    WIC Program: More Detailed Price and Quantity Data Could Enhance
    Agriculture's Assessment of WIC Program Expenditures (28-JUL-06,
    GAO-06-664).

    The Special Supplemental Nutrition Program for Women, Infants and
    Children (WIC), authorizes retail grocers, called regular WIC
    vendors, to provide the food benefit. Recently, some states have
    seen an increase in vendors called WIC-only vendors, who stock
    only WIC food and accept only WIC vouchers. Both vendor types
    accept WIC vouchers in exchange for a cash payment, or
    redemption, from WIC state agencies with U.S. Department of
    Agriculture (USDA) grant funds. To determine what effect WIC-only
    vendors' growth would have on program expenditures, in the
    absence of recent cost containment legislation, Congress asked
    GAO (1) what is known about WIC-only vendors' growth and their
    share of the WIC market in recent years, (2) to what extent do
    WIC-only and regular WIC vendors differ, and (3) what would
    WIC-only vendors' contribution to WIC program expenditures have
    been, if their market share increased. GAO analyzed national WIC
    vendor data, interviewed WIC state officials about vendors'
    business practices, and analyzed redemption data from California,
    Texas and Florida.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-06-664
        ACCNO:   A57620
      TITLE:     WIC Program: More Detailed Price and Quantity Data Could
    Enhance Agriculture's Assessment of WIC Program Expenditures
         DATE:   07/28/2006
      SUBJECT:   Children
    	     Competition
    	     Cost control
    	     Data collection
    	     Financial analysis
    	     Food programs for children
    	     Infants
    	     Women
    	     State-administered programs
    	     Vouchers
    	     Special Supplemental Nutrition Program
    	     for Women, Infants and Children

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    GAO-06-664

         *
              * Results in Brief
              * Background
                   * How the Retail Food Delivery System Works
                   * How WIC Vendors Are Managed
                   * How Vendor Management in the WIC Program Has Evolved
              * WIC-Only Vendors Increased in Number during Fiscal Years 199
                   * WIC-Only Vendors Tripled from Fiscal Year 1999 to Fiscal Yea
                   * Despite Recent Growth, WIC-Only Vendors Represent a Fraction
                   * WIC-Only Vendors Had the Smaller Share of the WIC Market in
              * WIC-Only Vendors and Regular WIC Vendors' Business and Marke
                   * WIC-Only Vendors Emphasized Customer Service, while Regular
                   * WIC-Only Vendors Tend to Locate near WIC Clinics; Regular WI
                   * WIC-Only Vendors Used Community-Based Media to Advertise; Re
                   * Officials Told Us That WIC-Only and Regular WIC Vendors Lowe
              * We Estimated That Program Participation Would Have Decreased
                   * If WIC-Only Vendors' Market Share Had Doubled in 2004 and Pr
                   * The Reasons for the Size of the Decrease in Program Particip
                   * If WIC-Only Vendors' Market Share Had Doubled and Program Ex
                   * Data Limitations Prevented Us from More Fully Analyzing the
              * Conclusions
              * Recommendation for Executive Action
              * Agency Comments
         * Appendix I: Scope and Methodology
              * Procedures for Analyzing WIC-Only Vendors' Growth and Market
                   * Data Collection
                        * Data Analysis
                   * Procedures for Determining the Extent to Which WIC-Only and
                        * Sample Selection
                        * Data Collection
                        * Data Analysis
                   * Scenario Analyses of WIC-Only Vendors' Contribution to WIC P
                        * Data Collection
                        * The model
                        * Scenario 1:
                        * Calculating the Number of Participants
                        * Scenario 2:
                        * Results of the Analysis for Scenario 1
                        * Results of the Analysis for Scenario 2
                        * Limitations
         * Appendix II: Number of WIC-Only Vendors, Fiscal Years 1999-2
         * Appendix III: Average Monthly Redemptions per WIC-Only Vendo
         * Appendix IV: WIC Vouchers Most Frequently Used at WIC-Only a
         * Appendix V: GAO Contacts and Staff Acknowledgments
              * Order by Mail or Phone

    Report to Congressional Requesters

    United States Government Accountability Office

    GAO

    July 2006

    WIC PROGRAM

    More Detailed Price and Quantity Data Could Enhance Agriculture's
    Assessment of WIC Program Expenditures

    GAO-06-664

    Contents

    Letter 1

    Results in Brief 5
    Background 8
    WIC-Only Vendors Increased in Number during Fiscal Years 1999-2004,
    although Their Market Share Remained Relatively Small in Fiscal Year 2004
    15
    WIC-Only Vendors and Regular WIC Vendors' Business and Marketing Practices
    Differ in Their Approach to Customer Service and Price 23
    We Estimated That Program Participation Would Have Decreased by about
    136,000 WIC Participants or Expenditures Would Have Increased by About $50
    Million if WIC-Only Vendors' Market Share Had Doubled in 2004 32
    Conclusions 37
    Recommendation for Executive Action 38
    Agency Comments 38
    Appendix I Scope and Methodology 41
    Appendix II Number of WIC-Only Vendors, Fiscal Years 1999-2004 61
    Appendix III Average Monthly Redemptions per WIC-Only Vendor by State in
    Fiscal Year 2004 62
    Appendix IV WIC Vouchers Most Frequently Used at WIC-Only and Regular WIC
    Vendors in California, Texas and Florida 63
    Appendix V GAO Contacts and Staff Acknowledgments 68

    Tables

    Table 1: Number of WIC-Only Vendors by State, Fiscal Years 1999 and 2004
    17
    Table 2: Estimated Change in the Number of Participants Served if WIC-Only
    Vendors' Market Share Increased while Program Expenditures Were Held
    Constant at Fiscal Year 2004 Levels 33
    Table 3: Difference between the Average Value of WIC-Only and Regular WIC
    Vendor Food Vouchers in 2004 and the Market Share of WIC-Only Vendors in
    California, Texas, and Florida 34
    Table 4: Change in Program Expenditures if WIC-Only Vendors' Market Share
    Increases while Maintaining the Total Number of Food Vouchers at Fiscal
    Year 2004 Levels 36
    Table 5: Time Periods Other than Monthly That WIC State Agencies Used in
    Reporting Fiscal Year 2004 Redemption Data to FNS 44
    Table 6: Example of Application of Model to Actual Data for California 52
    Table 7: Example of Calculation of WIC-Only and Regular WIC Vendors'
    Number and Average Value of Food Vouchers for California 53
    Table 8: Example Calculation of Decline in Number of Participants for
    California 54
    Table 9: Results of the Calculation of WIC-Only and Regular WIC Vendors'
    Number and Average Value of Food Vouchers for California, Texas, and
    Florida 56
    Table 10: Results of the Calculation of Decline in Number of Participants
    for California, Texas, and Florida 58
    Table 11: Results of Allowing Program Food Expenditures to Increase for
    California, Texas, and Florida 59

    Figures

    Figure 1: Sample Voucher from California 10
    Figure 2: National Total of WIC-Only Vendors 16
    Figure 3: Share of Total WIC-Only Vendors Nationwide by State and the Top
    Three Metropolitan Areas in 2004 18
    Figure 4: Percentage of Total WIC Vendors Represented by Each Vendor Type,
    Nationwide and in Select States 20
    Figure 5: Average Monthly WIC Redemptions per Vendor in 2004, by Vendor
    Type 21
    Figure 6: Share of Total Average Monthly WIC-Only Redemptions by State in
    2004 23
    Figure 7: Available WIC Food Items at WIC-Only Vendor in Texas 25
    Figure 8: Interior of WIC-Only Vendor in California 25
    Figure 9: Proximity of WIC-Only Vendor to WIC Clinic in Texas 28
    Figure 10: Sample WIC-Only Vendor Promotional Flyer 29
    Figure 11: Marquee of WIC-Only Vendor in Florida 30
    Figure 12: Example of the Average Value of Food Vouchers Redeemed by a
    WIC-Only Vendor 48
    Figure 13: Example of Hypothetical Vouchers Specifying Price and Quantity
    49
    Figure 14: Average Monthly Redemptions per WIC-Only Vendor by State in
    Fiscal Year 2004 62
    Figure 15: Most Frequently Used Vouchers for WIC-Only, Regular and State
    Total for California, 2004 63
    Figure 16: Most Frequently Used Vouchers for WIC-Only, Regular and State
    Total for Texas, 2004 64
    Figure 17: Most Frequently Used Vouchers for WIC-Only, Regular and State
    Total for Florida, 2004 66

    Abbreviations

    EBT electronic benefits transfer

    FNS Food and Nutrition Service

    GIS geographic information system

    IOM Institute of Medicine

    ITO Indian Tribal Organization

    MSA metropolitan statistical area

    TIP The Integrity Profile

    USDA U.S. Department of Agriculture

    WIC Special Supplemental Nutrition Program for Women,

    Infants, and Children

    This is a work of the U.S. government and is not subject to copyright
    protection in the United States. It may be reproduced and distributed in
    its entirety without further permission from GAO. However, because this
    work may contain copyrighted images or other material, permission from the
    copyright holder may be necessary if you wish to reproduce this material
    separately.

    United States Government Accountability Office

    Washington, DC 20548

    July 28, 2006

    The Honorable Tom Harkin Ranking Democratic Member Committee on
    Agriculture, Nutrition and Forestry United States Senate

    The Honorable Herb Kohl Ranking Democratic Member Subcommittee on
    Agriculture, Rural Development and Related Agencies Committee on
    Appropriations United States Senate

    Each month, the Special Supplemental Nutrition Program for Women, Infants,
    and Children, better known as WIC, provides nutritious food, nutrition
    education, and referrals to health care to more than 8 million low-income
    women, infants, of Agriculture's (USDA) Food and Nutrition Service (FNS)
    through WIC state and local agencies that implement the program and manage
    the food delivery system. WIC is a discretionary program, as Congress does
    not set aside funds to allow every eligible individual to participate, and
    was funded at a level of more than $5 billion in fiscal year 2005.

    In most states, WIC participants receive vouchers to exchange for food
    from authorized retail grocery stores that are known as WIC vendors in the
    program.1 These vouchers provide participants with a prescribed type and
    quantity of supplemental WIC foods tailored to their health needs, such as
    infant formula, milk, and peanut butter. Participants generally are not
    required by the federal WIC program to obtain all items on a voucher.
    However, they may not use the voucher to purchase items that are not
    listed on it. Because participants receive food in exchange for their
    vouchers, without exchanging any cash, their purchasing decisions are not
    price sensitive, that is, they do not need to consider the prices WIC
    vendors charge for the items.2 The vendors, which include independent
    stores as well as national and local chains, accept the vouchers and
    exchange them for a cash payment, or redemption, from the WIC state
    agency. Until recently, retail grocery stores that commonly carry a
    variety of foods including supplemental WIC foods-or regular WIC vendors,
    as they are referred to in this report-represented 98 percent or more of
    the stores each WIC state agency authorized as WIC vendors. However,
    beginning in about fiscal year 2000, some WIC state agencies noticed an
    increase in another type of authorized vendor in the WIC vendor market,
    one that sells only WIC-authorized food items to program participants and
    accepts only WIC vouchers. Prior to changes introduced by the Child
    Nutrition and WIC Reauthorization Act of 2004, these vendors were called
    WIC-only vendors.3 With data reported by the WIC state agencies, FNS has
    tracked WIC-only vendors' redemptions since 1998, but little else is known
    at the national level about the percentage of total WIC redemptions that
    WIC-only vendors are receiving, that is, their market share, or about
    their business practices.

    1WIC participants may receive benefits in the form of checks or vouchers,
    also called food instruments by the WIC program. We refer to both forms as
    vouchers for the purposes of this report.

    Questions have been raised about whether WIC-only vendors charge higher
    prices than other vendors and therefore will place a higher demand on
    overall program expenditures over time. If so, the WIC program may need to
    restrict program participation or seek additional funding. Concerned about
    the potential consequences of increasing claims on program funds, in
    fiscal year 2004, Congress established cost containment provisions to
    ensure that the WIC program is not charged more for food items obtained at
    WIC-only vendors than it would be for the same items at regular WIC
    vendors.4 Also, in fiscal year 2005, Congress prohibited the payment of
    administrative funds to any state agency that authorized any new WIC-only
    vendors, unless deemed necessary to ensure participant access, for 2
    years.5 To determine what the effect of WIC-only vendors' growth on WIC
    program expenditures would have been without the recent cost containment
    changes and the prohibition on authorizing new vendors, and to better
    understand how they do business, you asked us (1) what is known about
    WIC-only vendors' growth and their share of the WIC market in recent
    years, (2) to what extent do the business and marketing practices of
    WIC-only and regular WIC vendors differ, and (3) what would WIC-only
    vendors' contribution to WIC program expenditures have been if their
    market share increased.

    2While the WIC program generally does not require participants to pay
    attention to vendor prices, some WIC state agencies, such as that of
    Texas, for example, require WIC participants to obtain the least expensive
    brand of certain items (e.g., juice) with their voucher.

    3The Child Nutrition and WIC Reauthorization Act of 2004, Pub. L. No.
    108-265 (2004), created a new category of vendors referred to as above 50
    percent vendors, vendors whose revenue from the sale of WIC food is more
    than half of their annual revenue from food sales, as part of an overall
    cost containment strategy. This new category includes WIC-only vendors. In
    this report, we used the definitions established by FNS prior to the
    changes brought by the reauthorization because those definitions conform
    to the redemption data provided by FNS and WIC state agencies for our
    analyses.

    4The Child Nutrition and WIC Reauthorization Act of 2004 established cost
    containment provisions that require WIC state agencies to implement a
    vendor peer group system that groups stores according to similar
    characteristics in a way that ensures that all authorized vendors are paid
    competitive prices for WIC food.

    To find out what is known about WIC-only vendors' growth and their share
    of the WIC market in recent years, we analyzed data from FNS's
    administrative data files on the national WIC vendor population-The
    Integrity Profile (TIP)-for fiscal years 1999-2004 to determine the number
    and distribution of WIC-only vendors. We focused exclusively on data from
    the 50 states and the District of Columbia, and excluded from our analysis
    any vendor type other than WIC-only vendors and regular WIC vendors.6 To
    determine WIC-only vendors' share of the WIC market, we analyzed
    redemption data for an average month in fiscal year 2004 from FNS's
    regional office files.7 However, because TIP does not record when vendors
    enter or exit the WIC program, but instead records any vendor that
    participated in WIC during the fiscal year, it may overstate the number of
    vendors in operation at any point in time. As a result, we calculated the
    number of WIC-only vendors in the program each year, but we were unable to
    determine percentage-based growth from year to year. In addition, because
    national redemption data for fiscal years 1999-2004 did not meet GAO's
    data reliability standards, we could not use these data to analyze changes
    in WIC-only vendors' share of the WIC market over time. However, the
    fiscal year 1999-2004 TIP data on the number of vendors and FNS regional
    office redemption data were sufficiently reliable for our purposes.8

    5The Consolidated Appropriations Act of 2005, Pub. L. No. 108-447 (2004).
    The prohibition applied to those WIC vendors expected to derive 50 percent
    or more of their annual revenue from WIC vouchers. This prohibition was
    extended for fiscal year 2006, and the President's fiscal year 2007 budget
    proposal seeks a continuation of this prohibition through the fiscal year.

    6Vendor types excluded from our analysis include military commissaries and
    pharmacies. See the background section for more information on these
    vendor types.

    7Most redemption data from WIC state agencies were reported as average
    monthly redemptions in fiscal year 2004. According to FNS, this amount may
    represent either the average monthly value of WIC vouchers over a 3-6
    month period or a recent month that accurately reflects a vendor's normal
    redemptions. See appendix I for additional information.

    To determine the difference in WIC-only vendors and regular WIC vendors'
    business and marketing practices, we interviewed WIC state agency
    officials in seven of the eight states that had authorized more than 10
    WIC-only vendors in fiscal year 2004: Alabama, Arkansas, California,
    Florida, Georgia, North Carolina, and Texas.9 To complement these
    telephone interviews, we visited 4 WIC-only vendors and 4 regular WIC
    vendors in California, Texas, and Florida, for a total of 24 site visits.
    Our vendor selection criteria included urban and rural locations, years in
    operation, and redemption practices. WIC state officials' accounts and the
    site visits to vendors provided insight into the distinctions in WIC-only
    and regular WIC vendors' business behavior, but were not quantifiable or
    applicable beyond the states and vendors they represented.

    To calculate the contribution of WIC-only vendors to WIC program
    expenditures, we obtained administrative data from the California, Texas,
    and Florida WIC state agencies on the redemption value for every voucher
    redeemed in those states in fiscal year 2004. We selected these three
    states because they represent more than 80 percent of the national
    WIC-only vendor market. Because we needed data on both the price and the
    quantity of WIC food items purchased from WIC-only and regular WIC vendors
    to isolate the effect of WIC-only vendors' prices on program expenditures,
    and both of those data elements were not available from any existing data
    source, we developed a scenario analysis that used redemption data.10 We
    used the redemption data to determine the actual number of vouchers
    redeemed and to calculate the average value of all vouchers redeemed in
    each of the states by WIC-only and by regular WIC vendors. We applied the
    number of vouchers redeemed and the average value of all vouchers redeemed
    to the scenario analysis to estimate the effect on program participation
    and expenditures of successive increases in WIC-only vendors' market
    share. However, because redemption data do not break out the price and
    quantity of the individual food items on each voucher, we could not
    determine whether prices of individual food items were higher at WIC-only
    vendors than at regular WIC vendors. Thus, even though we were able to
    calculate the average value of all vouchers redeemed by both types of
    vendors, we were not able to explain why the values may have been
    different.

    8See the discussion of our data reliability assessment procedures in
    appendix I.

    9Because of Hurricane Katrina, Louisiana, one of the states with more than
    10 WIC-only vendors, was not included.

    Appendix I provides a detailed description of our methodology and its
    limitations. We conducted our work from April 2005 through June 2006 in
    accordance with generally accepted government auditing standards.

                                    Results in Brief

    The number of WIC-only vendors has grown substantially in recent years.
    However, their location is concentrated in a few states, and their share
    of the national WIC market remained small in 2004. The number of WIC-only
    vendors in operation at any point during the fiscal year increased from
    394 in 1999 to 1,180 in 2004. WIC-only vendors are concentrated
    geographically: in 2004, 84 percent of all WIC-only vendors operated in
    California, Texas, or Florida, home to nearly a third of all WIC
    participants. Moreover, nearly half were located within three metropolitan
    areas: Los Angeles, California; Riverside, California; and Miami, Florida.
    Notwithstanding the increase in WIC-only vendors, in 2004 they represented
    only 3 percent of the approximately 45,000 WIC vendors nationwide.
    Although we could not determine the growth of WIC-only vendors' market
    share over time, WIC-only vendors generated 6 percent of business in the
    WIC market on an average monthly basis in 2004, compared to the 94 percent
    generated by regular WIC vendors. However, on an individual store basis,
    WIC-only vendors redeemed about twice the monthly average redemption value
    of regular WIC vendors.

    10The California, Texas, and Florida WIC state agencies periodically
    collect data on WIC vendors' shelf prices, but they do not collect data on
    both the price actually charged and the quantity of each WIC food item
    purchased with each WIC voucher. The California and Texas WIC state
    agencies maintain the shelf price data they collect during vendor
    monitoring visits in paper records and do not enter it into the automated
    management information systems they use to monitor vendors' redemption
    claims. The Florida WIC state agency transfers the shelf price data it
    collects during monitoring visits to an EXCEL spreadsheet but does not
    incorporate these data into the state agency management information
    system. The California WIC state agency also sponsored a survey in fiscal
    year 2003 that collected shelf price data from a random sample of the
    state's WIC vendors, but this survey did not collect data on food item
    purchases. The Texas WIC state agency is currently conducting a pilot
    project for electronic benefits transfer (EBT) in selected areas of the
    state that collects WIC transaction data, including the type of food item
    purchased, the quantity purchased and the price paid, and stores it
    electronically in the EBT system. These data may be useful for future
    research.

    WIC-only and regular WIC vendors used different business models,
    reflecting, for the most part, the different customer groups they served,
    according to WIC state agency officials. Because WIC participants are not
    price sensitive, WIC-only vendors competed for their business by
    structuring their stores to emphasize customer service, which participants
    seemed to value. For example, to simplify the WIC food purchase, officials
    pointed out that WIC-only vendors often gathered the food items listed on
    the voucher for WIC participants from food maintained behind a counter.
    This practice eliminated the stigma participants may feel because of
    backups in regular WIC vendors' checkout lines when they select an
    unauthorized food item. WIC-only vendors, we were told, also tended to
    locate near WIC clinics, places that were very accessible to WIC
    participants. However, regular WIC vendors, who served non-WIC consumers
    as well as WIC participants, focused their businesses on their non-WIC
    customers, state officials told us. Because these non-WIC consumers are
    price sensitive, regular WIC vendors competed for their business based on
    price and competitors' behavior. For example, regular WIC vendors made
    location decisions based on their broader customer base and often used
    price-based incentives, such as "buy-one-get-one-free" offers, specials,
    or discount cards to appeal to their non-WIC, price sensitive customers.
    An important difference in these approaches was that because WIC
    participants were not price sensitive, they might take advantage of the
    service offered by WIC-only vendors, even if their prices were somewhat
    higher. In contrast to the vendors' different customer service and
    marketing practices, state officials told us that both WIC-only and
    regular WIC vendors are able to lower the average cost of food they
    purchase for resale when they buy in volume, according to a majority of
    WIC state agency officials interviewed, by expanding from one outlet to a
    chain or forming consortia. However, we did not analyze the effect of
    decreasing food-purchasing costs on WIC-only and regular WIC vendors' food
    prices.

    If WIC-only vendors' market share in 2004 had doubled in California,
    Texas, and Florida, either program participation would have decreased by
    about 3 percent-about 136,000 participants-or program food expenditures
    would have increased about 3 percent-about $50 million-according to our
    scenario estimates. Our estimates showed that the average value of all
    vouchers redeemed by WIC-only vendors in 2004 was higher than the average
    value of all food vouchers redeemed at regular WIC vendors: $0.87 higher
    in California, $9.83 higher in Texas, and $4.42 higher in Florida. As a
    result, if the number of food vouchers redeemed by WIC-only stores had
    increased and total expenditures remained fixed at 2004 levels, fewer
    vouchers could have been issued and fewer participants could have been
    served. Conversely, if the total number of vouchers issued to participants
    remained at the 2004 level, the higher average value of vouchers redeemed
    at WIC-only vendors' would have resulted in increased program
    expenditures. However, because we used the average value of all food
    vouchers in our analysis without knowing the price or quantity of the
    individual food items that made up the vouchers, we could not determine if
    the higher average value meant that prices for individual food items were
    higher at WIC-only vendors. WIC-only vendors' higher average value of
    redeemed vouchers could mean that they charge higher prices for WIC food
    but could also mean that WIC-only vendors' customers are more likely to
    select all of the food items on their vouchers. Making price comparisons
    would require both food item price and quantity data for WIC-only and
    regular WIC vendors, at a minimum.

    To assist WIC state agencies in more effectively monitoring WIC vendors'
    redemption practices, in implementing the new cost containment
    requirements, and in analyzing program expenditures, we are recommending
    that the Secretary of Agriculture require, if collection of more detailed
    information on WIC food purchases is cost-effective through electronic
    benefits transfer (EBT) implementation, that WIC state agencies collect
    data on both the price and the quantity of each WIC food item purchased,
    especially in each state that authorizes WIC-only vendors. In oral
    comments on a draft of this report, FNS officials generally agreed that
    our methodology was reasonable, given data limitations, and did not
    dispute our findings. However, officials did not believe that the
    small-scale study we recommended in the draft they read would be
    cost-effective or necessary, because of the difficulty in collecting price
    and quantity data under the current system and because state agencies
    already are required to collect shelf price data and redemption data from
    authorized vendors. We acknowledged that USDA's research funds are limited
    and that its research agenda is full. However, we maintained that because
    the cost containment provisions are complex, it is important for FNS to
    monitor state agencies' implementation of the provisions closely, to help
    ensure that program expenditures are in fact contained. In response, we
    removed our recommendation for further study and further clarified our
    recommendation for collection of data on both the price and the quantity
    of WIC food items purchased under a cost-effective EBT system.

                                       Background

    WIC aims to protect the health of low-income women, infants, and young
    children who are at nutritional risk by providing nutritious foods to
    supplement diets, information on healthy eating, and referrals to health
    care at no charge to participants. Permanently established in 1974, WIC
    serves more than 8 million participants each month, including women who
    are pregnant, postpartum, or breastfeeding; infants under the age of 1;
    and children under the age of 5, the largest category of participants. To
    participate in the program, eligible applicants must meet income
    guidelines, be deemed nutritionally at risk by a health professional
    (e.g., having a poor diet, low weight, or anemia), and must apply in the
    state in which they reside.

    In fiscal year 2005, the federal government spent over $5 billion on WIC.
    WIC is not an entitlement program that allows every eligible individual to
    participate; rather, it is a federal discretionary grant program for which
    Congress authorizes a specific amount of funds each year. At the federal
    level, WIC is administered by FNS, which provides grants to WIC state
    agencies for food and for nutrition services and administration. The
    nutrition services and administration grant covers the cost of certifying
    participants and determining nutrition risks; providing outreach and
    nutrition education services, including breastfeeding promotion; and
    printing vouchers and administering the food delivery system. FNS also
    determines WIC program policy and guidance, provides technical assistance
    to the WIC state agencies and sponsors research on program issues. In
    turn, WIC state agencies operate the program through thousands of local
    agencies and clinic sites. The 90 WIC state agencies include 50 state
    health departments, as well as those of the District of Columbia, 34
    Indian Tribal Organizations, and five U.S. territories (Northern Mariana,
    American Samoa, Guam, Puerto Rico, and the Virgin Islands).

    How the Retail Food Delivery System Works

    In most WIC state agencies, WIC participants receive vouchers to purchase
    supplemental food in appropriate amounts tailored to their health needs
    from authorized retail stores, known as vendors in the WIC program.11
    Vouchers prescribe food that is high in nutrients found to be lacking in a
    participant's diet, such as milk, cereal, and eggs, and are adapted from a
    set of federally established food packages that differ according to
    participant type (e.g., infants or pregnant woman). Each WIC state agency
    designs its own vouchers and usually issues vouchers that contain a
    combination of WIC food items. For example, one frequently used voucher
    contains eggs, juice, cereal, cheese, milk, and beans. However, some
    vouchers contain only one food item, such as formula or cereal. (See app.
    IV.) Most participants receive multiple vouchers each month for all of the
    food they are prescribed. However they may not use the voucher to purchase
    items that are not listed on it. Figure 1 shows a sample voucher for food
    items from California's WIC state agency.

    11WIC state agencies may also operate other, less prevalent food delivery
    systems, including home food delivery systems, in which authorized
    supplemental foods are delivered to the participant's home, and direct
    distribution food delivery systems, in which participants, or their
    proxies, collect authorized supplemental foods from storage facilities
    operated by the state agency or its local agency.

    Figure 1: Sample Voucher from California

    Unlike some other food assistance program models, WIC vouchers do not
    provide an incentive for program participants to consider vendor prices
    for supplemental foods. For example, the Food Stamp and WIC Farmers'
    Market Nutrition Programs generally provide electronic benefits or coupons
    that are used like cash at grocery stores or through farmers, and which
    encourage participants to make cost-conscious decisions regarding food
    choices. In contrast, because WIC participants purchase supplemental foods
    with vouchers that prescribe the type and quantity of foods a participant
    may receive, regardless of the prices charged by vendors to the WIC
    program, WIC participants are not price sensitive, that is, participants
    do not have an incentive to purchase their food benefit from lower-priced
    vendors.12

    The approximately 45,000 vendors in the WIC program accept vouchers and
    exchange them for cash payment-or redemption-from their WIC state agency.
    Vendors are subject to price limitations, often in the form of an overall
    maximum, not-to-exceed amount for each voucher, determined by WIC state
    agencies. As shown in figure 1, a state may clearly print the
    not-to-exceed amount for the total amount charged on the voucher.

    Like other retail grocery stores, WIC vendors sell to participants small
    quantities of food items that they typically purchase from manufacturers,
    wholesalers, or, on occasion, other retailers. The methods that grocery
    stores use to purchase food items are important business practices,
    because the cost of buying goods for resale is the largest single expense
    for an average grocery store, according to Food Marketing Institute
    research.13

    How WIC Vendors Are Managed

    Through regulation and program guidance, FNS provides broad oversight to
    WIC state agencies on cost containment and vendor management. FNS provides
    the food grant that state agencies use to reimburse vendors for redeemed
    vouchers, gathers program integrity data, supports upgrades to states'
    management information systems, and sponsors research on vendor management
    issues. Because federal legislation grants primary responsibility for WIC
    vendor management to the WIC state agencies, WIC state agencies have
    considerable flexibility in designing and implementing their vendor
    management systems. FNS regulations require that WIC state agencies'
    vendor management systems include six areas of activity:

    12The total amount charged for a voucher is monitored and assessed for
    reimbursement by WIC state agencies.

    13Food Marketing Institute, Marketing Costs (Washington, D.C.),
    http://www.fmi.org/facts_figs/superfact.htm (downloaded March 29, 2006).

               o  authorization and reauthorization-The authorization process
               begins with a vendor's application and an on-site visit by WIC
               state agency staff to verify the information provided in the
               application. Authorized vendors must enter into a written
               agreement, which may be reauthorized, usually every 1-3 years.

               o  training-WIC state agencies train vendor staff on the purpose
               of the WIC program and program procedures such as accepting
               vouchers from participants at the point of sale.

               o  representative monitoring-State agencies are required to
               conduct routine monitoring visits of at least 5 percent of their
               vendors annually to observe vendor and participant transactions
               and collect shelf prices to ensure they are within the required
               state limits.

               o  voucher review and redemption-State agencies are required to
               develop and implement an edit system of the vouchers turned in for
               redemption to detect noncompliance with program regulations. The
               redeemed-voucher review includes checking that charges for food
               items do not go over the not-to-exceed payment amount for
               vouchers, set by the state, and other edits such as transactions
               or redemptions outside of valid dates.

               o  high-risk vendor monitoring-WIC state agencies identify
               high-risk vendors through on-site monitoring visits or through the
               redemption system and must investigate a minimum of 5 percent of
               vendors meeting high-risk criteria, such as high rates of
               redemption at or near the not-to-exceed payment amount for
               vouchers.

               o  sanctions-State agencies may impose sanctions ranging from
               fines to disqualification on vendors that violate program
               requirements or may impose a civil money penalty when a
               disqualification would result in inadequate participant access. A
               temporarily disqualified vendor may reapply after the
               disqualification period has expired.

    How Vendor Management in the WIC Program Has Evolved

    In the past few years, the WIC program has initiated significant changes
    in vendor management practices to contain costs and maximize the number of
    eligible women, infants, and children that can receive benefits. Prior to
    fiscal year 2004, FNS characterized authorized WIC vendors that
    participate in the program as:

               o  retail grocery stores-vendors that commonly stock a variety of
               foods, including supplemental WIC foods, and serve a wide variety
               of customers, referred to as regular WIC vendors in this report;
               o  WIC-only vendors-vendors that stock only WIC-approved food and
               accept only WIC vouchers;
               o  military commissaries-vendors located on military installations
               and designed for military families; and
               o  pharmacies-vendors that only provide infant formula, exempt
               infant formula, or WIC-eligible medical foods.14

    The Child Nutrition and WIC Reauthorization Act of 200415 established new
    cost containment provisions designed, in part, to ensure that the WIC
    program is not charged more for the same supplemental food items provided
    in exchange for vouchers that participants might use at WIC-only vendors
    instead of at regular WIC vendors. These cost containment provisions
    require state agencies to implement a vendor peer group system that groups
    stores according to similar characteristics, such as vendor size and
    geographic location, in a manner that ensures that the WIC program pays
    all authorized vendors competitive prices for supplemental foods. FNS
    expects to complete certification of states' plans for cost containment by
    September 2006.

    One cost containment provision created a new category of vendors referred
    to as above 50 percent vendors, which include any vendor whose revenue
    from the sale of WIC supplemental food is more than half of its annual
    revenue from food sales.16 In addition, the Act prohibited above 50
    percent vendors from providing any incentive items, such as free diapers,
    detergent, baby strollers, or bicycles, to participants unless the
    incentives are of nominal value or were obtained at no cost. On November
    29, 2005, USDA issued an interim rule, effective on December 29, 2005,
    that incorporated the cost containment provisions of the Act into program
    regulations that are applicable to WIC state agencies.17 To help ensure
    that vendors' prices are competitive, these regulations require states to
    collect and review vendors' shelf prices at least every 6 months after
    authorization. The regulations also require state agencies to compare the
    average cost of each type of food instrument redeemed by WIC-only vendors
    against the average cost of the same type of food instrument redeemed by
    regular vendors.

    14Exempt infant formulas are designed for infants with specific medical or
    dietary problems. Similarly, WIC-eligible medical foods are considered
    medically necessary and are prescribed by a physician when conventional
    foods cannot be consumed by women or children with special dietary needs.

    15The Child Nutrition and WIC Reauthorization Act of 2004, Pub. L. No.
    108-265 (2004).

    16However, we used the WIC-only vendor definition established by FNS prior
    to the changes brought by the reauthorization because those definitions
    conform to the redemption data provided by FNS and WIC state agencies for
    our analyses.

    1770 Fed. Reg. 71,708 (Nov. 29, 2005).

    In December of 2005, attorneys representing an association of WIC-only
    vendors and three food companies, the plaintiffs, filed an action in
    federal district court for the District of Columbia to stop implementation
    of FNS's regulations. Arguing that the regulations were contrary to the
    Act and to congressional intent, the plaintiffs asserted that the cost
    containment provisions concerning above-50-percent vendors would reduce
    their WIC reimbursements to a level that would be unsustainable. In
    describing services that WIC-only vendors offered WIC participants, the
    plaintiffs characterized WIC-only vendors as small businesses and
    acknowledged that their cost of doing business was higher than that of
    large stores, referred to as box stores, that purchased food in high
    volume at discount prices. The plaintiffs estimated that WIC-only vendors'
    prices were about 8 to 15 percent higher than prices charged at box
    stores, on average. On February 23, 2006, the court dismissed the case,
    finding that the cost containment provisions of the interim rule were
    consistent with the plain language and purpose of the Act.18

    Recent initiatives suggest that more changes to the WIC program are
    forthcoming. In 2003, FNS developed a plan to transform WIC from its
    paper-based food benefit delivery system to an electronic benefits
    transfer system. Through pilot projects in many states that are still
    under way, FNS is working toward a national model that is both technically
    and financially viable for implementation of EBT by 2008. In addition, in
    2004 the Institute of Medicine (IOM) began examining WIC food packages to
    determine if modification could help participants eat a healthier diet. In
    its 2005 report, IOM recommended revisions to the food packages that match
    current dietary guidance for infants and young children, encourage
    consumption of fruits and vegetables, emphasize whole grains, lower
    saturated fat, and appeal to diverse populations.19

    18National Women, Infants and Children Grocers Association v. Food and
    Nutrition Service, 416 F.Supp. 2d 92 (D.D.C. 2006).

    19See the Institute of Medicine, WIC Food Packages: Time for a Change,
    National Academies Press: Washington, D.C., 2006, for more information.

      WIC-Only Vendors Increased in Number during Fiscal Years 1999-2004, although
            Their Market Share Remained Relatively Small in Fiscal Year 2004

    Since 1999, WIC-only vendors have increased in number, with concentrated
    growth in a few states, but their share of the national WIC market stayed
    small in comparison to the share of regular WIC vendors during an average
    month in 2004. The number of WIC-only vendors nationwide tripled from 1999
    to 2004, and the number of states with WIC-only vendors also grew over
    this period. Notwithstanding these increases, in 2004 the majority of
    WIC-only vendors were located in California, Texas, and Florida, and
    nearly half of all WIC-only vendors operated in a few metropolitan areas
    within these states. Nationwide, WIC-only vendors still accounted for
    about 3 percent of all WIC vendors in 2004 and generated about 6 percent
    of business in the WIC market during an average month that year, compared
    to regular WIC vendors' predominant market share. On a store-by-store
    basis, however, WIC-only vendors' redemption value was greater, on
    average, than regular WIC vendors' during this period.

    WIC-Only Vendors Tripled from Fiscal Year 1999 to Fiscal Year 2004, and They Are
    Highly Concentrated Geographically

    The 1,180 WIC-only vendors in operation at any point during 2004 were
    three times the number in business at any point in 1999 (see fig. 2).20

    20TIP does not record when vendors enter or exit the WIC program, and
    therefore may overstate the number of vendors in operation on any
    particular date. See appendix I for a more detailed explanation of the
    data limitations created by this issue.

    Figure 2: National Total of WIC-Only Vendors

    Note: Vendor counts include any vendor in operation at some point during
    the fiscal year.

    Just as the total number of WIC-only vendors has increased, the number of
    states with WIC-only vendors has grown in recent years. Of the 50 states
    and the District of Columbia, 15 had WIC-only vendors in 2004, an increase
    from 12 in 1999 (see table 1).21

    21 States may have had WIC-only vendors in 1999 that they did not report
    in TIP. As one example, Georgia did not identify WIC-only vendors as a
    separate vendor type until 2004. Appendix II presents the number of
    WIC-only vendors by state for all fiscal years from 1999 through 2004.

    Table 1: Number of WIC-Only Vendors by State, Fiscal Years 1999 and 2004

    State                1999  2004
    California            235   715
    Texas                  69   162
    Florida                57   109
    North Carolina          2    72
    Arkansas                4    42
    Georgia                 0    22
    Alabama                 0    19
    Louisiana               4    11
    Oklahoma                5     8
    New Mexico              4     7
    Virginia                5     6
    Kansas                  0     3
    Utah                    2     2
    District of Columbia    0     1
    Tennessee               2     1
    Oregon                  5     0
    Total                 394 1,180

    Source: GAO analysis of FNS 1999 and 2004 TIP data.

    Note: Vendor counts include any vendor in operation at some point during
    the fiscal year. Any state not listed had no WIC-only vendors authorized
    during either fiscal year.

    Even with the increase in recent years in both total WIC-only vendors and
    the number of states with such vendors, in 2004 most WIC-only vendors were
    located in three states, and nearly half operated in three metropolitan
    areas. Figure 3 shows that, at the national level, 84 percent of all
    WIC-only vendors operated in California, Texas, or Florida. Moreover,
    approximately one out of every two WIC-only vendors nationwide operated in
    Los Angeles, California; Riverside, California; or Miami, Florida. In
    contrast, each of the remaining states with WIC-only vendors accounted for
    less than 7 percent of total WIC-only vendors in 2004.

    Figure 3: Share of Total WIC-Only Vendors Nationwide by State and the Top
    Three Metropolitan Areas in 2004

    Note: Vendor counts include any vendor in operation at some point during
    the fiscal year. All figures have been rounded to the nearest whole number
    except for states that accounted for less than 0.5 percent of all WIC-only
    vendors, which are marked as "<1 percent." Metropolitan areas were
    determined using U. S. Census Bureau definitions for metropolitan
    statistical areas.

    The total number of WIC-only vendors in operation at any point in 2005 is
    not yet available, but may be lower than the 1,180 reported for 2004. For
    example, WIC state agency officials in Texas and Florida have indicated
    that the number of WIC-only vendors in their respective states decreased
    after 2004. Both WIC state agencies continued to monitor and occasionally
    disqualify WIC-only vendors. At the same time, Texas WIC agency officials
    have indicated that a number of WIC-only vendors went out of business.
    Moreover, because the Consolidated Appropriations Act of 2005 prohibited
    states from authorizing additional WIC-only vendors after December 8,
    2004, WIC state agencies could not replace WIC-only vendors that departed
    the program with new WIC-only vendors during much of fiscal year 2005.

    Despite Recent Growth, WIC-Only Vendors Represent a Fraction of All WIC Vendors

    Notwithstanding the increase in the number of WIC-only vendors in recent
    years, WIC-only vendors have remained a fraction of total WIC vendors.
    Nationally, the share of all WIC vendors accounted for by WIC-only vendors
    increased from approximately 1 percent in 1999 to about 3 percent in 2004
    (see fig. 4). During the same period, the number of regular WIC vendors in
    operation at any point changed only slightly, from 43,712 in 1999 to
    43,463 in 2004. However, in California, Texas, and Florida, WIC-only
    vendors have accounted for a larger proportion of all WIC vendors than in
    the nation as a whole. At the same time, these three states were home to
    nearly one-third of all WIC participants nationwide.

    Figure 4: Percentage of Total WIC Vendors Represented by Each Vendor Type,
    Nationwide and in Select States

    Note: Vendor counts include any vendor in operation at some point during
    the fiscal year.

    WIC-Only Vendors Had the Smaller Share of the WIC Market in 2004 but Redeemed
    about Twice the Average Monthly Amount per Vendor as Regular WIC Vendors

    Nationally, as their numbers might suggest, WIC-only vendors had the
    smaller share of the WIC market during an average month in 2004, but on a
    store-by-store basis, they redeemed about twice as much as regular WIC
    vendors.22 Whereas regular WIC vendors accounted for 94 percent of
    business in the WIC market, or about $784 million on an average monthly
    basis in 2004, WIC-only vendors redeemed about $47 million, or 6 percent
    of all WIC redemptions.23 However, WIC-only vendors nationwide redeemed
    nearly $40,000 per vendor during an average month that year, about twice
    the average monthly amount from WIC as regular WIC vendors that
    participated in the program (see fig. 5).

    Figure 5: Average Monthly WIC Redemptions per Vendor in 2004, by Vendor
    Type

    22 Because we were unable to calculate the growth of WIC-only vendors'
    redemptions over time, we reported redemptions on an average monthly basis
    in 2004.

    23 WIC business volume is defined as total redemptions from WIC, for the
    purposes of our report.

    Because these data represent simply the average monthly payments received
    per vendor from WIC state agencies, differences between WIC-only vendors'
    redemptions and those of regular WIC vendors could signify that a vendor
    type charges higher prices for WIC food, but could also reflect the number
    of participants that shop at each vendor type; the probability that a
    participant selected all or only part of the food items on a voucher; the
    amount of WIC business volume conducted, on average, by WIC-only and
    regular WIC vendors; or all of these practices.24 For example, a WIC-only
    vendor that serves a far greater number of WIC participants than a regular
    WIC vendor would tend to have higher redemptions for the same WIC items
    even if both vendors' prices for those items were comparable.

    At the state level, the three states with the most WIC-only vendors also
    produced the majority of total WIC-only vendor business volume during an
    average month in 2004. Though the average monthly redemptions per WIC-only
    vendor in California, Texas, and Florida fell below the high of nearly
    $64,000 per vendor in Oklahoma, the three states accounted for 90 percent
    of all WIC-only redemptions during that period (see fig. 6).25

    24 The FNS data we analyzed did not allow us to make determinations about
    these differences.

    25See appendix III for the average monthly redemptions per WIC-only vendor
    in fiscal year 2004 for all states with WIC-only vendors.

    Figure 6: Share of Total Average Monthly WIC-Only Redemptions by State in
    2004

    WIC-Only Vendors and Regular WIC Vendors' Business and Marketing Practices
                 Differ in Their Approach to Customer Service and Price

    WIC-only and regular WIC vendors generally employed different business and
    marketing practices, largely in response to the two different customer
    groups they served and the nature of the markets they faced. Because WIC
    participants are not required by the WIC program to consider retail
    prices, vendors that served only WIC participants competed for their
    business by emphasizing customer service, which participants seemed to
    value. On the other hand, regular WIC vendors served non-WIC consumers as
    well as WIC participants. Because these non-WIC consumers are considered
    price sensitive, regular WIC vendors competed for their business based on
    price and competitors' behavior. These differences in customer base also
    affected decisions on where to locate stores and how to advertise.
    WIC-only stores tended to locate near WIC clinics, while regular WIC
    vendors considered their broader customer base when choosing locations.
    Also, WIC-only vendors used community-based media and word-of-mouth to
    advertise, while regular WIC vendors were more likely to use mass media.
    Finally, WIC-only and regular WIC vendors used similar food purchasing
    practices, because the cost of food purchased for resale by vendors is
    related more to the quantity of food purchased than the type of vendor
    purchasing the food. Both WIC-only and regular WIC vendors were able to
    lower the average cost of food purchased for resale when they bought in
    volume, according to WIC state agency officials.

    WIC-Only Vendors Emphasized Customer Service, while Regular WIC Vendors Focused
    on Price

    WIC-only vendors employed a business model that allowed them to emphasize
    customer service for program participants rather than price, while regular
    WIC vendors focused on attracting a broader customer base by offering
    competitive prices. These differences have likely evolved because WIC
    shoppers need not be price sensitive. WIC-only vendors attracted WIC
    participants, who were not price sensitive, by emphasizing customer
    service. Because WIC participants were not price sensitive, they responded
    to non-price inducements, like service, which they valued. As a result,
    they might take advantage of the service offered by WIC-only vendors, even
    if their prices were somewhat higher. In comparison, regular WIC vendors
    more often used price reductions to appeal to a broad customer base, most
    of whom were price-sensitive shoppers, according to WIC state agency
    officials.

    Although WIC-only vendors did not compete on the basis of price, WIC-only
    vendors did compete with other WIC-only and regular WIC vendors on the
    basis of customer service, a central feature of their business model,
    according to WIC state officials. WIC-only vendors typically organized
    their stores in ways that emphasized service to their WIC participant
    customers. Because WIC-only vendors stocked only WIC-approved items (see
    fig. 7), they eliminated the need for WIC participants to identify
    WIC-eligible foods. Moreover, WIC-only vendors often kept food behind a
    counter, and employees gathered and bagged the WIC items customers
    requested, according to most WIC state agency officials we interviewed and
    our observations during site visits. (see fig. 8) As a result, customers
    did not need to spend time finding products in store aisles or face the
    risk or stigma of selecting an unauthorized food item and creating a delay
    in the checkout line. Several state officials thought that this feature of
    WIC-only vendors' business model was a prime attraction for WIC
    participants.

    Figure 7: Available WIC Food Items at WIC-Only Vendor in Texas

    Figure 8: Interior of WIC-Only Vendor in California

    Some state officials told us they believe the customer service features of
    WIC-only vendors' business model, together with their use of only one or
    two checkout points, their limited customer floor area, and their location
    in low-income neighborhoods, would reduce their operating expenses.
    However, we were unable to obtain the data needed to confirm these views.

    Few WIC-only vendors used price-based incentives such as
    buy-one-get-one-free specials, sale items, or discount cards to attract
    WIC customers. Because WIC participants purchase items with vouchers and
    are not price sensitive, price discounts would not induce them to go to a
    store with lower prices. However, for this same reason, WIC-only vendors
    would not risk losing WIC customers, even if their prices were higher.

    In the past, WIC-only vendors also have given away food and non-food
    items, called incentives, to attract customers. For example, WIC-only
    vendors gave away strollers and diapers in California and North Carolina,
    cash in Arkansas, and gift certificates in Georgia, according to WIC state
    agency officials. Because WIC-only vendors' main source of revenue was the
    WIC benefit, paid for by the WIC program, offering such incentives raised
    concerns about the use of federal funds. However, several WIC state agency
    officials noted that the use of incentives by WIC-only vendors has
    decreased as a result of rule changes required by the Child Nutrition and
    WIC Reauthorization Act of 2004.26 In fact, the WIC state officials we
    spoke with in California, North Carolina, and Arkansas said that WIC-only
    vendors no longer give away most of the items they provided in the past.
    None of the WIC-only vendors we observed on our site visits provided such
    incentives, with the exception of one in California that gave customers a
    small amount of free produce for purchasing a certain quantity of food
    items.

    In contrast to WIC-only vendors, the retail grocers that we define as
    regular WIC vendors targeted the population at large and did not focus on
    customer service, according to WIC state agency officials.27 Regular WIC
    vendors served WIC participants, but their largest group of customers was
    non-WIC consumers, who are price sensitive. For the most part, regular WIC
    vendors targeted their business practices on their non-WIC customers and
    set prices in response to this group. The regular WIC vendors we observed
    on our site visits provided examples of their business practices that
    contrast with those of WIC-only vendors. Of the 12 regular WIC vendors we
    visited, none gathered the WIC food items listed on the voucher for WIC
    customers and only 3 had food items authorized by the WIC program placed
    together on an aisle shelf to assist participants in finding the items on
    their vouchers. Having to search store aisles and shelves for the correct
    food type, brand, and size listed on their voucher can make shopping for
    WIC food items at regular WIC vendors challenging or uncomfortable for WIC
    participants.

    26Section 203(e)(14) of the law states, "A State agency shall not
    authorize or make payments to a [WIC-only] vendor that provides incentive
    items or other free merchandise, except food or merchandise of nominal
    value (as determined by the Secretary), to program participants unless the
    vendor provides to the State agency proof that the vendor obtained the
    incentive items or merchandise at no cost."

    27 Under the Child Nutrition and WIC Reauthorization Act of 2004, an
    unknown number of these vendors we call regular WIC vendors will be
    reclassified as 50 percent WIC vendors. As such, they will continue to
    serve some combination of both WIC participants and price-sensitive
    non-WIC shoppers.

    WIC state officials told us that regular WIC vendors' marketing practices
    are price-based, that is, they competed in the market based on price and
    their competitors' behavior. Regular WIC vendors commonly use
    buy-one-get-one-free specials, sale items, discount cards, and other
    price-based incentives to attract a broad client base that is price
    sensitive. Since the rule changes required by the Child Nutrition and WIC
    Reauthorization Act of 2004, regular WIC vendors, who have sources of
    revenue other than federal funds from their broad customer base, continue
    to provide higher-priced incentives to attract customers, according to
    several of the WIC state agency officials and WIC vendor employees whom we
    interviewed.

    Despite these differences, WIC-only vendors and regular WIC vendors used
    some similar business or marketing practices that did not involve
    price-based incentives. For example, both employed checkout staff who
    spoke one or more languages other than English, according to the majority
    of WIC state agency officials interviewed, a practice we observed on our
    site visits. In addition, both vendor types in several states organized
    community outreach activities, ranging from baby clothes exchanges to
    barbecues.

    WIC-Only Vendors Tend to Locate near WIC Clinics; Regular WIC Vendors Base
    Location Decisions on Their Broader Customer Base

    WIC-only vendors are often located in places readily accessible to WIC
    participants. All WIC state agency officials we interviewed stated that
    WIC-only vendors tend to locate their stores as close to WIC clinics as
    possible (see fig. 9), and several officials indicated that WIC-only
    vendors may also operate in low-income neighborhoods-geographic areas that
    are often one and the same.

    Figure 9: Proximity of WIC-Only Vendor to WIC Clinic in Texas

    In contrast, WIC state agency officials told us that regular WIC vendors
    typically make their location decisions based on their entire customer
    population, not just WIC participants. While WIC state agencies consider
    participant access when authorizing regular WIC vendors, they need not
    ensure that the vendor will be located near a WIC clinic.

    WIC-Only Vendors Used Community-Based Media to Advertise; Regular WIC Vendors
    Use Mass Media

    WIC-only vendors generally advertise with publicity flyers, word-of-mouth,
    and community-based media. WIC officials in all seven states reported that
    WIC-only vendors tend to use publicity flyers to publicize their stores;
    figure 10 presents an example of this type of advertisement. Further,
    word-of-mouth is the most important advertising practice for some WIC-only
    vendors. In addition to using flyers and word-of-mouth, some WIC-only
    vendors in Alabama, Florida, and North Carolina advertise in local
    newspapers, and a few WIC-only vendors in California and North Carolina
    promote their stores via radio.

    Figure 10: Sample WIC-Only Vendor Promotional Flyer

    In addition, most of the WIC-only vendors we visited post signs indicating
    that they accept vouchers. In California, the majority of the WIC-only
    vendors we visited post signs indicating that the stores accept vouchers.
    In Texas and Florida, several stores have replaced the name of the store
    in the marquee over the front door with statements such as "WIC Checks
    Accepted Here" (see fig. 11).28

    Figure 11: Marquee of WIC-Only Vendor in Florida

    In contrast to WIC-only vendors, which used community-based media, regular
    WIC vendors typically advertised to a broad client base through mass media
    such as newspapers, television, radio, and billboards, according to most
    WIC agency officials and regular WIC vendor employees interviewed.
    However, most of the regular WIC vendors that we visited do not post signs
    indicating that they participate in the WIC program, even though most WIC
    state agency officials whom we interviewed said that they provide regular
    WIC vendors with a state-authorized sign indicating that the store accepts
    vouchers.

    28Several WIC state agency officials noted that their states limit or do
    not permit WIC vendors to use the WIC acronym for advertising purposes.
    FNS policy states, "WIC State agencies have the discretion to authorize
    WIC vendors to use the acronym `WIC' and/or the WIC logo for the following
    purposes: 1) to identify the retailer as an authorized WIC food vendor;
    and 2) to identify authorized WIC foods by attaching channel strips or
    shelf-talkers stating 'WIC-approved' or `WIC-eligible' to grocery store
    shelves."

    Officials Told Us That WIC-Only and Regular WIC Vendors Lower Food-Purchasing
    Costs by Buying in Volume, although the Effect on Retail Food Prices Is Unclear

    Although their marketing and advertising practices differ, WIC state
    officials told us that WIC-only and regular WIC vendors use similar
    food-purchasing practices. Wholesalers tend to offer WIC-only and regular
    WIC vendors lower prices for higher volume purchases, according to a
    majority of WIC state agency officials interviewed. Some vendors have
    lowered food-purchasing costs by expanding the number of outlets they
    operate or forming consortia to buy in greater volume. For example, one
    WIC-only vendor in California operates a chain of 49 outlets. A few
    WIC-only chains in California and Florida have become wholesalers
    themselves because they are large enough to purchase food directly from
    manufacturers. WIC state agency officials in two states indicated that WIC
    vendors increase the amount of food purchased by forming a consortium with
    other vendors. For example, several WIC-only vendors in Florida purchase
    food collectively to earn volume discounts from wholesalers.

    In contrast to WIC vendors that form consortia or are large enough to
    purchase independently from wholesalers or manufacturers, some small WIC
    vendors-including both WIC-only and regular WIC vendors-purchase food for
    resale from other retail sources. The small WIC vendors may not have the
    room to store large amounts of goods or may not be able to buy on credit
    from wholesalers. Although several WIC state agency officials said that
    buying from other retailers leads to higher costs, a few officials noted
    that WIC vendors with a small purchasing capacity may in fact pay less by
    buying food from other large retailers, such as Wal-Mart or Costco,
    instead of from wholesalers.

    Even though WIC vendors can reduce their average food-purchasing costs by
    buying food in greater volume, existing data did not permit us to
    determine the relationship between food-purchasing costs and retail food
    prices. The retail price for food items reflects numerous store-operating
    expenses in addition to the cost of buying food for resale-such as
    employee salaries, rent, and insurance-and a decrease in average
    food-purchasing costs over time does not necessarily result in a reduction
    in other business costs.

     We Estimated That Program Participation Would Have Decreased by about 136,000
     WIC Participants or Expenditures Would Have Increased by About $50 Million if
                   WIC-Only Vendors' Market Share Had Doubled in 2004

    If the market share of WIC-only vendors had doubled in California, Texas,
    and Florida, either program participation would have decreased by about 3
    percent-about 136,000 participants-or program expenditures would have
    increased by about 3 percent-about $50 million-in those states, according
    to our scenario estimates using conditions present in 2004.29 These
    changes would have occurred because the average value of all food vouchers
    redeemed by WIC-only vendors in 2004 was higher than the average value of
    all food vouchers redeemed at regular WIC vendors. However, even though
    the change would be a similar 3 percent of 2004 levels across all three
    states, the reasons for the size of the change differ among the states,
    depending on WIC-only vendors' market share and the difference in WIC-only
    and regular WIC vendors' average voucher value. Because the average value
    of all food vouchers we calculated did not specify either the price or
    quantity of individual items that make up the voucher, we could not
    determine whether the prices for individual items at WIC-only vendors were
    higher than at regular WIC vendors. At a minimum, data on both the price a
    vendor charges for individual food items and the quantity purchased by
    participants are needed to make price comparisons.

    If WIC-Only Vendors' Market Share Had Doubled in 2004 and Program Expenditures
    Were Held Constant, We Estimated That Program Participation Would Have Decreased
    by About 136,000 WIC Participants

    The number of participants that could have been served would have
    decreased if the WIC-only vendors' market share increased while holding
    total WIC food expenditures constant at 2004 levels, according to our
    first scenario.30

    As shown in table 2, if redemptions at WIC-only vendors had doubled in
    each state, the decrease in the number of participants that could be
    served would be 136,202, or about 3 percent of 2004 levels for the three
    states.

    29Our estimates are based on available data for WIC-only and regular WIC
    vendors, excluding pharmacies and commissaries, from 2004 and assume that
    all program characteristics other than those we manipulated did not
    change. See appendix I for additional information on our methodology.

    30We increased the market share of WIC-only vendors by increasing the
    number of food vouchers redeemed at these stores. (See scenario 1 analysis
    in app. I.)

    Table 2: Estimated Change in the Number of Participants Served if WIC-Only
    Vendors' Market Share Increased while Program Expenditures Were Held
    Constant at Fiscal Year 2004 Levels

    Percentage
    increase            California                     Texas                       Florida            Total for 3 states
    in                      Decline as                   Decline as               Decline as                   Decline as
    WIC-only     Decline in          a        Decline in          a    Decline in          a        Decline in          a
    vendors'      number of percentage         number of percentage     number of percentage         number of percentage
    market     participants    of 2004      participants    of 2004  participants    of 2004      participants    of 2004
    share           serveda     levelb            served     levelb        served     levelb            served     levelb
    10 percent
    increase                    -6,277 0.29       -5,271        0.36                  -2,072 0.31      -13,620       0.32
    20 percent
    increase                   -12,553 0.59      -10,542        0.72                  -4,145 0.61      -27,240       0.64
    30 percent
    increase                   -18,830 0.88      -15,814        1.08                  -6,217 0.92      -40,861       0.96
    50 percent
    increase                   -31,383 1.47      -26,356        1.79                 -10,362 1.53      -68,101       1.59
    100
    percent
    increase                   -62,766 2.95      -52,712        3.58                 -20,724 3.05     -136,202       3.18

    Source: GAO analysis of California, Texas, and Florida WIC state agency
    redemption data for 2004.

    aWe calculated the number of participants that would be affected by using
    the average number of redemptions per participant in each state. (See app.
    I)

    bTo develop our estimates for fiscal year 2004, we used our redemption
    data to calculate the number of people who redeemed a voucher that year:
    2.1 million people redeemed vouchers in California, 1.5 million in Texas,
    and 0.679 million in Florida. To avoid double counting, we used a unique
    identification number for each person that was available in our data and
    counted each person only once. Because we had data for every voucher
    redeemed in each of the three states, for every month in fiscal year 2004,
    our calculations of annual program participation likely exceeded FNS's
    estimates based on average monthly participation. (See app. I)

    Because the average value of all food vouchers redeemed by WIC-only
    vendors in all three states in 2004 was higher than the average value of
    all food vouchers redeemed by regular WIC vendors, more funds would have
    been needed to reimburse WIC-only vendors than regular WIC vendors for the
    same number of vouchers.31 As a result, when the number of food vouchers
    redeemed by WIC-only vendors increased and program expenditures were held
    constant in our scenario estimate, fewer food vouchers could be issued and
    fewer participants could be served. This constraint was reflected in our
    analysis by a reduction in the number of vouchers redeemed by regular WIC
    vendors.

    31These data should be treated with caution. A higher average value for
    all food vouchers does not necessarily mean that prices for individual
    food items at WIC-only stores are higher than prices at regular WIC
    stores. Our average value of all food vouchers redeemed is the average
    value of all food vouchers redeemed in particular states, by type of
    vendor. (See app. I.)

    The Reasons for the Size of the Decrease in Program Participation Differ among
    the Three States

    Even though the size of the decrease in program participation would be a
    similar 3 percent of 2004 levels across all three states, the reasons for
    the size of the decrease differ among the states. Two key factors would
    affect the size of the decrease in each state: (1) the size of WIC-only
    vendors' share of the total WIC vendor market and (2) the difference
    between the average value of food vouchers redeemed by WIC-only and by
    regular WIC vendors.32 As shown in table 3, in California, WIC-only
    vendors' market share was 41.46 percent in 2004, and the difference in the
    average value of food vouchers redeemed by WIC-only and regular WIC
    vendors was $0.87. Because WIC-only vendors' market share is 41 percent in
    California, doubling their market share means that WIC-only vendors would
    account for most of the WIC market in that state.

    Table 3: Difference between the Average Value of WIC-Only and Regular WIC
    Vendor Food Vouchers in 2004 and the Market Share of WIC-Only Vendors in
    California, Texas, and Florida

                  Average value  Average value
                    of WIC-only of regular WIC    Difference between     WIC-only
                   food voucher   food voucher  WIC-only and regular     vendors'
    State           redeemed       redeemed       WIC redemptions market share
                        Dollars        Dollars               Dollars      Percent
    California        $13.15         $12.28                 $0.87        41.47
    Texas             $31.55         $21.72                 $9.83         7.93
    Florida           $22.92         $18.50                 $4.42         12.8

    Source: GAO analysis of California, Texas, and Florida WIC state agency
    redemption data for 2004.

    Conversely, in Texas and Florida, redemptions at WIC-only vendors
    accounted for a smaller market share than in California in 2004-8 percent
    in Texas and 13 percent in Florida. The difference between the average
    value of food vouchers redeemed at WIC-only and regular WIC vendors in
    2004, however, was higher than in California-$9.83 in Texas and $4.42 in
    Florida. Therefore, although WIC-only vendors accounted for a larger
    portion of the WIC vendor market in California than in Texas and Florida,
    the smaller difference in WIC-only and regular WIC vendors' food voucher
    values would have helped counteract the overall effect of an increase in
    California WIC-only vendors' market share. Conversely, the smaller market
    share held by WIC-only stores in Texas and Florida would have partially
    offset the overall effect of the larger difference in average food voucher
    value in those two states.

    32Our scenario analyses assumed that all factors other than those we
    changed, including the difference between WIC-only and regular WIC
    vendors' average food voucher values, remained constant as we increased
    WIC-only vendors' market share.

    We acknowledge that we could have increased the market share held by
    WIC-only vendors in Texas and Florida in 2004 further in our scenario
    analysis. However, our analysis is based on the relative market shares and
    the corresponding differences in average food voucher values in 2004. Over
    time, the differences in average food voucher values as well as the market
    share held by WIC-only vendors could increase or decrease with
    corresponding implications for program resources.

    If WIC-Only Vendors' Market Share Had Doubled and Program Expenditures Were Not
    Held Constant, Program Expenditures Would Have Increased About $50 Million

    Program expenditures would increase if the market share of WIC-only
    vendors grew and all else remained the same, including the overall number
    of food vouchers redeemed by both WIC-only and regular WIC vendors in
    2004.33 As shown in table 4, if redemptions at WIC-only stores doubled in
    each state, program expenditures would increase by about $50 million, or 3
    percent above the three states' 2004 levels. As discussed previously, the
    size of WIC-only vendors' share of t See appendix IV for the range of
    vouchers in California, Texas, and Florida that we analyzed. The total WIC
    vendor market and the difference between the average value of food
    vouchers redeemed by WIC-only and by regular WIC vendors in part explain
    why the changes for the three states are similar.

    33The overall number of food vouchers redeemed would remain constant as
    WIC-only vendors' market share increases because the number of vouchers
    redeemed by regular WIC stores would go down. Because our estimates do not
    take into account savings from infant formula rebates, the estimated
    dollar amounts in our scenario analysis do not reflect total cost to the
    program.

    Percentage
    increase                                                                      Total for 3
    in         California                Texas                    Florida           states
    WIC-only                      Change as a         Change as a                 Change as a                 Change as a
    vendors'    Change in         percent-age  Change percent-age          Change percent-age          Change percent-age
    market            WIC             of 2004  in WIC     of 2004          in WIC     of 2004          in WIC     of 2004
    share         dollars             levelsa dollars     levelsa         dollars     levelsa         dollars     levelsa
                 Millions Percent                     Millions of Percent         Millions of Percent         Millions of Percent
               of dollars                                 dollars                     dollars                     dollars
    10 percent
    increase         2.52    0.29                            1.78    0.35                0.69    0.30                4.99    0.31
    20 percent
    increase         5.04    0.57                            3.55    0.69                1.38    0.59                9.97    0.61
    50 percent
    increase        12.60    1.43                            8.89    1.73                3.45    1.48               24.93    1.53
    100
    percent
    increase        25.20    2.86                           17.77    3.46                6.89    2.96               49.86    3.07

    Table 4: Change in Program Expenditures if WIC-Only Vendors' Market Share
    Increases while Maintaining the Total Number of Food Vouchers at Fiscal
    Year 2004 Levels

    Source: GAO analysis of California, Texas, and Florida WIC state agency
    redemption data for 2004.

    aIn 2004, the value of redemptions was $880 million in California, $513
    million in Texas, and $233 million in Florida.

    Data Limitations Prevented Us from More Fully Analyzing the Effects of WIC-Only
    Vendors on WIC Program Participation and Expenditures

    Although our two scenario estimates are based on the best available data
    concerning WIC-only vendors' contributions to expenditures and
    participation, they are illustrative only and have limitations. Because
    food item price data and quantities of food items purchased were not
    available, we were unable to construct analyses that would have isolated
    the effect of actual prices charged by WIC-only and regular vendors on
    program expenditures or participation. For example, some food vouchers in
    our data were composed of a single item, but most of them contained
    multiple food items, such as milk, cheese, and cereal.34 Because most of
    the vouchers contained several types of WIC food and allowable quantities
    for each food item, the value of an individual voucher was not the price a
    vendor charged for an individual food item. The value of an individual
    food voucher was the sum of the price of each food item on the voucher
    times the quantity purchased. As a result, the difference in value between
    WIC-only and regular WIC vouchers could be due to differences in prices
    for individual items or differences in the quantities redeemed or both.
    For example, if some participant customers of regular WIC vendors select
    only a portion of the food items on a voucher, regular WIC vendors'
    average redemption value would be lower than WIC-only vendors', if their
    WIC customers received all of the items on the voucher. As a result,
    without these data, we could not attribute with certainty the changes in
    WIC program participation and expenditures we identified to WIC-only
    vendors' prices.

    34See appendix IV for the range of vouchers in California, Texas, and
    Florida that we analyzed.

                                      Conclusions

    The growth in the number of WIC-only vendors in recent years, combined
    with our finding that individual WIC-only vendors generally had more than
    twice the business volume of regular WIC vendors in an average month in
    2004, suggest that WIC-only vendors' share of the WIC retail market was
    increasing before the 2004 legislation. Although in some states the number
    of WIC-only vendors has not grown, in others the number has grown quickly
    and the future effect of the new cost containment requirements on this
    growth is not known. Our scenario analyses suggest that continued WIC-only
    vendor growth could have resulted in either fewer participants being
    served or higher program costs. Moreover, given the current program model
    that focuses on ensuring participants receive prescribed foods without
    having to consider the costs of the commodities, participants would likely
    continue to take advantage of the customer service and convenient location
    offered by WIC-only vendors, even if prices are higher.

    The lack of price and quantity data needed to explain the higher monthly
    average redemptions of WIC-only vendors and the higher average value of
    vouchers redeemed by WIC-only vendors leaves important questions
    unanswered. We could not determine how WIC-only and regular WIC vendors'
    prices differ. Our study was a first attempt to develop a national picture
    of WIC-only vendors, to inform policy initiatives and practice. However,
    absent a systematic analysis of vendor-level data, it is difficult to
    determine with more certainty how changes in market share between WIC-only
    and regular WIC vendors would affect WIC program expenditures.

    The lack of price and quantity data on WIC food purchases also has broader
    program implications. Although WIC state agencies have used routine and
    high-risk vendor monitoring and voucher review to promote accountability,
    for the most part they authorize and reimburse their WIC-only and regular
    WIC vendors without knowing precisely which prescribed foods were
    purchased and in what quantities, what price the program was being charged
    for food, and whether participants were receiving the whole food package
    or only part of it. Collecting these data under the current system would
    be costly and burdensome to states. Under the new interim rule, WIC state
    agencies are required to collect vendors' shelf price data but not the
    actual price charged the program or the quantity purchased. However, two
    recent developments in the WIC program-the implementation of electronic
    benefits transfer and the redesign of the WIC food package to include
    fruit and vegetables-may lead to changes in the WIC voucher and present
    WIC state agencies the opportunity to collect price and quantity data
    during the WIC transaction in a cost-effective way. This information could
    be used to determine whether the prices that both WIC-only and regular WIC
    vendors charge the program are reasonable and to analyze the effects of
    WIC vendors' prices on program expenditures with greater certainty.

                          Recommendation for Executive Action

    To assist WIC state agencies in more effectively monitoring WIC vendors'
    redemption practices, in implementing the new cost containment
    requirements, and in analyzing program expenditures, we recommend that the
    Secretary of Agriculture require, if collection of more detailed
    information on WIC food purchases is cost-effective through EBT
    implementation, that WIC state agencies collect data on both the price and
    the quantity of each WIC food item purchased, especially in each state
    that authorizes WIC-only vendors.

                                    Agency Comments

    We provided a draft of this report to the U.S. Department of Agriculture
    for review and comment. On June 14 and 16, 2005, FNS officials provided us
    with their oral comments. The officials generally agreed that our
    methodology was reasonable, given data constraints, and did not dispute
    our findings on the recent growth of WIC-only vendors, the business model
    differences between WIC-only and regular WIC vendors, and the likely
    effect on the WIC program of further growth of WIC-only vendors' market
    share based on 2004 data. However, they raised several concerns. They
    asked us to make clear that the 2004 data we used to determine the growth
    in the number of WIC-only vendors preceded the current moratorium on
    approving new WIC-only vendors, and the data we used to calculate the
    effect of additional growth on the program were gathered before the full
    implementation of new cost containment provisions. These provisions,
    enacted when the program was reauthorized in 2004, are intended to help
    ensure that the program pays competitive prices to all authorized vendors.
    We incorporated additional references to these recent changes where
    appropriate.

    FNS officials also commented on our finding that although the average
    value of all vouchers redeemed by WIC-only vendors in our three states in
    2004 was higher than that of vouchers redeemed by regular WIC vendors in
    these states, we could not determine with certainty whether prices charged
    by WIC-only vendors are higher than those charged by regular WIC vendors
    because we could not disaggregate price from quantity at the level of
    purchase. Officials acknowledged the ongoing challenges in collecting
    these data for foods provided under the WIC program. However, they
    expressed concern that this finding would be misinterpreted to mean there
    is no price difference between WIC-only and regular WIC vendors, and our
    finding on the likely effect on the program of continued growth of
    WIC-only vendors under 2004 conditions would be overlooked. We made some
    minor technical revisions to our report wording to clarify our findings
    and the limitations of available data on prices charged by WIC vendors.

    Further, in the draft these officials read, we recommended that FNS
    consider conducting a small-scale study to better understand how WIC-only
    vendor prices and operations contribute to program expenditures. Officials
    did not believe this study would be necessary or cost-effective because of
    the difficulty in collecting price and quantity data on WIC purchases
    under the current paper-based system, and because program regulations
    already require monitoring of shelf prices and redemption data as a
    component of their vendor management. We understand that USDA has limited
    funds available for research, with multiple demands on these funds. Since
    the cornerstones of the new legislative requirements are that prices at
    above-50-percent vendors should be competitive with those charged by
    regular vendors and that vendors that derive more than 50 percent of their
    revenue from WIC food instruments do not result in higher food costs to
    the program than do other vendors, officials are hopeful that the new cost
    containment provisions will ensure the program pays competitive prices to
    all vendors. However, the cost containment provisions are complex and
    entail significant changes for some states. We believe it is important for
    FNS to closely monitor implementation of cost containment provisions to
    help ensure that program costs are in fact contained as intended.
    Moreover, as long as the program is structured so that participants need
    not pay attention to price, and given the current lack of available
    information on whether participants are actually receiving their
    prescribed foods and at what price, we believe FNS should proactively take
    advantage of all cost-effective ways of gathering data that will help
    contain costs and ensure the program is meeting its overall goals. In
    response, we have removed our recommendation for further study and further
    clarified our recommendation for additional data collection on the price
    and quantity of WIC food items purchased under a new EBT system.

    FNS also made additional technical comments, which we have incorporated
    where appropriate.

    As arranged with your office, unless you publicly announce its contents
    earlier, we plan no further distribution of this report until 30 days
    after the date of this letter. At that time, we will send copies to the
    Secretary of Agriculture, relevant congressional committees, and other
    interested parties. We also will make copies available to others upon
    request. In addition, the report will be made available at no charge on
    the GAO Web site at http://www.gao.gov .

    If you or your staff have any questions about this report, please contact
    me at (202) 512-7215 or fagnonic@gao.gov . Contact points for our Office
    of Congressional Relations and Public Affairs may be found on the last
    page of this report. GAO staff that made major contributions to this
    report are listed in appendix V.

    Cynthia M. Fagnoni Managing Director, Education, Workforce, and Income
    Security Issues

    Appendix I: Scope and Methodology

    This appendix discusses in detail our methodology for determining whether
    the vendors authorized by the Special Supplemental Nutrition Program for
    Women, Infants and Children (WIC) that are known as WIC-only vendors
    contribute more to WIC program expenditures than do regular WIC vendors.
    The study was framed around three questions: (1) what is known about
    WIC-only vendors' growth and their share of the WIC market in recent
    years? (2) To what extent do the business and marketing practices of
    WIC-only and regular WIC vendors differ?(3) What would WIC-only vendors'
    contribution to WIC program expenditures have been if their market share
    increased?

    Scope

    Because existing research on WIC-only vendors consisted of a few
    single-state studies or analyses of a small number of individual states,
    we sought to develop a national picture. To ensure comparability of costs
    and business practices, we focused on the WIC retail vendor market,
    excluding Mississippi, which operates a direct distribution system, and
    Vermont, which uses a home food delivery system. To prevent potential
    duplication of data, we limited the study to the geographically contiguous
    states, omitting the 32 Indian Tribal Organizations that authorize many of
    same vendors authorized by the geographic WIC state agencies in which they
    reside. Given the large size of the WIC retail vendor population, we used
    existing data sources for our national-level analyses of WIC-only vendors'
    growth and market share. Because WIC food instrument and redemption
    systems are unique to each state, we focused our analyses of WIC-only
    vendors' contribution to program expenditures at the state level,
    concentrating on California, Texas, and Florida, the states that authorize
    84 percent of WIC-only vendors. To examine WIC-only and regular WIC
    vendors' business and marketing practices, we relied on the experience of
    WIC state agency officials who have managed a substantial number of
    WIC-only vendors, including officials from seven states that had
    authorized 10 or more WIC-only vendors in fiscal year 2004.

    Methodology

    We used separate sources of data for each study question, including
    national-level administrative data for the entire WIC vendor population,
    state-level administrative data for every WIC food instrument redeemed in
    fiscal year 2004, telephone interviews with WIC state agency directors and
    vendor management staff, and on-site observations and interviews at
    WIC-only and regular WIC vendor establishments. Before deciding to use the
    administrative data, we conducted a thorough data reliability assessment
    of each data base, including a review of the data collection and reporting
    system that produced the data, guidance on variable definitions and
    measures provided to entities that reported the data, and steps the Food
    and Nutrition Service (FNS) or the WIC state agencies took to ensure data
    reliability. Once we received the administrative data files, GAO's
    methodologists conducted electronic tests to check for the accuracy and
    completeness of individual data elements. We discuss our testing
    procedures and steps we took to mitigate any data limitations below, as
    part of the methodology for each study question. On the basis of these
    efforts, we believe the data are sufficiently reliable for our purposes.
    We conducted a descriptive analysis of WIC-only vendors' growth and market
    share, a scenario analysis of WIC-only vendors' potential contribution to
    WIC program expenditures, and a comparative analysis of WIC-only and
    regular WIC vendors' business and marketing practices.

    Procedures for Analyzing WIC-Only Vendors' Growth and Market Share

    To determine what is known about WIC-only vendors in recent years, we
    gathered various federal and other data sources. We collected copies of
    FNS's The Integrity Profile (TIP) for federal fiscal years 1999 through
    2004. TIP is a database that includes information on all vendors
    authorized to provide food benefits under the WIC program at any point
    during a fiscal year. For each vendor entry, TIP identifies vendor type,
    location, and WIC redemption amounts, among other data. TIP data is
    provided by 90 WIC state agencies, representing all 50 states, the
    District of Columbia, Indian Tribal Organizations (ITOs), and U.S.
    territories. WIC state agencies submit electronic data to FNS on an annual
    basis in accordance with instructions provided by FNS.1 To complement
    information provided by TIP, we conducted a literature search to compile a
    list of all research conducted on WIC-only vendors in recent years, but
    found that few such studies exist. As a result, our analysis focused
    largely on TIP.

      Data Collection

    As one step in our data reliability assessment process, we evaluated the
    integrity of TIP data. This procedure revealed two primary limitations.
    First, TIP does not report the actual date when a vendor enters or exits
    the WIC program; rather, it only indicates whether a vendor was authorized
    by a WIC state agency at any point during a fiscal year. As a result, TIP
    likely overstates the number of vendors in operation on any given date.
    For example, the number of WIC vendors in operation on the first day of a
    particular fiscal year-October 1-is probably less than the number reported
    by TIP for the same fiscal year, as TIP includes all WIC vendors for that
    fiscal year that were authorized as of October 1, in addition to all
    vendors that entered the program after that date. Thus, we could not
    calculate a percentage-based growth rate from year to year using TIP.
    Instead, we could only calculate the total number of WIC vendors of a
    specific type in operation for at least 1 day during a particular fiscal
    year.

    1Through fiscal year 2004, WIC state agencies provided data in electronic
    files, using either ASCII or delimited file formats, which FNS then
    converted into a consolidated file. For fiscal year 2005, WIC state
    agencies were able to upload data directly into the FNS database.

    The second limitation we identified was that national TIP redemption data
    did not meet GAO's data reliability standards, based upon information
    provided by FNS. Although FNS had requested that WIC state agencies submit
    average monthly redemption data for all WIC vendors during fiscal years
    1999-2003, FNS officials determined subsequently that not all WIC state
    agencies had followed these instructions. FNS officials concluded that
    some WIC state agencies had submitted redemption data in formats other
    than average monthly amounts, such as annual or quarterly figures, but
    they were uncertain about the time period used by any particular WIC state
    agency in reporting redemption data. In recognition of this problem, for
    fiscal year 2004, FNS requested that WIC state agencies specify the time
    period that their redemption figures covered when submitting TIP data. FNS
    then annualized all redemption figures not submitted as annual amounts by
    multiplying the figures that were other than annual by the appropriate
    number of months. However, this process may have resulted in overstated
    redemption figures for certain WIC vendors in fiscal year 2004, as FNS
    annualized the redemption figures for all WIC vendors that did not have
    annual redemption amounts-including those vendors that were not authorized
    to participate in WIC for the entire fiscal year. As a result of these
    issues, we determined that we could not use FNS's national TIP data to
    report trends in redemption amounts over time, or to calculate average
    annual redemption amounts by vendor type for any particular fiscal year.
    However, because FNS had requested that WIC state agencies specify the
    time period used in reporting redemption data for fiscal year 2004, we
    concluded that we could use the original state data files from that year
    to calculate average monthly redemption figures.

    We converted redemption figures for all WIC-only and regular WIC vendors
    with valid redemption data into average monthly redemption amounts for any
    state that reported redemptions in a form other than monthly (see table 5
    for these other time periods reported by states to FNS for fiscal year
    2004).2 For example, for any state that reported redemption amounts using
    quarterly figures, we divided each WIC vendor's redemption total by three
    to create an average monthly figure. In converting redemption amounts, we
    excluded vendors that were not authorized to participate in the WIC
    program but that were sometimes included in the state files. When such
    vendors appeared, they were clearly identified as being unauthorized.

    2The majority of WIC state agencies provided redemption data over an
    average monthly period in fiscal year 2004.

    Table 5: Time Periods Other than Monthly That WIC State Agencies Used in
    Reporting Fiscal Year 2004 Redemption Data to FNS

    State                Redemption data reporting period used
    Alaska               No valid redemptions reporteda
    Delaware             Quarterly
    District of Columbia Annual
    Kentucky             Annual, specifying the number of months in operation
    Maine                Annual, specifying the number of months in operation
    Maryland             Quarterly
    Mississippi          Not applicableb
    New Hampshire        Annual, specifying the number of months in operation
    New Jersey           Quarterly
    New Mexico           Annual
    Ohio                 Annual
    Oregon               Annual
    Pennsylvania         Annual
    Rhode Island         Annual, specifying the number of months in operation
    Vermont              Not applicablec
    Virginia             Annual
    West Virginia        Annual

    Source: FNS regional office 2004 TIP files.

    aAlaska's WIC state agency did not report valid redemption data for fiscal
    year 2004; therefore, we excluded Alaska from our redemption analysis.
    However, Alaska was included in our analysis of national WIC vendor
    numbers.

    bMississippi did not authorize any WIC-only or regular WIC vendors during
    fiscal year 2004.

    cVermont did not authorize any WIC-only or regular WIC vendors during
    fiscal year 2004.

    In addition to eliminating specific analysis procedures due to data
    reliability issues, we narrowed the focus of our analyses to certain
    geographic areas and WIC vendor types. Because TIP includes data from ITOs
    and U.S. territories in addition to the 50 states and the District of
    Columbia, some WIC vendors may have been listed in more than one state
    agency TIP file. For example, both a state and an ITO located within that
    state may have authorized, and thus included in their data file submitted
    to FNS, the same WIC vendor. To eliminate these potential data-reporting
    redundancies, our analysis of TIP focused exclusively on the 50 states and
    the District of Columbia. Concerning our vendor focus, TIP includes some
    vendor types and additional food delivery systems that are not directly
    comparable to WIC-only vendors. The noncomparable vendor types include
    military commissaries, usually located on military installations, and
    pharmacies, which often only provide infant formula and WIC-eligible
    medical foods. In addition, some state agencies authorize other food
    delivery systems, such as home food delivery and direct distribution. We
    eliminated from our analysis these noncomparable vendors and alternate
    food delivery systems, and defined our total WIC vendor population as
    consisting entirely of WIC-only vendors and regular WIC vendors.

      Data Analysis

    Our findings are the result of two primary analyses. First, we generated
    frequency statistics concerning the number and location of WIC-only
    vendors and regular WIC vendors for fiscal years 1999 through 2004, and
    used geographic information system (GIS) software to map the location of
    WIC-only vendors in fiscal year 2004. Second, using the original state
    data we received from FNS's regional offices for fiscal year 2004, we
    analyzed average monthly WIC redemption amounts by vendor type, both
    nationally and by state.

    Procedures for Determining the Extent to Which WIC-Only and Regular WIC Vendors'
    Business and Marketing Practices Differ

    To identify WIC-only and regular WIC vendors' business and marketing
    practices, we used two data collection strategies: group telephone
    interviews with WIC state agency directors, vendor management staff, and
    local agency staff that participate in vendor monitoring in selected
    states, and site visits to three of the states selected for telephone
    interviews. We developed criteria and selected states and officials for
    the telephone interviews and the site visits.

      Sample Selection

    Because we were relying on WIC state officials' experience managing their
    WIC-only and regular WIC vendors to identify their business and marketing
    practices, we selected states for the telephone interviews that had
    authorized a substantial number of WIC-only vendors and specified 10 as
    the minimum number of vendors. Using TIP data for fiscal year 2004 to
    determine the number of vendors in operation, we selected states that had
    at least 10 WIC-only vendors that year. During fiscal year 2004, the
    number of WIC-only vendors in the 16 states that authorized them varied
    from 1 to 715, but eight states-California, Texas, Florida, North
    Carolina, Arkansas, Alabama, Georgia, and Louisiana-had 10 or more. We
    treated Puerto Rico as a separate case and, because of Hurricane Katrina,
    excluded Louisiana, leaving seven states for interviews. To select
    telephone interview respondents, we asked the WIC state agency director to
    identify staff who had observed WIC-only and regular WIC vendors' business
    and marketing practices directly through representative monitoring and
    compliance investigations.

    To ensure that we visited establishments with a range of key
    characteristics, we selected states for site visits from among those with
    the greatest number of WIC-only vendors-California, Texas, and Florida. We
    selected vendor establishments to visit in consultation with the WIC state
    agency director. Our selection criteria included urban and rural
    locations, years in operation, food price range, and vendor size, measured
    by WIC redemption volume. The California and Texas WIC state agencies
    provided us with a list of vendors from which we chose vendors according
    to our selection criteria. The Florida WIC state agency provided us with a
    list of vendors that met our criteria. We visited four WIC-only and four
    regular WIC vendors in each of the three states.

      Data Collection

    We developed an interview guide with a standard set of questions for the
    telephone interviews and data collection instruments for the site visits.
    As a first step, we compiled a list of business and marketing practices
    from an interview with WIC state agency directors and vendor managers;
    interviews with representatives of vendor associations, such as the
    National Grocers Association, the Gulf Coast Retailers Association, and
    the California Independent Grocers Association; and existing studies of
    WIC-only vendors. These practices include selling shelf space to
    manufacturers; location of stores near clinics or military bases;
    advertising methods such as announcing weekly specials in newspaper ads or
    placing flyers on windshields in parking lots; incentives offered to
    participants at no cost, such as strollers, diapers, and bicycles; reduced
    price offers, such as buy one item, get one free; and transportation for
    participants to and from the vendor's establishment. For the telephone
    interviews, we converted the list of practices to a separate set of
    questions about WIC-only and regular WIC vendors. The site visit data
    collection instruments covered the same topics as the telephone instrument
    to permit comparisons of the information provided by WIC state agency
    staff and our observations of vendor establishments and interviews with
    store managers. However, the site visit instrument was designed with
    fixed-response questions in a checklist format to facilitate completion
    during observation. To complement the observational and interview data, we
    obtained digital cameras and, with the WIC vendors' permission, took
    interior and exterior photographs of the vendor establishments we visited.

      Data Analysis

    For all of the seven states we interviewed by telephone, we prepared a
    state-level table that synthesized the interview responses separately by
    vendor type and key business and marketing practice categories. We also
    prepared summary tables that further aggregated the business and marketing
    practice data within vendor type for each state. We used the summary
    tables to make cross-state comparisons. For the site visit interview
    responses, we created a matrix to summarize key findings on store
    characteristics, illustrative price data, and selected business and
    marketing practices.

    Scenario Analyses of WIC-Only Vendors' Contribution to WIC Program Expenditures,
    if Their Market Share Increases

    In order to assess WIC-only vendors' contribution to WIC program food
    expenditures, if their market share increased, we developed two scenarios,
    based on available data for 2004 (the latest data available). In these
    scenarios we asked:

               o  Scenario 1: What would have happened to the number of food
               vouchers that could have been issued and the number of WIC
               participants that could have been served in 2004, if we increased
               the number of food vouchers redeemed at WIC-only vendors while
               holding program food expenditures constant at fiscal year 2004
               levels?

               o  Scenario 2: What would have happened to program food
               expenditures in 2004 if we increased the number of food vouchers
               redeemed at WIC-only vendors while program expenditures were not
               held constant and the number of food vouchers issued to program
               participants remained at the 2004 level?

      Data Collection

    We obtained copies of administrative data files from WIC state agencies'
    management information systems in California, Texas, and Florida. These
    data included information on every food voucher that had actually been
    redeemed-that is, submitted for payment and paid-in these states. The unit
    of measure in our data was the value of a redeemed food voucher, and the
    data consisted of values for more than 100 million vouchers.

    Using these data, we could determine the actual number of food vouchers
    redeemed at WIC-only and regular WIC vendors for each of the three states,
    as well as the average value of all food vouchers redeemed at WIC-only and
    regular WIC vendors in each state. For example, figure 12 depicts the
    information available on three representative food vouchers and how we
    combined the values for these individual vouchers (e.g., $17.95, $13.07,
    and $12.55) to determine the average value of all vouchers redeemed (e.g.,
    $14.52). We did this for all vouchers for WIC-only and regular WIC vendors
    in California, Texas, and Florida.

    Figure 12: Example of the Average Value of Food Vouchers Redeemed by a
    WIC-Only Vendor

    Even though we were able to calculate the average value of all redeemed
    food vouchers for WIC-only and regular WIC vendors, we were not able to
    determine whether prices for individual food items were higher at WIC-only
    vendors than at regular WIC vendors. In order to answer that type of
    detailed question, we would have needed additional information that was
    not available because of the way data are collected by the states.
    Specifically, we would have needed the price of the individual food items
    listed on the voucher and the quantity of each food item purchased, in
    addition to the total redeemed value. Figure 13 shows hypothetical
    vouchers from two vendors that include the type of information that would
    have been needed for such an analysis. It specifies that 2 gallons of milk
    were purchased at $3.57 per gallon for a total expenditure of $7.14.
    However, the data files we received did not contain either the price or
    the quantity purchased for individual vouchers.

    Figure 13: Example of Hypothetical Vouchers Specifying Price and Quantity

    Without information on the quantity and price of the items on food
    vouchers, WIC participants would not know the value of the items they
    received and could not be price sensitive. WIC agencies would also not be
    able to determine the prices of the items they redeemed or whether
    participants received the total quantity of products specified on the
    voucher. Without this information, it is difficult to know why average
    redemption values differ.

    Figure 13 illustrates why it is important to know the quantity actually
    redeemed by the participant. For example, as shown in voucher 1 in the
    figure, the participant received the full quantity of food specified on
    the voucher. The average value of all items is $17.95. In voucher 2, the
    average value of the voucher at $14.00 is less expensive. The participant,
    however, did not buy eggs or cheese and did not receive the full quantity
    of food specified on the voucher. If the voucher represents a prescription
    designed to fulfill shortfalls in the participant's nutritional needs, the
    partial fulfillment suggests that although the average value of voucher 2
    is less than in voucher 1, the actual delivery of the food has not been
    achieved.

    Voucher 2 in figure 13 also demonstrates why it is necessary to know the
    price of individual items on the voucher. Without this information, it is
    not possible to know whether the prices at one vendor are higher than
    prices at another vendor. In voucher 2, the total value of the voucher is
    less than in voucher 1, yet the price charged for a gallon of milk is
    significantly higher. Use of the average value of the voucher of $14.00
    clearly does not prove that prices at the second vendor are less than
    prices at the first vendor with the higher average value of $17.95.

    In addition, it is important to collect the actual price of the sales
    transaction-collected at the point of sale-rather than a shelf price. This
    is because the price listed on the shelf may not be the actual price of
    the transaction. For example, if milk is being sold as a loss leader at
    the vendor represented by voucher 1, it is possible that the price on the
    shelf is actually $7.00 per gallon even though the price on the voucher is
    $3.57 per gallon.

    We also would have needed information on such things as the size and
    location of stores to further determine why prices and average values may
    have varied between WIC-only and regular WIC vendors in the states.

      The model

    To answer the questions presented in these two scenarios, we used the
    following equation for the sum of WIC-only and regular WIC retail vendor
    food expenditures:

    1) (program food expenditures for WIC-only vendors) + (program food
    expenditures for regular WIC vendors) = total WIC program food
    expenditures, or:

    2) qw xw + qrxr = F04

    Where,

    qw xw = program food expenditures for WIC-only vendors where

    qw= number of vouchers redeemed by WIC-only vendors

    xw = average value of vouchers redeemed by WIC-only vendors

    qrxr = program food expenditures for regular WIC vendors where

    qr = number of vouchers redeemed by regular WIC vendors

    xr= average value of vouchers redeemed by regular WIC vendors

    F04 = total WIC program food expenditures for fiscal year 2004

    Table 6 shows the actual data for 2004 for California and can be used to
    demonstrate the application of the model. The number of vouchers redeemed
    by WIC-only vendors (qw) equaled 28,866,000, the average value of vouchers
    redeemed (xw ) equaled $13.15.3 Conversely, the number of vouchers
    redeemed by regular WIC vendors (qr) equaled 40,745,000, the average value
    of vouchers redeemed (xr) equaled $12.28. Total WIC program food
    expenditures for California for fiscal year 2004 (F04 ) equaled
    $880,096,000. These data can be used in the formula to obtain the
    following:

    3) (28,866,000* $13.15) + (40,745,000 * $12.28) = $880,096,0004

    3For each state, we computed the number of redeemed vouchers as the total
    count of records in each state data file excluding vouchers redeemed at
    commissaries and pharmacies. In addition, we removed, on the advice of and
    in consultation with state representatives, any record that appeared to
    contain an anomaly such as missing an instrument ITEM number code, missing
    a vendor TYPE code, having a redeemed amount greater than the maximum
    allowable amount, or having a negative redeemed amount.

    4Numbers may not add because of rounding. The total is the result of
    numbers and calculations carried out using more significant digits than
    shown and is accurate.

    Table 6: Example of Application of Model to Actual Data for California

                 WIC-only vendors   Regular WIC vendors           Total
                           Average              Average
                          value of             value of    Total number
                Number of     food   Number of     food         of food    Total WIC
                 vouchers vouchers    vouchers vouchers        vouchers program food
                 redeemed redeemed    redeemed redeemed        redeemed expenditures
     California Thousands  Dollars  Thousands   Dollars  Thousands     Thousands
     2004          28,866   $13.15     40,745    $12.28     69,611       880,096
     Actual

    Source: GAO analysis of California WIC state agency redemption data for
    2004.

      Scenario 1:

    In the first scenario, we wanted to see how participation would change in
    California, Texas, and Florida in 2004 if the number of vouchers redeemed
    at WIC-only vendors increased while holding total WIC program food
    expenditures constant at 2004 levels. We did this by increasing the number
    of vouchers redeemed at WIC-only vendors in the states in 2004 by a
    hypothetical 10, 20, 30, 50, and 100 percent. Because we increased the
    number of food vouchers redeemed at WIC-only vendors, and do not allow
    total WIC program food expenditures to increase, the total number of
    vouchers for WIC-only and regular WIC vendors that can be issued depends,
    in part, on whether the average value of redeemed vouchers is higher for
    WIC-only vendors. If the average value is higher, fewer food vouchers
    could be issued under this scenario and thus fewer participants could be
    served. This would be reflected in our scenario by a reduction in the
    number of vouchers redeemed by regular WIC vendors. We calculated this
    change in the number of vouchers redeemed by regular WIC vendors by using
    equation 2a, which is equation 2 transformed.5 We calculated the number of
    vouchers that would have been redeemed at regular WIC vendors qr for each
    hypothetical increase. All else was held constant at 2004 levels.

    2a.) qr = ((F04 - qw xw/)/xr )

    We then used these new quantities calculated for WIC-only and regular WIC
    vendors under each of the hypothetical increases to determine the program
    food expenditures for each of the vendors. Examples of the scenario
    results for California are presented in table 7. In the case of a 100
    percent increase in WIC-only vendor redemptions, we increased the number
    of WIC-only redemptions from the actual value in 2004-28,866,000 by a
    hypothetical 100 percent to 57,732,000. The resulting number of
    redemptions for regular WIC vendors, as calculated in formula 2a,
    decreased from the 2004 value of 40,745,000 to 9,827,000. All else-the
    average value of redeemed vouchers for WIC-only ($13.15) and regular WIC
    vendors ($12.28), as well as total WIC program food expenditures
    ($880,096,000)-is held constant.

    5 Equation 2 is transformed to 2a in the following manner:

    qw xw + qr xr = F04

    qr xr = (F04 - qw xw)

    qr = ((F04 - qw xw)/xr )

    Table 7: Example of Calculation of WIC-Only and Regular WIC Vendors'
    Number and Average Value of Food Vouchers for California

                                          Regular WIC
                   WIC-only vendors         vendors                Total
                              Average             Average      Total
                  Number of  value of  Number of value of  number of
                       food      food       food     food       food    Total WIC
                   vouchers  vouchers   vouchers vouchers   vouchers program food
                   redeemed  redeemed   redeemed redeemed   redeemed expenditures
    California Thousands   Dollars  Thousands  Dollars  Thousands    Thousands
    100%          57,732    $13.15      9,827   $12.28     67,560     $880,096
    increase

    Source: GAO analysis of California WIC state agency redemption data for
    2004.

    This decline in the number of vouchers redeemed at regular WIC vendors
    results from the restriction in the analysis of keeping total WIC program
    food expenditures constant at 2004 levels. This decline occurs because
    according to our calculations based on all food vouchers for the state,
    the average value of food vouchers redeemed at WIC-only vendors is
    somewhat higher than the average value at regular WIC vendors.

      Calculating the Number of Participants

    We calculated the number of participants who might be affected by the
    change in the scenario. We did this by adding together the number of
    vouchers redeemed at WIC-only and regular WIC vendors in 2004 and under
    each hypothetical increase in the scenario for each of the three states.
    For example, in California, a total of 69,611,000 vouchers were redeemed
    in 2004 (table 6). As shown in table 7, for a doubling in the number of
    vouchers redeemed by WIC-only vendors, we estimated a total of 67,560,000
    vouchers.

    In the absence of more specific information on participation, we simply
    divided the total number of vouchers redeemed by the average number of
    vouchers redeemed per participant for each of the states. For example, in
    California we estimated 32.69 vouchers per participant.6 We used that
    information to estimate that there were 2,130,000 participants in 2004,
    (69,611,000 / 32.69). Conversely, as shown in table 8, if the redemptions
    of vouchers by WIC-only vendors doubled, we estimated that 2,067,000
    participants (67,559,000 / 32.69) would be affected.

    As shown in table 8, in California, the difference between the number of
    participants in 2004 and the estimated number of participants if WIC-only
    vendor redemptions increased 100 percent (2,067,000-2,130,000) indicated a
    decline of 63,000 participants that could be served. In California, this
    represented about 3 percent of the number of participants in 2004,
    ((63,000 / 2,130,000)*100).

    Table 8: Example Calculation of Decline in Number of Participants for
    California

                                      Total number of Average number
                                             vouchers    of vouchers
                                        redeemed, all   redeemed per    Number of
                                              vendors         person participants
    California                           Thousands         Number    Thousands
    2004 actual                             69,611          32.69        2,130
    100 percent increase in
    vouchers redeemed at WIC-only
    vendors                                 67,560          32.69        2,067
    Decline in vouchers and                 -2,052              0          -63
    participants

    Source: GAO analysis of California WIC state agency redemption data for
    2004.

    Note: Numbers may not add because of rounding.

      Scenario 2:

    In the second scenario, we wanted to see how expenditures that had been
    held constant in the previous scenario would have to change in order to
    maintain the level of program participation constant at 2004 levels when
    the market share of WIC-only vendors increased. As in the previous
    scenario, we increased the number of redeemed food vouchers for WIC-only
    vendors (qw) by a hypothetical 10, 20, 50, and 100 percent. While keeping
    the total number of vouchers redeemed constant at 2004 levels, we again
    used equation 2a to calculate the number of redeemed vouchers for regular
    WIC vendors (qr). We allowed total expenditures to increase (F04). We then
    looked at the difference between that new level of expenditures and 2004
    levels and then calculated what that change represented as a percentage of
    2004 levels.

    6The number of vouchers per participant is based on the number of unique
    people who redeemed a voucher, that is, people who are counted only once
    even if they came back multiple times. For California, we computed the
    number of participants as a count of all unique INDIVIDUAL_ID values. This
    was defined in the California data documentation as a "system generated 11
    character identifier unique to an individual". The Individual ID can
    remain constant throughout the participant's entire eligibility period
    with WIC. For Texas, we computed the number of participants as a count of
    all unique CID (Unique Number Identifying A Client) values in the file.
    For Florida, we asked the state agency for "the number of unique people
    who redeemed any type of food instrument in FY2004". Florida provided us
    with an "Unduplicated count for FFY04". The number of vouchers per
    participant was computed as the number of vouchers/number of participants.

      Results of the Analysis for Scenario 1

    The results of the analysis for scenario 1 are presented in the next two
    tables. As shown in table 9, if the number of food vouchers redeemed in
    California at WIC-only vendors doubled, the number would increase from
    28.8 million to 57.7 million, while the number at regular WIC vendors
    would decline from 40.7 million to 9.8 million.

    Table 9: Results of the Calculation of WIC-Only and Regular WIC Vendors'
    Number and Average Value of Food Vouchers for California, Texas, and
    Florida

    Actual and
    scenario                           Regular WIC
    increases   WIC-only vendors         vendors
    in                    Average              Average
    vouchers   Number of value of   Number of value of
    at              food     food        food     food    Total WIC
    WIC-only    vouchers vouchers    vouchers vouchers program food
    vendors     redeemed redeemed    redeemed redeemed expenditures
    California Thousands   Dollars  Thousands                Dollars Thousands
    2004          28,866    $13.15     40,745                 $12.28   880,096
    actual
    10 %          31,753     13.15     37,653                  12.28   880,096
    increase
    20%           34,639     13.15     34,561                  12.28   880,096
    increase
    30 %          37,526     13.15     31,470                  12.28   880,096
    increase
    50 %          43,299     13.15     25,286                  12.28   880,096
    increase
    100%          57,732     13.15      9,827                  12.28   880,096
    increase
    Texas
    2004           1,808     31.55     20,988                  21.72   512,976
    actual
    10 %           1,989     31.55     20,726                  21.72   512,976
    increase
    20%            2,170     31.55     20,463                  21.72   512,976
    increase
    30 %           2,350     31.55     20,201                  21.72   512,976
    increase
    50 %           2,711     31.55     19,675                  21.72   512,976
    increase
    100%           3,616     31.55     18,362                  21.72   512,976
    increase
    Florida
    2004           1,562     22.92     10,641                  18.50   232,709
    actual
    10 %           1,719     22.92     10,447                  18.50   232,709
    increase
    20%            1,875     22.92     10,254                  18.50   232,709
    increase
    30 %           2,031     22.92     10,060                  18.50   232,709
    increase
    50 %           2,343     22.92      9,673                  18.50   232,709
    increase
    100%           3,125     22.92      8,706                  18.50   232,709
    increase

    Source: GAO analysis of California, Texas, and Florida WIC state agency
    redemption data for 2004.

    WIC-only vendors account for a much smaller share of the WIC market in
    Texas and Florida than in California. In Texas, for example a doubling of
    the WIC-only vendors' market share would result in an increase in the
    number of food vouchers redeemed from 1.8 million to 3.6 million-with the
    number of food vouchers redeemed at regular WIC vendors decreasing from
    20.9 million to 18.3 million.

    For Florida, the doubling of WIC-only vendors' market share would result
    in an increase in the number of food vouchers redeemed from 1.6 million to
    3.1 million-with the number of food vouchers redeemed at regular WIC
    vendors decreasing from 10.6 million to 8.7 million.

    In all the states, the average value of vouchers redeemed at WIC-only
    vendors was higher than the average value of vouchers redeemed at regular
    WIC vendors. The value for California was calculated as $13.15, while the
    value for regular WIC was $12.28, with a difference of $0.87 between the
    two types of vendors. In Texas, the average value of vouchers redeemed at
    WIC-only vendors was calculated to be $31.55, while the value for regular
    WIC vendors was $21.72-a difference of $9.83. In Florida, WIC-only voucher
    redemptions averaged $22.92 in value, while the value for regular WIC was
    $18.50-a difference of $4.42. In addition, according to our analysis, the
    average value of vouchers redeemed at regular WIC vendors was lowest in
    California, at $12.28, followed by Florida at $18.50 and Texas at $21.72.
    The difference in the average value of vouchers redeemed should be treated
    with a great deal of caution. Because we used the average value of all
    food vouchers in our analysis without knowing the price or quantity of the
    individual food items that made up the vouchers, we could not determine if
    the higher average value meant that prices for individual food items were
    higher at WIC-only vendors. As described earlier, the data represent the
    average value of the vouchers, not prices for specific food items. These
    data do not enable us to make price comparisons between the two types of
    vendors. In addition, this analysis does not allow us to determine why the
    average values in vouchers redeemed may be higher. To do that, we would
    need enough data on the costs vendors incurred in obtaining the food items
    as well as an understanding of the factors affecting those costs, such as
    store size, store location, marketing conditions and business practices,
    and any other factors affecting food item prices, to identify the factors
    affecting voucher values.

    The results of our calculation of the decline in the number of
    participants due to the increase in WIC-only vendors' market share are
    presented in table 10. The number of redemptions as reported to us by each
    of the states was 33 per participant in California, 16 in Texas, and 18 in
    Florida. The decline in the number of participants ranged from less than 1
    percent for a 10 percent increase in the number or redemptions at WIC-only
    vendors to about 3 percent for a 100 percent increase.

    Table 10: Results of the Calculation of Decline in Number of Participants
    for California, Texas, and Florida

    Actual and                                                      Decline in
    scenario           Total   Average                               number of
    increases in   number of number of                            participants
    food vouchers  vouchers,  vouchers                Decline in          as a
    at WIC-only          all       per    Number of    number of percentage of
    vendors          vendors    person participants participants          2004
    California     Thousands    Number    Thousands    Thousands       Percent
    2004 actual       69,611        33        2,130            -
    10 % increase     69,406        33        2,123           -6          0.29
    20% increase      69,201        33        2,117          -13          0.59
    30 % increase     68,996        33        2,111          -19          0.88
    50 % increase     68,585        33        2,098          -31          1.47
    100% increase     67,560        33        2,067          -63          2.95
    Texas
    2004 actual       22,796        16        1,469            -
    10 % increase     22,715        16        1,464           -5          0.36
    20% increase      22,633        16        1,458          -11          0.72
    30 % increase     22,551        16        1,453          -16          1.08
    50 % increase     22,387        16        1,443          -26          1.79
    100% increase     21,978        16        1,416          -53          3.59
    Florida
    2004 actual       12,203        18          679            -
    10 % increase     12,166        18          677           -2          0.31
    20% increase      12,129        18          675           -4          0.61
    30 % increase     12,091        18          673           -6          0.92
    50 % increase     12,017        18          669          -10          1.53
    100% increase     11,831        18          658          -21          3.05

    Source: GAO analysis of California, Texas and Florida WIC state agency
    redemption data for 2004.

      Results of the Analysis for Scenario 2

    The results of our analysis for scenario 2 are shown in table 11.
    Expenditures for WIC-only vendors in California increased from $380
    million for a 10 percent increase to $759 million for a doubling of their
    market share. Expenditures changed by $2.5 million for the 10 percent
    increase to $25 million for a 100 percent increase in WIC-only market
    share.

    Table 11: Results of Allowing Program Food Expenditures to Increase for
    California, Texas, and Florida

    Actual and     Program food
    scenario      expenditures by          Total program food      Change in
    increases       vendor type               expenditures             total
    in                                                Change in program food
    vouchers                                               food expenditures
    at                    Regular                  expenditures         as a
    WIC-only   WIC-only       WIC       Total food        under   percentage
    vendors     vendors   vendors     expenditures    scenarios      of 2004
    California     Thousand Thousand      Thousand           Thousand dollars Percent
                    dollars  dollars       dollars
    2004            379,704  500,392       880,096
    actual
    10 %            417,674  464,942       882,616                      2,520    0.29
    increase
    20%             455,644  429,491       885,135                      5,039    0.57
    increase
    50 %            569,555  323,139       892,694                     12,598    1.43
    increase
    100%            759,407  145,885       905,292                     25,196    2.86
    increase
    Texas
    2004             57,046  455,930       512,976
    actual
    10 %             62,751  452,002       514,753                      1,777    0.35
    increase
    20%              68,455  448,075       516,530                      3,554    0.69
    increase
    50 %             85,569  436,292       521,861                      8,885    1.73
    increase
    100%            114,092  416,654       530,746                     17,770    3.46
    increase
    Florida
    2004             35,801  196,907       232,709
    actual
    10 %             39,382  194,016       233,398                        689    0.30
    increase
    20%              42,962  191,125       234,087                      1,378    0.59
    increase
    50 %             53,702  182,452       236,154                      3,446    1.48
    increase
    100%             71,603  167,997       239,600                      6,891    2.96
    increase

    Source: GAO analysis of California, Texas, and Florida WIC state agency
    redemption data for 2004.

    In Texas, program food expenditures in the scenario increased from $1.8
    million to $17.8 million, while expenditures increased from $689,000 to
    $6.9 million in Florida. In all three states the increase represented from
    less than 1 percent to about 3 percent of 2004 values.

      Limitations

    The scenarios presented are based on the best data available at the time
    of the analysis. The results, however, are illustrative and leave
    unanswered some fundamental questions, including whether WIC-only vendors
    charge higher prices for food items and if so why the prices would be
    higher and what is the overall effect on total program food expenditures
    and participation. In order to more fully answer these questions, we would
    have to know more about the actual prices and quantities of individual
    food items on the redemption vouchers. Any price comparison would have to
    be for similar products of similar quantity and quality. In addition, we
    would also have to know the factors that may be influencing prices. This
    would include such things as the costs for obtaining the product, as well
    as the difference between that cost and price. In addition, even if price
    differences exist, certain factors affecting the store's costs-the size of
    the store, the location of the store, and the general market structure in
    which the store operates-may help explain the price differences. In the
    case of the WIC market, the role of the program itself cannot be ignored;
    for example, that participants are not price sensitive. Thus to fully
    understand the price difference between WIC-only and regular WIC vendors,
    we would need not only additional data but a different framework of
    analysis that would allow us to hold various factors constant while
    changing others. This type of detailed analysis would require significant
    resources to gather the data and, in addition, would probably be limited
    in scale to cover local rather than national WIC markets.

    Appendix II: Number of WIC-Only Vendors, Fiscal Years 1999-2004

    State                  1999 2000 2001 2002 2003  2004
    Alabama                   0    0    0    3    4    19
    Arkansas                  4    4    9    0    0    42
    California              235  303  378  516  653   715
    District of Columbia      0    0    0    1    1     1
    Florida                  57   78   90  106  109   109
    Georgia                   0    0    0    0    0    22
    Kansas                    0    0    0    0    1     3
    Louisiana                 4    5    4    6   13    11
    Maryland                  0    0    0    1    1     0
    Missouri                  0    1    0    0    0     0
    New Mexico                4    4    4    4    4     7
    North Carolina            2   11   18   29   44    72
    Oklahoma                  5    6    6    6    6     8
    Oregon                    5    7    7    0    0     0
    Tennessee                 2    2    2    3    2     1
    Texas                    69   89   86   81  116   162
    Utah                      2    1    1    1    1     2
    Virginia                  5   12   16   22    6     6
    Total WIC-only vendors  394  523  621  779  961 1,180

    Source: GAO analysis of FNS 1999-2004 TIP data.

    Note: Vendor counts include any vendor in operation at some point during
    the fiscal year. States not listed did not authorize any WIC-only vendors
    at any time during any of the fiscal years listed.

    Appendix III: Average Monthly Redemptions
    per WIC-Only Vendor by State in Fiscal Year 2004

    The figure below shows the average monthly redemptions per WIC-only vendor
    and the number of these vendors in the 15 states (including the District
    of Columbia) with them in fiscal year 2004.

    Figure 14: Average Monthly Redemptions per WIC-Only Vendor by State in
    Fiscal Year 2004

    Note: N = number of WIC-only vendors with valid redemption data in fiscal
    year 2004. States are listed from left to right with decreasing numbers of
    WIC-only vendors.

    Appendix IV: WIC Vouchers Most Frequently Used
    at WIC-Only and Regular WIC Vendors in California, Texas and Florida

    The figures below show the most frequently used vouchers for WIC-only and
    WIC regular vendors as well as the state total. We defined "most
    frequently" used as those that accounted for more than 1 percent of the
    total. The figures indicate that both WIC-only and regular vendors are
    redeeming the same type of vouchers.

    Figure 15: Most Frequently Used Vouchers for WIC-Only, Regular and State
    Total for California, 2004

    Figure 16: Most Frequently Used Vouchers for WIC-Only, Regular and State
    Total for Texas, 2004

    [This page left blank intentionally.]

    Figure 17: Most Frequently Used Vouchers for WIC-Only, Regular and State
    Total for Florida, 2004

    Appendix V: GAO Contacts and Staff Acknowledgments

    GAO Contact

    Cynthia M. Fagnoni (202) 512-7215, fagnonic@gao.gov

    Acknowledgments

    Kay Brown,(Assistant Director), Sara Edmondson, (AIC), Carol Bray, Casey
    Hanewall, Avani Locke, Luann Moy, Jennifer Popovic, Mark Ramage, Tovah
    Rom, and Dan Schwimer also made significant contributions to this report.

    (130464)

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    Highlights of GAO-06-664 , a report to congressional requesters

    July 2006

    WIC PROGRAM

    More Detailed Price and Quantity Data Could Enhance Agriculture's
    Assessment of WIC Program Expenditures

    The Special Supplemental Nutrition Program for Women, Infants and children
    (WIC), authorizes retail grocers, called regular WIC vendors, to provide
    the food benefit. Recently, some states have seen an increase in vendors
    called WIC-only vendors, who stock only WIC food and accept only WIC
    vouchers. Both vendor types accept WIC vouchers in exchange for a cash
    payment, or redemption, from WIC state agencies with U.S. Department of
    Agriculture (USDA) grant funds. To determine what effect WIC-only vendors'
    growth would have on program expenditures, in the absence of recent cost
    containment legislation, you asked GAO (1) what is known about WIC-only
    vendors' growth and their share of the WIC market in recent years, (2) to
    what extent do WIC-only and regular WIC vendors differ, and (3) what would
    WIC-only vendors' contribution to WIC program expenditures have been, if
    their market share increased. GAO analyzed national WIC vendor data,
    interviewed WIC state officials about vendors' business practices, and
    analyzed redemption data from California, Texas and Florida.

    What GAO RecommendsGAO recommends that the USDA Secretary require, if
    collecting detailed information on WIC food purchases is cost-effective
    through electronic benefits transfer, that WIC state agencies collect data
    on the price and quantity of each food item purchased. USDA generally
    agreed with our findings.

    The number of WIC-only vendors has tripled since 1999, with growth
    concentrated in a few states. However, WIC-only vendors' share of the
    national WIC market was relatively small compared to that of regular WIC
    vendors in 2004. Nationally, WIC-only vendors increased in number from 394
    in 1999 to 1,180 in 2004, but 84 percent of these vendors are in
    California, Texas, and Florida. Despite their growth, WIC-only vendors
    accounted for 3 percent of all WIC vendors nationwide, and their market
    share, that is, their percentage of all WIC redemptions nationally, was on
    average 6 percent in 2004. Because of limitations in the data, we were
    unable to calculate annual growth rates or analyze changes in market share
    over time.

    WIC-only and regular WIC vendors generally employed different business and
    marketing practices, largely in response to the two different customer
    groups they served, according to WIC state agency officials. Because WIC
    participants are not required to consider retail prices, WIC-only vendors
    competed for participants' business by emphasizing customer service, which
    participants seemed to value. On the other hand, regular WIC vendors
    served non-WIC consumers as well as WIC participants. Because these
    non-WIC consumers are price sensitive, regular WIC vendors competed for
    their business based on price and competitors' behavior. An important
    difference in these approaches was that because WIC participants were not
    price sensitive, they might choose the service offered by WIC-only
    vendors, regardless of price. Finally, WIC-only and regular WIC vendors
    used similar food purchasing practices, because the cost of food purchased
    for resale is related more to the volume purchased than to the type of
    vendor purchasing the food. Both WIC-only and regular WIC vendors were
    able to lower the average cost of food purchased for resale when they
    bought in volume, according to WIC state agency officials.

    If WIC-only vendors' market share in 2004 had doubled in California,
    Texas, and Florida, either about 3 percent-about 136,000-fewer
    participants could have been served in each state, or program food
    expenditures would have increased about 3 percent-about $50
    million-according to our scenario estimates. The average value of all
    vouchers redeemed by WIC-only vendors in 2004 was higher than the average
    value of all vouchers redeemed at regular WIC vendors. Thus, if the number
    of vouchers redeemed by WIC-only vendors had increased and state food
    expenditures remained at 2004 levels, fewer vouchers could have been
    issued, and fewer participants served. Conversely, if the number of
    vouchers issued remained at 2004 levels, the higher average value of
    vouchers redeemed at WIC-only vendors would have resulted in increased
    program expenditures. However, the price and quantity of the individual
    food items that make up the vouchers were not available to us; therefore
    we could not determine if the higher average value of vouchers meant that
    prices for individual food items were higher at WIC-only vendors. Making
    price comparisons would require food item price and quantity data for both
    WIC-only and regular WIC vendors, at a minimum.
    *** End of document. ***