Special Supplemental Nutrition Program for Women, Infants and Children (WIC): Vendor Cost Containment, 51745-51759 [E9-24143]

Agencies

• DEPARTMENT OF AGRICULTURE
• Food and Nutrition Service

[Federal Register Volume 74, Number 194 (Thursday, October 8, 2009)]
[Rules and Regulations]
[Pages 51745-51759]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-24143]


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DEPARTMENT OF AGRICULTURE

Food and Nutrition Service

7 CFR Part 246

[FNS-2009-0001]
RIN 0584-AD71


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

AGENCY: Food and Nutrition Service, USDA.

ACTION: Final rule.

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SUMMARY: This final rule adopts, with changes, an interim rule 
published on November 29, 2005 amending the WIC regulations. The final 
rule incorporates into program regulations new legislative requirements 
for vendor cost containment 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 final 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 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 (``above-50-percent vendors'') 
do not cause higher food costs for the program than do other vendors 
(``regular vendors''). The intent

[[Page 51746]]

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 November 9, 2009.

FOR FURTHER INFORMATION CONTACT: Debra Whitford, Chief, Policy and 
Program Development Branch, Supplemental Food Programs Division, Food 
and Nutrition Service, 3101 Park Center Drive, Room 522, Alexandria, 
Virginia 22302, (703) 305-2746.

SUPPLEMENTARY INFORMATION:

Executive Order 12866

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

Regulatory Impact Analysis Summary

    As required for all rules designated as Significant by the Office 
of Management and Budget, a Regulatory Impact Analysis was developed 
for the WIC Vendor Cost Containment Final Rule. A complete copy of the 
Impact Analysis is available by contacting the person indicated in the 
FOR FURTHER INFORMATION CONTACT section of this Preamble.

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, which amended the Child Nutrition Act (CNA). 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 above-50-percent vendors 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 the program pays 
competitive prices, this rule confirms the codification of the new 
statutory requirements in the interim rule for State agencies to use in 
evaluating vendor applicants' prices during the vendor selection 
process and when paying vendors for supplemental foods following 
authorization, with a few exceptions. However, in response to comments, 
the interim rule's requirement for weighting food instruments in 
quarterly cost neutrality assessments has been made optional in Sec.  
246.12(g)(4)(i)(D) of this final rule. Also, the requirement for 
recouping excess payments or terminating vendor agreements based on 
food instruments which had exceeded cost neutrality levels calculated 
during quarterly cost neutrality assessments, but were submitted for 
redemption within the maximum allowable reimbursement levels in effect 
at the time of redemption, has been removed from Sec.  
246.12(g)(4)(i)(D). Further, the final rule includes one new 
requirement based on the comments received; a sentence has been added 
to Sec.  246.12(g)(4) stating the State agency must inform all vendors 
of the criteria for peer groups, and must inform each individual vendor 
of its peer group assignment. This one new requirement is not expected 
to increase the administrative burden of State agencies since State 
agencies are already doing this, as indicated during the processing of 
the certification and exemption requests.
    While the Child Nutrition and WIC Reauthorization Act mandates that 
State agencies 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. The Food and Nutrition Service (FNS) 
considered using the interim rule to mandate specific means of 
developing peer groups, competitive price criteria and allowable 
reimbursement levels in order to ensure the outcome of this legislation 
was achieved. However, given the responsibility of the State agencies 
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, the interim 
rule provided State agencies with flexibility to develop their own peer 
groups, competitive price criteria and allowable reimbursement levels.
    The State agency vendor cost containment plans and exemption 
requests approved by FNS following the implementation of the interim 
rule reflected considerable diversity in peer group criteria, 
competitive price criteria, and allowable reimbursement levels. 
Paragraph 246.12(g)(4)(vi) of the interim rule required State agencies 
which authorized above-50-percent vendors to obtain certification for 
their vendor cost containment systems from FNS. Also, State agencies 
could seek an exemption from the requirement to establish peer groups 
under Sec.  246.12(g)(4)(v), from the requirements for a geographic 
peer group criterion, or for the use of more than one peer group 
criterion under Sec.  246.12(g)(4)(ii)(A). The peer group requirements 
applied to all State agencies, regardless of whether above-50-percent 
vendors were authorized. These vendor cost containment certification 
submissions and requests for exemption provided the data needed to 
determine whether State agency vendor cost containment systems actually 
reflected the flexibility intended by the interim rule. The following 
chart summarizes this data from the vendor cost containment plans 
submitted by the 32 State agencies which sought certification from FNS:

------------------------------------------------------------------------
                                                        Number of State
                                                      agencies using the
                                                          peer group
      Peer group criteria/reimbursement policy             criteria/
                                                         reimbursement
                                                            policy
------------------------------------------------------------------------
Geography/Population Density........................                  26
Number of Cash Registers............................                  11
Type of Ownership (e.g., Sole Proprietorship,                          3
 Corporate).........................................
Size (e.g., Square Footage).........................                   6
Type of Store (e.g., Small Neighborhood Store,                        11
 Chain).............................................
WIC Sales Volume....................................                  10
Separate Peer Groups for Supercenter Stores or                         9
 Commissaries.......................................
Separate Peer Groups for Above-50-Percent Vendors;                    13
 Paid Statewide Average.............................
Above-50-Percent Vendors in Same Peer Groups with                     16
 Regular Vendors; Paid Statewide Average............
Above-50-Percent Vendors in Same Peer Groups with                      3
 Regular Vendors; Paid Peer Group Average...........
------------------------------------------------------------------------


[[Page 51747]]

    Further, FNS granted exemptions from the peer group requirements in 
entirety to 28 State agencies which did not authorize above-50-percent 
vendors. In addition, FNS granted exemptions from the requirement for a 
geographic peer group criterion to all 10 State agencies which had 
requested such exemptions. Finally, FNS granted exemptions from the 
requirement to use more than one peer group criterion to both State 
agencies which had requested such exemptions; for both of these State 
agencies, the geographic peer group criterion is the only peer group 
criterion.
    Thus, the interim rule gave State agencies flexibility to design 
cost containment practices that would be effective in their own markets 
and would ensure adequate participant access. The final rule maintains 
this flexibility, while continuing to ensure that above-50-percent 
vendors do not result in higher costs to the program than regular 
vendors as required by the CNA.

Benefits

    The WIC Program will benefit from the provisions of this rule by 
reducing unnecessary food expenditures, thereby increasing the 
potential to serve more eligible women, infants, and children for the 
same cost. The rule should ensure that payments to vendors reflect 
competitive prices for WIC foods, particularly regarding above-50-
percent vendors. Previously, the WIC Program paid above-50-percent 
vendors more for supplemental foods than it paid other authorized 
vendors. Under the interim rule, State agencies that chose to authorize 
these vendors needed to demonstrate in their certification requests 
that payments to such vendors would not be higher on average per food 
instrument than payments to comparable vendors.
    FNS conservatively estimated that implementation of the interim 
rule would result in a cost savings of approximately $75 million 
annually, as discussed in the Regulatory Impact Analysis for the 
interim rule. As previously noted, one State agency has already 
reported that it has been able to serve more than 40,000 additional 
participants because of the savings resulting from implementation of 
the interim rule. However, due to other factors which impact on food 
costs, such as inflation in commodity prices, it is not possible to 
confirm with absolute certainty that food costs for the Program have 
declined because of the interim rule. Even so, FNS stands by its 
estimate of savings since it was based on a comparison of regular 
vendor prices and above-50-percent vendor prices before the interim 
rule, when the prices of above-50-percent vendors were usually higher 
than the prices of regular vendors.

Costs

    In order to comply with the interim rule, State agencies needed to 
make one-time changes in their vendor cost containment systems. Some 
State agencies were already in full or partial compliance with the 
rule, while others needed to demonstrate that they met the conditions 
for an exemption from all or some of the vendor peer group system 
requirements. As indicated by the State agency comments on the interim 
rule, many State agencies, particularly those that chose to authorize 
above-50-percent vendors, incurred additional costs and administrative 
burdens to achieve compliance with its provisions.
    Of the eleven WIC State agencies which submitted comments on the 
interim rule, nine addressed the administrative burden resulting from 
implementation of the interim rule. All nine of these State agencies 
stated that implementation of the interim rule had required a 
substantial increase in the administrative burden, citing particular 
requirements of the interim rule, including the requirements to weight 
food instrument redemption amounts in cost neutrality assessments; 
collect food prices from vendors at least every six months following 
authorization; document the above-50-percent vendor status for all 
vendors; document the above-50-percent vendor status for pharmacies; 
and to conduct quarterly cost neutrality assessments for State agencies 
which do not have automated systems for performing statistical 
analyses. The requirement in the interim rule for weighting food 
instrument redemption amounts for cost neutrality assessments has been 
made optional in this final rule, and requirement for collecting food 
prices from vendors at least every six months following authorization 
have been modified in this final rule to provide for exemptions.
    Also, FNS has provided State agencies with methodologies for 
reducing the administrative burden of identifying above-50-percent 
vendors and of the quarterly cost neutrality assessments. Over ninety 
percent of WIC vendors are also authorized by the Supplemental 
Nutrition Assistance Program (SNAP, formerly the Food Stamp Program). 
To assist the State agencies, FNS established a process for comparing 
WIC redemptions to SNAP redemptions; this process established that 
about 88 percent of authorized WIC vendors had greater SNAP redemptions 
than WIC redemptions. As a result, there was no need to obtain further 
documentation from these vendors, such as tax returns or other 
verifiable documentation, to establish whether more than 50 percent of 
a vendor's food sales were derived from WIC purchases. Further, the 
State agency workload for this redemption comparison process is 
negligible because FNS maintains the fully automated reporting process 
which matches the redemption data maintained by the WIC The Integrity 
Profile (TIP) and the SNAP Store Tracking and Redemption System (STARS) 
systems.
    One State agency commented that this process should not use 
annualized WIC redemption data for a new WIC vendor because this may 
erroneously indicate that this vendor is an above-50-percent vendor, 
resulting in the restriction of payments to this vendor at the maximum 
allowable redemption levels permitted for above-50-percent vendors. 
However, the WIC-SNAP redemption match cannot result in a determination 
that a vendor is an above-50-percent vendor because this match does not 
include eligible food sales made with cash, credit cards, personal 
checks, etc. Instead, this process has one of two results: Either the 
vendor is not an above-50-percent vendor, or the vendor is potentially 
an above-50-percent vendor. If a vendor is designated as a potential 
above-50-percent vendor, the State agency needs to obtain further 
documentation before determining whether the vendor is in fact an 
above-50-percent vendor. Also, as discussed more fully below in the 
Background section of this preamble, the State agency must ask all 
vendor applicants whether they expect to become above-50-percent 
vendors, and, if not, the vendor must provide supporting documentation 
to the State agency.

Regulatory Flexibility Act

    This rule has been reviewed with regard to the requirements of the 
Regulatory Flexibility Act (5 U.S.C. 601-612). Although not required by 
the Act, the Food, Nutrition, and Consumer Services hereby certifies 
that this rule will not have a significant economic impact on a 
substantial number of small entities. The provisions implemented 
through this rulemaking apply to all State agencies administering the 
WIC Program, regardless of size. Further, as pointed out above, several 
provisions of this rule provide considerable flexibility to WIC State 
agencies regarding the manner of implementing its requirements, rather 
than new prescriptive requirements for the

[[Page 51748]]

operation and administration of the Program.

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 final 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.

Executive Order 12372

    WIC is listed in the Catalog of Federal Domestic Assistance under 
10.557. For the reasons set forth in 7 CFR 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 interim rule. Because the WIC Program 
is a State-administered, federally funded program, FNS 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. Prior to the 
implementation of the interim rule, several regional offices convened 
meetings with State WIC staff that included discussion of the vendor 
cost containment provisions of this law. In addition, in October 2004, 
FNS' Supplemental Food Programs Division 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 implementation of the interim rule, FNS further 
clarified the meaning of the cost containment provisions in response to 
numerous issues raised by the certification and exemption requests 
submitted by State agencies. These questions and informal comments 
received on the interim rule have assisted FNS in making the final rule 
responsive to State agency concerns.

Nature of Concerns and the Need To Issue This Rule

    The comments of most of the State agencies on the interim rule 
reflected concerns about FNS interpretations of Public Law 108-265, the 
extent of the flexibility provided to the State agencies by the interim 
rule, and the administrative burden of implementing the interim rule. 
These concerns focused on several of the interim rule's requirements, 
including: above-50-percent vendors may not be paid more on average per 
food instrument type than regular vendors; food instrument redemption 
amounts must be weighted in cost neutrality assessments; food prices 
must be collected from vendors at least every six months following 
authorization; and verifiable documentation must be used to identify 
above-50-percent vendors.

Extent to Which Those Concerns Have Been Met

    As discussed more fully below in the Background section of this 
preamble, most of the provisions of the interim rule reflected the 
explicit requirements of Public Law 108-265 and thus cannot be 
eliminated or altered. However, as also discussed below, some 
provisions of the interim rule which were not based on the explicit 
requirements of Public Law 108-265 have been modified in this final 
rule. Also, several of these modified provisions had been viewed as 
administratively burdensome in the comments of State agencies, 
including the weighting of food redemption amounts in cost neutrality 
calculations, which has been made optional in the final rule, and the 
collection of food prices from vendors every six months following 
authorization, from which a State agency may be exempted under the 
final rule but not under the interim rule. Additionally, as discussed 
more fully in the Regulatory Impact Analysis section of this preamble, 
FNS has also reduced the administrative burden by developing a 
methodology which has eliminated the need to obtain documentation from 
approximately 88 percent of authorized vendors regarding whether they 
are above-50-percent vendors. Finally, this final rule continues the 
considerable flexibility provided by the interim rule for the manner of 
State agency implementation, in particular the broad range of peer 
group criteria available to State agencies as noted above in the 
Regulatory Impact Analysis section of this preamble. Indeed, the peer 
group exemption process of the interim rule is continued in the final 
rule so State agencies may request exemptions from some or all of the 
peer group requirements; 40 State agencies were granted such exemptions 
under the interim rule.

Executive Order 12988

    This final 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, or otherwise impede its full 
implementation. This final 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 final rule in accordance with Departmental 
Regulation 4300-4, ``Civil Rights Impact Analysis,'' to identify and 
address any major civil rights impacts the final rule might have on 
minorities, women, and persons with disabilities. FNS has determined 
that this final 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,

[[Page 51749]]

sex, age or disability. Section 246.8 of the WIC regulations (7 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 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 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. 
Some of the information collections in this final rule have been 
previously approved under OMB No. 0584-0043, based on the information 
reporting requirements outlined in the interim rule WIC Vendor Cost 
Containment Interim Rule, published on November 29, 2005 at 70 FR 
71708. The information collection for this final rule has been 
submitted to OMB with revisions based on comments and new information, 
as discussed below.
    The preamble of the interim rule separated the reporting burden of 
that rule into three parts. The first part, listed under Sec.  
246.4(a)(14)(xv), included: The description of the vendor cost 
containment system (peer groups, maximum allowable reimbursement 
levels, average redemption amounts for selected food instruments) in 
the State Plan, which is an annual requirement; State agency 
notification to FNS concerning non-profit above-50-percent vendors 
exempted by the State agency from cost containment requirements, which 
could occur at any time; request for exemption from vendor peer group 
requirements, which must be re-approved triennially; information 
required for FNS for certification of the State agency's vendor cost 
containment system, which must be re-approved triennially; and, 
detailed assurances concerning the implementation of the commitments 
made under existing certifications, which must be provided annually in 
the State Plan. The second part, listed under Sec.  246.12(g)(4)(i), 
concerns the identification of above-50-percent vendors. The third 
part, listed under Sec.  246.12(g)(4)(ii)(B), concerns the collecting 
of vendor food prices every six months following authorization of the 
vendor.

Comments

    As noted in the Regulatory Impact Analysis Summary of this 
preamble, nine commenters, all of them State agencies, addressed the 
administrative burden of the interim rule. However, only two of these 
State agencies suggested different burden hours than set forth in the 
interim rule. One of these State agencies stated that at least one-half 
of a staff position would be needed to manage ongoing reporting 
activities, without indicating how this staff time would be distributed 
between the different reporting burdens set forth in the preamble of 
the interim rule, including the burdens which have been modified in 
this final rule. Similarly, the other State agency stated that eight 
new staff had been requested to address the new administrative needs 
resulting from the interim rule, including all of the reporting 
burdens, but also to address the administrative needs unrelated to 
vendor cost containment--the State agency's emerging Electronic 
Benefits Transfer (EBT) system. Although lacking in specificity, these 
comments indicate that FNS may have underestimated the reporting burden 
hours.
    The Regulatory Impact Analysis Summary of this preamble also 
discusses the other comments on the administrative burden and how the 
final rule reflects accommodations intended to reduce those burdens. 
All nine of these State agencies stated that implementation of the 
interim rule had required a substantial increase in the administrative 
burden, citing particular requirements of the interim rule, including 
the requirements to weight food instrument redemption amounts in cost 
neutrality assessments; collect food prices from vendors at least every 
six months following authorization; document the above-50-percent 
vendor status for all vendors; document the above-50-percent vendor 
status for pharmacies; and to conduct quarterly cost neutrality 
assessments for State agencies which do not have automated systems for 
performing statistical analyses. The information collection burden 
hours have also been adjusted due to these comments, as discussed 
below.

Collections Added by the Final Rule

    Unlike the interim rule, this final rule includes a provision which 
permits State agencies to seek approval of their methodologies for 
excluding partially-redeemed food instruments from the required 
quarterly cost-neutrality assessments. The commenters who stated that 
such food instruments should be excluded from the cost neutrality 
assessments included two State agencies. Paragraph 246.4(a)(14)(xv) 
requires State agencies include information in their State Plan 
submissions to FNS demonstrating compliance with the cost containment 
provisions of Sec.  246.12(g)(4), which includes the quarterly cost 
neutrality assessment requirement of Sec.  246.12(g)(4)(i)(D). Thus a 
State agency would need FNS approval of a State Plan amendment setting 
forth a methodology for excluding partially-redeemed food instruments. 
This is one of the reasons why the information burden hourly rate for 
the State Plan submissions under the interim rule has been doubled 
under this final rule.
    Burden hours have been added in the final rule to account for an 
exemption process which, unlike the interim rule, would permit State 
agencies to seek exemptions from the requirement set forth in Sec.  
246.12(g)(4)(ii)(B) for biannual collection of vendor shelf prices. FNS 
estimates that 15 State agencies will seek such exemptions at the same 
rate of 16 hours per response used in connection with the request for 
exemption from the peer group requirement under Sec.  246.4(a)(14)(xv), 
resulting in 240 burden hours (15 x 16 = 240). This change in the 
burden hours based on the addition of an exemption process under Sec.  
246.12(g)(4)(ii)(B) is the only change of burden hours due to program 
changes. All of the other changes in burden hours are considered to be 
adjustments.
    The burden hours per response set forth in connection with Sec.  
246.12(g)(4)(ii)(B) of the interim rule for the collection of vendor 
food prices every six months following authorization has been increased 
in this final rule from one to two hours for both State agencies and 
vendors in recognition of the aforementioned comments. Although this 
provision has been modified in the final rule to

[[Page 51750]]

provide for exemptions, the overall result is a net increase of 223,154 
burden hours for the biannual shelf price collection process. (The 
final rule allots 313,332 burden hours for the collection of shelf 
prices by the State agencies and vendors combined, while the interim 
rule allotted 90,178 hours for this.) Such exemptions could be based on 
numerous different reasons. As indicated in the Regulatory Impact 
Analysis, 67 percent of the State agencies are in compliance with the 
price collection requirement. Thus the exemptions would involve some 
proportion of the other 33 percent of the 90 State agencies (30 State 
agencies). FNS estimates that as many as one half of these State 
agencies may be granted exemptions, i.e., 15 State agencies. (See 
section 4 of the Background part of this preamble for more information 
on this exemption process.) Thus the chart below shows that 75 State 
agencies will need to collect vendor shelf prices biannually under 
Sec.  246.12(g)(4)(ii)(B), about 83.3 percent of the State agencies, 
and that about 83.3 percent of the vendors--39,167 vendors--will need 
to cooperate with this price collection process. As a result, the chart 
also shows that each of the 75 State agencies will need to collect 
prices from 1,044 vendors on average twice per year, i.e., (39,167 / 75 
= 546.5) x 2 = 1,044.
    Unlike the interim rule, Sec.  246.12(g)(4) of this final rule 
states that the State agency must inform all vendors of the criteria 
for peer groups and each individual vendor of its peer group 
assignment. State agencies have been advising vendors of their peer 
group assignments and the peer group criteria, but, for added 
assurance, a sentence has been added to Sec.  246.12(g)(4) in this 
final rule to state that the State agency must inform all vendors of 
the criteria for peer groups and each individual vendor of its peer 
group assignment. Thus this new requirement set forth in Sec.  
246.12(g)(4) would not result in any new information collection burden 
hours.

Reducing the Collections

    As noted in the Regulatory Impact Analysis section of this 
preamble, four State agencies commented that the interim rule's 
requirement for weighting food instrument redemption amounts made the 
cost neutrality assessment process more burdensome. In response, FNS 
has eliminated the requirement for weighting food instrument redemption 
amounts in the cost neutrality assessment process. Also, FNS expects 
certification requests, exemption requests, and State Plan submissions 
in the future will only involve amendments and/or updating information 
for most State agencies.

Numbers of Certifications and Exemptions

    The previous estimates of 65 State agencies seeking certification 
and 30 State agencies seeking exemptions need to be replaced with 
numbers based on actual experience. The certifications concern the cost 
neutrality of above-50-percent vendors with regards to comparable 
regular vendors. The exemptions concern the peer group requirements for 
all vendors. All State agencies are subject to the peer group 
requirements unless granted an exemption by FNS, but only those State 
agencies which authorize above-50-percent vendors need to be certified 
by FNS regarding their processes for maintaining the cost neutrality of 
above-50-percent vendors in comparison to comparable regular vendors. 
In Fiscal Years 2005 and 2006, 32 State agencies requested 
certification and 42 requested exemptions.

Conclusions

    Balancing the State agency comments and new requirements against 
the factors reducing the paperwork burden expected for future 
certification requests, exemption requests, and State Plan submissions, 
the burden hours per response estimated for the final rule will be 
doubled for three of the four information burden categories related to 
these requests and submissions, as detailed in the chart below. This 
includes increasing the hourly information burden rate for the State 
Plan description of the vendor cost containment system from 4 to 8 
hours, for exemptions from the peer group requirements from 8 to 16 
hours, and for information related to the certification and monitoring 
of the vendor cost containment system from 8 to 16 hours.
    FNS has not been notified by any State agency that it has 
authorized a non-profit above-50-percent vendor, as required by Sec.  
246.12(g)(4)(iv); such notification would be provided as a State Plan 
submission under Sec.  246.4(a)(14)(xv). FNS does not know if any State 
agencies will elect to authorize such vendors in the future. Thus the 
current estimate of the number of State agencies and annual burden 
hours related to this notification requirement will remain unchanged: 
five State agencies with one annual burden hour for each, resulting in 
a total of annual five burden hours. This is the only information 
burden category related to certification requests, exemption requests, 
and State Plan submissions for which the burden hours will not be 
doubled.
    The paperwork burden for the annual identification of above-50-
percent vendors, per Sec.  246.12(g)(4)(i), was previously set at 2 
hours per response. As previously noted, the comparison of WIC and SNAP 
redemptions has made it possible to eliminate about 88 percent of 
authorized vendors from any need for further documentation since this 
comparison has confirmed that about 88 percent of authorized vendors 
have more SNAP redemptions than WIC redemptions. FNS has established an 
automated process which matches the redemption data maintained by the 
WIC TIP and the SNAP STARS systems. The State agency workload for use 
of this process is negligible.
    FNS recognizes that obtaining additional documentation of above-50-
percent status for the remaining 12 percent of vendors is more 
burdensome than the WIC-SNAP redemption match, for both State agencies 
and vendors. Accordingly, in consideration of the comments on the 
reporting burden, the burden hours per response for the State agencies 
has been increased from 2 to 4 hours, and for the vendors from 1 to 2 
hours for the data collection related to identifying above-50-percent 
vendors. However, this higher number of burden hours for vendors will 
only be applied to the 12 percent of vendors which have been designated 
as potential above-50-percent vendors based on the WIC-SNAP redemption 
match (5,640 vendors), since those vendors which have been designated 
as not being above-50-percent vendors as a result of the WIC-SNAP 
redemption match will not need to provide any documentation to the 
State agency at all.
    The chart below sets forth the estimated annual reporting burden 
for the final rule to reflect the above-noted revisions based on State 
agency comments and information not available when the interim rule was 
published. Decimals are not included in the chart.

[[Page 51751]]



                                  Final Rule Estimated Annual Reporting Burden
----------------------------------------------------------------------------------------------------------------
                                                                                  Estimated
                                       Estimated       Data  collections or    average burden   Estimated annual
    Section of the regulations         Number of        reports  required         hours per       burden hours
                                      respondents            annually             response
----------------------------------------------------------------------------------------------------------------
Sec.   246.4(a)(14)(xv):
     Description of                      90  1......................                 8               720
     vendor peer group system and
     allowable reimbursement
     levels; average redemption
     amounts for selected food
     instruments.
     Notification of                      5  1......................                 1                 5
     exemption of non-profit
     vendors.
     Request for                         42  1--(triennial).........                16               224
     exemption from vendor peer
     group requirement.
     Information required                32  1--(triennial).........                16               171
     for certification of vendor
     cost containment system and
     to monitor ongoing
     compliance with
     certification requirements.
                                                 32  1......................                 8               256
Sec.   246.4(a)(14)(xv) Total....                90  3.66...................  ................             1,376
Sec.   246.12(g)(4)(i)...........                90  63.....................                 4            22,560
Above-50-Percent Determination...             5,640  1......................                 2            11,280
Sec.   246.12(g)(4)(ii)(B).......                75  1,044..................                 2           156,666
Biannual Price Collection........            39,167  2......................                 2           156,666
Sec.   246.12(g)(4)(ii)(B)                       15  1......................                16               240
 Biannual Price Collection
 Exemption.
----------------------------------------------------------------------------------------------------------------
Total Burden Hours Due to Program Changes.....................................................               240
Total Burden Hours Due to Adjustments.........................................................           143,629
Total Burden Hours for the Final Rule.........................................................           143,869
Currently Approved WIC Reporting and Recordkeeping Burden Hours...............................         3,451,206
Total Proposed WIC Reporting and Recordkeeping Burden Hours...................................         3,595,075
----------------------------------------------------------------------------------------------------------------

E-Government Act Compliance

    FNS is committed to complying with the E-Government Act, to promote 
the use of the Internet and other information technologies to provide 
increased opportunities for citizen access to Government information 
and services, and for other purposes.

Background

    Ninety-two letters and electronic mail messages of comment were 
submitted on the interim rule during the comment period, from 37 WIC-
authorized vendors; 22 WIC local agencies; 13 WIC State agencies; 8 
members of Congress (in one joint letter); 5 retailer advocacy 
organizations; 5 social service advocacy organizations; 4 law firms 
representing WIC-authorized vendors; 3 general public individuals; and 
2 non-WIC State agencies. Many of these comment letters and electronic 
mail messages addressed multiple issues.

1. Definitions of ``Above-50-Percent Vendor'' and ``Food Sales'' (Sec.  
246.2)

Definition of ``Above-50-Percent Vendor''
    Section 246.2 of the interim rule defined ``Above-50-percent 
vendors'' as referring to vendors that derive more than 50 percent of 
their annual food sales revenue from WIC food instruments, and new 
vendor applicants expected to meet this criterion under guidelines 
approved by FNS. Two commenters opposed this definition. One of these 
commenters stated that this group of vendors should be defined based on 
70 percent of food sales derived from WIC, so small stores and 
convenience stores will not go out of business due to the requirement 
that the redemption amounts of above-50-percent vendors must be 
comparable to the redemption amounts of chain stores, potentially 
leading to inadequate participant access. The other commenter stated 
that the final rule should focus on vendors with WIC redemptions close 
to 100 percent of their food sales since these are the vendors which 
have proven to be so costly, not small vendors with a regular retail 
vendor business model who serve a high percentage of WIC participants 
in low-income areas.
    The definition of ``above-50-percent vendor'' is based on a 
legislative requirement in section 17(h)(11)(D)(ii)(I) of the CNA, 
i.e., vendors with more than 50 percent of annual food sales revenue 
derived from WIC sales. Therefore, this definition remains as set forth 
in the interim rule.
Definition of ``Food Sales''
    Three commenters opposed the definition of ``food sales'' in Sec.  
246.2 of the interim rule as referring to all SNAP-eligible foods. One 
of these commenters stated that ``food sales'' as defined in the 
interim rule cannot be easily verified by many stores because their 
scanners cannot identify SNAP-eligible food or, if they do, they cannot 
tally the amounts and that federal tax forms and other documentation 
maintained by the vendors do not show the sales based on SNAP-eligible 
foods. Another commenter asserted that State tax forms in one State 
were not helpful for determining above-50-percent status because these 
forms do not require a total sales amount from which taxable non-food 
sales could be subtracted to result in an estimate of food sales, and 
some foods are taxable; therefore this commenter stated that a vendor 
should be defined as an above-50-percent vendor based on total sales, 
not total food sales. One other commenter stated that there is no 
universal definition of ``food sales,'' resulting in WIC State agencies 
using a variety of conflicting approaches with disparate results. This 
commenter argued that State agencies should be allowed to accept self-
declaration of vendors with legal penalties for inaccuracy, instead of 
imposing burdensome data collection processes on vendors.
    However, section 17(h)(11)(D)(ii)(I) of the CNA identifies above-
50-percent vendors based on more than 50 percent of annual revenue from 
the sale of food items for WIC food instruments, not food and all other 
items. Thus the final rule cannot permit total sales instead of total 
food sales as the basis for identifying above-50-percent vendors. Also, 
self-declaration would generally not serve as a proper basis for 
compliance with this provision of the CNA, since self-declaration would 
be an opinion, not objective data. Therefore,

[[Page 51752]]

the definition of ``food sales'' remains as set forth in the interim 
rule.

2. Assessment of Above-50-Percent Vendor Status (Sec.  246.12(g)(4)(i))

Methodologies for Determining the Above-50-Percent Status of Vendor 
Applicants
    Three commenters objected to the statement at 70 FR 71715 of the 
preamble of the interim rule that State agencies must review invoices 
as one of the steps needed to determine the above-50-percent status of 
vendor applicants. These commenters view this requirement as unduly 
burdensome, recommending instead that State agencies be permitted to 
review stock for this purpose during the pre-authorization visit or at 
some other time, and to consider the history of the vendor. One of 
these commenters also stated that a review of invoices might be 
misleading because the State agency has no way of knowing if it has 
received all of a vendor's invoices. FNS agrees with the commenters 
that a review of invoices should not be required. Instead, the State 
agency should have the option to rely only on a review of stock at the 
preauthorization visit, as recommended by the commenters, or even to 
use both methodologies. Accordingly, new paragraphs 246.12(g)(4)(i)(E) 
and (g)(4)(i)(F) have been established in the final rule to set forth 
the required methodologies, previously discussed in the preamble to the 
interim rule and in FNS guidance, for determining the above-50-percent 
status of vendor applicants and current vendors, including the other 
methodologies set forth at 70 FR 71715 of the preamble of the interim 
rule, but including the review of invoices only as one option. Also, a 
reference to these two new paragraphs has been added to the second 
sentence of paragraph 246.12(g)(4)(i).
Timing of Determinations of Above-50-Percent Status
    One commenter would prefer to conduct the annual review of the 
above-50-percent status of its vendors at their individual annual 
agreement renewal dates rather than reviewing all of them at the same 
time once a year. Like many State agencies, this State agency processes 
vendor applications for authorization on an ongoing basis. Paragraph 
246.12(g)(4)(i) of the interim rule stated that each State agency must 
annually implement procedures approved by FNS to identify authorized 
vendors and vendor applicants as either above-50-percent vendors or 
regular vendors. The definition of the term ``above-50-percent vendor'' 
in Sec.  246.2 of the interim rule refers to vendors that derive more 
than 50 percent of their annual food sales revenue from WIC food 
instruments, and new vendor applicants expected to meet this criterion. 
These provisions did not specify that a State agency must make this 
determination for all vendors at the same time. Thus, under these 
provisions, FNS may approve procedures which permit a State agency to 
conduct the annual review of the above-50-percent status of its vendors 
at their individual annual agreement renewal dates. These provisions 
remain unchanged in the final rule.
Assessment of Above-50-Percent Status of Pharmacies
    Three commenters recommended greater discretion for State agencies 
to exclude pharmacies from above-50-percent status. One of these 
commenters stated that pharmacies generally do not meet the above-50-
percent vendor definition and thus the expenditure of administrative 
resources is not justified to determine their above-50-percent status. 
Another commenter contended that it is inconsistent to permit exemption 
of pharmacies which only provide exempt infant formula and WIC-eligible 
medical foods, but not if these pharmacies also provide contract infant 
formula. One other commenter stated that State agencies should be able 
to exempt pharmacies that are authorized to provide exempt infant 
formula, even if they also provide contract infant formula.
    Paragraph 246.12(g)(4)(iv) states that the State agency may except 
from the competitive price criteria and allowable reimbursement levels 
pharmacy vendors that supply only exempt infant formula and/or WIC-
eligible medical foods, and non-profit vendors for which more than 50 
percent of their annual revenue from food sales consists of revenue 
derived from WIC food instruments. This provision is based on section 
17(h)(11)(D) of the CNA, which permits an exemption from competitive 
price criteria and allowable reimbursement levels for pharmacies that 
supply only exempt infant formula and WIC-eligible medical foods, but 
not for pharmacies which also transact food instruments for contract 
infant formula. Therefore, this final rule must reflect the requirement 
in the CNA.
State Agency Choice To Authorize Above-50-Percent Vendors
    One commenter recommended a statement be added to Sec.  
246.12(g)(4)(i) to the effect that a State agency may choose to not 
authorize above-50-percent vendors. The interim rule included the 
equivalent statement in the last sentence of Sec.  246.12(g)(4)(i) and 
in the first sentence of Sec.  246.12(g)(4)(v)(A), by referring to 
State agencies choosing or not choosing to authorize above-50-percent 
vendors. This language mirrors the language of section 17(h)(11) of the 
CNA, which refers to State agencies electing to authorize or not 
authorize above-50-percent vendors. Therefore, this final rule adopts 
the language of the interim rule on this subject.

3. Cost Neutrality Standards and Assessment--(Sec.  246.12(g)(4)(i)(D))

    Under Sec.  246.12(g)(4)(i)(D) of the interim rule, the State 
agency is required to ensure that the prices of above-50-percent 
vendors do not result in higher total food costs if program 
participants transact their food instruments at above-50-percent 
vendors rather than at other vendors that do not meet the above-50-
percent criterion. (These other vendors were referred to as ``regular 
vendors.'') The State agency must not permit the average cost of each 
type of food instrument redeemed by above-50-percent vendors to exceed 
the average cost of the same type of food instrument redeemed by 
regular vendors; the State agency must compute statewide average costs 
per food instrument at least quarterly to monitor compliance with this 
requirement. In addition, Sec.  246.12(g)(4)(i)(D) also requires that 
the average cost per food instrument must be weighted to reflect the 
relative proportion of food instruments redeemed by each category of 
vendors in the peer group system.
    Under Sec.  246.12(g)(4)(vi) of the interim rule, which concerned 
FNS certification of State agency vendor cost containment systems, a 
State agency is required to demonstrate to FNS that its competitive 
price criteria and allowable reimbursement levels did not result in 
average payments per food instrument to above-50-percent vendors that 
are higher than average payments per food instrument to comparable 
vendors that are not above-50-percent vendors. The commenters who 
opposed the statewide average requirement of Sec.  246.12(g)(4)(i)(D) 
supported the comparable vendor average requirement of Sec.  
246.12(g)(4)(vi). The term ``comparable vendor'' refers to the regular 
vendors which share common characteristics or criteria with above-50-
percent vendors that affect food prices, as determined by the State 
agency, for the purpose of applying appropriate competitive price 
criteria to vendors at authorization and limiting payments for food to 
competitive levels.

[[Page 51753]]

    Twenty-four commenters supported the requirement that the average 
redemption amount per food instrument for all above-50-percent vendors 
must not exceed the average redemption amount per food instrument of 
all regular vendors statewide. Thirty-six commenters opposed it. The 
opponents stated that this provision exceeded the intent of section 
17(h)(11)(A)(i)(III)(bb) of the CNA, which requires State agencies to 
establish competitive price criteria and allowable reimbursement levels 
which do not result in higher food costs if participants transact food 
instruments with above-50-percent vendors rather than regular vendors. 
These commenters stated that cost neutrality for above-50-percent 
vendors should be based on the peer group average per food instrument, 
not the statewide average of all regular vendors per food instrument, 
since the statewide average does not take into account pricing 
differences based on location (e.g., rural/urban) or type of vendor 
(e.g., large/small/military commissaries/supercenter stores).
    One of these commenters pointed out that section 
17(h)(11)(A)(i)(III)(bb) of the CNA requires that food costs not be 
higher if participants use their food instruments with above-50-percent 
vendors than with regular vendors, unlike section 17(h)(11)(E) of the 
CNA, which requires that above-50-percent vendors not be paid more on 
average per food instrument than comparable regular vendors. According 
to this commenter, the absence of the average payment per food 
instrument language in section 17(h)(11)(A)(i)(III)(bb) shows that 
Congress intended to permit State agencies the discretion to consider 
participant preferences for above-50-percent vendors or other factors 
that may affect the different redemption levels of above-50-percent 
vendors in comparison to regular vendors. This commenter also stated 
that the final rule should include the statement in section 17(h)(11) 
of the CNA to the effect that the cost containment requirements may not 
be construed to compel a State agency to achieve lower food costs if 
participants transact WIC food instruments with above-50-percent 
vendors rather than regular vendors.
    FNS does not agree with these comments. Section 
17(h)(11)(A)(i)(III)(bb) of the CNA does not distinguish between 
vendors based on size or location, and does not provide discretion 
based on participant preferences or other factors. Such interpretations 
would undermine the point of this provision--that above-50-percent 
vendors must be cost neutral in comparison to all other retail vendors. 
Indeed, such interpretations would make this provision little different 
from section 17(h)(11)(E), which allows for distinctions based on 
comparability. Instead, the CNA requires above-50-percent vendors to be 
cost-neutral with respect to both comparable vendors and all other 
retail vendors. Moreover, the interim rule did not compel State 
agencies to achieve lower food costs if participants transact WIC food 
instruments with above-50-percent vendors rather than regular vendors, 
and thus a statement to this effect is not needed in the final rule.
    Twelve commenters stated that Congress did not intend to put above-
50-percent vendors out of business. However, the purpose of the interim 
rule was not to put above-50-percent vendors out of business. Instead, 
the interim rule intended to make above- 50-percent vendors cost-
neutral in comparison to regular vendors, both with respect to peer 
groups and all regular vendors statewide, as required by the CNA. 
Ensuring the availability of funds to serve program participants is the 
paramount consideration. Therefore, the cost neutrality standard 
remains as set forth in the interim rule.
Weighting
    Paragraph 246.12(g)(4)(i)(D) of the interim rule required the 
average cost per food instrument to be weighted to reflect the relative 
proportion of food instruments redeemed by each category of vendors in 
the peer group system. As discussed in the preamble of the interim 
rule, a weighted average enables the State agency to take into account 
the frequency with which vendors redeem food instruments of varying 
redemption amounts. If a State agency makes more payments to vendors 
that offer the lowest prices for WIC foods, a weighted average will 
reflect this fact more than a simple average. The weighted average 
correlates with WIC participants' shopping patterns by giving the most 
weight to redemption prices of stores with the largest number of WIC 
transactions. However, following issuance of the interim rule, FNS 
issued guidance making this requirement optional, pending the final 
rule, to prevent any administrative difficulties in determining the 
weighted average from interfering with the certification of State 
agency vendor cost containment systems as required by the statute. Only 
one State agency has chosen to use weighting.
    Seven comments were submitted on weighting; three of these comments 
supported the weighting requirement, while four opposed it. Two of the 
supporting comments stated that the rationale for the weighting 
requirement, as set forth in the preamble of the interim rule, was 
sound. The third supporting comment stated that the weighting 
requirement and the adding of standard deviations to redemption 
averages would help to avoid price adjustments unfairly based only on 
exceeding a simple average. Three of the opponents, all State agencies, 
stated that the weighting requirement would greatly complicate cost 
neutrality calculations which had already required a significant 
expenditure of administrative funds to modify their Management 
Information Systems. These three State agencies and one other, also an 
opponent of this requirement, stated that weighting should be an 
option, not a mandate.
    FNS agrees with these commenters; the use of weighting in cost 
neutrality calculations should be optional, not mandatory. This 
requirement is not necessary to implement the cost neutrality 
requirements of the CNA, and some State agencies feel it is 
administratively burdensome. However, as noted above, one State agency 
has chosen to use weighting. Accordingly, weighting has been made 
optional in Sec.  246.12(g)(4)(i)(D) of the final rule.
Recoupment and Termination Based on Cost Neutrality Assessments
    Paragraph 246.12(g)(4)(i)(D) of the interim rule required the State 
agency to conduct quarterly cost neutrality assessments to ensure that 
above-50-percent vendors are not paid on average per food instrument 
more than all regular vendors statewide. In the event that the above-
50-percent vendors are paid more on average than the regular vendors, 
the State agency had to take action to ensure compliance, such as 
adjusting payment levels. This provision also states that such action 
may have included recouping excess payments and terminating the vendor 
agreements of vendors whose prices are least competitive and which are 
not needed to ensure participant access. FNS has reconsidered this 
issue and decided that State agencies must not recoup monies that were 
paid to a vendor for food instruments redeemed within the established 
maximum allowable reimbursement level for that vendor, in order to 
achieve cost neutrality. Likewise, since a State agency cannot recoup 
monies paid to a vendor for food instruments redeemed within the 
established maximum allowable reimbursement level for that vendor in 
order to achieve cost neutrality, it follows that a State agency may 
not terminate the vendor agreement of a vendor that redeemed food

[[Page 51754]]

instruments within the established maximum allowable reimbursement 
level for that vendor in order to achieve cost neutrality. Accordingly, 
the above-noted language in Sec.  246.12(g)(4)(i)(D) of the interim 
rule which referred to the recoupment of monies and the termination of 
vendor agreements has been deleted in this final rule.
    This does not preclude a State agency from making price adjustments 
to food instruments in accordance with Sec.  246.12(h)(3)(viii) of this 
final rule and recouping amounts paid to the vendor above the 
established maximum allowable reimbursement level applicable to the 
vendor. This also does not preclude a State agency from terminating the 
vendor agreement of a vendor for failure to remain price-competitive in 
accordance with Sec.  246.12(h)(3)(viii) of this final rule, i.e., for 
failure to maintain shelf prices at levels acceptable for 
authorization, or for failure to submit food instruments for redemption 
within the established maximum allowable reimbursement level applicable 
to that vendor.
Partially-Redeemed Food Instruments
    Fifteen commenters stated that partially-redeemed food instruments 
should not be included in cost neutrality determinations because above-
50-percent vendors typically redeem all of the supplemental foods 
authorized for a food instrument while many regular vendors do not; a 
vendor providing all of the supplemental food authorized for a food 
instrument should not be held to a redemption level based on food 
instruments redeemed by other vendors for less than all of the 
supplemental food authorized for a food instrument. One of these 
commenters stated that State agencies should have the discretion to 
compensate for relative rates of partial redemption. FNS agrees that 
State agencies should be able to exclude partially-redeemed food 
instruments from the quarterly cost neutrality assessments.
    However, the identification of partially-redeemed food instruments 
to be excluded must be based on an empirical methodology. For example, 
a State agency could exclude a food instrument because its purchase 
price is less than the total of the vendor's least expensive food items 
authorized for that food instrument. A sentence has been added to Sec.  
246.12(g)(4)(i)(D) in the final rule to allow a State agency to exclude 
partially-redeemed food instruments from a quarterly cost neutrality 
assessment if FNS approves the State agency's empirical methodology for 
identifying the partially-redeemed food instruments to be excluded.
    Another sentence has been added to Sec.  246.12(g)(4)(i)(D) in the 
final rule to clarify that a State agency may not exclude food 
instruments from the quarterly cost neutrality assessment based on a 
rate of partially-redeemed food instruments. A rate of partially-
redeemed food instruments, such as a percentage of food instruments 
with the lowest purchase prices, might include food instruments which 
reflect a vendor's lower prices instead of partial redemptions. Also, a 
definition of ``partially-redeemed food instrument'' has been added to 
the definitions in Sec.  246.2 to ensure there is a clear understanding 
of the meaning of this term.
Other Cost Neutrality
    One commenter recommended that State agencies be permitted to 
review no more than 80 percent of the most commonly used food 
instruments to determine cost neutrality, excluding food instruments 
which are not redeemed very often. However, the CNA does not provide 
that a food instrument may be excluded from cost neutrality 
requirements based on how often food instruments for the same 
authorized supplemental foods are redeemed.
    Another commenter stated that a State agency should be able to 
assess overall cost neutrality without the redemptions of competitively 
priced as well as noncompetitively priced above-50-percent vendors 
needed for participant access. FNS does not agree. The exclusion of the 
redemptions of noncompetitively priced above-50-percent vendors needed 
for participant access is intended to prevent the high prices of these 
above-50-percent vendors from jeopardizing the State agency's efforts 
to achieve overall cost neutrality, given these State agencies have 
little choice but to authorize these vendors. Since the prices of 
competitively priced above-50-percent vendors would not jeopardize the 
State agency's efforts to achieve overall cost neutrality, there is no 
reason for the exclusion of their prices, even though these vendors 
were needed for participant access.