From: WebMaster@fns.usda.gov
Sent: Wednesday, November 29, 2006 1:19 PM
To: WICHQ-SFPD
Subject: Vendor Cost Containment Interim Rule Comments

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NAME:          Jo-Ann Tyler 
EMAIL:         jdb04@health.state.ny.us
CITYSTATE:     Albany, New York 
ORGANIZATION:  New York State Department of Health-Division of Nutrition-NYS WIC Program
CATEGORY:      StateAgency
OtherCategory: 

COMMENTS:

November 29, 2006

Patricia Daniels, Director
Supplemental Food Programs Division
United States Department of Agriculture (USDA)
3101 Park Center Drive – Room 528
Alexandria, Virginia 22302
 
Dear Ms. Daniels:

The purpose of this correspondence is to provide comments on the following Interim rule and the associated Interim Guidance (June 2006) which specifies USDA’s interpretation of the Interim rule:   

Department of Agriculture
Food and Nutrition Service
7 CFR Part 246
Vendor Cost Containment
Interim rule
Issued: November 29, 2005
	Docket ID Number 0584-AD71	
 
We appreciate the opportunity to comment on this Interim rule because of its implications on the current vendor management practices for all State agencies.  Developing meaningful comments presented a challenge due to the interrelationship between the Interim rule, the preamble to the rule, and the Interim Guidance.  Accordingly, our comments relate to information included in all three sources.    

Since October 2004, when the New York State WIC Program (NYS) was invited to participate in a meeting convened by USDA Headquarters to review and discuss the requirements included in Public Law 108-265, we have assisted with the USDA’s efforts to implement the new vendor cost containment requirements.  NYS has provided detailed information on its vendor cost containment strategies and submitted redemption data to demonstrate that the program has an alternate cost containment system that is as effective as a vendor peer group system as described in 246.12 (g) (4) of the Interim rule.  Accordingly, an exemption from the vendor peer group requirement specified in the Interim rule was granted in September 2006.    

While NYS appreciates USDA’s positive assessment of its vendor cost containment system, we are concerned about the inflexible manner in which State agencies are expected to implement the requirements of the Interim rule.  NYS is providing comments to:   

(1) demonstrate the need for USDA to incorporate more flexibility with respect to the stringent requirements included in the Interim rule and guidance;  
(2) request that USDA reconsider the intent of this rule and make the appropriate modifications.     

General Comments

In general, NYS finds the Interim rule and the guidance issued which details implementation requirements to be unnecessarily complex and inflexible.  The abundance of guidance memoranda that USDA has been required to issue to State agencies in response to this Interim rule mandating prescribed methods of implementation and providing explanations highlight this fact.  Additionally, NYS is concerned that certain provisions of the Interim rule are based on undocumented assumptions regarding the pricing practices of a certain category of vendors who are referred to as “above-50-percent vendors”.      

NYS respectfully requests that the USDA focus on the intent of the Rule:  to maximize program participation by ensuing that (1) WIC State agencies operate vendor management systems that effectively control food costs; and (2) by controlling payments to certain vendors whose prices are not governed by retail market forces.  The primary focus of the Final rule should be the requirement for states to implement effective processes and procedures, including techniques to identify high priced vendors, and effective measures to control excessive costs. 

The Interim rule does give State agencies flexibility in developing peer groups, competitive price criteria and allowable reimbursement levels based on the retail markets in their states.  USDA acknowledges (page 71710) that variations in State agency vendor populations, geography, and other characteristics and limited information available on proven competitive pricing approaches, preclude the use of a standardized approach.  However, many of the requirements in this Interim rule do stringently dictate the manner in which cost containment much be achieved without due consideration to the differences among states.   

The Final rule should appropriately give states more flexibility in determining how to design its methods to effect vendor cost containment, instead of prescribing exact methods for achieving that end.   It may be efficient and effective for certain states to establish vendor peer group systems as described in 246.12 (g) (4), but counterproductive and unnecessary for other states.   While cost containment is a goal common to all state WIC programs, all states are not the same with respect to their vendor populations and the retail markets in which they operate.  Accordingly, more flexibility in meeting the intent of the vendor cost containment rule is warranted.      

NYS recognizes the importance of controlling program costs to help achieve the ultimate goal of serving as many eligible women, infants and children as possible with the available funding.  As the third largest WIC program, and the State agency with the most authorized vendors, overall cost containment has been a high priority for NYS since the inception of the program.  

NYS offers the following information about our system which demonstrates how the multi-faceted approach to vendor cost containment, along with our  strict enrollment criteria have been successful not only in controlling costs, but also responsible for preventing the authorization of WIC-only stores:  
 
o	NYS has stringent vendor enrollment criteria (codified in state regulation) that require the assessment of the prices charged by vendor applicants in comparison to peers in the geographic location in which they operate.  Vendors that are not competitively priced are not eligible for enrollment unless, in rare instances, they are needed to ensure participant access.   Once enrolled, the NYS WIC Vendor Contract requires vendors to remain competitively priced in relation to vendors in their geographic location throughout the authorization period.  

o	NYS is fortunate to have a sophisticated automated system in place that performs analysis of check redemption information.  This system generates a variety of reports that enable ongoing vendor price reviews based on monthly redemption information.  Throughout the authorization period, vendors that are high priced are identified and requested to implement corrective action.  NYS has the authority to nonrenew or terminate contracts for those vendors that do not comply with the program’s pricing requirements. 

o	Due to the cost containment controls that have been in place for many years, and other state requirements for vendor enrollment (including a food stamp license), NYS does not have any stores that only stock WIC approved foods and only accept WIC checks.  Unlike those identified states with WIC-only stores, NYS is not faced with the problem of excessive expenditures resulting from vendors who follow this business model.        

Addressing the Concept of Above-50-Percent Vendors

Background to the Interim rule (page 71713) states the following: 

 “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.”        

Based on the above observation, it would seem logical that the target group of vendors for the Final rule should be vendors who are truly WIC-only stores, or those whose WIC redemptions are close to 100 percent of their food sales (e.g., 90 percent or more).  

In our attempt to implement this Interim rule in our state, NYS has determined that stores considered to be above-50-percent vendors are regular vendors.  They do not look like WIC-only stores, nor do they employ their business practices.    
While NYS does not have any WIC-only stores, due to the diverse communities present in New York City and within a few large cities located in Upstate areas, a small percentage of our authorized stores do derive more than 50 percent (typically only slightly more than 50 percent) of their food sales from WIC checks.  NYS makes the observation that like WIC-only stores, these above-50-percent vendors provide a valuable service and convenience to WIC participants in densely populated low income areas. 

However, unlike the WIC-only stores located in other states, NYS has proven that the prices of above-50-percent vendors compare quite favorably with regular vendors within their geographic peer group.  This is not surprising because NYS’s selection criteria require stores to be competitively priced to be authorized.  

NYS has found that these above-50-percent vendors follow the business model of other retail stores; they sell a full range of foods, not just WIC approved items.  It is intuitive that these stores need to remain competitively priced compared to other vendors to stay in business because they often serve almost an equal percentage of non-WIC customers.   

NYS is unaware of any empirical evidence presented which demonstrates that the pricing structure and business model of stores which “derive more-than-50 percent of their food sales from WIC checks” are comparable to WIC-only stores.  Accordingly, grouping above-50-percent vendors with WIC-only stores for the stated purposes of this Interim rule on vendor cost containment is arbitrary, and unfair to the small business owners who, due to neighborhood demographics in low income areas, serve a high percentage of WIC participants.  

From both a cost containment perspective and a program operations issue, NYS finds it counterproductive and inefficient to be required to “fix” a problem if one does not exist.  Instead of assuming states have a problem with such vendors, and proscribing methods to manage the assumed excessive prices charged by these vendors, as an alternative the Final rule should require states to assess above-50-percent vendors to determine if they are actually high priced (based on the state’s own cost containment system).   

NYS questions the methodology of defining a store as an above-50-percent vendor based on food sales, instead of total sales.   If this is based on the fact that WIC-only stores only sell food, the logic seems faulty.  Most stores, even those with high WIC redemptions, sell other items in addition to food.       

Vendor Peer Group System  (page 71714) 

The Interim rule requires that when regular vendors are included in a peer group with above-50-percent vendors, the state must exclude the prices of above-50-percent vendors when establishing competitive price criteria and allowable reimbursement levels.  This provision assumes that above-50-percent vendors, as a group, are higher priced than the pool of regular vendors.  The Final rule should recognize that this is not always to case and afford State agencies more flexibility.  States that can successfully demonstrate that its above-50-percent vendors are competitively priced should be given the option of including the redemption information from these stores in their typical competitive pricing assessment.   For State agencies that use an automated system for analyzing redemption information for competitive pricing determinations, eliminating data for a select group of stores is an administrative burden and serves no purpose if the stores are reasonably priced.       

Identifying Above-50-Percent Vendors   (page 71715)     

New York State appreciates the recognition (page 71715)  that states may request to use alternate methods to identify above-50-percent vendors and will be pursing that option based on our experience in using the methods for current vendors and vendor applicants outlined in the Interim rule and the Interim Guidance (June 2006).  

NYS relied on the “Retail Food Sales Calculator” to estimate food sales in most cases.  From our unsuccessful attempts to reasonably obtain documented “food sales” information from vendors, and the lack of practical guidance, it appears that the USDA will need to continue to allow states to rely on this tool indefinitely (beyond 2007).  In addition, in some cases, self reported information on food sales (with an attestation by the owner) may need to be accepted with follow-up reviews (including onsite store visits for a determination of the reasonableness of the information).   The Final rule needs to give states the ability to be flexible and reasonable in their assessment of vendors based on unique circumstances.       

For current vendors, the approach to identify potential above-50-percent vendors (using the ratio between food stamps redemptions and WIC redemptions) is cumbersome and inefficient for large states.   For example, during the assessment completed in 2005 by NYS WIC, this method resulted in the identification of nearly 1,000 vendors as potential above-50-percent vendors for which food sales information had to be obtained.  After several months of work which included mailings, phone calls and site visits, less than 30 stores were determined to actually be above-50-percent vendors.  In addition to a significant drain on state and vendor management agency staffing resources, this process was quite damaging to vendor relations.

In 2006, NYS discovered that the report of potential above-50-percent vendors generated by the method prescribed in guidance (using TIP data) included annualized data for stores that had been WIC-authorized less than one year.  NYS finds this method to be erroneous for purposes of identifying potential above-50-percent vendors.  NYS notes that this method should not be employed because of the potential negative impact of this designation (above-50-percent vendor) on stores with respect to reimbursement.   In addition to being confusing to vendors, NYS asserts that it is not accurate to use a projection to determine the food stamps to WIC redemption ratio. 

The final guidance issued should offer more flexibility in the identification of potential above-50-percent vendors.  State agencies should be allowed to use methods to identify above-50-percent vendors that correspond with their current vendor management practices.  For example, NYS currently reviews the contract performance of each vendor on an annual basis; at this time many factors are reviewed including adherence to all contract and pricing requirements.  NYS would prefer to assess all vendors at their annual contract renewal date, instead of performing a simultaneous mass review of 1,000+ vendors once a year. 

In conducting the required assessments of potential above-50-percent vendors in 2005 and 2006, NYS WIC has requested documentation from vendors and has reviewed several different federal and state tax forms.   While the NYS sales tax forms appeared to be the most promising with respect to obtaining a “food sales” figure, we have found that this is not the case.   

NYS requested sales tax returns from vendors as a means to estimate “food sales”, with the idea that the “taxable sales” figure could be subtracted from the “gross sales” figure as a reasonable measure of “food sales”.   This method was determined to be inaccurate because: (1) the NYS Department of Taxation and Finance is interested in taxable sales, so a gross sales figure is not required and often times is not provided; (2) corporations are not required to submit separate sales tax returns for each store so the individual store’s information cannot always be 
ascertained; (3) some food items are taxable, so it is impossible to determine how much of the taxable sales would be attributed to these foods (for example, soda, candy); (4) if a business is qualified to accept food stamps, the purchase of certain food items that would ordinarily be subject to sales tax are exempt when they are purchased with food stamps (for example, soda, candy, fruit juices with less than 70% natural juice); (5) the majority of gross sales for pharmacies are drugs and medicines which are tax exempt.   

The suggestion that states request invoices to document food sales is also not a viable method.  Requiring vendors to provide volumes of invoices that specifically match the foods sold each year that can be purchased with food stamps benefits (i.e., food stamps-eligible foods) is simply not feasible for vendors (who buy products from a variety of sources) and represents an extreme administrative burden (of immeasurable proportions), especially for large states such as New York.   In addition, if actual invoices were submitted by vendors how would the state know that they were all inclusive?     

Competitive Pricing (pages 71717-71720) 

NYS concurs that State agencies should retain the flexibility in establishing competitive price selection criteria for the selection of vendors for participation in the program.  

This Interim rule requires State agencies to collect shelf prices for WIC approved foods twice annually after authorization.  While NYS concurs that competitive price determinations should include the review of shelf prices at authorization, the periodic review of redemption information to determine ongoing pricing compliance (in addition to the periodic collection of actual shelf prices) is effective in states that do not allow substitutions and that require participants to purchase all the foods listed on the food instrument (Interim Guidance, page 42).  NYS asserts that when a State agency has a robust automated system to screen the redemption information of vendors on a frequent basis (i.e., quarterly  or  more) obtaining a “snapshot” of shelf prices twice a year is less effective with respect to overall cost containment.  Based on the intent of this provision, the Final rule should consider State agency differences (and capabilities) and allow more flexibility.

Allowable Reimbursement Levels (pages 71720-71721) 

Vendors are of critical importance to the WIC Program.  As part of the State’s general retail food delivery system, it is NYS’s position that WIC vendors are entitled to receive payments for WIC food instruments that equal the retail prices they charge to regular customers.  By only authorizing vendors who are reasonably priced in relation to their peers, and selecting acceptable foods that are cost effective, the program (1) effects cost containment and (2) is able to pay vendors the prices charged to regular customers.                  

With respect to payments to above-50-percent vendors, the Interim rule requires State agencies to ensure that average payments per food instrument do not exceed average payments to regular vendors.  These vendors must be cost neutral to the program, and State agencies are required to complete an assessment that uses statewide average redemption amounts per food instrument 
type (or a representative sample).  NYS asserts that the use of the statewide average is clearly unreasonable because the method fails to account for wide variances in the general cost of living and doing business within a single state.   The proposed payment requirement for above-50-percent vendors could force legitimate, competitively priced vendors to withdraw from the WIC Program, adversely affecting participant access.  

New York City is one of the most expensive cities in the country.  It necessarily follows that the prices charged by NYC stores (regular vendors and above-50-percent vendors) would naturally exceed the prices in comparable stores doing business in Upstate New York.   NYS recommends that the Final rule appropriately takes these variances into consideration and give State agencies the flexibility to determine cost neutrality based on the peer group average (or another comparable statistic if a state does not employ a peer group system).                         

NYS considers the requirement to complete quarterly assessments of cost neutrality for above-50-percent vendors to be excessive and an administrative burden for States that do not have the necessary systems in place to perform the statistical calculations electronically.  Instead of mandating a proscribed method, the Final rule should give State agencies the flexibility of using alternate methods that meet the intent of this requirement.   

Concerning the requirement for the assessments of cost neutrality for above-50-percent vendors, the Final rule should recognize that a formal assessment may not be necessary if the State agency can demonstrate that its payment system reimburses these vendors at the statewide average for each check type.          

This Interim Rule recognizes that the State agency must not deny authorizing a vendor that is needed for participant access even if the vendor’s prices exceed the competitive price criteria. 
Additionally, the Interim Guidance (page 32) allows State agencies to exempt the redemptions derived from these stores from the required cost neutrality assessment for above-50-percent stores.  However, above-50-percent stores needed for participant access that are not high priced (i.e., meet the State’s competitive pricing criteria), are not exempt from the required cost neutrality assessment.   This is an example of one of the inconsistencies included in the guidance for this Interim rule which needs to be appropriately addressed in the Final rule.         
The Interim Rule allows State agencies to exempt pharmacies (meeting the above-50-percent criteria) that only supply exempt formula and medical food to the program from competitive price criteria and allowable reimbursement levels.  The food instruments redeemed by these pharmacies are exempt from the required cost neutrality assessment for above-50-percent stores (Interim Guidance, page 32).  Many states authorize pharmacies for participant access to exempt formula and medical food, but do not prohibit the purchase of contract formulas.  However, these pharmacies (meeting the above-50-percent criteria) are not exempt from the required cost neutrality assessment.   This is another example of the inconsistencies included in the guidance for this Interim rule which needs to be appropriately addressed in the Final rule.          

Cost Containment Certification (page 71721)

The Final rule should give State agencies the flexibility to design reimbursement processes for above-50-percent vendors that are consistent with the capabilities of its current system.   Based on the language contained in 246.12(g)(4)(D), State agencies whose payment process for 
above-50-percent vendors that includes a recoupment of excess payments should be eligible for cost containment certification.    

Once again, NYS appreciates the opportunity to comment on this Interim rule and looks forward to a Final rule and guidance that focus on the intent of the vendor cost containment regulations, and give State agencies optimal flexibility to effectively implement the requirements.  

							Sincerely, 

							Timothy Mooney, Director
							Bureau of Supplemental Food Programs
							Division of Nutrition