of WIC-only vendors, and the average 
redemption values of the five most frequently redeemed WIC food 
instruments in September 2004.\7\
---------------------------------------------------------------------------

    \7\ September 2004 was deemed to be a representative month 
because there were no significant or unusual spikes in food prices 
during that month.
---------------------------------------------------------------------------

    Using these data, FNS examined the cost differential between the 
average redemption amounts for the five food instruments most 
frequently redeemed at non-WIC-only and WIC-only vendors (see column 
labeled ``Ratio of Average Redemption Amounts of Non-WIC-Only to 
WIC-Only Vendors'' in Table 5 below). By applying the average cost 
ratio for these five food instruments to all redemptions for WIC-
only vendors, FNS determined what the redemptions would have been at 
WIC-only vendors if the prices were the same as those at non-WIC-
only vendors. The resulting cost savings was about $6 million 
monthly, $75 million annually, or about $377 million (assuming no 
inflation) over the course of five years for the 12 States. Table 5 
summarizes this analysis.
    It is also worth considering that the number of WIC-only stores 
had been growing rapidly before the California moratorium, the FY 
2005 appropriations act, and Pub. L. 108-265. It is reasonable to 
project that there could be substantially more of these high-cost 
stores in the program absent these measures and this rule. If the 
number of stores continued to grow at the rate they were growing, 
the excess costs (and thus potential savings) could be far greater 
than what is estimated here. From this perspective, our cost savings 
estimate may be lower than what would occur if these limitations on 
the growth of WIC-only stores had not been imposed.

                                                  Table 5.--Potential Cost Savings by Implementing Rule
                                                                  [Dollars in millions]
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                     Ratio of
                                                                                                                     average
                                                                                   Estimated non-  Estimated WIC-   redemption     Total
                                                                        Total         WIC-only          only        amounts of  redemptions    Monthly
                              State                                  redemptions     redemptions     redemptions     non-WIC-    if all at       cost
                                                                    (Sept. 2004)    (Sept. 2004)    (Sept. 2004)   only to WIC-   non-WIC-     savings
                                                                                                                       only      only level
                                                                                                                     vendors
--------------------------------------------------------------------------------------------------------------------------------------------------------
1................................................................           $5.99           $5.73            $.26          .82        $5.94         $.05
2................................................................            4.79            3.59            1.20          .75         4.50          .29
3................................................................           97.33           66.47           30.86          .87        93.27         4.06
4................................................................           18.53           16.40            2.13          .81        18.13          .40
5................................................................            3.49            3.38             .11          .80         3.47          .02
6................................................................            9.67            9.29             .38          .80         9.59          .08
7................................................................            3.17            2.86             .31         1.19         3.23         -.06
8................................................................           12.56           11.46            1.10          .67        12.20          .36
9................................................................            4.51            4.14             .37          .78         4.43          .08
10...............................................................           43.51           37.49            6.02          .83        42.52         1.00

[[Page 71729]]

 
11...............................................................            6.85            6.78             .07          .69         6.83          .02
12...............................................................           14.44           13.22            1.22         1.02         1.24         -.03
                                                                  -----------------
    Total........................................................         $210.40         $167.59          $42.81  ...........      $204.11       $6.27
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: States reported total redemptions to FNS and calculated non-WIC-only and WIC-only redemptions. All other figures calculated by FNS based on this
  and other data supplied by the States.

    This analysis assumes that September 2004 is a representative 
month and can be used to calculate annual cost savings. It also 
assumes that the mix of items within each redemption and the rate of 
full versus partial redemptions are the same for both vendor types. 
However, there is some evidence that WIC-only stores require full 
redemption of vouchers, resulting in higher redemption values 
compared with other vendors. This could overstate the impact of the 
rule. This analysis also excludes State agencies with smaller 
numbers of WIC-only stores and does not account for any impact on 
other types of vendors, which would tend to make this estimate lower 
than what actual savings might be. To realize some level of savings, 
State agencies would need to develop effective peer group systems. 
As noted below, there is uncertainty about the degree to which State 
agencies will be able to develop such systems initially, given the 
data collection and analysis needed.
    Uncertainty: Because the vendor peer group provisions in the 
Child Nutrition and WIC Reauthorization Act of 2004 and this rule 
provide for some flexibility in implementation, and because there is 
a wide degree of variation in food prices and current vendor cost 
containment practices across State agencies, the impact of many of 
the provisions of this rule is uncertain. Uncertainties include the 
administrative burden State agencies will incur and the savings that 
can be realized nationally or in any State agency. The major 
uncertainties for administrative burden were discussed previously in 
the analysis; the following is a discussion of the uncertainties 
regarding program savings.

Program Savings

Peer Groups

    Three issues introduce uncertainty regarding the impact of peer 
groups, as defined in the rule, on program costs. These issues 
center on the requirements for including geography as one of the 
criteria, choosing a second peer group criteria, and establishing an 
effective peer group. These issues are outlined below.
    Peer groups must be based on two criteria, one of which is 
geography. A state-sponsored analysis of WIC peer group practices 
suggest that geography is an important criterion for defining peer 
groups, but the findings also suggest that the way geography is 
defined and applied also matters.\8\ For example, study findings 
show that in some cases, grouping geographic entities (i.e., cities 
and counties) by price level was more effective than relying on 
contiguous geographic groupings, such as administrative program 
areas or geographic regions. Additionally, rule of thumb definitions 
of geography, such as one major metropolitan area versus the rest of 
the State, may result in geographic peer groups that are too large 
and heterogeneous to be effective. Conversely, using the county as 
the measure of geography might result in peer groups that are too 
small and whose average price is influenced by the prices of a 
single outlying vendor.
---------------------------------------------------------------------------

    \8\ State of Texas, Department of Health, Bureau of Nutrition 
Services, Retailer Peer Grouping Study for Competitive Pricing: 
Deliverable 3, Non-Commercial Vendor Recommendations. Prepared by 
Burger, Carroll and Associates, December 30, 2003.
---------------------------------------------------------------------------

    Additionally, the measure selected for the second peer group 
criterion could influence the effectiveness of the peer group 
structure. FNS's preliminary analysis of redemption data in two 
large States suggests that measures of sales volume (number of 
registers, market share, amount of redemptions) seem to have a 
bigger effect on price than type of ownership (sole proprietorship, 
partnership, corporation), but that no one measure of sales volume 
is consistently the best measure to group vendors once broken down 
by geography.
    To examine different scenarios, FNS obtained data from two large 
State agencies and developed hypothetical peer groups based on 
geographic area, number of registers, and monthly redemption amounts 
for vendors. Four sets of hypothetical peer groups were developed. 
All four used the same geographic criterion for the first criterion. 
For two sets of peer groups, the second criterion was based on the 
number of registers. For the other two sets of peer groups, the 
second criterion was based on the WIC redemption amounts for the 
vendor. The peer groups were formed by analyzing the distribution of 
number of registers or amount of WIC redemptions and dividing the 
vendors such that the same number of vendors fell into each of the 
five groups. Average prices for each group were calculated and 
tested to ensure they were statistically different from each other. 
In each scenario below, the two types of peer groups are compared 
(number of registers versus WIC redemptions) based on the method 
used to calculate the groups. For scenario one, the peer groups were 
calculated excluding the WIC-only vendors in the State data file. 
For scenario two, the peer groups were calculated including all 
vendors in the file. Analysis on average price was calculated for 
all non-WIC-only vendors since WIC-only vendors are most likely to 
be above-50-percent vendors and as such, could be put into separate 
peer groups under the rule.
    Tables 6 and 7 below compare the mean price for a food 
instrument using two different second criteria. For comparison 
purposes, only the range of categories in one geographic grouping is 
displayed here.

          Table 6.--Scenario 1, Mean Price of Food Instrument, Groupings Based on non-WIC Only Vendors
----------------------------------------------------------------------------------------------------------------
  2nd Peer group  criterion              Number of registers                     WIC redemption amounts
----------------------------------------------------------------------------------------------------------------
                                                            Mean price                                Mean price
            Group                 Number of registers        of food       WIC redemption amounts      of food
                                                            instrument                                instrument
----------------------------------------------------------------------------------------------------------------
1...........................  1 to 3.....................      $3.5316  Up to $3,835...............      $3.5404

[[Page 71730]]

 
2...........................  4 to 7.....................       3.5116  $3,836 to $130,318.........       3.5172
3...........................  8 to 10....................       3.3428  $130,319 to $1,943,825.....       3.3051
4...........................  11 to 12...................       3.3368  $1,943,826 to $3,205,592...       3.3885
5...........................  13 or more.................       3.3082  $3,205,593 or more.........       3.2293
----------------------------------------------------------------------------------------------------------------

    In scenario 1, all but one of the group averages are 
statistically equal, regardless of whether the number of registers 
or monthly WIC redemption amounts is used as the second peer group 
criterion. This result suggests that it would not matter which 
measure is used as the second criterion; both would have about the 
same outcome. But, when the same characteristics are applied to all 
vendors (scenario 2), the average prices in almost all of the 
categories are statistically different, indicating that the 
groupings are different from one another and may result in different 
outcomes. It is obviously difficult to definitively assess the 
effect of the peer groups when there is so much variation in how 
peer groups could be defined and how the vendors could be grouped.

               Table 7.--Scenario 2, Mean Price of Food Instrument, Groupings Based on All Vendors
----------------------------------------------------------------------------------------------------------------
  2nd Peer group  criterion              Number of registers                     WIC redemption amounts
----------------------------------------------------------------------------------------------------------------
                                                            Mean price                                Mean price
            Group                 Number of registers        of food       WIC redemption amounts      of food
                                                            instrument                                instrument
----------------------------------------------------------------------------------------------------------------
1...........................  1 to 2.....................      $3.5418  Up to $5,628...............      $3.5395
2...........................  3 to 5.....................       3.5119  $5,628 to $80,442..........       3.5131
3...........................  6 to 9.....................       3.4337  $80,443 to $1,872,819......       3.3539
4...........................  10 to 12...................       3.3064  $1,872,820 to $2,973,459...       3.3669
5...........................  13 or more.................       3.3082  $2,973,460 or more.........       3.2293
----------------------------------------------------------------------------------------------------------------

    Further, the rule provides State agencies considerable 
flexibility and few specific requirements for constructing peer 
groups. The rule focuses more on the intended outcome (i.e., cost 
neutrality of above-50-percent vendors) than on how State agencies 
achieve this outcome. FNS assumes that State agencies will perform 
sufficient analysis and will select the most effective criteria to 
contain vendor costs. The inability or failure of State agencies to 
do so could undermine or minimize the success of this rule. For 
example, State agencies will need to prevent peer groups from having 
wide price variation or non-normal distributions, or from being so 
large or so small that they are ineffective.
    Since State agencies could choose a strategy that is effective 
or ineffective for their particular needs and characteristics, and 
since an effective strategy for one State agency may not be an 
effective strategy for another State agency, the impact of the 
vendor peer group requirement on cost savings is uncertain. If 
implemented effectively, the peer group requirement as specified in 
the rule should ensure that above-50-percent vendors do not result 
in higher costs to the program than regular vendors.

Establishing Competitive Price Criteria and Allowable Reimbursement 
Levels

    The degree to which cost savings can be achieved also depends on 
the effectiveness of a state's method for assessing the prices of 
new vendor applicants relative to others in a peer group. Currently, 
many states either apply a percentage or a standard deviation 
measure to set a maximum competitive price criteria or a maximum 
reimbursement level. For example, some states may set their 
competitive price criteria at 5 percent above the average peer group 
price and others may set their competitive price criteria at 1 or 2 
standard deviations above the average peer group price.
    Either method could control costs effectively depending on the 
size of the peer group, the distribution of prices within that peer 
group and the percentage or number of standard deviations applied. 
For example, a standard deviation measure might be more effective in 
a peer group of a given size with a relatively small distribution of 
prices. But, a percentage might be more effective in a peer group 
with a relatively large distribution. Consequently, State agencies 
have been given flexibility to determine their competitive price 
criteria.
    2. Alternatives: This rule implements the vendor peer group 
provisions of the Child Nutrition and WIC Reauthorization Act of 
2004, which FNS believes is an effective means of controlling WIC 
food costs. While this Act mandates that States establish peer 
groups, competitive price criteria and allowable reimbursement 
levels and states that these requirements must result in the outcome 
of paying above-50-percent vendors no more than regular vendors, the 
Act does not specify particular criterion for peer groups or 
acceptable methods of setting competitive price criteria and 
allowable reimbursement levels. FNS considered mandating specific 
means of developing peer groups, competitive price criteria and 
allowable reimbursement levels in order to ensure that the outcome 
of this legislation was achieved.
    However, given States' responsibility to manage WIC as a 
discretionary grant program and the varying market conditions in 
each state, FNS believes that states need flexibility to develop 
their own peer groups, competitive price criteria and allowable 
reimbursement levels. At the October 2004 meeting that FNS convened 
to gain input for this rule, States indicated that they needed the 
ability to design cost containment practices that would be effective 
in their own markets and would ensure participant access. In 
addition, there is little information about the effectiveness of 
particular cost containment practices in the variety of markets 
represented by the 89 state agencies. Mandating more specific means 
of developing peer groups, competitive price criteria and allowable 
reimbursement levels could have unintended, negative consequences on 
participant access, food costs and administrative burden.
    As States gain experience and the results of their vendor cost 
containment practices become apparent, FNS may develop further 
regulations and guidance to improve achievement of the WIC vendor 
cost containment goals of the Child Nutrition and WIC 
Reauthorization Act of 2004. In the interim, FNS believes that the 
current rule will substantially accomplish the goal of the Act of 
containing food costs and ensuring that above-50-percent vendors do 
not result

[[Page 71731]]

in higher costs to the program than regular vendors.
[FR Doc. 05-23365 Filed 11-28-05; 8:45 am]
BILLING CODE 3410-30-P