N. Issue: The Potential Impact of a Flat, Combined, Regulated Federal
Order and Compact Over-Order Price on the Women, Infants and Children
Special Supplemental Nutrition Program of the United States Child
Nutrition Act of 1966

    Section 10 of the Compact sets forth a nonexhaustive list of issues
that the Commission may, in its discretion, address in a Compact over-
order price regulation. Subsection 10 therein provides that a price
regulation may contain ``[p]rovisions for reimbursement to participants
of the Women, Infants and Children Special Supplemental Food Program of
the United States Child Nutrition Act of 1966.'' (WIC Program).
    The Commission has been most concerned from the outset of its
regulatory process with ensuring that this program is not adversely
affected. Accordingly, the Commission sought, and received, testimony
and both individual and joint written comments from each of the state
WIC directors addressing the potential consequences of an over-order
price regulation on the administration of the WIC Program.
    The Commission is particularly impressed with the expertise and
knowledge of these witnesses regarding the administration of the
program. In light of the absence of any comments opposing the proposals
set forth in the joint WIC directors' comments, the Commission hereby
adopts that written statement, set forth in its entirety below.

About the WIC Program

    The Special Supplemental Nutrition Program for Women, Infants and
Children (WIC) is a unique health and nutrition program serving women
and children with--or at risk of developing--nutrition-related health
problems. WIC provides access to healthcare, free nutritious food, and
nutrition information to help keep low to moderate income pregnant
women, infants and children under five healthy and strong.
    WIC provides a monthly `prescription' for nutritious foods tailored
to supplement the individual dietary needs of each participant. Foods
include milk, cheese, eggs, cereal, fruit juice and peanut butter.
Included foods are specifically chosen to provide high levels of
protein, iron, calcium, and Vitamins A and C--nutrients that have been
scientifically shown to be lacking or needed in extra amounts in the
diets of the WIC-eligible population. These five nutrients--plus
calories and other essential nutrients provided by the WIC food
prescription--are critical for good health, during periods of growth
and

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development. Milk and other dairy products play a large and important
role in every participant's food package. WIC also distributes coupons
for fresh produce--redeemable at local farmers' markets--in conjunction
with State Departments of Agriculture.
    WIC is a prevention program designed to influence lifetime
nutrition and health behaviors. Ongoing nutrition education--the
centerpeice of WIC--is designed to ensure that program participants
continue to make healthy choices at the grocery store even when they
are no longer eligible.

WIC Works

    WIC is widely acknowledged to be effective in the prevention of
immediate health problems and in the improvement of long-term health
outcomes. More than 70 evaluation studies have demonstrated the
effectiveness of WIC and documented medical, health and nutrition
successes for women, infants, and children:
    <bullet> Women participating in the WIC Program have improved
diets, received prenatal care earlier and have improved pregnancy
outcomes
    <bullet> Infants born to WIC mothers have better birth weights,
larger head size, and are less likely to be premature
    <bullet> WIC infants and children consume more iron, vitamin C and
other nutrients, resulting in improved growth and nutritional status
    <bullet> Children enrolled in WIC are more likely to have regular
medical care and immunizations, and demonstrate better cognitive
performance
    <bullet> WIC families buy more nutritious foods than non-WIC
families.
    And WIC saves money! Studies have also shown that WIC is cost
effective. Every WIC dollar spent on pregnant women produces $1.92 to
$4.21 in Medicaid savings for newborns and their mothers.

How WIC Works

    The WIC Program is a Federally funded program carried out according
to provisions of the Federal Child Nutrition Act. The Program is funded
through the Food and Consumer Service of the United States Department
of Agriculture (USDA).
    The Program is administered on the local level by State WIC
Programs in the Connecticut, Maine, Massachusetts, New Hampshire, Rhode
Island, the Vermont State Departments of Public Health (the States).
State funds are also provided in Massachusetts. Participants are issued
WIC checks or vouchers at local agencies for WIC authorized foods. The
checks or vouchers--which do not have a predetermined value--are
redeemed at authorized retail stores at current store prices in
accordance with posted prices. The checks are processed through the
banking system for reimbursement, except in New Hampshire where
vouchers are paid through a state accounting system. Prepayment edits
are performed on each check to ensure that specific food purchasing,
pricing and payment requirements are met.
    The average number of women and children provided WIC benefits and
services in August, 1996 in the New England States was 212,760--
individual State WIC participation was: Connecticut 47,673,
Massachusetts 99,643; Maine 20,243; New Hampshire 14,700; Rhode Island
17,360; and Vermont 13,141 (Final August, 1997 FSC 298 Reports). These
numbers do not include infants also served by the WIC Program.
    WIC is not an entitlement program. As such, the number of
participants that WIC is able to serve at any time is dependent upon
availability of funds from Federal and State sources, and the costs of
WIC food items. The national appropriation for WIC is capped by
Congress. The amount of USDA funding each State received is determined
through complex formulae taking into account such factors as the number
of people served and the funding level of the previous year. The grant
determines the number of people who can be serviced--not the number of
people in need.
    Since the amount of funds is fixed, any increase in the price of
WIC foods has the effect of reducing the number of women and children
the available grant dollars can serve. USDA estimated that there are
9.4 million women, infants, and children in the US who meet WIC's
income eligibility guidelines (185% of the Federal poverty level.) The
national WIC fiscal year 1997 Federal appropriation is approximately $4
billion. This sum would serve only about 5.5 million at full retail
prices, about 60% of the eligible persons.
    All the States have instituted measures to stretch food funds to
the maximum, including restrictions on container size, brands and
product price, requiring least expensive brands, competitive store
selection procedures, and manufacturers' rebates on infant formula and
infant cereal. Nationally, these measures have brought over $1 billion
in savings, which are then used to provide services to an additional
1.9 million needy mothers and children. In New England, over 75,000
women and children receive WIC services as a direct result of these
cost savings measures, the most significant of which are the result of
cooperative projects of State WIC directors working together on an
interstate basis.
    Still, more than 20% of eligible women and children remain
unserved. WIC's current funding is estimated to be $100 million short
for this year, with several States reducing caseloads. Funding
prospects for next year are not any better, and State WIC programs in
New England are not eligible to receive funding to offset the impact of
an Over-Order Price Regulation.
    As such, it is imperative that WIC's funds be held harmless from
adverse impact due to a Regulation.

The WIC Program and the Milk Over-Order Price Regulation

    The WIC Program recognizes the important role that farms and
farmers play in New England, including ensuring an ongoing supply of
fresh milk at competitive prices, keeping important industry--and
jobs--in our area, and providing open space that increases quality of
life for all New England residents. The WIC Program also understands
the need for dairy farmers' relief.
    WIC is a major purchaser of locally produced dairy products in the
New England region. Because, however, WIC recognizes the importance of
dairy products at critical times of child development, and therefore,
must continue its milk purchases, the Program must be concerned with
the fact that food cost increases have a direct, inverse effect on the
number of participants WIC is able to serve. An increase in milk prices
is of particular concern because of the large quantity of milk WIC
purchases each month.
    Milk purchases are some 35% of WIC food dollars spent by
participants. The number of quarts of Class 1 fluid milk purchased by
WIC participants in New England in August 1996 was 3,779,015, which
represents approximately 3.7% of the total amount sold by New England
producers in the Region. WIC Class 1 fluid milk purchases in quarts by
State were: Connecticut 1,100,000; Massachusetts, 1,481,163; Maine
457,852; New Hampshire 230,000; Rhode Island 300,000; and Vermont
210,000.
    Given current WIC participation levels, a 1 cents per quart
wholesale price increase in Class 1 Fluid milk reflected at the retail
level would translate into an increase in monthly WIC program
expenditures of $37,790 for New England as a whole. This increase would
necessitate a decrease in monthly program funded participation of
1,260. A 5 cents per quart milk retail price increase would result in
an increase in monthly

[[Page 23052]]

WIC expenditures of $189,950 and a participation decrease of 6,302.
    In order to maintain services to eligible persons, without
compromising the nutritional health effectiveness of its food benefits
if food costs rise, WIC managers must achieve offsets to increased food
benefit expenditures and use those offsets to serve a significant
portion of the eligible women and children in need. Further, if the
States in New England must reduce or limit participation levels due to
higher Class 1 fluid milk costs, there will be negative impact on
Federal WIC funding to the New England Region--and on the amount of
milk purchased.
    As important, low income women and children who WIC is not able to
serve because of increased food costs will not receive the essential
medical, health and nutritional benefits of WIC participation. It is
critical, then, that the intended benefits to the regional economy and
the continuation of dairy farming in New England not accrue at the cost
of a significant risk to maternal and child health stemming from
Regulation-related costs to WIC.

Retail Price Impact of An Over-Order

    The Northeast Interstate Dairy Compact enables participating States
collectively to regulate the New England farm price for Class 1 fluid
milk, thereby enhancing and stabilizing dairy farmer income. This
Regulation may have the effect of increasing the price paid for Class 1
fluid milk by WIC participants at retail stores, if the regulated farm
price increase translates directly into an increase at the retail
level. Other goals are to stabilize processor and retailer costs and
consumer prices.
    Concomitantly, the findings of Hansen et al \108\ with regard to
the variability of milk farm prices and asymmetric price transmission
are the basis for the theory that an Over-Order Price Regulation of
Class 1 fluid milk which brings about stable farm prices for Class 1
fluid milk will result in price stability--and potential price
decreased--in Class 1 milk at the retail level for consumers over a
period of time. Testing this concept, presented by US Senator Patrick
Leahy of Vermont in public comment before the Northeast Dairy Compact
Commission, would appear viable with regard to the impact of a
Regulation on consumer milk prices.
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    \108\ Hahn et al, ``Determinants of the Farm-to Retail Milk
Price Spread'', Agriculture Information Bulletin #693, March 1994.
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Demonstration Period and Continuing Assessment of Impact

    The New England State WIC Programs understand that the Compact is
considering an Over-Order Price Regulation on Class 1 fluid milk for a
specific period of time. The State directors believe it appropriate
that any initial Regulation be in effect for a limited period, such as
six months. A potential outcome of such a demonstration could provide
evidence which supports that milk farm price stability due to a
Regulation will result in price stability, and perhaps decreases and
related savings, on Class 1 fluid milk purchases by consumers--
including WIC participants--over time.
    To measure and document the impact of a Regulation, the Commission
will need to develop systems and methodologies to gather, track and
analyze Class 1 fluid milk retail price data in order to accurately
assess and evaluate any Regulation-related adverse or beneficial impact
on costs to consumers and WIC, and to make related adjustments to
assure that the public interest is served and consumers and the WIC
Program and its participants are protected. Such an analytical
framework should include information which is appropriate to milk
purchasing and pricing at both the New England Regional and individual
State levels--including each State's WIC programs--comprising
representative samples of market areas and retail store types,
proportion of sales by package size (quarts, half falls and gallons),
and the degrees to which retail price fluctuations differ for package
sizes in relation to each other, since data reflect WIC operations and
purchasing patterns in each State. WIC participants often purchase 2
half gallon containers, and the majority do not have ready access to
supermarkets, especially for frequent purchase of a perishable product
such as milk.
    As important, analysis should include development of a baseline by
which changes over time will be measured, as well as evaluation of the
relationship between changes in the Regulation and Class 1 fluid milk
prices at retail levels over time and the cost impact to WIC. WIC does
not specify the fat content of milk purchased. Tracking and measuring
product differentials based on fat content; therefore, it is not
necessary to any WIC cost impact methodology.

Post Demonstration Reimbursement System

    Given such analysis and evaluation and sufficient evidence,
Commission reimbursement to WIC could be then based upon the Over-Order
Price Regulation and--specifically, on the amount of any portion of the
retail cost for Class 1 fluid milk to WIC attributable to the
Regulation which would encompass and respond to individual state WIC
programs.

Demonstration Period Reimbursement System

    WIC recognized, however, that the theory and data which may justify
the adoption of a demonstration period Regulation does not provide
demonstrated, proven assurance that there would be no cost increase to
WIC on its Class 1 fluid milk purchases. Notwithstanding any public
interest or other justification for a Regulation, in the absence of
such current evidence that a Regulation would be either cost neutral or
beneficial to WIC's present year funding, the Commission should provide
a way to protect and hold harmless the WIC Program--and its
participants--in the New England States from potential increases in the
Class 1 fluid milk retail price during a period of a demonstration
Over-Order Price Regulation, for at least the period of any
demonstration Regulation. It is clearly a part of the public interest
under any Regulation to protect WIC's limited funds and the full number
of women and children WIC would otherwise serve. WIC cannot support a
Regulation which would leave women's and children's health and
nutritional status at risk because appropriated WIC funds were diverted
to pay higher milk prices, rather than remaining with the WIC Program
to provide benefits to participants.
    As such, the State WIC Programs in New England propose a method by
which the WIC Program will be held harmless from any impact related to
a demonstration of a Compact Over-Order Price Regulation for Class 1
fluid milk. The Commission would reimburse each respective State WIC
Program. The amount of reimbursement would be based on (1) the
quantities of milk purchased with WIC checks and (2) the amount of any
Compact Over-Order Price Regulation.
    This would allow the Commission to implement a Compact
demonstration Regulation, providing essential relief to dairy farmers,
and WIC could continue to serve the maximum number of participants in
each State allowed by the grants during an Over-Order demonstration.
This would also allow the Commission a period of time to develop a more
finely attuned analysis of the impact of the Regulation, and the
develop methods to most accurately

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ascertain any cost to WIC and the most appropriate reimbursement
levels.
    The principles of the interim mechanism proposed by the State
directors are:
    1. The Commission should establish a Reserve Account, to assure
that funds are on hand for timely reimbursement by the Commission to
the States. This account will be funded from the Compact over-order
price regulation based on the recent percentage of total milk sold in
New England purchased by WIC participants.
    2. Any Commission Over-Order Price Regulation in a given month will
result in a cent for cent reimbursement for Class 1 fluid milk paid for
by each State WIC Program in that month. The amount of reimbursement
will be based on the quantities of milk actually paid for by each WIC
state. Funds in the Reserve Account will only be drawn by individual
States in proportion to the Over-Order Regulation. Unused funds would
return to the Commission.
    3. Each State WIC Program will invoice the Commission on a monthly
basis for reimbursement due. When the refund amounts are small,
individual States may elect to bill up to 3 months in one invoice to
avoid unnecessary administrative costs for both parties.

Formal Agreement

    Implementation will take place under the terms and conditions of a
formal agreement between the Commission and the States, entered into by
the State WIC Programs acting as a single entity. Such an agreement
must contain the above provisions for interim reimbursement
determination and procedures, continuing assessment of impact, how the
parties will change to any post demonstration reimbursement system,
conditions for mutual agreement for modifications to the agreement,
term of the agreement and conditions for mutual or either party
termination prior to expiration of the agreement.
    The above proposal by the State WIC Programs in New England and any
subsequent agreement are subject to approval by the Food and Consumer
Service of the USDA. The State WIC Programs will collaborate with the
Compact Commission and USDA Food and Consumer Service to develop and
implement agreement provisions and operating procedures for any
reimbursement system which meet the requirements of Compact legislation
and Federal WIC guidance, rules and regulations.