Appendix AA.2 OIG Audit report: State Agencies' Food Costs for Food and Nutrition Service's WIC Audit Report 27004-0001-22

United States Department of Agriculture

Office of Inspector General
State Agencies' Food Costs for the Food
and Nutrition Service's Special
Supplemental Nutrition Program for
Women, Infants, and Children

27004-0001-22

September 2014

State Agencies’ Food Costs for Food and Nutrition 
Service’s Special Supplemental Nutrition Program for 
Women, Infants, and Children 
Audit Report 27004-0001-22 
What Were OIG’s
Objectives
Our overall audit objective was
to evaluate the factors that
contribute to high average food
costs per participant, as
reported for various States
within the WIC program. We
also evaluated FNS’ oversight
activities for monitoring food
costs.

Although FNS has worked with State 
agencies to reduce food costs for the WIC 
program, FNS could take further steps to 
secure additional cost savings. 

What OIG Reviewed

What OIG Found

We performed audit fieldwork
at the national office, six of
the seven regional offices, and
eight State agencies. In
addition, we conducted
follow-up fieldwork at the
Georgia State agency and
FNS’ Southeastern regional
office to discuss corrective
actions and implemented State
controls particular to Georgia.
What OIG Recommends
FNS needs to develop a
national strategy to reduce
food costs in the WIC
program, including correcting
issues identified in the States
reviewed and ensuring broader
implementation of policies to
lower average food costs.
FNS should also explore
additional avenues for
resolving issues in the States,
including elevation to the
appropriate officials.

We found that FNS’ current strategy for monitoring State agency’s
food costs does not ensure Federal resources are being used efficiently
in the WIC program. Although FNS reports through the Office of
Management and Budget’s A-133 Compliance Supplement that
management evaluations (ME) are the WIC program’s main oversight
tool, we found that the MEs themselves, and the ME process, have
several weaknesses. For example, we found that the MEs did not
always identify significant issues that may impact a State agency’s
food costs, and when FNS did identify deficiencies at State agencies,
it did not always ensure that those agencies took appropriate and
timely corrective actions. Finally, although FNS is aware of policies
that various State agencies have implemented to reduce their food
costs, it has not evaluated those policies for program-wide
implementation. Not evaluating these policies and their cost saving
implications has led to missed cost saving opportunities. By
strengthening its strategy for monitoring food costs and considering
program-wide implementation of proven cost containment measures,
FNS could generate savings it could use to provide benefits to more
participants and help further the program’s mission.
OIG accepted management decision on four of the six report
recommendations; however, further action from the agency is needed
before management decision can be reached for the remaining
recommendations.

United States Department of Agriculture
Office of Inspector General
Washington, D.C. 20250

DATE:

September 25, 2014

AUDIT
NUMBER:

27004-0001-22

TO:

Audrey Rowe
Administrator
Food and Nutrition Service

ATTN:

Mark Porter
Director
Office of Internal Controls, Audits and Investigations

FROM:

Gil H. Harden
Assistant Inspector General for Audit

SUBJECT:

States’ Food Costs for the Food and Nutrition Service’s Special Supplemental
Nutrition Program for Women, Infants, and Children

This report presents the results of the subject audit. Your written response to the official draft,
dated September 17, 2014, is included in its entirety at the end of this report. Excerpts from your
response and the Office of Inspector General’s (OIG) position are incorporated into the relevant
Finding and Recommendation sections of the report. Based on your written response, we are
able to accept management decision on Recommendations 3, 4, 5, and 6. However, we are
unable to accept management decision on Recommenations 1 and 2. Documentation or action
needed to reach management decision for these recommendations are described under the
relevant OIG Position sections.
In accordance with Departmental Regulation 1720-1, please furnish a reply within 60 days
describing the corrective actions taken or planned, and timeframes for implementing the
recommendations for which management decisions have not been reached. Please note that the
regulation requires management decision to be reached on all recommendations within 6 months
from report issuance, and final action to be taken within 1 year of each management decision to
prevent being listed in the Department’s annual Agency Financial Report. Please follow your
internal agency procedures in forwarding final action correspondence to the Office of the Chief
Financial Officer.
We appreciate the courtesies and cooperation extended to us by members of your staff during our
audit fieldwork and subsequent discussions. This report contains publically available
information and will be posted in its entirety to our website (http://www.usda.gov/oig) in the
near future.

Table of Contents
Background and Objectives ................................................................................... 1
Section 1: FNS Oversight ...................................................................................... 5
Finding 1: FNS Can Strengthen Its Oversight of State Agency Cost
Containment Practices............................................................................................ 5
Recommendation 1 ........................................................................................9
Section 2: WIC Coordination with Medicaid .................................................... 11
Finding 2: Improvements are Needed to Ensure the WIC Program is
Coordinating with Other Agencies to Provide Benefits to Mutual Participants
................................................................................................................................. 11
Recommendation 2 ......................................................................................12
Recommendation 3 ......................................................................................13
Section 3: WIC Food Cost Containment Policies ............................................. 14
Recommendation 4 ......................................................................................16
Recommendation 5 ......................................................................................16
Recommendation 6 ......................................................................................17
Scope and Methodology ........................................................................................ 18
Abbreviations ........................................................................................................ 21
Exhibit A: Summary of Monetary Results ........................................................ 22
Exhibit B: FY 2012 Food Costs for Three Sampled State Agencies that Had
Rebates from Foods Other than Infant Formula............................................... 23
Exhibit C: FY 2012 Food Costs and Participation for 10 Surveyed State
Agencies that Had Rebates from Foods Other than Infant Formula .............. 24
Agency's Response ................................................................................................ 25

Background and Objectives 
Background
The Food and Nutrition Service’s (FNS) Special Supplemental Nutrition Program for Women,
Infants, and Children (WIC) serves pregnant, postpartum and breastfeeding women, and infants
and children up to age five. To be eligible for program benefits, applicants must meet income
guidelines and State residency requirements, and be individually determined to be at nutritional
risk1 by a healthcare professional.
In fiscal year (FY) 2013, the WIC program served an average of 8.7 million participants per
month, with food benefits totaling more than $4.5 billion for the fiscal year. More than half
(52.9 percent) of WIC participants in FY 2013 were children (ages 1-4), 23.5 percent were
infants, and 23.6 percent were women. In FY 2012, for the first time, the proportion of
breastfeeding women exceeded that of non-breastfeeding postpartum women. Among all WIC
participants in FY 2012, 10.1 percent were pregnant women, 6.8 percent were breastfeeding
women, and 6.7 percent were postpartum non-breastfeeding women.
According to FNS data, the average monthly food cost per participant was $43.26 nationwide.2
High variances occur between States with regard to food costs. For example, in FY 2013, the
highest average monthly cost per participant was $88.88 in Puerto Rico, compared to the lowest
in Texas at $26.47. As a comparison, New York had the highest food costs in FY 2013 amongst
the 50 States and the District of Columbia at $54.71.
FNS administers the program at the Federal level and provides funding to State health
departments or comparable agencies to pay for supplemental foods, nutrition education,
breastfeeding promotion and support, and administrative costs. Each State agency administering
the program must sign a Federal/State agreement that commits it to observe applicable laws and
regulations in carrying out the program. The State agencies in turn, award sub-grants to local
agencies to certify applicants’ eligibility for WIC program benefits and deliver such benefits to
eligible persons.3 The WIC program has 90 State agencies, which are made up of the 50 States,
34 tribal organizations, the District of Columbia, and 5 U.S. territories.
FNS has already implemented a variety of mandatory practices which have reduced costs
nationwide in the WIC program. Examples include rebates on infant formula4 and the grouping
of vendors with similar characteristics to determine competitive price criteria for the redemption
of food instruments. Competitive price criteria are computed by increasing the average
1

Two major types of nutritional risks are recognized for WIC eligibility: (1) Medically-based risks such as anemia,
being underweight or overweight, or having a history of pregnancy complications or poor pregnancy outcomes; and
(2) Dietary risks, such as inappropriate nutrition/feeding practices or failure to meet the current Dietary Guidelines.
2
This number is calculated by taking the total food costs nationwide for the year, dividing it by the number of
participants receiving services for the year and then dividing that number by 12 to account for the number of months
within a year.
3
Office of Management and Budget (OMB) A-133 Compliance Supplement (March 2013) 4-10.557-1 CFDA 10.557,
Special Supplemental Nutrition Program for Women, Infants, and Children Section II Program Procedures.
4
State agencies solicit bids from infant formula manufacturers to supply and provide a rebate for infant formulas.
AUDIT REPORT 27004-0001-22

1

redemption amount for each grouping of vendors by either a set percentage or number of
standard deviations. This ensures that payments to vendors comply with the State agency’s
competitive price criteria. Generally, cost containment measures begin as a State agency
initiative that is tested by trial and error. As specific measures become refined and employed by
multiple State agencies, FNS begins to assist other State agencies in adapting them for use in
their retail food delivery systems. When cost containment measures are adaptable to a majority
of State agencies, FNS drafts legislative or regulatory proposals to require nationwide
implementation, but the requirements usually have ample discretion to permit them to be
applicable to most State agencies. Examples of other cost containment measures that are not
currently required nationwide, but are being implemented in State agencies, are a policy that
restricts foods redeemed to the least expensive brand and obtaining rebates contracts on noninfant formula items (such as infant cereal).
Another avenue for the reduction of food costs in the WIC program is coordination with
Medicaid State programs to obtain reimbursements for exempt infant formula and medical foods
when recipients are eligible to receive such products under both WIC and Medicaid. A
memorandum sent in 2001 by FNS to the WIC State agencies stated that Medicaid is the primary
payer of exempt infant formula and medical foods for mutual participants. However, Federal
regulations only require that State agencies coordinate with the State Medicaid offices for
program reimbursement of exempt infant formula and medical foods and do not specify which
program will be the primary payer.5 For example, some States have coordinated their WIC State
programs and State Medicaid programs by enacting statutes specifying that WIC is the primary
payer.
FNS’ oversight of WIC encompasses a review of the program’s nine functional areas:
Organization and Management; Funding and Participation; Vendor Management; Information
Systems; Certification, Eligibility, and Coordination; Nutrition Services; Civil Rights;
Monitoring and Audits; and Food Delivery. According to FNS guidance, the management
evaluation6 (ME) is a significant component in FNS oversight activities and is the most critical
tool for monitoring State agency program compliance and improving program operations.
According to FNS officials, each year FNS regional office staff evaluate as many of these areas
as possible, given available resources, focusing on those areas they consider to have the most
need for review.
In May of 2012, staff with the U.S. House of Representatives, Committee on Appropriations,
Subcommittee on Agriculture, Rural Development, Food and Drug Administration, and related
agencies provided information to the Office of Inspector General (OIG) regarding food costs in
the WIC program. Specifically, the information highlighted Georgia’s high average food costs,
as well as the great disparities in food costs nationwide. As a result, we began our work in
Georgia. The results of the work done in Georgia led us to initiate an audit to further identify the
factors that impact food costs in various States nationwide.
Our audit found that high food costs in Georgia were caused by deficient program management
and an antiquated information system that lacked appropriate access controls, resulting in
5
6

7 Code of Federal Regulations (CFR) § 246.10(e)(3)(vi).
7 CFR § 246.19.

2

AUDIT REPORT 27004-0001-22

potentially unreliable data. FNS completed MEs of Georgia for FYs 2008, 2010, and 2012 that
identified several problems, including:
·

Georgia did not consistently apply its vendor selection criteria and incorrectly assigned
vendors to peer groups.7 In addition, the State agency did not always identify vendors
who derived more than 50 percent of annual revenue from WIC. This impacted food
costs, as vendor peer groups are used to determine the maximum redemption amount the
State agency will pay vendors for supplemental foods. This ongoing area of
noncompliance resulted in estimated overpayments to vendors, totaling more than
$65 million in FY 2011 and nearly $50 million in 2012.8

·

After receiving notification that a vendor was disqualified from the Supplemental
Nutritional Assistance Program (SNAP), Georgia took between 5 and 8 months to
disqualify some vendors from WIC in FYs 2011 and 2012. In total, nine vendors were
able to redeem $1.8 million in WIC benefits after being disqualified from SNAP.
Although the regulation9 does not specify an exact timeframe for how soon the
disqualification from WIC should occur, the 2012 ME stated that Georgia was not
performing these disqualifications timely and notified the State agency that its corrective
action plan must include procedures for ensuring WIC disqualification of vendors within
90 days of that vendor being disqualified from SNAP.

In a memorandum dated December 31, 2012, FNS imposed a moratorium on new vendors in the
State of Georgia due to FNS concerns related to overpayments contributing to the state’s high
food costs. Since February 2013, the State has been unable to authorize any new vendors to
participate in the WIC program, unless a vendor is needed for the participant’s access. This
moratorium was lifted on January 15, 2014, when the food and vendor management issues in the
State were resolved to FNS’ satisfaction. The December memorandum also notified the State
agency of FNS’ intent to establish a claim for $19.8 million in estimated overpayments made
between October 2010 and June 2012. FNS settled with the State for $10.6 million in
January 2014. Of this, Georgia will need to pay $2 million in cash to FNS by 2018. 10

7

A vendor peer group is a classification of authorized vendors based on common characteristics or criteria that
affect food prices, for the purpose of applying appropriate competitive price criteria to vendors at authorization and
limiting payments for food to competitive levels. Peer groups are defined by the State agency in their State Plan.
8
FY 2011 Above 50 Percent Vendors - $43,812,182 and Probable Above 50 Percent Vendors -$21,342,045.
FY 2012 Probable Above 50 Percent Vendors - $49,908,634.
9
7 CFR 246.12(l)(1)(vii) outlines the requirements with regard to SNAP disqualifications and the effect on WIC.
This regulation provides that a State agency must disqualify a vendor who has been disqualified from SNAP. This
regulation provides that a State agency must disqualify a vendor who has been disqualified from SNAP, and also
that the WIC disqualification must be for the same length of time as the SNAP disqualification, may begin at a later
date than the SNAP disqualification, and is not subject to administrative or judicial review under the WIC program.
10
Georgia committed to use $1.2 million to upgrade WIC program vendor integrity. However, FNS allowed
Georgia to include the amounts spent for this purpose for the 2 years prior to the settlement and the remaining
balance would need to be spent prior to September 30, 2018. FNS agreed to hold $7.4 million at risk. If Georgia
fulfills all performance measures set by FNS through September 30, 2019, then FNS will forgive the $7.4 at risk
amount. If it does not, Georgia must remit a $7.4 million cash payment to FNS by December 30, 2019.
AUDIT REPORT 27004-0001-22

3

Objectives
Our overall audit objective was to evaluate the factors that contribute to the high average food
costs reported for various States within the WIC Program. We also evaluated FNS’ oversight
activities for monitoring food costs.

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AUDIT REPORT 27004-0001-22

Section 1:  FNS Oversight 
Finding 1: FNS Can Strengthen Its Oversight of State Agency Cost
Containment Practices
FNS’ current oversight strategy has been ineffective with regard to State food cost containment.
Although FNS reports through the OMB Circular A-13311 Compliance Supplement that MEs are
the main oversight tool for the WIC program, we found that MEs themselves and the ME process
have several weaknesses. For instance, MEs reviewed did not always identify significant issues
that impact WIC food costs; and when MEs did identify deficiencies, FNS did not always take
appropriate and timely corrective actions. According to FNS officials, this occurred because
FNS used discretion permitted under program regulations to allow State agencies flexibility in
managing WIC as partners, instead of issuing nationwide cost containment policies. In addition
to addressing deficiencies found within the ME process, FNS needs to strengthen its oversight of
State agency coordination with State Medicaid offices and provide tools for State agencies in
their search for additional cost containment strategies. By strengthening its oversight of cost
containment, FNS could generate savings that it could use to help further the program’s mission
of promoting healthy mothers and children.
OMB Circular A-12312 states that management has a fundamental responsibility to develop and
maintain effective internal controls for proper stewardship of Federal resources. Federal
employees must also ensure that programs operate efficiently and effectively. As the Federal
steward over the WIC funds, FNS is responsible for overseeing disbursements to State agencies.
Through OMB Circular A-133, Compliance Supplement, FNS reported that its oversight
mechanism includes evaluating the program’s nine functional areas,13 focusing on those areas it
considers most in need of review. This supplement also reflects that FNS reported that it has
enforcement mechanisms through the assessment of a claim to recover losses. In addition, it
states that FNS has the authority to notify States of issues identified, and if improvements do not
occur, withhold administrative funds for not implementing program requirements. This same
supplement shows that MEs are the main oversight tool for the WIC program. However, we
found that MEs themselves and the ME process have several weaknesses.
Improvements are Needed to Ensure State Agency WIC Pricing Structures are
Effective in Controlling Costs
We found that MEs for two of eight State agencies reviewed did not identify policy
violations. First, in Ohio, the State agency did not adhere to FNS guidance on obtaining
an exemption from FNS to not use the required vendor peer group structure.14 The State
agency was setting prices Statewide, as opposed to separating vendors into different peer
11

OMB Circular A-133: Audits of States, Local Governments, and Non-Profit Organizations (Effective July 1,
1996).
12
OMB Circular A-123: Management’s Responsibility for Internal Control (effective beginning with FY 2006).
13
Functional areas include: Organization and Management; Funding and Participation; Vendor Management;
Information Systems; Certification, Eligibility, and Coordination; Nutrition Services; Civil Rights; Monitoring and
Audits; and Food Delivery.
14
7 CFR 246.12 (g)(4)(ii).
AUDIT REPORT 27004-0001-22

5

groups and setting different pricing and reimbursement levels for each. FNS guidance
explains that vendor categorization is important for controlling costs, as it allows State
agencies to determine the appropriate maximum reimbursement levels for specific vendor
types (i.e., small corner stores would have higher food costs than large chain grocery
stores). Ohio’s State agency said FNS’ regional office knew about and consented to its
pricing structure, even though it did not obtain a formal exemption. FNS provided no
documentation that it had granted an exemption or reviewed the Ohio State agency’s peer
group structure. We notified FNS of the issue, and FNS officials agreed that they should
have required an exemption. FNS is working with the State agency to review its system
and prepare an application for a formal exemption. The review is especially important, as
it will allow FNS to determine whether vendors in Ohio are able to charge higher prices
than would be allowed under a peer grouping system.
Second, in Louisiana, we found the State agency set pricing for all vendor groups using
outdated formulas that could not be justified or explained. FNS requires State agencies to
create competitive pricing criteria for all vendors, based on sound statistical methods.
This deficiency was identified only for above-50 percent of vendors during a ME
conducted in FY 2011, but the State agency did not correct the problem. After we
brought the issue to an FNS official’s attention, they conducted a subsequent ME of
Louisiana in FY 2013 and discovered that Louisiana had not set appropriate pricing
levels for all vendors, and that the State’s information system did not have controls in
place to enforce proper reimbursement levels for all vendors. The State agency is taking
corrective actions on this issue.
Both of these issues occurred because FNS does not assess or verify in their ME process
the effectiveness of the State agency’s pricing structure. The ME process only confirms
that the State agency assesses its own pricing structure. Both Ohio and Louisiana
detailed their improper price structures in their State plans. Annually, State agencies
submit a plan for FNS approval that includes details of how they will implement WIC.
These documents are very detailed, containing extensive figures, and often include
hundreds of pages. While FNS does review and approve these documents, it did not
identify the incorrect pricing structures in the submitted plans. By incorporating a more
in-depth review of State pricing structures within the ME, FNS can create a control to
ensure that pricing follows FNS guidance and demonstrates effective cost containment.
This would serve as a more effective control to the approval process in ensuring these
inadequate pricing structures do not continue.15
Improvements are Needed to Ensure the WIC Program is Coordinating with Other
Agencies to Provide Benefits to Mutual Participants and that Proven Cost Containment
Strategies are Implemented More Broadly
Although a Federal regulation requires coordination between WIC State agencies and, at
minimum, Medicaid State offices for the provision of benefits to mutual participants, no
15

A previous OIG audit (Report 27601-0038-CH, Vendor Management in the Food and Nutrition Service’s Special
Supplemental Nutrition Program for Women, Infants, and Children, March 2013) recommended that FNS reassess
the ME process and update guidance and the ME tool. FNS agreed to take these actions by December 31, 2014.

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AUDIT REPORT 27004-0001-22

oversight reviews, including MEs, were designed to include any tests to evaluate such
coordination efforts (see Finding 2). Also, no oversight review, including the ME
process, had a mechanism for reviewers to note examples of cost saving best practices
that other States may be able to learn from or implement. As a result, FNS was not
taking steps to expand proven cost containment practices, such as policies requiring WIC
recipients to purchase the least expensive brand for a particular product, and the
expansion of negotiated rebates that some State agencies receive for non-formula food
items (see Finding 3).
Improvements are Needed to Ensure that Appropriate and Timely Corrective Actions
are Taken to Resolve Program Violations Identified
We identified two State agencies with issues that went unresolved for a number of years
after they were first discovered in an ME. For instance, in 2008, FNS identified that the
Georgia State agency did not effectively identify stores that derive more than 50 percent
of their sales from the WIC program that resulted in overpayments to vendors. The
finding was still unresolved in follow-up MEs completed for FYs 2010 and 2012. During
this time, FNS officials said that the Georgia State agency had five directors and was
assigned to report to different departments and secretaries. In December 2012, FNS took
action by sending the State a letter that stated its intent to establish a claim for $19.8
million in estimated overpayments made between October 2010 and June 2012, as well as
initiating a moratorium16 on approving new WIC vendors in the State. FNS and the State
agency began a lengthy negotiation, which slowly worked its way up to the Georgia
Governor and a Department of Agriculture Under Secretary for Food, Nutrition, and
Consumer Services. In January 2014, FNS settled with the State for $10.6 million and
ended the moratorium. Of this, Georgia paid $2 million in cash to FNS in April 2014.17
Although some of the necessary improvements to its overall WIC vendor management
system were designed and implemented more quickly by the State agency, the claim and
its eventual settlement took 6 years to resolve.
Although a 2003 Government Accountability Office (GAO) report found that
Puerto Rico’s issuance of non-contract and exempt infant formula was the highest in the
nation, FNS did not ensure that Puerto Rico is containing costs derived from issuing noncontract infant formula.18 As recently as May 2013, an FNS review of Puerto Rico found

16

The moratorium is an additional administrative restriction on the State agency that is meant to prevent any new
vendors from joining the program and allow for the State to correct all issues discovered in the ME.
17
Georgia committed to using $1.2 million to upgrade WIC program vendor integrity. However, FNS allowed
Georgia to include the amounts spent for this purpose for the 2-years prior to the settlement with the remaining
balance needing to be spent prior to September 30, 2018. FNS agreed to hold $7.4 million at risk. If Georgia fulfills
all performance measures set by FNS through September 30, 2019, then FNS will forgive the $7.4 million at risk
amount. If it does not, Georgia must remit a $7.4 million cash payment to FNS by December 30, 2019.
18
GAO-03-331, Potential to Serve More WIC Infants by Reducing Formula Cost (February 2003).
AUDIT REPORT 27004-0001-22

7

that the State agency was improperly issuing large amounts of non-contract and exempt
infant formula19 to participants. This issue was cited in a March 2012 review. Although
Puerto Rico had informed FNS as early as December 2011 that non-contract formulas
would not be authorized, it had not taken steps to ensure non-contract formula wasn’t
being issued. According to FNS, the State agency did not create policies prohibiting the
issuance of non-contract infant formula until early 2013.20 In addition, the Puerto Rico
State plan for FY 2014 informed FNS that 39.73 percent of infant formula issued would
be non-contract or exempt.
This is not the first time that OIG has reported on the ME process for WIC. In response
to a 2013 OIG report21 that identified other weaknesses in the ME process, FNS officials
indicated they are revising the ME process in order to develop and identify a vision,
oversight, and formalize collaborative approaches to secure an agency commitment for
consistency in all program areas across the country.22 FNS is currently working on this
project and plans to finish in December 2014. In addition to the ME process changes,
FNS told us it is also looking to hire a contractor to conduct a vendor risk assessment that
will examine how State agencies currently implement peer group and cost containment
systems to control costs, and how these may be improved. Finally, in January 2014, FNS
told us that it created a new national Program Integrity Monitoring Branch that will be
responsible for MEs and other duties, such as reporting. As of the date of our report, this
branch is not yet operational.
In summary, FNS is not effectively containing or recouping costs, such as coordinating
with Medicaid for the potential program reimbursement for exempt infant formula (see
Finding 2), implementing policies that favor lowest-cost brands, and expanding the use of
food rebates (see Finding 3). As to problems identified in MEs that FNS did not act on,
in one State alone, FNS allowed a problem to continue that cost an estimated
$19.8 million in less than 2 years. The enforcement actions FNS reported to OMB
through the compliance supplement, when utilized, should encourage States to comply
with policies and, when properly utilized, should result in cost savings23 as these issues
would be less likely to reoccur.
In response to the areas of improvements needed in FNS oversight, FNS officials said
that State agencies are partners, and, therefore, the prior strategy was to use the discretion
allowed by program regulations to provide State agencies flexibility in managing their
WIC operation to encourage cooperation. As a result, as FNS focused on partnership, we
19

“Non-contract brand formula” means all formula, including exempt formula, that is not covered by an infant
formula cost containment contract awarded by the State agency. “Exempt formula” means infant formula that meets
the requirements for exempt infant formula in 21 U.S.C. 350a (h) and the regulations at 21 CFR parts 106 and 107.
Exempt infant formulas (and WIC-eligible medical foods) are authorized only in Food Package III with medical
documentation.
20
As of the date of this report, these policies have not been provided to OIG for verification.
21
A previous OIG Audit (Report 27601-0038-CH, Vendor Management in the Food and Nutrition Service’s Special
Supplemental Nutrition Program for Women, Infants, and Children, March 2013) recommended that FNS reassess
the ME process and update guidance and the ME tool. FNS agreed to take these actions by December 31, 2014.
22
FNS Management Evaluation Collaboration, page 2.
23
Costs savings are explained in Exhibit A: Summary of Monetary Results.

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AUDIT REPORT 27004-0001-22

conclude it placed less emphasis on its oversight role, and did not develop a national
strategy to lower food costs. FNS officials acknowledged that they need to change their
focus to fulfill more of an oversight role. The focus on partnership, as opposed to
controlling the program as the national authority, has weakened FNS’ position as an
oversight agency.
In 2013, FNS conducted a nationwide survey of State agencies to get an understanding of
cost containment practices. States noted several budget pressures in their responses.
Most notably, New York said that it provided $13.6 million in State funds to take care of
anticipated WIC budget shortfalls.24 If money remains in the WIC budget once all
applicants are provided food benefits, the State agencies can utilize those funds to
promote nutrition through supplemental activities like the issuance of breast pumps to
participants who otherwise could not afford them. WIC’s position is that breast milk is
more nutritious than formula for infants and breast pumps allow low income mothers
who may be returning to work to pump and provide breast milk to their children for a
longer period of time, as opposed to switching to formula. New York, along with several
other States such as Alabama, Kentucky, and Wisconsin, discontinued issuing breast
pumps to participants due to the budgetary pressures noted in their responses to the
survey. By strengthening its oversight of cost containment, FNS can generate savings
that it can use to help further the program’s mission of promoting healthy mothers and
children.

Recommendation 1
Develop a national cost containment strategy for the WIC program. This should include, at a
minimum, guidance to State agencies on the deadlines to correct issues identified during ME
reviews, and the enforcement actions FNS will take if the deadlines are missed.

Agency Response
In its September 17, 2014, response FNS stated:
FNS has a national WIC cost containment strategy that requires State agencies to
implement a vendor peer group system, competitive price criteria, and allowable
reimbursement levels in a manner that ensures the WIC Program pays authorized vendors
competitive prices for supplemental foods. It also requires State agencies to ensure
vendors that derive more than 50 percent of their annual food sales revenue from WIC
food instruments do not cause higher food costs for the program than do other vendors.
All of these requirements are codified in program regulations (7 CFR 246.12). FNS also
created a new WIC Program Integrity Monitoring Branch which is tasked with
developing consistent tools, resources and solutions to program integrity challenges so
that State agencies can correct issues identified in management evaluation (ME) reviews
and other oversight reports. FNS is developing a system to analyze and use the findings
24

WIC is a discretionary program and therefore was impacted by the sequester as opposed to the entitlement
programs whose funding is not tied to annual budget appropriations.
AUDIT REPORT 27004-0001-22

9

from the ME reviews and other data sources to identify State agencies with deficient
vendor management practices and provide targeted Technical Assistance to address the
findings.

OIG Position
We are unable to reach management decision. FNS’ proposed corrective action for this
recommendation does not address necessary guidance to State agencies on the deadlines to
correct those issues identified in ME reviews, and the enforcement actions FNS will take if the
deadlines are missed. To achieve management decision, FNS should specify what actions it will
take to ensure that these two items are addressed as part of its cost containment strategy.

10

AUDIT REPORT 27004-0001-22

Section 2:  WIC Coordination with Medicaid 
Finding 2: Improvements are Needed to Ensure the WIC Program is
Coordinating with Other Agencies to Provide Benefits to Mutual Participants
FNS has not effectively coordinated with the Department of Health and Human Services (HHS)
to address the provision of exempt infant formula and WIC-eligible medical foods to mutual
program participants and clarify what coordination means between WIC State agencies and
Medicaid State offices. Federal regulation25 requires that WIC State agencies coordinate, at a
minimum, with Medicaid State offices for the provision of exempt infant formulas and WICeligible medical foods that are authorized or could be authorized under the State Medicaid
program for reimbursement.26 Such reimbursement from Medicaid to WIC applies to
participants who are prescribed exempt infant formula and medical foods and who take part in
both programs (hereafter referred to as mutual participants).
Prior to the issuance of the regulation requiring coordination between WIC State agencies and
Medicaid State offices, on September 17, 2001, FNS had issued a memorandum (the “FNS
Memorandum”) to FNS Supplemental Food Programs Regional Directors, advising that the
Medicaid program would be the primary payer for these products that are issued to WIC
participants who are also Medicaid beneficiaries. The FNS Memorandum states that it is
applicable in States where the Medicaid office has elected to provide exempt infant formulas and
WIC-eligible medical foods as part of their benefit packages. HHS’ Center for Medicaid and
State Operations transmitted the FNS Memorandum to its Associate Regional Administrators on
October 1, 2001. We found that, while the 2001 FNS Memorandum provided guidance that
Medicaid State programs should be the primary payer for exempt infant formula and medical
foods, the lack of regulations supporting such an obligation by Medicaid State programs to cover
such products may have led to confusion amongst WIC State agencies as to what coordination
with Medicaid should entail. For example, some State agencies have told us that they believe
they have no authority to force Medicaid to coordinate with them at all, despite the existence of a
regulation requiring coordination.
FNS officials stated they had approached HHS regarding coordination in the past year; however,
they were unable to explain the delays in the required coordination efforts with their HHS
counterparts, except to say that discussions with HHS were pending because HHS was focusing
on the Affordable Care Act. Also, we noted FNS has not provided WIC State agencies with the
technical guidance necessary to coordinate with their Medicaid counterparts. As a result, WIC
State agencies are not consistently coordinating with Medicaid State offices, as required by
regulation, which can result in missed cost saving opportunities.

25

7 CFR § 246.10(e)(3)(vi).
Medical foods are specially formulated and processed for a patient who is seriously ill or who requires use of the
product as a major component of a disease or condition’s specific dietary management.
26

AUDIT REPORT 27004-0001-22

11

In our review of FNS’ coordination efforts with Medicaid we requested information from
90 WIC State agencies. We received responses from 79 of the 90 State agencies. Thirty-four
State agencies responded that they have agreements with their Medicaid counterparts for exempt
infant formula and medical foods. Of these 34, two State agencies, Texas and Virginia, have
agreements for direct program reimbursements where WIC provides the products to mutual
participants and then bills Medicaid directly for the cost. In FY 2012, the Texas WIC State
agency was directly reimbursed by the State Medicaid program for $23.8 million ($2.05 in
monthly savings per participant) and the Virginia WIC State agency received $8.3 million from
the State Medicaid program ($4.31 in monthly savings per participant). Another 17 State
agencies reported that they coordinate with Medicaid to “refer” mutual participants, meaning that
when a mutual participant needs these products as part of their nutrition prescription,27 WIC
State agencies will refer the participant to the State Medicaid office to obtain the products. An
additional 12 State agencies reported that they coordinate with Medicaid, but WIC is the primary
payer. The remaining 3 State agencies did not provide sufficient explanation of the terms of
these agreements to indicate whether the agreement is for program reimbursement or referral, or
whether the agreement specifies which entity is the primary payer.
Of the 45 State agencies reporting that they do not have agreements with their Medicaid
counterparts:
·
·
·

Eleven reported that Medicaid State offices had not been willing to coordinate with them.
Five reported having discussions with Medicaid but have not yet reached any agreement.
Twenty-nine reported not having an agreement with Medicaid, but did not provide
sufficient explanation for why no agreement exists.

In following up with FNS national office officials, they stated that State agencies must
coordinate more with Medicaid to establish agreements that will ensure (1) Medicaid is the
primary payer for exempt infant formula and WIC-eligible medical foods, and (2) WIC should
be reimbursed for costs associated with providing these products to mutual participants. They
also informed OIG that they plan to reissue the FNS memorandum this year after discussing it
with HHS to notify State agencies that Medicaid is the primary payer for those products that are
authorized or could be authorized under the State Medicaid program for reimbursement.
However, we again note that there is no regulatory requirement that Medicaid must be the
primary payer, only that coordination take place.

Recommendation 2
In collaboration with HHS, clarify what coordination between WIC State agencies and Medicaid
State offices means with regard to the provision of exempt infant formula and WIC-eligible
medical foods to mutual program participants. Record this clarification between HHS and FNS
in an appropriate decision document.

27

WIC assigns benefits to participants based on the nutritional risks and needs of each participant based on the
determination of a physician, nutritionist, or nurse. WIC refers to the benefit as a nutrition prescription.

12

AUDIT REPORT 27004-0001-22

Agency Response
FNS will consult with HHS on the provision of exempt infant formulas and WIC-eligible
medical foods to mutual program participants. Following these discussions, FNS will update and
reissue the policy memorandum to provide guidance to WIC State agencies about coordination
with Medicaid on the provision of exempt infant formulas and WIC-eligible medical foods to
mutual program participants, including information on primary payer for these products.

OIG Position
We are unable to reach management decision for this recommendation. While FNS’ proposed
corrective action addresses the need for FNS to consult with HHS, we cannot accept
management decision solely based on the reissuance of the policy memorandum to WIC State
agencies. To reach management decision, FNS should record the results of the coordination
efforts between HHS and FNS in the appropriate decision document. This document should
include specific elements, such as the responsibilities of each office for coordination, as well as
the conditions in which each party has the responsibility of primary payer for the provision of
exempt infant formulas and WIC-eligible medical foods to mutual program participants.

Recommendation 3
Provide technical assistance to WIC State agencies to assist in their coordination efforts,
including sharing best practices from WIC State agencies that have successfully coordinated with
Medicaid for the provision of exempt infant formula and WIC-eligible medical foods.

Agency Response
In its September 17, 2014, response FNS stated:
FNS has initiated work on technical assistance for WIC State agencies that will assist in
their coordination efforts with Medicaid. In January 2014, FNS held discussions with
WIC State agencies that have successfully coordinated with Medicaid for reimbursement
of exempt infant formulas and WIC-eligible medical foods to obtain useful tips and
lessons learned from their coordination efforts. FNS plans to continue similar
discussions with WIC State agencies that have successfully coordinated with Medicaid
using a referral process, such that mutual participants are referred to Medicaid for the
provision of these products. The information obtained from State discussions will form
the basis of technical assistance provided to all WIC State agencies. The discussions
with HHS will also help inform technical assistance.
FNS provided an estimated completion date of September 30, 2015, for these actions.

OIG Position
We accept FNS’ management decision on this recommendation.

AUDIT REPORT 27004-0001-22

13

Section 3:  WIC Food Cost Containment Policies 
Finding 3: FNS Has Not Taken Effective Steps to Expand Cost Containment
Measures Used Effectively by Some State Agencies
Although some WIC State agencies’ policies have been shown to decrease costs in the States
where implemented, the FNS national office has not yet undertaken steps to evaluate and
potentially expand these initiatives throughout the nation. FNS officials stated they need
additional analysis to mitigate concerns that implementing these measures will cause some
participants to avoid buying an item, which could affect the nutritional aspect of the program.
We note that 42 of the 79 State agencies that responded to the OIG survey have some kind of
least expensive brand policy in place and 16 have contracted for rebates on infant cereal, baby
food, or both while still nutritionally serving their participants. For example, Texas has a least
expensive brand policy and a rebate contract on infant cereal that contributes to its success of
having one of the lowest costs per participant in the nation in FYs 2012 and 2013. By not
making greater use of these practices, State agencies may incur higher food costs, potentially
reducing available funding to serve more eligible participants.
OMB Circular A-123 states that proper stewardship of Federal resources is an essential
responsibility of agency managers and staff. Federal employees must ensure that programs
operate and Federal resources are used efficiently and effectively to achieve desired objectives.
FNS’ FY 2013 Strategic Priorities states that “promoting access to nutrition assistance program
goes hand-in-hand with managing them in a manner that ensures public confidence and
maximizes the impact of the Federal investment.”28
During our review we found that State agencies have implemented other cost containment
measures that can provide additional savings to WIC if implemented in more States. We discuss
two of these cost containment measures, least expensive brand and obtaining rebates on other
food items, in the subsequent sections.
FNS Has Not Taken Effective Steps to Analyze and Expand the Least Expensive Brand
Policies
State agencies provided different reasons for not having the least expensive brand policy
in place. Some responded saying they had policies requiring that participants purchase
only generic or store brands, which are normally cheaper than national brands. The State
agencies believed this practice is easier for participants to comply with. Although
limiting WIC purchases to in-store brands is a good alternative to the least expensive
brand, such brands are more available at large box stores, rather than at smaller or local
convenience stores, which often might carry only one or two brands for a particular
product.
Some Indian Tribal Organizations that did not have least expensive brands stated that
they had limited vendors or food options for their participants (i.e., a small store with
28

FNS FY 2013 Strategic Priorities, Increase Access to Nutritious Food, Improve Program Integrity.

14

AUDIT REPORT 27004-0001-22

only one brand available), making the least expensive brand unfeasible in their program.
Other reasons that State agencies provided for not implementing the least expensive
brands were that it causes participant confusion, is burdensome to participants and
vendors, limits product variety, increases difficulty in compliance investigations, or
would require updates to electronic systems and vendor equipment. While implementing
least expensive brand policies will inevitably require additional compliance activities
from the State agencies, we note that Texas’ policy places the bulk of the burden of
implementation on vendors, yet is still carried out Statewide. Congress has mandated
that all WIC State agencies use electronic benefit transfer (EBT) systems by 2020, which
means that information technology upgrades that would aid in implementing the least
expensive brand policy will soon be underway.
FNS Has Not Taken Effective Steps to Analyze and Expand Rebate Use Among State
Agencies
To further understand the use of rebates, we surveyed all 90 State agencies and asked
whether they received rebates on foods other than infant formula. Four did not have
retail food delivery systems, and another eight were in our original sample. Of the
remaining 78, 10 agencies reported rebate amounts of an estimated $3.9 million from
foods other than infant formula in FY 2012. Three agencies reported they received
rebates, but did not report the amount. A total of 54 did not receive rebates from other
foods and 11 did not respond to the question.
Three of the eight States in our sample had rebate programs that led to significant
savings. For FY 2012, Texas received $1.68 million from infant cereal rebates that it
negotiated with a manufacturing company ($0.14 in monthly savings per participant);
Ohio has two contracts for rebates and received $501,736 from infant cereal ($0.15) and
$2,459,805 from baby food ($0.74); and New York received $2,403,586 from infant
cereal rebates ($0.38). The other five State agencies did not have rebate contracts for any
foods other than infant formula.
Because FNS aims to give States flexibility in operating their programs, FNS officials
stated they do not have a policy requiring State agencies to negotiate rebates for nonformula foods. In a prior GAO report, FNS also said that the rebate contracts must
undergo the State procurement process and set up monitoring redemptions, billings, and
collections, which can be cumbersome and might cause an undue burden on those who
run the WIC program.29 Some State agencies that had not implemented rebates pointed
out that their paper coupon systems would require them to issue separate checks for
rebate items vs. non-rebate items, and then count the number of rebate checks
redeemed—which would pose administrative costs. They also said that for products
made by a variety of manufacturers, it is often hard to get an effective rebate contract
from the fragmented market.

29

GAO/RCED-97-225, A Variety of Practices May Lower the Costs of WIC, September 1997, page 6.
AUDIT REPORT 27004-0001-22

15

FNS officials are aware of WIC State agencies cost containment policies such as least
expensive brand policies and rebates contracts; however, they have not taken steps to
potentially expand these policies nationwide. Exploring these options will help FNS
better meets its strategic priorities and maximize the impact of Federal funding. FNS
officials have concerns that implementing some of these cost containment measures will
adversely impact participation rates contrary to the goal of the program. While we agree
that nutrition is a priority, we also note that 42 State agencies determined that a least
expensive brand policy and 16 State agencies determined that other rebates were
appropriate cost containment measures. OIG acknowledges that, while additional cost
containment measures may present implementation challenges, obtaining and analyzing
available State agencies cost containment data and providing guidance to State agencies
will aid in expanding additional measures in ways that States find appropriate to reduce
costs.

Recommendation 4
Develop and issue guidance to State agencies for implementing the best cost containment
practices available to reduce food costs.

Agency Response
In its September 17, 2014, response FNS stated:
FNS concurs with this recommendation. Guidance will be developed using existing State
agency practices and will be made available to all State agencies.
FNS provided an estimated completion date of April 30, 2015, for this action.

OIG Position
We accept FNS’ management decision on this recommendation.

Recommendation 5
Request that State agencies provide FNS with an analysis of implementing the available cost
containment measures to reduce food costs.

Agency Response
In its September 17, 2014, response FNS stated:
FNS concurs with this recommendation. FNS will request State agencies submit an
analysis of implementing available cost containment measures to reduce food costs.
FNS provided an estimated completion date of September 30, 2015, for this action.

16

AUDIT REPORT 27004-0001-22

OIG Position
We accept FNS’ management decision on this recommendation.

Recommendation 6
Conduct a study that examines the methods of implementing various cost containment measures
and their relative effectiveness.

Agency Response
FNS concurs with this recommendation. FNS is working with ERS [Economic Research
Service] on its update of the 2005 report, Interstate Variation in WIC Food Package Costs: The
Role of Food Prices, Caseload Composition, and Cost-Containment Practices. This study will
examine the degree to which food prices, caseloads, and the implementation of various cost
containment measures influence in State agencies’ food package costs.
FNS provided an estimated completion date of September 30, 2015, for this action.

OIG Position
We accept FNS’ management decision on this recommendation.

AUDIT REPORT 27004-0001-22

17

Scope and Methodology 
We performed our audit fieldwork in FNS Headquarters in Alexandria, Virginia; FNS’ Southeast
and Southwest Regional Offices located in Atlanta, Georgia; Dallas, Texas; and eight WIC State
agencies located in California, Georgia, Kentucky, Louisiana, Texas, Ohio, New York, and
Puerto Rico. We also conducted interviews with program officials in four other regional offices.
FY 2012 WIC funding for these eight States totaled $2,239,863,233. The scope of this review
covered the State’s Food Costs for the WIC Program.
We judgmentally selected the eight State offices, based primarily on reported high average
monthly food cost per participant for FY 2012, and, secondarily, on the method used for
gathering data monthly for review and use of rebates. Also, some States were selected based on
congressional interest or past concerns reported within the WIC Program. Identification of these
judgmental factors by State follows (listed in alphabetical order):
·

·

·

·

·

·

·

·

18

California - California had the highest total food costs of all 90 State agencies for
FY 2012. California has been subject to a moratorium on authorizing new vendors in the
past, and has a history of FNS concerns with its WIC program. The State uses paper food
instruments.
Georgia - We selected Georgia due to Congressional interest in its high food costs.
Georgia had the highest food cost per participant of the 50 States and the District of
Columbia.
Kentucky - Kentucky had the lowest average monthly food costs per participant in the
Southeast region. The State uses an EBT on-line system, which means the State receives
transactional data in real time.
Louisiana - Louisiana had the highest average monthly food costs per participant of all
the States, not including the Indian Tribal Organizations, in the Southwest region. The
State uses paper food instruments.
New York - New York had the highest average monthly food costs per participant of all
of the States, not including Indian Tribal Organizations, in the Northeast region. The
State uses paper food instruments.
Ohio - Ohio had the lowest average monthly food costs per participant in the Midwest
region. Ohio made extensive use of rebates on other food items. Ohio uses paper food
instruments.
Puerto Rico - Puerto Rico had the second highest average monthly food costs per
participant of all 90 State agencies, including the Indian Tribal Organizations. OIG
received reports of vendor fraud and overcharging of participants, as well as a high
number of authorized vendors who derive more than 50 percent of their business from
WIC. These vendors account for over 80 percent of WIC redemptions. Puerto Rico uses
paper food instruments.
Texas - Texas had the lowest average monthly food costs per participant in the nation.
The State uses an EBT off-line system, which means they gather data on a daily basis, but
transactions are not monitored in real time.

AUDIT REPORT 27004-0001-22

To accomplish our objectives, we conducted interviews with agency officials and gathered and
analyzed documents within FNS’ Headquarters, regional offices, and States selected for review.
At FNS Headquarters, we:
·
·
·
·
·
·
·

Determined the cost factors used in determining each State’s food costs per participant
and average food costs.
Gained an understanding of FNS’ oversight responsibilities.
Obtained and reviewed WIC funding levels for FYs 2010 to 2012.
Identified State agencies that experienced food cost problems since FY 2010 and MEs
conducted since FY 2010.
Reviewed ME reports and correspondence between FNS and State agencies concerning
WIC program operations in States.
Gained an understanding of the integrity profile database of vendors, which keeps track
of high-risk vendors.
Obtained data and supporting documentation on the factors that influence food costs for
each State we selected for review.

At the FNS regional offices, we:
·
·

·
·
·
·

Conducted fieldwork at FNS’ Southeast and Southwest Regional Offices.
Interviewed officials at four other regional offices by conference call. We discussed
possible deficiencies and potential recommendations for FNS’ oversight of WIC food
costs.
Conducted follow-up fieldwork at the Southeast regional office in order to discuss
corrective actions in Georgia.
Developed and distributed a State questionnaire with various questions relating to cost
containment procedures and policies.
Evaluated oversight activities for monitoring food costs.
Obtained the status of EBT implementation milestones for States that have yet to
implement EBT.

At the eight State agencies, we:
·
·
·
·
·

·
·
·

Conducted interviews with officials responsible for the WIC program.
Reviewed State rebate reports for October 2009 through April 2013.
Interviewed staff that select and create food instruments.
Obtained and analyzed procedures related to high risk vendors.
Discussed the vendor peer group system, competitive price criteria, and setting maximum
allowable reimbursement levels for each peer group. Evaluated the process for setting
competitive price criteria for each vendor peer group.
Identified measures State agencies take for competitive pricing structures, and evaluated
the appropriateness of the measures.
Obtained redemption totals for FYs 2011, 2012, and 2013 for each group of vendors.
Reviewed cost containment measures and MEs.

AUDIT REPORT 27004-0001-22

19

·
·
·
·
·
·

Met with officials and obtained and analyzed information regarding investigations, in
order to determine their impact on food costs.
Determined how State officials set the maximum allowable reimbursement levels.
Distributed WIC questionnaires that included questions on State cost containment
measures.
Obtained and reviewed the structure and controls of each State’s Management
Information Systems.
For those States that have implemented EBT (Texas and Kentucky), we obtained and
reviewed EBT procedures and policies, and reviewed transactions on-line.
Obtained, reviewed, and analyzed the procedures for establishing peer groups and food
prices, cost containment measures, controls over high-risk vendors and above 50-percent
vendors, and the potential impact of fraud and investigations.

We conducted this audit in accordance with generally accepted government auditing standards.
These standards require that we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our findings and conclusions based on our audit
objectives. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions.

20

AUDIT REPORT 27004-0001-22

Abbreviations 
CFR ........................................Code of Federal Regulations
EBT ........................................Electronic Benefit Transfer
FNS ........................................Food and Nutrition Service
FY ..........................................Fiscal Year
GAO .......................................Government Accountability Office
HHS........................................Department of Health and Human Services
ME..........................................Management Evaluation
OIG ........................................Office of Inspector General
OMB ......................................Office of Management and Budget
SNAP .....................................Supplemental Nutritional Assistance Program
WIC ........................................Special Supplemental Nutrition Program for Women, Infants, and
Children

AUDIT REPORT 27004-0001-22

21

Exhibit A:  Summary of Monetary Results 
The table below shows the amount the agency should save once the OIG recommendations are
implemented.
Finding
Number

Description

1

Savings to be realized
from the implementation
of the recommended
improvements to the ME
process.

1

The difference between
FNS’s calculated
overpayments as a result
of identified issues in the
State of Georgia and the
settlement amount.

30

Amount

Category

Funds to be put to Better Use $19,789,789 Management or Operating
Improvement Savings30

$9,189,789 Questioned Costs-No Recovery31

As stated in the Finding, implementing the recommendation for this Finding should save the agency this type of
expense in the future.
31
As the settlement should result in a return of $10.6 million in estimated remuneration, the remaining
$9,189,789 million was not recovered by the agency. However, we are not recommending recovery of this amount
as the settlement was agreed to by both parties and adjudicated.

22

AUDIT REPORT 27004-0001-22

Exhibit B:  FY 2012 Food Costs for Three Sampled State Agencies 
that Had Rebates from Foods Other than Infant Formula 
The table below shows the average monthly amounts per participant that three sampled State
agencies received through rebates for infant formula to compare to the amount they received
through rebates for infant cereal and baby food.
Average Monthly Amounts per Participant
State Agency (Rank) 32

Net Food
Cost

Infant
Formula
Rebates

Infant Cereal & Baby
Food Rebates

Ohio (6)

$36.02

$17.26

$0.89

New York (50)

$55.02

$17.83

$0.38

Texas (1)

$29.30

$16.97

$0.14

Average For The three States

$37.96

$17.27

$0.33

32

Rank based on average monthly food costs per participant for the 50 States and the District of Columbia with
1 being the lowest and 90 being the highest.
AUDIT REPORT 27004-0001-22

23

Exhibit C:  FY 2012 Food Costs and Participation for 10 Surveyed 
State Agencies that Had Rebates from Foods Other than Infant 
Formula
The table below shows the average montly amounts per participant that three sampled State
agencies received through rebates for infant formula to compare to the amount they received for
infant cereal and baby food.

State Agency (Rank)

33

Massachusetts (18)

Average
Monthly
Participation

Average
Monthly
Net Food
Costs

Average Monthly per Participant
Net Food
Cost

Infant
Formula
Rebates

Infant
Cereal &
Baby Food
Rebates

122,568

$5,004,493

$40.83

$15.79

$0.70

Connecticut (45)

56,584

$2,952,917

$52.19

$13.53

$0.67

Maine (20)

25,537

$1,049,820

$41.11

$13.49

$0.63

118,585

$5,080,558

$42.84

$15.23

$0.60

New Hampshire (4)

16,299

$561,571

$34.45

$16.49

$0.59

West Virginia (29)

47,891

$2,107,536

$44.01

$18.37

$0.27

146,272

$6,564,813

$44.88

$17.04

$0.27

District of Columbia (30)

16,474

$725,202

$44.02

$24.36

$0.27

Delaware (19)

22,214

$907,440

$40.85

$18.38

$0.26

New Jersey (47)

172,333

$9,085,131

$52.72

$15.17

$0.26

TOTAL

744,757

$34,039,481

$45.71

$16.00

$0.44

Wisconsin (25)

Maryland (32)

33

Rank based on average monthly food costs per participant for the 50 States and the District of Columbia with
1 being the lowest and 90 being the highest.

24

AUDIT REPORT 27004-0001-22

Agency's Response 

USDA’S
FOOD AND NUTRITION SERVICE
RESPONSE TO AUDIT REPORT

AUDIT REPORT 27004-0001-22

25

United States
Department of
Agriculture
Food and
Nutrition
Service

3101 Park
Center Drive
Room 712

DATE:

September 17, 2014

AUDIT
NUMBER:

27004-0001-22

TO:

Gil H. Harden
Assistant Inspector General for Audit

FROM:

/s/ (for): Audrey Rowe
Administrator
Food and Nutrition Service

SUBJECT:

States’ Food Costs for the Food and Nutrition Service’s Special
Supplemental Nutrition Program for Women, Infants, and Children
(WIC Program)

Alexandria, VA
22302-1500

This letter responds to the official draft report, dated August 18, 2014, for audit report
number 27004-0001-22, States’ Food Costs for the Food and Nutrition Service’s
Special Supplemental Nutrition Program for Women, Infants, and Children (WIC
Program). Specifically, the Food and Nutrition Service (FNS) is responding to the
general content, Section 3: WIC Food Cost Containment Policies, and the six
recommendations in the report.
FNS General Response to the audit report:
The success of the WIC Program is measured by the health outcomes of program
participants. Food packages align with the Dietary Guidelines for Americans and
infant feeding practice guidelines of the American Academy of Pediatrics. They
provide supplemental foods designed to meet the special nutritional needs of lowincome pregnant, breastfeeding, non-breastfeeding postpartum women, infants and
children up to five years of age who are at nutritional risk. WIC participation has been
associated with improved fetal development, reduced incidence of low birth weight and
short gestation for infants, and with reduced incidence of anemia, and improved dietary
intake for children and pregnant and postpartum women. Good stewardship of Federal
funds should not be based solely on the costs of goods and services but on their value
relative to their costs in achieving the Program’s mission and goals.
FNS would like to highlight the WIC Program’s long history as an effective and
efficient government program. Since 1990, the Thrifty Food Plan food inflation has
increased by 85%, while WIC average food package cost has increased by 49%.
During fiscal year (FY) 2013, the Food and Nutrition Service (FNS) provided extensive
technical assistance to State agencies to help them lower the WIC Program’s food cost.
As a result, State agencies have more cost-effective vendor peer groups, participants

are purchasing more reasonably priced food items, and WIC rebates are higher and net
food costs are lower. The FY 2013 average food package cost per participant ($43.26)
was 3.86% lower than the FY 2012 food package cost ($45.00). Every year, FNS works
with all 90 State agencies to ensure that sufficient funds are available to serve all eligible
women, infants and children who seek program benefits and services.
FNS response to Section 3: WIC Food Cost Containment Policies
Finding 3: FNS Has Not Taken Effective Steps to Expand Cost Containment
Measures Used Effectively by Some State Agencies, does not acknowledge the steps
FNS has taken to expand the use of cost containment practices to nearly all WIC State
agencies. Over the past 30 years, FNS and State agencies have worked together to
develop and implement a number of successful cost containment measures. During the
1980s and 1990s, State agencies implemented an infant formula rebate system that
significantly reduces the need for annually appropriated Federal funds. During the 2000s,
FNS promulgated new food delivery regulations to strengthen vendor selection and
management, including a requirement for State agencies to limit the amounts they pay
retail grocery stores for WIC foods based on their vendor peer group’s prices. More
recently, State agencies have been making administrative adjustments to their food
packages and authorized food lists to ensure that participants purchase more reasonably
priced food items. In response to a May 2013 survey conducted by FNS, all State
agencies, except for two extremely small Indian Tribal Organizations (ITO) State
agencies, reported implementing one or more administrative adjustments to their food
packages or authorized food lists to reduce their food costs. A majority of State agencies
have made at least four of the seven adjustments included in the survey.
In the first paragraph of this section, OIG states: “FNS officials stated they need
additional analysis to mitigate concerns that implementing these measures will cause
some participants to avoid buying an item, which could affect the nutritional aspect of the
program. We note that 42 of the 79 State agencies that responded to the OIG survey have
some kind of least expensive brand policy in place and 16 have contracted for rebates on
infant cereal, baby food, or both while still nutritionally serving their participants.27 For
example, Texas has a least expensive brand policy and a rebate contract on infant cereal
that contributes to its success of having one of the lowest monthly average food costs per
participant in the nation for FYs 2012 and 2013.” (emphasis added). In response to FNS’
May 2013 survey, several State agencies indicated they had to reverse adjustments made
to their food lists when they determined that the much lower pick-up rates by participants
of the food items (e.g., least expensive brand) undermined the nutritional goals of the
WIC Program. If participants do not pick up food items, it reduces both the nutritional
benefits and food costs of the WIC Program.
In the section FNS Has Not Taken Effective Steps to Analyze and Expand the Least
Expensive Brand Policies, the OIG does not provide clear evidence that least expensive
brand measures would be the most effective cost containment practice in all State
agencies.

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FNS would like to clarify that: 1) There are significant differences in the retail grocery
market and variety and availability of brands across the country; 2) The administrative
costs of implementing least expensive brand measures in some State agencies may
outweigh their food costs savings; and 3) State agencies may have already implemented
the most efficient cost containment measures based on the capabilities of their
management information systems, food instrument systems, and their retail grocery
markets. FNS provides technical assistance to State agencies in implementing various
administrative adjustments to authorized product lists, including: 1) Adding generic or
store brands; 2) Eliminating national brands; 3) Reducing number of brands and/or
flavors; 4) Limiting to lowest cost item; and 5) Limiting package size. The OIG’s
statement in the opening paragraph that, “42 of the 79 State agencies that responded to
the OIG survey have some kind of least expensive brand policy in place,” points to the
success of FNS in expanding least expensive brand measures to a majority of State
agencies.
In the final section included in Finding 3, FNS Has Not Taken Effective Steps to
Analyze and Expand Rebate Use Among State Agencies, the OIG offers no support
that expanding rebates on foods other than infant formula would provide “significant
savings.” In the opening paragraph of this section, the OIG states: “10 agencies reported
rebate amounts of an estimated $3.9 million from foods other than infant formula in FY
2012.” Including the three State agencies in OIG’s sample in the second paragraph, the
total savings OIG found from rebates on foods other than infant formula was about $11
million, which equates to about 0.2% savings in annual FY 2012 food costs. Since 1985,
FNS has been working with State agencies on expanding rebates on foods other than
infant formula with very little success. The administrative costs of procuring and
maintaining these contracts often outweigh their savings. With limited competition
among these foods, manufacturers have not extended some rebate contracts, have filed
protests in response to bid solicitations, or have not met technical requirements. Some of
the recent rebate bid solicitations on foods other than infant formula have resulted in
cancellation due to numerous protests from manufacturers, State alliances falling apart,
and lack of bids from manufacturers.

FNS response to the report’s recommendations:
OIG Recommendation 1:
Develop a national cost containment strategy for the Special Supplemental Nutrition Program
for Women, Infants, and Children (WIC) program. This should include, at a minimum,
guidance to State agencies on the deadlines to correct issues identified during management
evaluations (ME) reviews, and the enforcement actions FNS will take if the deadlines are
missed.

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Food and Nutrition Service Response:
FNS has a national WIC cost containment strategy that requires State agencies to
implement a vendor peer group system, competitive price criteria, and allowable
reimbursement levels in a manner that ensures the WIC Program pays authorized vendors
competitive prices for supplemental foods. It also requires State agencies to ensure
vendors that derive more than 50 percent of their annual food sales revenue from WIC
food instruments do not cause higher food costs for the program than do other vendors.
All of these requirements are codified in program regulations (7 CFR 246.12). FNS also
created a new WIC Program Integrity Monitoring Branch which is tasked with
developing consistent tools, resources and solutions to program integrity challenges so
that State agencies can correct issues identified in management evaluation (ME) reviews
and other oversight reports. FNS is developing a system to analyze and use the findings
from the ME reviews and other data sources to identify State agencies with deficient
vendor management practices and provide targeted Technical Assistance to address the
findings.
Estimated Completion Date: June 30, 2015

OIG Recommendation 2:
In collaboration with the Department of Health and Human Services (HHS), clarify what
coordination between WIC State agencies and Medicaid State offices means with regard
to the provision of exempt infant formula and WIC-eligible medical foods to mutual
program participants. Record this clarification between HHS and FNS in an appropriate
decision document.
Food and Nutrition Service Response:
FNS will consult with HHS on the provision of exempt infant formulas and WIC-eligible
medical foods to mutual program participants. The intent of the discussions will be to
learn whether the basis for WIC Policy Memorandum #2001-6, Medicaid Primary Payor
for Exempt Infant Formulas and Medical Foods, remains valid, and to gain a better
understanding of how State WIC and Medicaid Programs can interact. Following
discussions with HHS, which are targeted for completion by December 2014, FNS will
update and reissue the policy memorandum to provide guidance to WIC State agencies
about coordination with Medicaid on the provision of exempt infant formulas and WICeligible medical foods to mutual program participants, including information on primary
payer for these products.

Estimated Completion Date: June 30, 2015

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OIG Recommendation 3:
Provide technical assistance to WIC State agencies to assist in their coordination efforts,
including sharing best practices from WIC State agencies that have successfully coordinated
with Medicaid for the provision of exempt infant formula and WIC-eligible medical foods.

Food and Nutrition Service Response:
FNS has initiated work on technical assistance for WIC State agencies that will assist in
their coordination efforts with Medicaid. In January 2014, FNS held discussions with
WIC State agencies that have successfully coordinated with Medicaid for reimbursement
of exempt infant formulas and WIC-eligible medical foods to obtain useful tips and
lessons learned from their coordination efforts. FNS plans to continue similar
discussions with WIC State agencies that have successfully coordinated with Medicaid
using a referral process, such that mutual participants are referred to Medicaid for the
provision of these products. The information obtained from State discussions will form
the basis of technical assistance provided to all WIC State agencies. The discussions
with HHS will also help inform technical assistance.
Estimated Completion Date: September 30, 2015

OIG Recommendation 4:
Develop and issue guidance to State agencies for implementing the best cost containment
practices available to reduce food costs.

Food and Nutrition Service Response:
FNS concurs with this recommendation. Guidance will be developed using existing State
agency practices and will be made available to all State agencies.
Estimated Completion Date: April 30, 2015

OIG Recommendation 5:
Request that State agencies provide FNS with an analysis of implementing the available cost
containment measures to reduce food costs.

Food and Nutrition Service Response:
FNS concurs with this recommendation. FNS will request State agencies submit an
analysis of implementing available cost containment measures to reduce food costs.
Estimated Completion Date: September 30, 2015
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OIG Recommendation 6:
Conduct a study that examines the methods of implementing various cost containment
measures and their relative effectiveness.

Food and Nutrition Service Response:
FNS concurs with this recommendation. In addition to FNS studies, we rely on the
USDA Economic Research Service (ERS) for current program research. In response to
this OIG recommendation, FNS is working with ERS on its update of the 2005 report,
Interstate Variation in WIC Food Package Costs: The Role of Food Prices, Caseload
Composition, and Cost-Containment Practices. This study will examine the degree to
which food prices, caseloads, and the implementation of various cost containment
measures influence in State agencies’ food package costs.
Estimated Completion Date: September 30, 2015

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To learn more about OIG, visit our website at

www.usda.gov/oig/index.htm

How To Report Suspected Wrongdoing in USDA Programs
Fraud, Waste and Abuse
e-mail: USDA.HOTLINE@oig.usda.gov
phone: 800-424-9121
fax: 202-690-2474
Bribes or Gratuities
202-720-7257 (24 hours a day)

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