Feeding Babies vs. Fueling Competition

Yvette Edwards never imagined that baby food could be so expensive. Each month, the Washington receptionist spends about $80 on infant formula for her newborn daughter.

"I don't see how some people do it," she says.

Her lament is common among families with modest incomes, and it's easy to see why. In the last 15 years, formula producers have raised their prices by more than 200 percent while the cost of milk, formula's primary ingredient, has risen by only about 30 percent.

Part of the problem, analysts say, is a virtual monopoly enjoyed by the two largest formula producers, Ross Laboratories and Mead Johnson & Co., who together supply almost 90 percent of the market.

But there's another side to this story that policymakers in Washington aren't focusing on: the Special Supplemental Nutrition Program for Women, Infants, and Children (WIC). This government nutritional program, which provides poor families with free formula, has won widespread praise lately for cutting costs and increasing service. But some analysts say it may be contributing to formula's high retail price.

If true, it's a cautionary tale about the unintended consequences of federal policies - of a program that helps the poor and pleases taxpayers while exacting a financial toll on working parents like Ms. Edwards.

At a time when many social programs are under review, the question begs exploration. "It's worth looking into," says Doug Besharov, a policy analyst at the American Enterprise Institute. "It is possible that the WIC program has this effect."

Each year, WIC provides nutritional assistance to 7 million low-income mothers and children, in part by distributing coupons for free formula. In recent years, states have saved billions by forcing formula producers to bid on WIC contracts. As a result, they have been able to add 1.6 million people to the program in seven years. Both Democrats and Republicans have recently hailed WIC as an example of a government program doing more with less.

Soaring retail prices

But as successful as the competitive bidding process has been, some experts say, it has worsened price conditions in the $2 billion formula industry. By cutting into the profits of manufacturers, WIC has increased pressure on the companies to make up for lost revenue.

"Formula already costs more than it should, and WIC has made it worse," argues Naomi Baumslag, a Maryland pediatrician who wrote a book about the formula industry. As a result, she alleges, formula companies "try to recover these costs by raising prices on the people who don't get it for free."

Indeed, the general public might pay $2.50 for a 13-ounce can of formula, while some states have negotiated WIC contracts in which they pay as little as 20 cents, according to a study by the Center on Budget and Policy Priorities.

Still, there is little evidence that competitive bidding has driven up prices more than they would have risen anyway. Even before Congress enacted the bidding reforms in 1989, formula prices increased at an average rate that far outpaced increases for other products. In the past 15 years, prices for all goods and services have risen 2.5 percent annually. Formula prices, meanwhile, averaged a 12 percent annual increase - a jump that many experts argue is unjustified.

Since 1992, dozens of states have filed suits charging formula manufacturers with price fixing and antitrust violations. Both Ross and Mead Johnson have settled several suits out of court, although they deny any wrongdoing. Industry representatives declined to comment for this article.

Effect on competition

Yet WIC's effect on the formula market may go beyond issues of price. According to Laurie MacDonald, spokeswoman for Nestle, which entered the American formula market in 1989, WIC's competitive bidding rules have made it difficult for her company to improve its market share.

The problem, she says, is that the profit margin for sales of formula to WIC recipients has fallen so low. Although manufacturers do not make much money on these contracts, she says, companies benefit in the long run by building brand loyalty and winning better display space on supermarket shelves. As a result, companies with WIC contracts gain a competitive edge among consumers who pay full price.

Congress recently passed measures that make it easier for new entrants to compete for WIC contracts, but it may be too late. The previous third-place formula producer, Wyeth Ayerst, pulled out of the business this year, citing a lack of profitability. And WIC's success at cutting costs and adding families to the rolls has enlarged the program's share of the formula market to 57 percent and made it more crucial than ever for manufacturers to win WIC contracts.

Even longtime advocates of WIC agree that some reforms in the structure of the program are warranted. Rodney Leonard, one of WIC's founders, argues that more could be done to ensure a level playing field for all producers. Instead of offering assistance only to families that make less than 185 percent of the federal poverty level, he suggests, WIC benefits should be phased in gradually, allowing more families to get partial assistance.

"It's always been a problem with programs like WIC and food stamps," Mr. Leonard says. "There's often little difference between those who qualify for assistance and those who don't."

To parents like Edwards, help could not come soon enough. The high cost of formula is yet another magnet pulling them down toward public assistance. Already, Edwards is planning to return to work sooner than she'd hoped, because the costs of formula and other baby-related expenses are diminishing her savings.

"I spend more to feed my baby than I spend to feed myself," she says. "That just doesn't add up."