By Akash A. Desai, Beghou Consulting
The Special Supplemental Nutrition Program for Women, Infants, and Children (WIC) is a federally funded program in the United States that provides grants to states for supplemental food, education, and referral services to low-income pregnant, postpartum women, and to infants and children up to 5 years of age found to be at risk of nutritional deficiencies. Supplemental food packages are the cornerstone of the WIC program and accounted for approximately 69% of total program costs in 2014.
As opposed to traditional cash-value vouchers, food packages are mainly provided to WIC eligible participants through food vouchers. Participants are given vouchers for specific combinations of food at zero out-of-pocket cost. Consumers may generally pick any brand of food products regardless of the price for the items as long as the WIC-allowed item(s) meet the voucher criteria and are purchased in WIC authorized stores. This means that if there is a $5 gallon and a $3 gallon of milk at a WIC authorized store, consumers can generally pick either; even if there is no nutritional difference between the two. A notable exception to this policy is the WIC program in the state of Texas, which generally requires that consumers pick the least expensive food item available. Texas, by no coincidence, has the lowest food cost per participant of any state.
The use of food vouchers allows WIC participants to have substantial flexibility in choosing which stores to shop in and what brands to select within their defined package. These vouchers also encourage the consumption of nutritionally dense food packages tailored to the specific needs of different WIC populations. For example, fish contains a significant amount of the types of fats important for prenatal health and is included within the food package for pregnant women. The challenge with this approach is that consumers become insensitive to item prices and to seeking lowest costs. In short, why would consumers pick the $3 gallon of milk if they may pick the $5 gallon at no additional cost? In fact, there is evidence that consumers positively correlate price with product quality even if there is no real difference in quality. This means that consumers may have a preference for the more expensive WIC-allowable item(s) rather than an insensitivity or indifference. There is no benefit gained from increased expenditures resulting from clever branding.
Although WIC is an incredibly successful program, it is important to note that WIC is not a guaranteed benefit, and funding for the program is established by Congress on an annual basis. The number of people served by the program can be limited by reductions in funding, and lawmakers continue to take aim at WIC for cuts. This situation presents a significant challenge to WIC program administrators, who want to balance consumer choice and satisfaction against increasing program expenditures, while maintaining the nutritional integrity of tailored food bundles and high program participation.
Reference Pricing in Health Care
Health insurance companies and employers offering health plans, collectively referred to as ‘payers’ of health care, have also struggled with market failures at least partially attributable to price insensitive consumers. Although this price insensitivity in healthcare largely stems from information asymmetries rather than consumer preferences, payers have taken various approaches — such as construction of narrow or tiered networks — to prevent consumers from obtaining services from high-cost providers. The problem with these approaches is that they seemingly restrict consumer choice, potentially lowering consumer satisfaction and enrollment rates as seen during the backlash against managed care in the 1990s.
In response, payers have recently begun experimenting with reference pricing for consumer purchases of health care services. Under this scheme, a “reference price” is set for services, often the lowest price offered by a healthcare provider within a defined region. Consumers may then choose any healthcare provider to obtain that service but will face additional co-pays or co-insurance above the defined reference price. This maintains full consumer choice but requires that consumers more directly consider price in their decision. A demonstration conducted by CalPERs has had success in reducing projected program expenditures by redirecting patient volume to lower-cost providers, and has even lowered prices through increased provider competition.
Application of Reference Pricing to WIC
Could the same impact be seen in WIC with reference pricing? Although the WIC food vouchers are substantially different than healthcare service purchases, the basic mechanism of creating a price-sensitive consumer and then nudging the consumer toward more economical choices could be applied to WIC food items.
The most straight-forward implementation of reference pricing would require consumers to pay an out-of-pocket cost, either a flat co-pay or percentage, for items priced higher than the reference price. WIC administrators may not have the legal authority to implement cost-sharing policies, which, regardless, would likely affect program participation and satisfaction negatively. Instead, WIC could reimburse participants a percentage of the difference between an inexpensive item relative to a reference price, a so called “shared-savings” for both the consumer and WIC. Under this policy, consumers who choose an item at or above the reference price would receive no reimbursement, but would still face zero out-of-pocket cost. Either of these policies would appropriately incentivize the purchase of a relatively inexpensive item while fully maintaining consumer choice.
Although theoretically appealing, such policies require careful construction tailored by state. First, administrators must set the “right” reference price, which could vary by region or perhaps by store, and the percentage of co-pays or shared-savings. WIC administrators should have access to food receipt data to help inform their options. Administrators must also consider their options for reimbursing shared-savings to participants, which would likely depend on if WIC vouchers are paper or EBT. Finally, administrators must continue to monitor program outcomes such as satisfaction, enrollment, and overall cost.
WIC Administrators, who are operating under a difficult fiscal and policy environment, must consider innovations to effectively nudge consumers towards less expensive but similar quality foods. Although a reference pricing policy for WIC food items would require substantial planning, such a policy seems worthy of simulations and demonstration programs to explore its feasibility and sustainability.
The author would like to thank Tom Workman and Douglas Bradham for their advice on this post.