Special Supplemental Nutrition Program for Women, Infants and Children (WIC): Vendor Cost Containment, 71708-71731 [05-23365]

Agencies

• DEPARTMENT OF AGRICULTURE
• Food and Nutrition Service

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



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Part III





Department of Agriculture





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Food and Nutrition Service



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7 CFR Part 246



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

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

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DEPARTMENT OF AGRICULTURE

Food and Nutrition Service

7 CFR Part 246

RIN 0584-AD71


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

AGENCY: Food and Nutrition Service, USDA.

ACTION: Interim rule.

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

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

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

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

SUPPLEMENTARY INFORMATION: 

Executive Order 12866

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

Regulatory Impact Analysis

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

Need for Action

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

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

Benefits

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

Costs

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

Regulatory Flexibility Act

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

Public Law 104-4

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

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Executive Order 12372

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

Federalism Summary Impact Statement

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

Prior Consultation With State Officials

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

Nature of Concerns and the Need To Issue This Rule

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

Extent to Which We Will Meet Those Concerns

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

Executive Order 12988

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

Civil Rights Impact Analysis

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

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

Paperwork Reduction Act

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

[[Page 71712]]

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

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

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

Government Paperwork Elimination Act

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

Good Cause Determination

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

Background

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

[[Page 71713]]

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

Overview of the New Vendor Cost Containment Requirements

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

Implementation of This Interim Rule

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

[[Page 71714]]

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

Vendor Peer Group System

General Requirement

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

Specific Requirements

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

[[Page 71715]]

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

Identifying Above-50-Percent Vendors

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

[[Page 71716]]

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

Acceptable Vendor Peer Group Methodologies

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

Exemptions From Peer Group Requirements

    In accordance with section 17(h)(11)(A)(ii) of the CNA, the interim 
rule (Sec.  246.12(g)(4)(v)) establishes two conditions under which FNS 
may grant a State agency an exemption from the peer group requirements. 
The first condition applies to a State agency that elects not to 
authorize any above-50-percent vendors. The State agency must 
demonstrate to FNS that establishing a vendor peer group system would 
be inconsistent with efficient and effective operation of the program, 
or that its alternative cost containment system would be as effective 
as a peer group system.
    The second condition for an exemption applies to a State agency 
that authorizes above-50-percent vendors. The WIC redemptions of above-
50-percent vendors authorized by the State agency must be less than 
five percent of the State agency's total WIC redemptions (dollars) in 
the year preceding a year in wh