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Chapter 4 Infant Formula Demand and Supply Before the 2022 Shortage This chapter describes the demand for infant formula and the infantformula supply chain prior to the 2022 infant formula shortage. It alsodescribes the relationships between the Special Supplemental NutritionProgram for Women, Infants, and Children (WIC) and the U.S. infantformula market. CHARACTERIZING THE DEMAND FOR INFANT FORMULA This section describes the demand for infant formula, including themarket segments, consumer behavior, and how infant formula is used inhospitals. Market Segments The next several sections cover market segments related to infantformula in the United States.Product Segment There are several different types and categories of infant formulasold in the United States. Infant formulas designed for healthy terminfants between the ages of 0 and 12 months must meet Food and DrugAdministration (FDA) guidelines surrounding the nutrient requirementsand quality factor studies required of infant formula (as described in 69 PREPUBLICATION COPY—Uncorrected Proofs

70 INFANT FORMULA REGULATIONChapter 3) and are referred to in this report as “non-exempt.” Theycomprise the vast majority of infant formulas sold in the United States.Infant formulas designed for a subset of infants that have specializednutrient needs (e.g., cows’ milk protein allergy, prematurity and inbornerrors in metabolism) are exempt from FDA guidelines surroundingthe nutrient requirements and quality factor studies required of infantformula (as described in Chapter 3), and thus are referred to as “exempt”.Non-Exempt Infant Formula As described in Chapter 3, non-exemptinfant formula must meet all known nutritional requirements for ahealthy term-born infant formulas (Abrams and Bergner, 2023). Thenutrient composition of non-exempt formulas designed for healthy term-born infants can be found in Appendix F. All non-exempt infant formulascontain the same base categories of ingredients necessary to meet infantneeds and remain stable during shelf life: a protein source, a fat source,a carbohydrate source, vitamins and minerals and necessary stabilizersand/or emulsifiers. Many infant formulas also add non-required oroptional “bioactive” ingredients, such as prebiotics, probiotics, and suchingredients as milk fat globule membrane (MGFM) that are often found insome form in breast milk (see Figure 4-1). These optional ingredients areoften associated with a higher price and are the subject of many marketingmessages (Cheung et al., 2023; Neuberger, 2010). Hypoallergenic infantformula (described below) is exempt but easily accessible in stores andonline and follows the same compositional construction pattern as non-exempt formula, depicted in Figure 4-1.FIGURE 4-1 (opposite page) Categorization of ingredient variation of term infantformulas universally available in stores and online in the U.S. market before the2022 infant formula shortage.NOTE: FOS = fructo-oligosaccharides; GOS = galacto-oligosaccharides; HMO =human milk oligosaccharide; MFGM = milk fat globule membrane. 1 Examples: glucose syrup, glucose syrup solids, corn syrup, corn syrup solids,maltodextrin. 2 Examples: potato and tapioca starch. 3 Inositol is a required ingredient in soy formula but is also added as a nonre-quired additional ingredient at various concentrations to some dairy formula. 4 Nonrequired ingredients that have been notified as Generally Recognized asSafe and are considered safe for use in infant formula. Often used in marketingmessaging for the product. 5 Methionine is required. Taurine and carnitine are also added to every U.S. soy-based infant formula offering. 6 Intact protein cow’s milk formula exists with various whey:casein ratio rangingfrom 70:30 to 18:82. 7 A2 cow’s milk is milk from cows that only produce the A2 form of the milkprotein β-casein.SOURCE: Developed by the Committee on Challenges in Supply, Market Compe-tition, and Regulation of Infant Formula in the United States PREPUBLICATION COPY—Uncorrected Proofs

Term Ingredient Components in Infant Formula Infant Required Optional Formula Fat Micro- Nonrequired Protein + Carbohydrate + + + Categories nutrients Bioactives4 • Intact Protein: o Cow’s milk • DHA & ARA (whey & casein6) • Lactose • Nucleotides Dairy o A2 Cow’s milk • Glucose-Based sugar1 • Cow’s milk fat • Vitamins • Lutein o Goat’s milk • Sucrose • Vegetable Oils • Minerals • Lycopene (Non-Exempt) • Partially Hydrolyzed: • Rice starch • Inositol3 o Cow’s milk • Lactoferrin o Cow’s milk whey • MFGM • HMOs • Prebiotics • Intact Soy + amino acids5 • Vitamins Soy • Glucose-Based sugar1 • Vegetable Oils • GOS • Partially Hydrolyzed Soy • Minerals • Sucrose • FOS (Non-Exempt) + amino acids5 • Polydextrose • Probiotics Hydrolyzed Hypo- • Extensively Casein protein • Glucose-Based sugar1 • Vegetable Oils • VitaminsPREPUBLICATION COPY—Uncorrected Proofs Hydrolyzed • Sucrose • Medium Chain • Minerals Whey protein Allergenic • Extensively • Glucose-based starch2 Triglycerides (Exempt) • Free Amino Acids 71

72 INFANT FORMULA REGULATION Many non-exempt infant formulas are marketed as specialty, gentle,sensitive, premium, and so on. This report does not use such descriptorsto distinguish between variations of non-exempt infant formula becausethese are marketing terms that are not regulated and have been defineddifferently over the years. For example, infant formula companies havedifferentially applied the word gentle in their marketing materials to indi-cate the use of partially hydrolyzed protein or intact A2 protein, or ahigh whey-to-casein ratio, or a reduced lactose content. Academic clas-sifications of specialty infant formula have previously defined the termto mean infant formula containing nonrequired ingredients, or targetedto a specific clinical population, such as infants with acid reflux (Rossenet al., 2016). However, as mentioned above and displayed in Figure 4-1,the possible permutations of protein, carbohydrate, and fat ingredientcombinations in infant formula products on the U.S. market make it dif-ficult to define distinct nonoverlapping categories that could be consid-ered specialty. As new products, and the continual introduction of newbioactive ingredients rapidly change the market, the term specialty is nolonger relevant. For example, 99.9 percent of powdered infant formulathat was sold in the United States between 2017 and 2019 contained thelong-chain polyunsaturated fatty acid docosahexaenoic acid (DHA), anoptional additive (Strzalkowski et al., 2023). As another example, prebi-otics are another optional additive commonly found in infant formula. Given the dynamic infant formula market environment, this reportrefers to non-exempt infant formulas in two categories: dairy based andsoy based. This categorization is based on U.S. formulas that were avail-able prior to the 2022 shortage. Dairy-based infant formulas include bothbovine-based formula (cow’s milk, including A2 milk from cows thatonly produce the A2 form of the milk protein β-casein) and, although notin the market prior to 2022, caprine-based formula (goat’s milk) (Jung etal., 2023). As there are dairy-based infant formulas on the market thatprovide protein as a mixture of partially hydrolyzed and intact-proteinformula, the committee includes both partially hydrolyzed and intactprotein formulas within the dairy category. The dairy category includesinfant formulas with a range of carbohydrate sources, ranging from lessthan 1 percent lactose to 100 percent lactose. The soy category includesinfant formulas that provide a protein source of intact or partially hydro-lyzed soy protein, supplemented with amino acids (as required). All soy-based infant formulas on the U.S. market are lactose free, although thisis not a requirement. Figure 4-2 shows a breakdown of the proportion of U.S. sales ofpowdered term infant formula from physical retailers between 2017 and2019 (Strzalkowski et al., 2022). Hypoallergenic and post-discharge pre- PREPUBLICATION COPY—Uncorrected Proofs

DEMAND AND SUPPLY 73FIGURE 4-2 Popularity of term infant formula categories universally available instores and online in the U.S. market (2017-2019) determined by powdered infantformula purchased from major physical retailers.NOTE: Presented is the proportion of liquid equivalent ounces purchased bycategory.SOURCE: Modified from Strzalkowski et al., 2022 by the Committee on Chal-lenges in Supply, Market Competition, and Regulation of Infant Formula in theUnited States.mature formulas are exempt (as described below). Thus, 94 percent ofnon-exempt U.S. formula sold falls into the dairy category.Exempt Infant Formula As described in Chapter 3, exempt infant for-mula are infant formulas that are exempt from certain FDA regulations(e.g., nutrient requirements), as they are for infants with inborn errors ofmetabolism, low birth weight, or other unusual medical or dietary con-ditions (21 CFR § 107.3). A list of all currently marketed exempt infantformulas can be found on the FDA website (FDA, 2019a; see Appendix H).The committee refers to exempt infant formula in four different categoriesbased on FDA classifications: 1. extensively hydrolyzed and amino acid-based formulas, often referred to as hypoallergenic; PREPUBLICATION COPY—Uncorrected Proofs

74 INFANT FORMULA REGULATION 2. formula for premature infants; 3. metabolic formula, such as infant formulas designed for use by infants with identified inborn errors of metabolism; and 4. formula for uncommon medical conditions, such as infant formula for infants with kidney disease or post-surgical chylothorax (FDA, 2019a).The exempt infant formula category also includes multi-nutrient fortifiers,both those made from donated breast milk and those based on cow milk(intact and hydrolyzed proteins). The following section describes each ofthe four types of exempt infant formula. Table 4-1 shows the categories of infant formula that are marketedin the United States, as well as the formats and availability of theseinfant formulas. The first category of exempt infant formula is extensivelyhydrolyzed (casein or whey) protein and amino acid containing formulas,which are often referred to as hypoallergenic. These infant formulas in theU.S. market are lactose free, although it is not a requirement. These infantformulas are widely available in stores and online. The second category of exempt infant formulas, metabolic infant for-mulas, are often designed to meet the nutritional requirements of infantsand toddlers (ages 1–2 years) with any one of several inherited meta-TABLE 4-1 Categories of Infant Formula Marketed in the UnitedStates and Their Formats and Available Locations FDA Desig- Available Loca- Types of Infant Formula Formats nation tions Powder, Dairy (cow’s and goat’s milk RTF,a con- based) Widely available in Non-exempt centratea stores and online Powder and Soy based RTFa Extensively hydrolyzed (hypoal- Powder and lergenic) RTFa Exempt Available in stores, Amino acid based (hypoallergenic) Powder online, and via pharmacy Post-discharge and premature Powder and (transitional) RTFa For inborn errors of metabolism Powder and In hospital and via Exempt RTFa pharmacy onlyb For uncommon diseasesNOTE: RTF = ready to feed. a RTF and concentrate available for some products in this category, not all. b Require a letter of medical necessity.SOURCE: Developed by the Committee on Challenges in Supply, Market Competition, andRegulation of Infant Formula in the United States. Modified from (FDA, 2019a). PREPUBLICATION COPY—Uncorrected Proofs

DEMAND AND SUPPLY 75bolic disorders. For example, phenylketonuria (PKU) is a rare inheriteddisorder caused by a change in the gene that encodes for phenylalaninehydroxylase, the enzyme responsible for breaking down phenylalaninein the body (Williams, 2008). In its classic form, resultant high levels ofphenylalanine can cause severe brain injury (van Spronsen et al., 2021).The metabolic formula designed for infants with PKU is devoid of phenyl-alanine, with remaining essential amino acids added. Because inheritedmetabolic disorders are rare, metabolic products are manufactured lessoften than non-exempt infant formulas and often in a single plant. Theyare only prepared as a powder to increase the shelf life. While a letter ofmedical necessity is legally required for purchase of metabolic products,these products are nevertheless available for purchase at some onlineretailers without such a letter. Moreover, the caregivers of infants withmetabolic disorders are often unable to switch products or provide othersources of nutrition during times of shortage. The third category of exempt infant formula is for infants withuncommon diseases. These infant formulas include, for example, SimilacPM 60/40 for infants with impaired renal function (Abbott, n.d.a.), CalciloXD for infants with hypercalcemia (high levels of calcium in the blood)(Abbott, n.d.b.), and Enfaport for infants with conditions such as chylo-thorax (Reckitt Mead Johnson Nutrition, n.d.). While healthy infants canuse these products without any adverse effects for short periods, theseinfant formulas are typically deficient in critical nutrients such as sodium,iron, and calcium. Infants with uncommon diseases for whom these infantformulas are intended cannot safely use any alternative infant formulas.Some infant formulas in this category may be obtained at the retail level(e.g., Similac PM 60/40), although their availability may be limited. The fourth category of exempt infant formula is infant formula forpremature infants (designed for infants born less than 37 weeks gestationand most often for infants born of very low birthweight (less than 1500g) (AAP, 2020). These infants have elevated energy and essential nutrientrequirements to facilitate their rapid growth and development, which arenot met by non-exempt infant formulas (AAP, 2020). These exempt infantformulas are usually hypercaloric (e.g., 0.8 kcal/ml or 24 kcal/oz for usein-hospital and 74 kcal/dl or 22 kcal/oz for transitional infant formulasintended for use in larger preterm infants and after hospital discharge);they also contain higher concentrations of protein, electrolytes, vitamins,and minerals per 100 kcal than non-exempt infant formula (Young et al.,2016; Koletzko et al., 2021). All infant formulas in the United States that aredesigned for very low birth weight preterm infants contain the long-chainpolyunsaturated fatty acid DHA and a significant fraction of the fat sourceas medium-chain triglycerides to support fat absorption (Klein, 2002).These post-discharge products at 22 kcal/oz are largely available at the PREPUBLICATION COPY—Uncorrected Proofs

76 INFANT FORMULA REGULATIONretail level and will generally not cause harm to full-term healthy infantsconsuming them. Families of premature infants have limited options forswitching infant formulas in times of a shortage; however skilled clini-cians (e.g., neonatal dietitians) with knowledge of formula compositioncould make adaptations in the hospital setting by concentrating formulasdesigned for term-born infants. It is important to note that hypoallergenicand postdischarge/premature infant formulas are available for purchasewithout a prescription outside the hospital setting. The exempt infant formula category also includes multi-nutrient for-tifiers designed to be added to breast milk to meet the elevated energyand nutritional requirements of the very low birth weight and/or verypreterm (28–32 weeks) and extremely preterm (less than 28 weeks) infants(Klein, 2002). The use of breast milk, compared with use of infant formula,is associated with improved early feeding tolerance; a reduction in sepsis,retinopathy of prematurity, and necrotizing enterocolitis; and improvedneurodevelopment (Parker et al., 2021; Patel et al., 2013; Fang et al., 2016;Anderson et al., 1999; Horta et al., 2015; Belfort et al., 2016; Quigley et al.,2019). Therefore, the World Health Organization (WHO) and the Ameri-can Academy of Pediatrics (AAP) recommend the use of appropriatelyfortified breast milk (preferably the mother’s own milk or pasteurizedhuman donor milk if the mother’s own milk is not available, insufficient,or contraindicated) as the optimal way to feed very low birthweightinfants (Parker et al., 2021; WHO, 2022). As a result of evidence and recommendations, there has been a sig-nificant shift in how very low birth weight and preterm infants are enter-ally fed in tertiary neonatal intensive care centers in the United Statesfrom predominantly infant formula feeding to promotion of nutrient-fortified breast milk and the use of pasteurized donor breast milk whenthe mother’s own milk is unavailable (Parker et al., 2020; Xu et al., 2020).Owing to concerns about the sterility of powders, and specifically therisk of Cronobacter sakazakii in the high-risk hospitalized preterm infantpopulation that is also immunocompromised, WHO, AAP, and the Cen-ters for Disease Control and Prevention (CDC) have recommended thatpowdered products not be used in the neonatal intensive care unit if anutritionally appropriate one can be provided as a commercially sterileliquid (WHO, 2012; Flores et al., 2011; CDC, 2002; AAP, 2002).Pasteurized donor milk As noted above, pasteurized donor milk is theoptimal way to feed preterm infants born with very low birthweightwhenever the mother’s own milk is unavailable while infants are at riskof necrotizing enterocolitis (Quigley et al., 2019). While the supportingevidence is sparse, there is considerable interest in using pasteurizeddonor human milk for other hospitalized patient populations such as for PREPUBLICATION COPY—Uncorrected Proofs

DEMAND AND SUPPLY 77infants with some types of intestinal disorders or as a supplement in level1 nurseries for healthy term born infants with or without medical indica-tion until breastfeeding is established (Parker et al., 2020, 2021). Pasteur-ized donor milk can be safely purchased from a for-profit companies orfrom any member of the not-for-profit Human Milk Banking Associationof North America. However, processes involved in producing donor milksuch as container changes, freeze thawing1, and heat treatment (e.g., pas-teurization) are known to affect both the essential nutrient and bioactivecomposition of the milk (Ewaschuk et al., 2011; O’Connor et al., 2015;Pitino et al., 2019,2023; Castro et al., 2021). Thus, it is unclear whetherpasteurized donor human milk will meet all of the nutrient requirementsof infants without vitamin and/mineral supplementation for the infantor nutrient fortification of milk as occurs in the hospital setting with verylow birth weight infants.Consumer Segments This section of the report describes the consumer segments that useinfant formula in the care of infants who are partially or fully fed infantformula, and their experiences with obtaining infant formula and navigat-ing options for feeding infants prior to the 2022 infant formula shortage.As described above, some infant formula consumers require this foodsource because other options are not suitable. Breastfeeding and the useof infant formula interact and an essential component of characterizingcaregivers’ use of infant formula is understanding the external factors thatshift the balance between breastfeeding and the use of infant formula. As of 2020, about 2.5 million infants (0–12 months of age) in theUnited States were using infant formula as a source of nutrition; closeto half of them were 6 months of age or younger. More than one millioninfants (0–6 months of age) are estimated to have used infant formula asan exclusive source of food (Osterman et al., 2024; Decker et al., 2023).2Once infant formula has been introduced into an infant’s diet, it is dif-ficult to replace with breast milk. CDC recommends that cow’s milk notbe introduced until 12 months of age (CDC, 2022). For infants who aredependent on metabolic infant formulas, breast milk may not be a viable 1 Freeze thawing human donor milk includes storing it at -20°C and placing the donorhuman milk in the refrigerator to thaw one day before processing it for use (Haiden andZiegler, 2017). 2 Computations are based on U.S. Census data reporting 3,791,712 live births in 2018(Osterman et al., 2023), and the NHANES study finding that the proportion of infants 0 to<6 months exclusively fed infant formula was 44.8 percent from 2013 to 2018 (Decker et al.,2023). PREPUBLICATION COPY—Uncorrected Proofs

78 INFANT FORMULA REGULATIONalternative and the metabolic exempt infant formula is their only appro-priate food source. Most infants in the United States who are not fully breastfed are fedinfant formula, which affects the number of consumers relying on infantformula. In the most recent national data (2020) reported by the CDC, 83.1percent of infants start out consuming their mother’s breast milk, and by 1and 6 months of age, respectively, 79.5 percent and 58.2 percent of infantscontinued to receive at least part of their nutrition through breastfeeding(CDC, 2023a). Stopping breastfeeding earlier can make families more vul-nerable to local or national shortages in the availability of infant formulaby reducing their infant feeding options; however, many caregivers reportnot being able to provide breast milk for as long as intended because ofsubstantial structural and other barriers to breastfeeding and pumping(ACOG Committee, 2021; CDC, 2023a; Pérez-Escamilla et al., 2023). Those who breastfeed partially are less reliant on infant formula, ornot at all if exclusively breastfeeding, although comprehensive supportfor their breastfeeding requires a combination of interventions at thenational and state policy, health system, and individual levels (Rollins etal., 2016; Pérez-Escamilla, 2020; Segura-Pérez et al., 2021; Pérez-Escamillaet al., 2023). A public policy intervention to support breastfeeding mayinclude paid maternity and paternity leave. At the health system level,WHO’s Baby-Friendly Hospital Initiative includes implementation of the“Ten Steps to Successful Breastfeeding,” which is a collection of policiesand clinical practices to support breastfeeding in birthing units (Rollinset al., 2016; Pérez-Escamilla, 2020; Pérez-Escamilla et al., 2016, 2023). Themain interventions at the individual level are peer and skilled support.Globally, the primary reasons that caregivers who initiate breastfeed-ing begin to supplement with infant formula or stop breastfeeding areself-reported insufficient milk supply and unresolved breastfeeding dif-ficulties (Odom et al., 2013; Balogun et al., 2015; Pérez-Escamilla et al.,2023; Segura-Pérez et al., 2022). It is well-established by several system-atic reviews that skilled lactation support helps breastfeeding parents tobreastfeed exclusively and longer in the first 6 months postpartum (Rol-lins et al., 2016; McFadden et al., 2017,2019; Chetwynd et al., 2019; Sinhaet al., 2015; Patel and Patel, 2016; Pérez-Escamilla et al., 2023). There are many aspects of the U.S. cultural, economic, and medicalenvironment that are not supportive of breastfeeding, especially for cer-tain socioeconomic groups (HHS, 2011; Segura-Pérez et al., 2021; Tomori,2022; Pérez-Escamilla et al., 2023). Addressing these gaps is outside of thescope of this report. However, without adequate breastfeeding supportfor mothers who can breastfeed, it becomes essential that (1) an adequatesupply of safe infant formula is available, and (2) caregivers have unlim- PREPUBLICATION COPY—Uncorrected Proofs

DEMAND AND SUPPLY 79ited access to free, evidence-based and unbiased care and support forinfant formula feeding.Acquiring and providing safe infant formula Many factors affect a care-giver’s ability to acquire and safely provide infant formula. While con-sidering the vulnerability framework and the consumer segment of thesupply chain, the committee identified factors that affected the abilityto provide safe infant formula. A comprehensive analysis was not per-formed by the committee but some of the factors that were identifiedcould impede a safe and adequate supply of infant formula at the house-hold level and are listed below. Food insecurity affects caregivers’ ability to purchase infant formula.Food insecurity is linked with early cessation of breastfeeding (Gallo etal., 2019) and can create or exacerbate disparities in vulnerability to ashortage of available infant formula (CBPP, n.d.a.). Between 2020 and2021, minoritized populations had the highest percentage of food inse-cure households (22.4 percent of Black households and 20.8 percent ofHispanic households, compared with 9.3 percent of White households)(Kim-Mozeleski, et al., 2023; Rabbitt et al., 2023). Despite the significant economic impacts of the COVID-19 pandemic,food insecurity remained relatively steady because of the increases in foodassistance program availability, flexibility, and benefits (Long, 2023). Foodinsecurity increased in 2022 to 12.8 percent when COVID-19 era foodassistance benefits and flexibilities abruptly ended. While Hardy andLogan (2021) had forecasted that Black populations would experience amuch longer economic recovery period after the COVID-19 pandemic,this was not the case, as policies focused on an equitable recovery (e.g.,tax credit improvements, SNAP expansion, Medicaid expansion) bluntedthe differential in recovery expected by individuals with low income,American Indians, and Indigenous persons, compared with more affluentand White U.S. residents (USDT, 2023). The ability to acquire infant formula requires economic resources forcommuting to stores and purchasing formula, which can be expensive.Infant formula can become costly for families who are exclusively or pri-marily feeding infant formula. Even the least expensive infant formulaavailable can cost at least $1,000 per year, and the cost is potentiallygreater than twice that amount for name brand formulas including thosewith optional ingredients (Abrams, 2019). To safely prepare powdered infant formula, clean water is needed.An example of an event that reduced the access to clean water was theFlint, Michigan, clean water crisis. Factors such as economic instabilityand systemic racism (see Box 4-1) further complicated the impact of theinfant formula shortage in Flint (CDC, 2020; EPA, 2024a; City of Flint, PREPUBLICATION COPY—Uncorrected Proofs

80 INFANT FORMULA REGULATION BOX 4-1 Structural Racism—An Overarching Contribution to Health Equity Structural racism as a form of discrimination has been implicated as a factor contributing to health inequities (Bailey et al., 2017; NASEM, 2023). This form of racism stems from historical policies and practices that caused differential treat- ment of individuals by their race and has affected factors such as educational op- portunities, health care, and housing opportunities for minoritized populations for generations (Braveman et al., 2022; NIH, 2023). Discriminatory housing patterns, such as blockbusting and redlining, lead to disinvestment in minoritized communi- ties resulting in lack of access to healthy foods (Sadler et al., 2021). In addition, Sadler et al. (2021) found that gentrification leads to increased access to food,1 which reflects the differential experience by race. Minoritized populations are more likely to have low incomes, work at jobs that do not provide paid maternity leave or routinely scheduled paid breaks (e.g., food delivery and rideshare), participate in WIC, and are less likely to breastfeed (Asiodu, 2022; Pathak et al., 2022). Black people face historical, social, and eco- nomic factors, including the trauma of being forced to breastfeed White infants, which may contribute to a greater prevalence of formula feeding (CBPP, 2023). Black and non-Black Hispanic women have similar intentions to breastfeed, but lower odds of meeting these intentions relative to non-Hispanic White women (Hamner et al., 2020). Rhodes et al. (2022) find that a lack of culturally informed care is a significant barrier to Latina women when seeking breastfeeding support. One area that is often not considered when discussing structural racism is the area of food insecurity (Odoms-Young, 2018). American Indians and other traditionally minoritized populations have the highest percentage of food insecure households. In addition, Jernigan et al. (2017) reported that only 26 percent of American Indians who live on reservations live within a mile of a grocery store compared with 59 percent of White individuals (Kaufman et al., 2014). Low-income Black women are also more likely to live in communities with limited healthy food options, have fewer resources (e.g., time, transportation), and fewer food retailers in their communities compared with more affluent parents (Blackman et al., 2022). While the entire U.S. population was negatively affected by the COVID-19 pandemic, minoritized populations faced increased challenges (Fortuna et al., 2020). Policies during the COVID-19 pandemic that focused on equitable recovery resulted in minoritized communities faring better than they have in other reces- sions (USDT, 2023). However, the efforts taken during the COVID-19 pandemic did not completely mitigate the effect of the infant formula crises on low-income and minoritized families. 1 A term used to describe the displacement of the working-class residents of neighborhoods by an influx of middle-class newcomers. https://www.dictionary.com/browse/gentrification (ac- cessed June 13, 2024). PREPUBLICATION COPY—Uncorrected Proofs

DEMAND AND SUPPLY 81Michigan, 2023). Families of low-income, Native American, and minori-tized populations needing to find infant formula for their infants also hadto navigate how to acquire bottled water to prepare the infant formula(NASEM, 2023e). The committee also notes that WIC plays a large role in assisting indi-viduals to overcome many of the barriers that low-income or minoritizedindividuals face. This is discussed in greater detail below.Special Supplemental Nutrition Program for Women, Infants, and Chil-dren (WIC) consumers WIC is a federal nutrition assistance programadministered by the U.S. Department of Agriculture (USDA) for pregnantand postpartum women and children under age 5 who have low incomesand are at nutritional risk. In 2022, 39 percent of infants born in the UnitedStates participated in WIC (USDA, 2024a), and, despite providing largerfood packages for breastfeeding individuals and breastfeeding support(see Appendix I), 87 percent of infant WIC participants (0–12 months ofa*ge) were either partially fed infant formula (24 percent) or fully formulafed (63 percent) (USDA, 2023a).3 Therefore, WIC participants consume more than half of the infantformula sold in the United States, and the cost of the infant formula WICprovides is covered by federal funding (USDA, 2022a). The amount ofinfant formula provided through the WIC food package, however, maynot be enough to fully formula feed an infant, and it is estimated that aWIC participant would still pay nearly $200 annually out of pocket oninfant formula (Abrams and Daniels, 2019). Many studies have assessed associations between WIC participa-tion and maternal and child health and nutrition outcomes. A systematicreview of the evidence found associations with improved birth outcomes,lower infant mortality, and better child cognitive development; WIC par-ticipation is also associated with purchasing healthier foods and withimproved diet quality in pregnant people and children (Caulfield et al.,2022). Native populations and minoritized populations are more likely tobe eligible for WIC and to participate in the program than White people(Kessler et al., 2023). As a result, WIC may help to mitigate health dis-parities for pregnant and postpartum people and young children of color(Neuberger et al., 2024; Testa and Jackson, 2021). In 2022, nearly 3 millionparticipants identified as Hispanic/Latino, and 1.4 million participantsidentified as Black (Zvavitch et al., 2024). 3 Infants classified as partially breastfed receive about half the amount of infant formulacompared to fully formula fed infants, based on Food Package V (Hodges et al., 2024). PREPUBLICATION COPY—Uncorrected Proofs

82 INFANT FORMULA REGULATION WIC participants, on average, have much lower reported incomesthan the program’s limit of 185 percent of the Federal Poverty Guide-lines (FPG). In 2022, 57.0 percent of WIC participants reported incomesat or below 100 percent of the FPG (Zvavitch et al., 2024) and 80 percentreported incomes at or below 150 percent of the FPG. As a result of theirlow incomes, many WIC participants are also eligible for assistance fromother federal assistance programs. In 2022, 80.4 percent of WIC applicantsparticipated in Temporary Assistance for Needy Families, the Supple-mental Nutrition Assistance Program (SNAP), or Medicaid; 21.3 percentparticipated in both SNAP and Medicaid (Zvavitch et al., 2024).Low-income consumers eligible for WIC but not participating It wasestimated that 22 percent of infants who were eligible for WIC did notparticipate in the program in 2021 (Kessler et al., 2023). There are manyreasons that eligible families may not participate, including not realizingthat they are eligible, lack of transportation, lack of work flexibility toattend daytime appointments, lack of childcare, and the cost of takingtime off from work to meet program requirements (Liu and Liu, 2016).However, another possibility is that nonparticipants may not need theprogram’s assistance and services as much as participants. Mothers ofWIC participating infants were more likely to have lower education (col-lege graduate: 6.9 vs. 28.8 percent), to be younger (less than 30 years: 57.2vs. 39.2 percent), and to be unmarried (56.2 vs. 25.8 percent) comparedwith nonparticipating eligible mothers (Zhang et al., 2021). Individuals not participating in WIC that want to feed infant formulamust purchase it similar to any other food product through the privatesector. Infant formula can become very costly for families that exclusivelyor primarily feed infant formula and is likely especially burdensome forlow-income families. As discussed above, even purchasing the genericstore brand of infant formula can cost more than $1,000 dollars per year(Abrams and Daniels, 2019). Consumer Behavior Before the 2022 Infant Formula ShortageRole of Marketing The marketing of infant formula, and marketing in general, is com-posed of four overlapping activities: (1) product design, development,and packaging; (2) price; (3) placement (e.g., shelf space and location onthe shelf in the store); and (4) promotion (AMA, 2022). The marketing ofinfant formula in the United States includes targeting each of these activi-ties (Hastings et al., 2020). PREPUBLICATION COPY—Uncorrected Proofs

DEMAND AND SUPPLY 83 Mass direct-to-consumer marketing began in the late 1980s wheninfant formula manufacturers began marketing directly to parents forthe first time (Cutler and Wright, 2002). This marketing was opposed byAAP, warning of its “interference with the patient–physician relationshipregarding nutritional advice” (Greer and Apple, 1991). Moreover, as notedin Chapter 3, the United States does not adhere to the International Codeof Marketing of Breast-milk Substitutes (the Code)4 (WHO, 1981), andmarketing of infant formula is pervasive in the United States (Harris andPomeranz, 2020). Digital platforms and use of personal data collected bymanufacturers has allowed for very targeted personalized marketing toconsumers (Rollins et al., 2023). This includes unrequested, direct-to-the-doorstep arrival of infant formula to the home of expecting parents, freesamples, and extensive use of sophisticated and targeted social mediaadvertising. Describing in further detail the extensive infant formula mar-keting practices employed in the U.S. market are out of the scope of thecurrent report. In addition to product marketing, the use of health-related claims andmessaging on infant formula packaging and websites in the United Statesis extensive (Harris and Pomeranz, 2020). A 2022 international survey ofhealth claims used to market infant formulas in 15 countries found thatinfant formulas in the United States were the most heavily marketed,including an average of four health and nutrition-related claims per prod-uct (Cheung et al., 2023). Other studies have found that messages oninfant formula labels tend to overstate the science and inappropriatelyleave the false impression that the product provides the same healthoutcomes as breast milk (Rollins et al., 2023; FDA, 2016). Such claimsare often poorly substantiated and/or unreferenced, and are potentiallyharmful (Cheung et al., 2023; Munblit et al., 2020). A recent series onbreastfeeding in the Lancet characterized formula marketing as mislead-ing and exploitative and stated: The evidence base for purportedly improved health outcomes, including brain development, immunity, growth, and sleep, and absence of harms, should be assessed by an independent scientific body. Ingredients found to be beneficial should be mandatory in all formula products. (Rollins et al., 2023, p. 497) Extensive infant formula marketing has been directly linked to infantfeeding outcomes (Rollins et al., 2023). Infant formula marketing has also 4 The Code is an international health policy framework to promote and protect breastfeed-ing and was adopted by the World Health Assembly of the World Health Organization in1981. PREPUBLICATION COPY—Uncorrected Proofs

84 INFANT FORMULA REGULATIONbeen shown to influence normative beliefs and values surrounding infantfeeding and, in doing so, reduce breastfeeding practices and increase theuse of infant formula both overall and beyond the first year of life (Piwozand Huffman, 2015; Pérez-Escamilla et al., 2023; Hastings et al., 2020). Par-ents who are exposed to and agree with marketing messaging are morelikely to feed their infants infant formula over breast milk than parentswith less exposure and agreement (Romo-Palafox et al., 2020).Consumer and Medical Education Inadequacies in the quality of teaching about nutrition in U.S. medi-cal schools has been a public health concern for decades (NRC, 1985).In the United States, pediatricians receive relatively limited educationregarding non-exempt infant formula nutrition (Essel, 2022). Nutritioneducation in general is severely limited in U.S. medical schools, withapproximately 80 percent of medical educators agreeing that more nutri-tion education is needed (Abrams and Daniels, 2019; Crowley et al., 2019;Adams et al., 2015; NRC, 1985). Infant feeding has specifically been notedto be a critical nutrition topic to be incorporated into medical education(Abrams and Daniels, 2019; NRC, 1985). Some infant formula companieshave attempted to fill the gap and offer education to health care provid-ers; however, this education carries a risk for bias and may not includeenough information about the benefits of breastfeeding or discussion ofother brands and products. Furthermore, there is increasing internationalpressure from professional and health care organizations for health careproviders to limit interactions with the infant formula industry, includingparticipation in educational opportunities (Wright and Waterston, 2006;Boyle and Shamji, 2021; Mayor, 2019; Becker et al., 2022). Physician andmedical education on non-exempt infant formula provided by entitiesoutside of the infant formula industry is limited. In addition to a lack of formal education about infant formula nutri-tion, health care providers are subject to marketing messaging and aretargets of marketing campaigns, as well (Rollins et al., 2023; Clark andGhebreyesus, 2022). A marketing practice called “medical detailing,” iswhen manufacturers rely on hospitals and individual health care provid-ers to recommend infant formula brands and products (Oliveira et al.,2004). In a setting in which there is direct marketing by manufacturersto health care providers, or where health care providers do not feel veryknowledgeable about infant nutrition (Baker et al., 2021b; Harvard T.H.Chan School of Public Health, n.d.), they may default to particular prod-ucts (e.g., the WIC contract product, or a product they used with theirown children) in their recommendations (Rollins et al., 2023). PREPUBLICATION COPY—Uncorrected Proofs

DEMAND AND SUPPLY 85 Meanwhile, health care providers are one of caregivers’ first resourcessought for guidance on infant formula feeding, especially regardingswitching infant formulas owing to caregivers’ perceptions of toleranceissues, or when a desired brand or product is unavailable (e.g., a recall orshortage). Health care providers may be inadequately trained or preparedto deal with such inquiries. In an open information gathering session withprevious infant formula industry representatives, the committee learnedthat the infant formula industry thinks that it is the health care provider’srole to provide guidance to parents about various infant formula prod-ucts that may be appropriate for their child (NASEM, 2023b). However,the lack of education for health care providers is reflected in parentalexperiences. Most formula-feeding parents report not receiving adequateeducation or information about all types of infant feeding and/or conflict-ing guidance (Appleton et al., 2018; Dattilo et al., 2020; Fahlquist, 2016;Hvatum and Glavin, 2017; Lagan et al., 2014; Thomson et al., 2015). Addi-tionally, a common theme from formula-feeding parents’ experiences isperceived judgement from health care providers surrounding their feed-ing choices (Jackson et al., 2021; Thomson et al., 2015; Fallon et al., 2017).5 In addition to limited access to guidance from qualified professionalregarding infant formula selection and switching, the information pro-vided to parents regarding safe handling and preparation of infant for-mula varies. There has been longstanding disagreement between U.S. andinternational recommendations on safe consumer preparation of infantformula. The WHO guidance for preparation of all powdered infant for-mulas has always been to boil water and then cool to no less than 70°Cbefore mixing with powder (WHO, 2012). In the United States, prior tothe 2022 infant formula shortage, there was no universal consensus or sin-gle centralized preparatory guidance, creating confusion for both parentsand health care providers. The determination of whether the caregivershould boil water or use ready-to-feed (i.e., sterile) infant formula or if itis safe to use powdered infant formula without boiling water lies with thehealth care provider and is based on the infants’ individual risk of Crono-bacter sakazakii infection and is informed by the infant’s gestational age,age, immune status, and other medical factors (FDA, 2023a; CDC, 2023c). Despite these recommendations, most U.S. parents do not boil waterwhen preparing powdered infant formula. The Infant Feeding PracticesII Survey reports that about 21 percent of parents boil water when pre-paring powdered infant formula for their 2-month-old infants (CDC,2021a). Additional data suggest that up to 78 percent of powdered infantformula bottles are prepared incorrectly, indicating that the current ways 5 Most of these qualitative studies of parents’ experiences were conducted in countriesother than the United States. PREPUBLICATION COPY—Uncorrected Proofs

86 INFANT FORMULA REGULATIONof educating families have not resulted in acceptable rates of proper infantformula preparation (Altazan et al., 2019). Only 12 percent of U.S. motherssurveyed in the Infant Feeding Practices II Survey reported ever receivinginstruction from a doctor, health worker, or birth class about how to safelyprepare and store infant formula (CDC, 2021a).Formula Introduction in Hospitals It is important to note the interplay between infant formula intro-duced in the hospital and families’ likelihood of providing breast milkand ability to maintain breastfeeding undisrupted after leaving the hos-pital. Many hospitals still routinely supplement breastfed infants withinfant formula, which is associated with reduced duration of breastfeed-ing (CDC, 2021b; Whipps et al., 2021; Chantry et al., 2014; Pérez-Escamillaet al., 2022; Eilers et al., 2020). In addition, manufacturer sales repre-sentatives are present in some hospitals, and some scholars argue thatdirect relationships between hospital health care providers and the infantformula sales representatives influence health care providers’ decisions(Bobbie, 2023b; Rhodes et al., 2022). These relationships often are framedas professional collaborations or expert advice to doctors to address com-mon infant behaviors, such as fussiness, as a manifestation of a medicalissue such as an allergy, which can lead to over-diagnosis (Rollins et al.,2023; Mehta et al., 2022; Boyle et al., 2016). Any effect on duration ofbreastfeeding affects the likelihood, and the degree, to which a family canprovide breast milk during an infant formula shortage. Hospital Feeding Preparation Infant formula is generally provided in ready-to-feed format by bottleor supplemental nursing system for healthy term-born infants in thehospital. Often, these infant formulas are provided to institutions bythe manufacturer free of charge, except in facilities designated as “BabyFriendly Hospitals” that “pay market value for formulas that they usevery sparingly” (Steele and Collins, 2018). Brand loyalty, a term introducedby Tucker (1964), can help explain the marketing behavior or infant for-mula brands and loyal purchasing. For example, brand loyalty occurswhen a specific brand of infant formula is known to the family, and ifthe infant is tolerating the infant formula, it is often purchased after dis-charge, beginning the development of brand loyalty. Many preterm and sick infants who require an extended hospital staywill require either multi-energy and nutrient fortification of their ownmother’s milk (breast milk multi-nutrient fortifiers), pasteurized donatedbreast milk, or nutrient concentrated infant formulas (e.g., 72–74 kcal/100 PREPUBLICATION COPY—Uncorrected Proofs

DEMAND AND SUPPLY 87ml versus standard 64–68 kcal/100 ml) to meet their elevated nutritionalrequirements (Young et al., 2016). Given that feeds are administered in awarm environment, it is important that they be prepared safely to reducethe likelihood of contamination and bacterial growth (CDC, 2023c). The Pediatric Nutrition Practice Group of the Academy of Nutritionand Dietetics has championed an authoritative guide on breast milk andinfant formula storage, handling, and preparation techniques for healthcare facilities (Steele and Collins, 2018). This guide is widely used todevelop hospital-specific policies on the preparation and handling ofinfant formula. Recommendations include a separate room for milk/formula preparation, written guidelines on how long feeds can be heldat what temperature, monitoring of the same, specific guidance on hangtimes for tube feedings, and nutrition education of parents for mixing andadministering feeds after discharge. Infant formula supplementation should only be provided when theparent’s own milk is unavailable (e.g., parent choice, maternal illness) orif medically indicated, especially for preterm infants at risk of necrotiz-ing enterocolitis (Lucas and Cole, 1990; Abrams et al., 2014). Often theseinfant formulas are provided to institutions free of charge (Steele andCollins, 2018). Associations between prelacteal feeds and breastfeeding have beencharacterized in low- and middle-income countries (Pérez-Escamilla etal., 2023).6 Equivalent national data are not available from high-incomecountries. CHARACTERIZING THE SUPPLY CHAIN This section of the report describes the infant formula supply chain,including supply chains upstream and downstream from the produc-tion of the finished infant formula product7, and product availability inhomes (see Figure 4-3). This chapter also describes the flow of informationthrough the supply chain as well as imports and trade restrictions. Figure 4-3 illustrates the sources of materials used to create infantformulas by U.S. manufacturers, as well as the contributions of non-U.S.manufacturers to the total supply of infant formula available to U.S. con-sumers (in green). Imported products from foreign brands also contributeto the U.S. formula supply. This diagram also illustrates the complex- 6 Prelacteal feeding is the introduction of foods and/or liquids other than breast milkgiven before breastfeeding is established during the first few days after birth (WHO, 2003). 7 Upstream refers to the ingredients, packaging, and other materials used in the manu-facturing of infant formula. Downstream refers to distribution channels for the final infantformula product after production. PREPUBLICATION COPY—Uncorrected Proofs

88 Imported and domestic components Imported Direct (vitamin pre-mixes, formula base, etc.) infant distribution formulas from Fed to Purchased by manufacturer any caregiver non-WIC U.S. infant Retailers infants Only brands Required formula Supermarkets on state WIC ingredients manufacturers E-Commerce contract and supplies House brands U.S. infant Formula (powdered/liquid) formula Distribution components (no WIC contracts) via supply Other Name brands Redeemed by Fed to intermediary components (powdered/liquid) caregiver of WIC (bottles, labels) (may have WIC Smaller stores Only brands Pharmacies WIC infant infants contracts) on state WIC Clinics contract Some hospitals Free samples Group Fed to By contract to future purchasing hospitalized Specific hospitals parents organization infants Upstream SC Manufacturer Downstream SC ConsumersPREPUBLICATION COPY—Uncorrected Proofs FIGURE 4-3 Supply chain from production to use of infant formula: United States, pre-Abbott recall NOTE: SC = supply chain; WIC = Special Supplemental Nutrition Program for Women, Infants, and Children. SOURCE: Developed by the Committee on Challenges in Supply, Market Competition, and Regulation of Infant Formula in the United States.

DEMAND AND SUPPLY 89ity of the distribution system for infant formula in terms of the severaltypes of distribution channels and the complexity of serving healthyinfants through the marketplace (in blue), hospitalized infants (in red),and infants supported by WIC (in yellow). In addition, there is someleakage of infant formula from WIC families to ineligible families (dashedyellow line). Upstream Supply Chain Although nearly all infant formula consumed in the United Statesis produced domestically, many of the ingredients are or have recentlybeen imported from abroad. These include vegetable oils, whey proteinconcentrates; vitamins; minerals; special additives, such as probiotics;and “infant formula base powder” (Harmonized System Classification(HS) Code 9903.19.23), which is a dry mixture of protein, fat, and car-bohydrates to which manufacturers add vitamins, minerals, and specialadditives to create a final product. It is difficult to map where ingredientscome from using publicly available product-level trade data; however, wepresent a few examples of critical nutrients and the countries from whichthe United States imports them. Figure 4-4 shows a select number of ingredients used to deliver criti-cal nutrients in infant formula and the frequency with which they areimported from China, a leading supplier of infant formula inputs. Whilethe United States imports these vitamins and minerals from diverse coun-tries, China is by far the largest supplier of nearly all of them. Some ofthese micronutrients may be used as ingredients in products other thaninfant formula, such as dietary supplements. The landscape for infant formula ingredient sourcing is further com-plicated by the possibility that the countries from which the United Statesimports these ingredients import the ingredients themselves or importraw materials to refine them from other countries. In addition, infantformula industry experts explained in a public session that premixesof critical nutrients have become common, presenting a challenge formanufacturers that wish to diversify supply chains (NASEM, 2023c),both because it is difficult for manufacturers to trace the ultimate sourceof ingredients in premixes that they import and because the supply sideof the market for premixes appears to be concentrated itself. The com-mittee could not identify the Harmonized System (HS) product code—aninternational trade code that is used to describe a product (Department ofCommerce, n.d.)—for these premixes needed to view the data on importflows, possibly because premixes often are customized and may plausiblyenter the country under a range of different product codes. The commit- PREPUBLICATION COPY—Uncorrected Proofs

90PREPUBLICATION COPY—Uncorrected Proofs FIGURE 4-4 U.S. imports of vitamins and minerals listed among essential nutrients for infant formula: Share from China. NOTE: The values indicate U.S. imports of the vitamins and minerals for all uses, not just or necessarily for infant formula. SOURCE: Developed by the Committee on Challenges in Supply, Market Competition, and Regulation of Infant Formula in the United States, based on U.S. Census USA trade data.

DEMAND AND SUPPLY 91tee likewise was unable to find data on imports of infant formula basepowder to identify key country sources. Prior to the 2022 shortage, FDA regulations required infant formulamanufacturers to maintain records of lot numbers for ingredients, as wellas documentation of quality testing by the supplier or by the formulamanufacturer (21 CFR 106.100). However, FDA does not require reportingof this information unless responding to an event, such as suspected food-borne illness, that requires tracing back to upstream ingredients (FDA,2023b).Packaging In addition to ingredients, the upstream supply chain also includespackaging materials for infant formula.Types of packaging Infant formulas in the United States are packaged ina variety of containers of different sizes that are composed of various con-tact materials. The packages are designed to protect the product againstoxygen, moisture, and light (Pascall et al., 2022). Liquid infant formulas(e.g., concentrates, ready-to-feed, and liquid multi-nutrient milk forti-fiers) are frequently packaged in plastic (e.g., polypropylene) or asepticpackaging and come in flexible pouches or sachets of various sizes. Forexample, 2 oz (59 ml) ready-to-feed formula packaged in plastic nursettesare popular for institutional use as they are single-use, commercially ster-ile, and a nipple can be attached; single use (e.g., 6 and 8 oz ready-to-feed)and larger sized options (e.g., 32 oz ready-to-feed, 13-oz concentrates) arecommonly used after hospital discharge (Connecticut State Departmentof Health, 2020; Minnesota Department of Health, 2022). Liquids are commercially sterile, which serves the additional purposeof preventing spoilage. Commercial sterilization is achieved by either: (1)traditional retort sterilization, which involves heating the container to240°F for 15 to 20 minutes after it is filled and sealed using pressurizedhot water; or (2) ultrahigh-temperature sterilization at 275 to 300°F for 1second or less (direct or indirect heating), which takes place in-line priorto the product being transferred, through aseptic filling, into sterile con-tainers (Jiang and Guo, 2021). Powdered infant formulas are packaged in plastic tubs with resealablelids, fiber boxes (e.g., refills), and metal cans (often with a plastic lid foruse after opening). Packages generally contain a measuring scoop sizedfor that specific product. The size of the containers ranges from single-usesachets to 31.4 oz refillable boxes. While there are heating steps duringprocessing, the heating is insufficient to produce a commercially sterileproduct (FDA, 2023a; CDC, 2023c). The sifted final powdered product is PREPUBLICATION COPY—Uncorrected Proofs

92 INFANT FORMULA REGULATIONtransferred to a filler hopper in the powder packaging line (often by largetotes). Filling of both non-exempt and exempt infant formula includinghuman milk fortifiers into containers can occur at the same facility wherethe formula is manufactured or off-site at an infant formula manufacturerowned facility or third-party FDA-regulated facility. The filler hopperfeeds the powder into the can-filling line under a nitrogen atmosphere,which prevents oxidation of the milk fat (Jiang and Guo, 2021). Containersare then sealed after they are filled with powdered formula. The location of the scoop varies by packaging. Some packages includea click-in holder for the formula scoop (often on the underside of the lid).It is also very common to have no holder for the scoop. Thus, the scooparrives buried within the powder, and can also become easily reburiedin the powder with subsequent use. Health care institutions are recom-mended to only use a powdered infant formula when a nutritionally suit-able sterile liquid product is unavailable (WHO, 2012). However, severalexempt infant formulas, most notably the metabolic formulas, are onlyavailable in a powdered format.Regulation of food contact material Infant formula packaging is regu-lated by FDA. FDA considers infant formula packaging to be a food con-tact article made up of food-contact materials (FDA, 2023c, d; 21 U.S.C §348[h]) which, in turn, are comprised of “food contact substances.” Com-ponents of packaging that come into contact with infant formula includescoops, lids, container liners, and totes used to collect and store powderedformula prior to packaging. FDA’s focus on packaging is to determinewhether each food contact substance that comprises the components ofpackaging is authorized for its specific intended use in the packaging(FDA, 2023e). For example, FDA’s evaluation of an infant formula scoopincluded in a can of powdered formula would examine the regulatorystatus of each of the food contact substances that make up the scoopincluding the polypropylene base, the colorant, and the stabilizer. As described in 21 C.F.R. § 106.40(b), any substance used in packag-ing material for infant formula that is reasonably expected to becomea component of food as a result of its intended use must be authorizedor exempt for its intended use by one of the following: a food additiveregulation, an issued Threshold of Regulation exemption, have GenerallyRecognized as Safe status, be subject to a prior sanction, or be subject toan effective Food Contact Substance Notification (FCN) (FDA, 2015). If afood contact substance used in infant formula packaging is not alreadyauthorized or exempt for its intended use, additional premarket autho-rization such as a FCN may be required. FCNs are manufacturer-specific PREPUBLICATION COPY—Uncorrected Proofs

DEMAND AND SUPPLY 93for the intended use and only valid for the manufacturer listed in thenotification (FDA, 2021). Infant formula manufacturers heavily rely on the vendors of packag-ing material to provide the information that FDA requires to determine ifthe food contact material is safe for its intended use (e.g., provide a dec-laration of compliance) (see Public Access File)8. FDA published guidancefor the industry regarding preparation of FCN submissions for food con-tact substances that are intended to contact infant formula or human milk(FDA, 2019b). Specifically, this guidance provides direction on how toaddress dietary exposure and safety assessment considerations for infantsrelated to the migration of a food contact substance from packaging andother food contact articles that are intended to contact infant formula.Challenges with packaging of infant formula The committee becameaware of several challenges associated with packaging that could affectthe timeliness of a new infant formula entering the market or a changebeing made in response to supply chain issues in sourcing packagingmaterials through an public session with former infant formula industryemployees on November 10, 2023, correspondence with the Infant Nutri-tion Council of America, and additional written comments (see PublicAccess File). These challenges relate to sourcing food-grade materials thatmeet good manufacturing practices required for infant formula (21 C.F.R.§ 106) and logistics to verify new food contact materials and substances.Infant formula manufacturers are reliant on third-party vendors that pro-vide packaging materials to assist with FCNs, and far as the committee isaware, no U.S. infant formula manufacturers produce their own packag-ing materials. In addition, all currently approved food contact materialsmay not meet FDA guidelines for preparation of FCN submissions forfood contact substances that may contact infant formula or human milk(FDA, 2019b). While the intention of these guidelines was to facilitate the prepara-tion of a complete and timely review of FCN submissions, infant formulamanufacturers have requested clarity on various aspects of these guide-lines (e.g. information to be included in the Food Master Files used toshare confidential information). In addition, infant formula manufacturersreported that a 2020 extension of the review period for a major change toan infant formula (including packaging) from 90 to 180 days was slowingentry of products to the market (FTC, 2024). Ongoing packaging chal- 8 Public Access File available by request via the National Academies. https://www.na-tionalacademies.org/our-work/challenges-in-supply-market-competition-and-regulation-of-infant-formula-in-the-united-states (accessed April 11, 2024). PREPUBLICATION COPY—Uncorrected Proofs

94 INFANT FORMULA REGULATIONlenges experienced by infant formula manufacturers in considering newpackaging materials, and monitoring those in use currently, include: 1. ensuring container seal integrity (and ways to verify it); 2. minimizing foreign matter contamination (e.g., manufacturing debris from cans); and 3. lead time necessary to secure a new type of container (e.g., could be up to a year) and the requirement to conduct shelf-life testing of the product in this new packaging once received for the Infant Formula Notification to FDA. Emerging challenges, in addition to producing safe packaging, includethe need for the infant formula industry to explore alternative materials,such as bioplastics or chemical recycling, to progress on sustainability andExtended Producer Responsibility, which is a policy approach that assigns producers greater responsibility for the end-of-life management of the products they introduce to the market and encourages innovation in product design (NCSL, 2023).The identification of microplastics in infant formula and a determinationof how to measure these microplastics and what levels are acceptable arealso important future challenges (Li et al., 2020; Zhang et al., 2023). Manufacturing of Infant Formula This section of the report describes the production of infant for-mula, starting with the manufacturing processes followed by marketconcentration.Production Infant formulas are currently available as liquids (concentrated orready-to-feed) and powders, each type made through a complex but dif-ferent process. Part of the reason for a different manufacturing process isthat liquids must be sterile until opened, whereas powders are not (FDA,2023a; CDC, 2023c; Finn et al., 2013; Beuchat et al., 2013; Bourdichon et al.,2021). The equipment used to produce liquids differs from that of pow-ders; hence, manufacturing lines used to produce liquid and powderedinfant formulas are not interchangeable (NASEM, 2023a). Further, certainproducts such as hypoallergenic infant formulas (extensively hydrolyzedamino acid based) are produced on designated lines where extra cleaningprocedures are introduced to avoid contamination with intact proteins. PREPUBLICATION COPY—Uncorrected Proofs

DEMAND AND SUPPLY 95Because of the specialization of the manufacturing process, manufactur-ing plants generally focus on specific products rather than an entire infantformula product line. Liquid infant formula products include ready-to-feed products andliquid concentrates; the liquid concentrates need to be mixed in equalvolumes with water prior to feeding. The manufacturing and packagingprocesses for liquid infant formulas varies, but typical processes involvethe sequential mixing of ingredients. For example, in the case of bovinemilk-based infant formula, the process commences with the mixing ofcow’s milk (e.g., non-fat cow milk, whey protein concentrate), filteredwater, and lactose with vitamin and mineral premixes (Jiang and Guo,2021). Vegetables oils and, potentially, sources of long-chain polyunsatu-rated fatty acids (e.g., DHA and arachidonic acid) are then hom*ogenizedwith an emulsifier (e.g., lecithin) to create a stable emulsion between thelipid and water-soluble phases (Jiang and Guo, 2021). During this, heat isapplied to facilitate mixing (e.g., to reduce viscosity and enhance hom*og-enization), and reduce the bacterial content of raw ingredients (Jiang andGuo, 2021). The resulting infant formula is cooled and maintained in tem-perature-controlled tanks, where analytical testing is done to ensure thefinal infant formula meets specified nutrient levels (Jiang and Guo, 2021). Cans, plastic nursettes, or bottles are filled with the resultant infantformula, and sealed and heated at 250°F for 15 to 20 minutes using pres-surized hot water. This process and critical control points, called retortsterilization, destroys bacteria present in the final product and enablesstorage of the unopened product at room temperature without microbialspoilage. The heating process can induce Maillard reactions, a form ofnon-enzymatic browning where the ε-amino group of lysine residue ofmilk proteins reacts with milk lactose, thus making the infant formulaunusable (Jiang and Guo, 2021). The committee is aware of the use ofultrahigh-temperature sterilization (275–300°F for seconds) for at least onebreast milk-based fortifier. Some infant formulas may also be sterilized,stored in large pre-sterilized tanks, cooled, and then dispensed into thepre-sterilized product containers aseptically. To produce powdered infant formula, the liquid product is heatedagain and then transferred to specialized dryers, often spray dryers (Jiangand Guo, 2021). Specifically, the concentrated liquid formula is sprayed(atomized) under pressure into a chamber (usually a vertical tower witha conical bottom) with circulating hot air, which produces a fine powderof uniform diameter. The temperature of the air in the chamber is 340 to480°F, while the product temperature remains below 212°F. Heat-sensitiveingredients may be added at this stage to some infant formulas. After,containers are filled with powdered infant formula and sealed as part of PREPUBLICATION COPY—Uncorrected Proofs

96 INFANT FORMULA REGULATIONa product monitoring process that includes instruments to verify weightand seal integrity. Low-moisture foods are not inherently sterile, and these foods,including infant formula, are not free of risk of foodborne disease (Finnet al., 2013; Beuchat et al., 2013; Bourdichon et al., 2021). Additionally,the combination of wet and dry processing of infant formula providesan environment where microbial contamination can occur (Mullane etal., 2007; FDA, 2023h). As described in FDA’s compliance manual (2023i): These organisms [pathogenic bacteria] can survive drying particularly well and are difficult to kill with heat when they are dehydrated or in low moisture products. ... The growth of these organisms is favored in those areas of a manufacturing plant where water occasionally wets the area, either intentionally as part of periodic wet cleaning, or inadvertently as the result of leaking pipes or valves or a leaking roof. An ideal growth and survival environment is one which periodically gets wet (even if only once every few months) and then takes at least one day or more to fully dry. Different types of powdered infant formula may require special han-dling and ingredients to avoid contamination (e.g., with partially hydro-lyzed and intact protein). Metabolic and hypoallergenic infant formula,in particular, may require extreme care and isolation of ingredients anddedicated lines or careful decontamination of lines prior to manufacture.For this reason, some types of infant formula may be produced in batches,just once or twice per year. Depending on the age and design of the plants,production lines may or may not be able to be shut down or be repur-posed individually (NASEM, 2023d). Also depending on plant design,ingredients may need to pass through areas of the plant outside of theindividual line where a final product is manufactured. Thus the uniquemanufacturing requirements of different powdered formulas can reduceflexibility to address a shortage of one product with another within aplant, especially exempt infant formula products. Issues of infant formula production safety are related to bacterialcontamination and contamination with other components, such as heavymetals including lead and arsenic, and pesticides and other organic con-taminants (Mielech et al., 2021). The Food and Drug Administration hasdeveloped criteria for each of these contaminants, and FDA has an ongo-ing working group related to heavy metal and other contaminants (FDA,2023a,f). Nonetheless, clear understandings of the relative role of infantformula companies, FDA, and importers in monitoring and respondingto contamination issues is an important component of any comprehensiveassessment of infant formula safety. PREPUBLICATION COPY—Uncorrected Proofs

DEMAND AND SUPPLY 97 During a public meeting, one industry expert told the committee thatmanufacturers should assure 6 months to a year’s infant formula supplyto have on hand to buffer fluctuations in orders or supply, but that theseinventories became very low during the shortage and may not yet be fullyreplenished (NASEM, 2023d).Concentration The supply side of the infant formula market is highly concentratedat multiple levels. The infant formula manufacturing industry emergedat the end of the nineteenth century and has entered a phase of matura-tion in the product life cycle characterized by consolidation, large marketshares among the dominant firms with a competitive fringe of smallerfirms, and concentration of manufacturing capacity in large, capital-inten-sive plants.9 These factors often lead to aggregate concentration in salesand production capacity both globally and within the United States.Global sales concentration Globally, available data presents challenges inseparating the production and sale of infant formula (ages 0–12 months)from follow-on formula for older infants (ages 6–12 months). Infant andfollow-on formulas are often produced in the same facility and are notdistinguishable in tariff (product) codes at the 6-digit level, which isthe finest level of detail in product categories for which codes are thesame across countries. In 2018, the six largest infant formula manufactur-ers globally (Nestlé, Danone, Reckitt Benckiser-Meade Johnson [RBMJ],Abbott Laboratories, Friesland Campina, and Feihe) accounted for nearlytwo-thirds of world sales, with the three largest (Nestlé, Danone, andRBMJ) accounting for 42 percent (Baker et al., 2021a), when consideringthe combined measure of commercial milk formula. In an analysis ofdata from Euromonitor Passport, Russ and Baker (2022) estimated thatthe largest two U.S. manufacturers (Abbott and RBMJ) accounted for justunder four-fifths of the U.S. market in 2019. In terms of concentration, theUnited States ranked 10th among members of the Organization of Eco-nomic Cooperation and Development (OECD),10 a level similar to that inthe United Kingdom, and not very different than the median country (75 9 See Vernon (1966), Klepper (1996), Gowrisankaran and Holmes (2002), and Holmes andStevens (2014) for a discussion of product and industry lifecycles, concentration, and capital-intensity in maturing manufacturing industries. 10 An international organization that works with governments, policy makers, and citi-zens from 38 mid-high income member countries, including the United States, to establishevidence-based international standards and solutions to social, economic, and environmen-tal issues (USOECD, n.d.) PREPUBLICATION COPY—Uncorrected Proofs

98 INFANT FORMULA REGULATIONpercent), but substantially higher than in Australia, France, and Germany(Russ and Baker, 2022). Although each country’s market is different, a 2014 assessment of theglobal market by the consulting firm Coriolis, commissioned by the NewZealand Board of the Pacific Economic Cooperation Council, attributesthe high degree of concentration to the complexity of the product, patentsand intellectual property, regulations, government market interventions,and resulting economies of scale and consolidation (NZPECC, 2014). Theauthors note that consolidation is particularly: pronounced at the national or regional level with almost all markets structured as three or four key firms, typically some subset of the global firms and, perhaps some vestigial regional brands, and a few small niche brands. (NZPECC, 2014; pg. 5)Analysis of Euromonitor Passport data by Baker et al. (2021) largely bearsout this assessment across many countries. In 2014, Coriolis emphasized China as one notable exception to thistrend, where it observed several major local dairy food producers withassociated infant formula brands, as well as a host of small and medium-sized startups (NZPECC, 2014). However, similar to its actions to promoteconsolidation in the airline industry in the 1990s, China’s government hassince promoted consolidation in the commercial milk formula industry toaddress safety concerns (Reuters, 2013; Master, 2023). While as many as400 brands competed for market share prior to tightening of regulations(Master, 2023), new product registration in China declined by 40 percentbetween 2016 and 2021 (Lyubomirova, 2023). By 2022, the largest fiveproducers accounted for about two-thirds of the market and observersexpect new rules introduced in June 2023 to tighten standards for nutrientcontent, testing, marketing, and licensing to cause more smaller firms toexit the market (Lyubomirova, 2023).U.S. Sales Concentration Within the United States, firms manufacture anaverage of 524 million kg of infant formula each year (CRS, 2022). FDAreports that the market share of the top-two infant formula suppliers tothe U.S. market, Abbott (Similac) and RBMJ (Enfamil), were 27 percentand 39 percent, respectively, for a total of 66 percent in 2022 (FDA, 2023b).Previously, in 2021, the market share for Abbott was 40 percent and themarket share of RBMJ was 31 percent, suggesting that RBMJ absorbedmore than half of the decline in Abbott’s market share during the year ofthe infant formula shortage. This two-firm estimate of market concentra-tion for infant formula is somewhat lower than the estimate for combinedcommercial milk sales (infant formula and commercial milk formula) in PREPUBLICATION COPY—Uncorrected Proofs

DEMAND AND SUPPLY 99the Euromonitor Passport data reported by Russ and Baker (2022). Nestlé(Gerber) accounted for 8 percent of the U.S. market, and smaller firmsincluding private labels (many of which contract with Perrigo for manu-facturing) accounted for 12 percent in 2021 (Lincicome and Beaumont,2023). Nestlé exited from the U.S. infant formula market in 2022. It is important to note that while U.S. sales remain highly concen-trated, multiple analyses indicate that they are less concentrated than theywere historically. Using the Herfindahl-Hirschman Index (HHI), a tool formeasuring market concentration used by the U.S. Department of Justiceand the Federal Trade Commission, USDA found that the infant formulamarket was more concentrated in 1987 (HHI = 4,332) than it was in 2022(HHI = 2,972). USDA reports data from the Government AccountabilityOffice and USDA Economic Research Service (ERS) showing that the mar-ket share of the top two infant formula producers was 87 to 90 percent in1987 (Ross and RBMJ), 80 percent in 1994, and 87 percent in 2000 (Oliveiraet al., 2001). All three market share percentages from 1987, 1994, and 2000are higher than estimates of the two-firm concentration ratio for infantformula in 2021 or 2022 shown by FDA (FDA, 2023b). Nonetheless, there is precedent in other industries of the federal gov-ernment investing in building supply chain resilience. For example, theResilient Food Systems Infrastructure program, which is overseen bythe USDA Agricultural Marketing Service, aims to build resilience inthe middle of the food supply chain by working with states to makecompetitive grants available to domestic food and farm business to sup-port infrastructure in the middle of the supply chain; some funding mayalso be used to develop or strengthen supply chain coordination. TheDepartment of Commerce’s National Institute for Standards and Technol-ogy supports and collaborates with the semiconductor industry and hasgathered information to inform the planning and design of programs toincrease investment in semiconductor manufacturing facilities.U.S. production capacity For the resilience of supply chains, it is notprincipally the concentration of sales across firms, but the concentrationof production capacity across plants that can magnify the effect of a shockto any one plant and thus to the aggregate supply of infant formula.Approximately 99 percent of all infant formula sold in the United Stateswas produced domestically before 2022 (FDA 2023b). Table 4-2 describesthe number of manufacturing sites by manufacturer. FDA collects information on the number and location of the facilitiesthat produce each infant formula product, including exempt and meta-bolic formula, as these are included in the required filings during newproduct notifications (21 CFR § 106). Under the Major Change reporting PREPUBLICATION COPY—Uncorrected Proofs

100 INFANT FORMULA REGULATIONTABLE 4-2 Number of Manufacturing Facilities Located in theUnited States, by Infant Formula Manufacturer, as of April 2024 Number of U.S. manufacturing facili- Manufacturer ties Abbott 4 Bobbie/Baby’s Only 1 ByHeart 1 Perrigo 3 RBMJ* 3NOTE: The committee did not distinguishing between manufacturing facilities and testingfacilities which do not produce product suitable for consumption. RBMJ = Reckitt Benckiser-Mead Johnson. *The committee was unable to confirm the numbers of facilities with the company, butidentified sources that suggested these numbers.SOURCE: Abbott, 2022; Nestlé, 2022a,b; SEC, 2017, 2024a,b; Bobbie, 2023a; RBMJ, n.d.; FDA,2023g.requirement,11 FDA has information on how many lines within each facil-ity have been used at some point to manufacture any particular prod-uct. FDA noted during a public session with the National Academiesin September 2023 that it has this information in their possession butdo not have the analytical infrastructure to synthesize the information(NASEM, 2023f). FDA also noted that it did not have information aboutinfant formula manufacturing discontinuations (NASEM, 2023f). Duringthe same public session, FDA also said that it does not request that com-panies report when approved lines are discontinued or provide monthlyor annual production of various categories of products (e.g., non-exemptdairy infant formula, metabolic infant formula, hypoallergenic infant for-mula) (NASEM, 2023f). Prior to 2022, there did not appear to be any regulatory requirementfor resiliency risk management planning to protect the infant formula mar-ket from external shocks such as climate-related events. In other indus-tries, regulators require that companies submit resilience plans (EPA,2024b) and in some instances, different requirements for resilience areapplied to large companies; for example, the Federal Reserve System hasa different set of requirements for banks that are “too-big-too-fail” (Board 11“Major change” is defined as “any new formulation, or any change of ingredients orprocesses where experience or theory would predict a possible significant adverse impacton levels of nutrients or bioavailability of nutrients, or any change that causes an infant for-mula to differ fundamentally in processing or in composition from any previous formulationproduced by the manufacturer” (21 CFR § 106.3). PREPUBLICATION COPY—Uncorrected Proofs

DEMAND AND SUPPLY 101of Governors, 2020). Overall, the following evidence emerges regardingconcentration of sales and production capacity: • Infant formula as an industry has existed for more than a century and is in a period of consolidation nationally and globally, with a small number of dominant firms accounting for large national market shares in many advanced economies, including in the United States. • The concentration of U.S. infant formula sales appears to be no higher than it has been for nearly 40 years, prior to the inception of WIC’s competitive bidding process for obtaining infant formula. • Large economies of scale have led to the concentration of production capacity in a limited number of plants, some of which are large relative to the size of the U.S. market. • Modern design and tightly observed safety protocols may allow some lines within a plant to continue operating if adulteration is identified on another line within the facility, but some large manufacturing sites are very old and may not have these capacities. • Tariff and non-tariff barriers have kept the U.S. market relatively closed to imports of formula, such that even during a period of shortage it is very difficult to obtain large quantities of infant formula produced overseas. • There are gaps in authorities and information that FDA collects and has the capability to process, which could be useful in resiliency risk management planning. Downstream Supply Chain—Product Flow This section describes the distribution of infant formula to vendors,such as retailers and hospitals, after it leaves the manufacturer’s plantas a final product. While some nuances are described below, generallyinfant formula moves from the production facility to the manufacturer’sdistribution center then to the vendor’s distribution center and finally tothe selling location.Distribution Distribution refers to the process of getting the product from manu-facturing plants to locations where consumers can purchase or accessthem. Once a manufacturer makes the infant formula, it typically movesthe infant formula from the production facility to one of possibly manydistributor centers (NASEM, 2023a). Smaller manufacturers may use athird-party distributor to distribute their products (NASEM, 2023a), while PREPUBLICATION COPY—Uncorrected Proofs

102 INFANT FORMULA REGULATIONlarger infant formula manufacturers typically have several distributioncenters across the country, strategically placed to efficiently cover theirentire geographic region, and often with a distribution center supplyingto multiple neighboring states (NASEM, 2023a). Large food, merchandise, and pharmacy retail chains and hospitalsoperate their own distribution centers (Luther, 2022). Products destinedto be sold through these channels typically move from a manufactureror a third-party distribution center to the large retail chain or hospi-tal distribution center and from there to the individual retail store orhospital (NASEM, 2023a). Smaller retailers obtain their products fromindependent third-party distributors who receive their supplies frommanufacturers (NASEM, 2023a). For some smaller retailers, product mayflow from a third-party distribution center to a wholesaler and then tothe store. The specific distribution process depends on such factors as thesize of the store and whether it is in an urban or rural location (NASEM,2023a). Smaller retailers may engage with more than one distributor forthe same product. The products are moved using manufacturer- andretail-contracted transportation companies (both trucking and rail deliv-ery) (NASEM, 2023a). International product that is approved for sale inthe United States is shipped mainly by sea freight, but occasionally by airfreight (NASEM, 2023a). They are then cleared by customs and sent tothe manufacturers’ distribution centers (NASEM, 2023a). Once throughcustoms, the international products are distributed in a similar manner asthose manufactured in the United States (NASEM, 2023a). Both retail (online and physical stores) and non-retail vendors (e.g.,hospitals) place orders with the manufacturer that are processed andshipped from the manufacturer’s distribution centers (NASEM, 2023a).WIC-authorized vendors purchase products from distributors on a listmaintained by the WIC state agency (7 C.F.R. § 246.12(g)(10)). In addi-tion to in-state distributors, a WIC state agency may also list distributorsoutside of their states (NASEM, 2023g). See the section Providing InfantFormula to WIC Participants for more information on distribution of infantformula to WIC participants. Disruptions in infant formula supply can be local, regional, ornational. A disruption caused by a partial or complete shutdown of aplant of a large manufacturer creates a national shortage (FTC, 2024).Regional or local shortages may occur because of disruptions to distribu-tors or vendor locations. A national shortage reduces overall supply of infant formula products(FTC, 2024). Manufacturers may then begin to ration the available stockto different customers. The exact allocation mechanisms used by manu-facturers to different channels of distribution following the 2022 shortage PREPUBLICATION COPY—Uncorrected Proofs

DEMAND AND SUPPLY 103is unknown; however, allocating scarce quantity based on past sales is acommon approach (NASEM, 2023b). For products moving through distribution centers of large chains,allocation to various outlets is usually made in a centralized fashion bystakeholders along the supply chain to optimize availability across vari-ous outlets. Large chains have better visibility into stock levels of eachstore and can do such allocations optimally. When the product movesthrough an independent distributor to small outlets (e.g., retailers andhospitals), the distributor often has little to no visibility into stock positionat the outlet they serve. It is unclear how distributors allocate the scarcestock they have on hand.Vendors The committee considered both retail and hospitals as vendors ofinfant formula products.Retail Infant formula that is received at the retailer’s distribution centersis stored in a climate-controlled area or in a fully controlled ambient ware-house (NASEM, 2023a). Retail stores can then order infant formula fromthe distribution center or warehouse when needed (NASEM, 2023a). Theorder amounts are determined based on the shelf space a retailer choosesto allocate to various brands, forecasted demand, and actual consump-tion. Infant formula is commonly placed on the retail shelf, or if therehas been previous theft, the products may be placed in a secure location(NASEM, 2023a). Shelf space dedicated to infant formula at the stores varies amongretailers and is influenced by their estimate of demand for various typesof infant formula and brands, including private labels (NASEM, 2023a).WIC-authorized vendors are required to maintain a minimum stock ofsome WIC products but make their own determinations about how toallocate shelf space (NASEM, 2023a). A food retail expert shared with thecommittee during a public session that stores generally keep 3–4 days ofexpected sales worth of inventory and sometimes more of the core WICproducts, while distributors may keep 2–3 weeks’ worth of inventoryavailable (NASEM, 2023a).Hospitals As mentioned above, infant formula typically moves throughthe supply chain from manufacturers to distributors to hospitals, as wellas retailers. The amount of non-exempt infant formula that is distributedto hospitals is determined by product purchased, with input from reg-istered dietitians, and by relative usage (NASEM, 2023a). Hospitals canalso receive infant formula directly from manufacturers using company PREPUBLICATION COPY—Uncorrected Proofs

104 INFANT FORMULA REGULATIONdistributors, such as Vizient (NASEM, 2023a). It should be noted thatneonatal intensive care unit formula is generally provided by the manu-facturer to the hospital free of charge, based on the hospital contract. A large hospital participating in an information-gathering session atthe National Academies indicated that they contract directly with manu-facturers (NASEM, 2023a). However, specialized health care product dis-tributors (e.g., Cardinal Health) often serve smaller and medium-sizedhospitals (NASEM, 2023a). Smaller and medium-sized hospitals mayhave contracts with distributors or manufacturers arranged by interme-diaries, such as a group purchasing organization (GPO) (e.g., Vizient),though these intermediaries never handle the actual product themselves(NASEM, 2023a). GPOs require their members to obtain products fromauthorized distributors (NASEM, 2023a). The specialized health careproduct distributors have override systems in place to prevent hoardingduring times of supply shortages, rationing products when needed bycapping orders at a percentage of past individual customer purchases(NASEM, 2023a). Product Available in Homes for Consumers The infant formula supply chain goes beyond having the product inretail establishments; it must also be available in the household to feed toinfants (Figure 4-3). There are consumers who are unable to access infantformula because they do not live near grocery stores or they have lim-ited access to transportation (USDA, 2009; Zhang and Debarchana, 2016;Blackman et al., 2022). In addition, in rural areas, smaller stores are moreprevalent than larger stores, and small stores tend to have higher prices,lower stocks, and sell fewer types of infant formula than larger retailers(USDA, 2009). Where the Internet is available, infant formula can be pur-chased online through retailer websites, and at least one manufacturer hasa subscription-based model, selling direct to consumers’ homes (NASEM,2024a). Furthermore, materials for proper preparation of infant formula,such as clean water and a means to properly heat it (e.g., stove or micro-wave), are needed to safely feed infants in the home. Information and Money Flow As described above, for large manufacturers, products typically movefrom the production facility to a manufacturer’s distribution center, tothe retail chain distribution center, to the selling location. From an infor-mation flow perspective, a vendor will order infant formula with theirdistribution centers that, in turn, will periodically place (re-)orders withmanufacturers. Manufacturers may also get point-of-sale information PREPUBLICATION COPY—Uncorrected Proofs

DEMAND AND SUPPLY 105from large retail chains, which may be useful in production and replen-ishment decision making. From a money flow perspective, a manufacturer sells the product tothe retailer at a wholesale price.12 Manufacturers provide a national-levelwholesale price list for their products that vary only by volume, so largervolume purchases receive a bulk discount (Oliveira et al., 2010). Thewholesale price is a function of the type of product, size, labor, packaging,and other factors. When selling to a distributor, manufacturers typically sell productsat a wholesale price, and then the distributor sells the product to theretailer at a higher price. In this pathway, the retail price for the consumerincludes two markups—one by the distributor that purchases from themanufacturer and another by the retailer that purchases from the distribu-tor. Retailers determine the prices of the various products that should beclearly marked on the shelf display (Oliveira et al., 2004; Hockert, 2014;NASEM, 2024a). Retail prices are a function of several factors, includingbut not limited to wholesale prices, demand, local competition, and thecost of transporting the infant formula to the store (Oliveira et al., 2004).For hospitals that participate in a GPO, the contracting process is a bitdifferent. GPOs negotiate prices with the manufacturers on behalf oftheir members (NASEM, 2024a). They also negotiate handling and deliv-ery fees with the distributor, which is then added to the wholesale priceoffered by the manufacturer, which is the total price paid by the GPOmember (NASEM, 2024a). While information about orders flows upstream sequentially througheach party, manufacturers and distributors rarely have visibility into con-sumer sales from the selling outlets. The distribution nodes in the sup-ply chain present a challenge to policymakers seeking to address localor widespread shortages for several reasons. While the manufacturersknow to which distributor locations they sent their product, they may notalways have knowledge of, and typically do not have control over, wherea distributor will send infant formula for final retail sale (INCA, 2024). Imports and Trade Restrictions According to the Congressional Research Service (CRS) the UnitedStates imported 4.3 million kg of infant formula in 2021 (CRS, 2022). Thisamount is less than 1 percent of the estimated 524 million kg consumedannually, on average, between 2012 and 2021 (CRS, 2022). In 2021, majorsources of these imports were Ireland (2.3 million kg), Chile (1.2 million 12 Wholesale price is the price charged to a retailer, whereas retail price is the price that aretailer charges to a customer PREPUBLICATION COPY—Uncorrected Proofs

106 INFANT FORMULA REGULATIONkg), the Netherlands (0.55 million kg), and Brazil (0.18 million kg), withmuch smaller amounts from Venezuela, Serbia, Mexico, Australia, Den-mark, and the United Kingdom (CRS, 2022). It is often difficult to disentangle the role that trade barriers play indetermining an observed level of imports relative to supply and demand.Trade barriers that close off a market from trade come in two forms, tar-iffs and non-tariff measures (NTMs). Tariffs on imports of finished infantformula in most countries are 17.5 percent for imports up to a thresholdquota (CRS, 2022). For quantities above that aggregate quota, a highertariff takes effect: $1.035 per kg plus 14.9 percent (USITC, 2024). Importsfrom Mexico are exempt from the quota (USITC, 2024). Imports from cer-tain free-trade area partners and certain developing countries are exemptfrom duty-free tariffs (until the quota is reached) (CRS, 2020).13 Tariffsgenerally shelter domestic producers from foreign competition (Irwin,2006). In the presence of large, fixed costs involved in getting productsapproved for the U.S. market, tariffs can reduce the likelihood that anoverseas producer exports to the United States during normal times, asit reduces the expected profits from entry (Alessandria and Choi, 2019). U.S. producers of infant formula also have to pay tariffs when import-ing inputs, especially dairy-based inputs (USDA, 2016). Tariffs on inputsrequired for production make the final product less cost-competitive com-pared to competing imported goods, unless the final good is also pro-tected by a tariff. Tariffs on inputs into production are also likely to makeU.S. exports of infant formula less cost-competitive in the global market.For example, Cox (2021) found that tariffs on steel products resulted in alower global market share for U.S. industries that use these products asinputs. Non-tariff barriers facing overseas producers wanting to serve theU.S. market are considerable. A tariff-rate quota as described above is onetype of NTM. However, non-tariff barriers more broadly can emerge as abyproduct of standards that deviate from international norms, even whenthe domestic standards (i.e., quality factors) are designed solely with theintention to protect infant health. Non-tariff barriers facing exporters tothe United States include, but are not limited to: • Requirements in some provisions of infant formula manufacturing and quality control regulations in 21 CFR § 106 that may diverge from norms in other countries with a safe supply of infant formula, possibly because they have not been fully updated for some years. 13 These countries include Australia, Bahrain, Canada, Chile, Colombia, Israel, Jordan,Korea, Mexico, Morocco, Panama, and Singapore. Available at: https://hts.usitc.gov/ (ac-cessed April 12, 2023). PREPUBLICATION COPY—Uncorrected Proofs

DEMAND AND SUPPLY 107 These include the specifications of the growth monitoring study and protein efficiency ratio requirements in 21 CFR § 106.96. • The 90-day new infant formula notification requirement prior to the introduction of a new infant formula to the U.S. market in 21 CFR § 106.120, which in the event of a shortage can delay newly introduced imports of infant formulas with a history of safe usage in other high-income countries. However, FDA can use enforcement discretion to relax certain regulatory requirements (that would not pose a risk to safety) in order to alleviate these potential negative outcomes. • Labeling requirements in 21 CFR § 107 that require ingredients to be listed in a particular order, particular wording for the expiry date, directions for use, format for nutrient content, and use of a descriptive statement about iron that diverge from standards in other high-income economies. • Composition requirements that may differ from standards in other high-income economies by focusing on minimum, rather than average, levels of certain nutrients. • Small differences in requirements for certain nutrients, especially iron, in 21 CFR § 107 and in requirements specific to infant formulas eligible for use in WIC. • Generally Recognized as Safe (GRAS) notification for any ingredients included in infant formulas that are not already categorized as GRAS or approved food additives for infant formula in the United States. • Inspection requirements where FDA or FDA-recognized facility inspections are not already taking place. These requirements are justified as steps to assure the safety andquality of infant formula sold in the U.S. market; however, they are alsoviewed as hurdles that may inhibit importation of infant formula. TheUnited States has been very active in preventing non-tariff barriers totrade in infant formula at the World Trade Organization (Russ et al., 2021).In addition to these hurdles to suppliers seeking to export to the UnitedStates, regulations limit the types of businesses that can import infantformula; for example, 7 CFR § 6.23 describes restrictions on the types ofentities that are eligible to import non-cheese dairy products within thequota amount. As a result of these requirements, not all retailers who wishto start importing infant formula are easily able to do so. PREPUBLICATION COPY—Uncorrected Proofs

108 INFANT FORMULA REGULATION SPECIAL SUPPLEMENTAL NUTRITION PROGRAM FOR WOMEN, INFANTS, AND CHILDREN This section describes the unique role of WIC in the infant formulamarket and how it provides infant formula to an important subset offormula-fed infants in the United States. Background WIC is administered by USDA’s Food and Nutrition Service to pro-vide supplemental nutrition support for income-eligible, pregnant, andpostpartum participants, and children under age 5.14 This section of thereport describes how the program and participants obtain infant formula. As described in Chapter 3, WIC funding is set through the annualappropriations process and there is no guarantee that funding will besufficient to serve all eligible people who seek to participate in the WICprogram. For the first decades after WIC was established in 1974, limitedfunding prevented some eligible women and young children from par-ticipating. State WIC agencies routinely maintained waiting lists, usinga priority system based on medical, dietary, or other risks to determinewho will be served when it was not possible to serve all income-eligibleindividuals (USDA, 2023b). On a bipartisan basis, policymakers increased funding over time toreach a greater proportion of eligible applicants (USDA, 2024b). Since 1997,WIC has been fully funded—that is, it has received sufficient resources toserve all eligible individuals who apply or would like to renew their ben-efits. As a result, it has no longer needed to turn away eligible applicantsbecause of funding constraints (Bergh et al., 2023). However, there is noguarantee that the program will be fully funded each year. Individuals who are pregnant, breastfeeding (up to 12 months post-partum), and postpartum (up to 6 months postpartum), along with infants(up to 12 months old) and young children (under 5 years old), are eligibleto receive WIC benefits if they are at nutritional risk (see Figure 4-5). To beincome eligible an applicant must have household income at or below 185percent of the FPG or be enrolled in another benefit programs that con-fers adjunctive or automatic income eligibility (USDA, 2023c). WIC staffdetermine whether an applicant meets one of the program’s five nutritionrisk criteria based on anthropometric measures and dietary and healthinformation (Hodges et al., 2024). Risk criteria include conditions suchas anemia, overweight, or underweight, as well as dietary deficiencies. 14 https://www.fns.usda.gov/wic (accessed March 11, 2024). PREPUBLICATION COPY—Uncorrected Proofs

Women Pregnant Postpartum (until 6 months) Breastfeeding (until 12 months) Benefits Low income Supplemental food Infants Enrolled in Medicaid, SNAP, or TANF, Nutrition education Newborn to 12 months or at or below 185% of FPG and at Breastfeeding support Nutritional Risk Referrals to health care or social services Children 1 through 4 years old FIGURE 4-5 Design of the Special Supplemental Nutrition Program for Women, Infants, and Children. NOTE: FPG = Federal Poverty Guideline; SNAP = Supplemental Nutrition Assistance Program; TANF = Temporary Assistance for Needy Families.PREPUBLICATION COPY—Uncorrected Proofs SOURCE: Adapted from Rush, 1986. https://www.fns.usda.gov/wic/frequently-asked-questions. 109

110 INFANT FORMULA REGULATION In addition to providing evidence-based supplemental food packagesdesigned to deliver priority nutrients that research has shown to be lack-ing in the diets of each category of participants, WIC provides referralsto health care and social services, nutrition education to assist partici-pants in planning a healthy diet, and support for breastfeeding for bothpregnant individuals who are considering their infant-feeding optionsand postpartum individuals who have chosen to breastfeed their infants(USDA, 2022b). The federal requirements for WIC’s breastfeeding supportare detailed in Appendix I. In addition, breastfeeding is promoted andsupported in WIC though its peer-counseling program (USDA, 2022c).WIC is often used as an access point for delivering other services, suchas vaccinations or assistance with smoking cessation, which are fundedthrough other sources (Verughese et al., 2016).Food Packages WIC’s food packages are designed to meet the needs of the differ-ent groups of WIC participants. The food packages each include specificfoods and allowed amounts.15 Within the federal rules, WIC state agencieshave discretion over the specific products and forms of foods to allow andmay use this flexibility to contain program costs; for example, states couldrequire participants to purchase the least expensive brand. The specific-ity of these requirements can make it challenging for WIC participants toshop, as they cannot choose just any kind of cheese or breakfast cereal, forexample, they are restricted to specific package sizes and brands. The word supplemental is in the name of the program, and the WICfood package is not designed to meet all the nutritional needs of WICparticipants—except for fully formula-fed infants, for whom WIC aimsto meet their full nutritional need. The WIC food package also meets thefull nutritional need for infant formula among infants receiving comple-mentary foods. The food package for formula-fed infants has a highervalue, $138.64 in FY 2018, than the $32–$38 for the other categories ofparticipants (Kline et al., 2020). These data are the latest available asWIC only collects data periodically. These figures reflect the cost to buythese foods at retail across the country and do not include the value ofthe infant-formula rebate paid to WIC, so they provide an estimate of thevalue of WIC foods to participants. While only 51.2 percent of all eligibleindividuals participated in WIC in 2021, 78.0 percent of eligible infantsparticipated (Kessler et al., 2023). Thus, the free infant formula seems tobe a draw for income-eligible families to enroll in WIC. 15 https://www.fns.usda.gov/wic/wic-food-packages (accessed March 11, 2024). PREPUBLICATION COPY—Uncorrected Proofs

DEMAND AND SUPPLY 111 WIC provides an amount of infant formula intended to meet thefull nutritional needs of infants based on age category (0–3 months, 4–5months, 6–11 months of age) and feeding status (fully formula fed orpartially breastfed) (USDA, 2024c). However, WIC may not provide allof the infant formula that parents might like to offer their infants, as theamounts are fixed by age group and cannot be customized (e.g., for fast-growing babies). Some low-income families still purchase infant formulaat retail prices, as some families participating in WIC do not receive all ofthe infant formula their infants need. Some income-eligible families alsodo not participate in WIC. These families would need to purchase anyneeded infant formula at retail prices.Infant Feeding Among WIC Participants WIC served 39 percent of the infants in the United States in 2022,16 andit provides more than half of the infant formula consumed in the UnitedStates. USDA estimated that infants participating in WIC accounted for56 percent of the infant formula consumed in the United States in 2018(USDA, 2022d). In 2009, WIC sought to improve breastfeeding rates with a programof breastfeeding support.17 This program included peer counseling andan updated structure of the food packages to offer more food to womenwho breastfeed (Collins et al., 2010). Researchers have examined whetherthese efforts were successful in improving breastfeeding outcomes andfound that following the 2009 revisions, rates of breastfeeding initia-tion increased among WIC-eligible women regardless of whether theyparticipated in WIC, with the largest increase for Black women. WICparticipants continued to have lower rates of breastfeeding initiationthan eligible non-participants, but the gap narrowed for Asian/PacificIslander women, American Indian/Alaska Native women, and non-His-panic White women, slightly narrowing the overall gap (Hodges et al.,2023, 2024). Analyses of 2020 data from CDC’s National ImmunizationSurvey-Child showed that 35.0 percent of adult WIC participants wereexclusively breastfeeding at infant age 3 months, compared with 53.6 per-cent in eligible non-WIC participants and 53.3 percent in WIC-ineligible(higher-income) non-participants (CDC, 2023b). These data raise the question of whether breastfeeding outcomesin eligible non-WIC participants compared to WIC participants result 16 Estimate was calculated based on CDC birth data and USDA WIC participation data:https://www.cdc.gov/nchs/products/databriefs/db477.htm (accessed April 12, 2024);https://www.fns.usda.gov/pd/wic-program (accessed April 12, 2024). 17 https://wicbreastfeeding.fns.usda.gov/ (accessed April 12, 2024). PREPUBLICATION COPY—Uncorrected Proofs

112 INFANT FORMULA REGULATIONfrom differences in the characteristics of these two income-qualifyingpopulations (self-selection biases) or to WIC influences on infant feedingchoices. For example, mothers of WIC participating infants were morelikely to have lower education (college graduate: 6.9 vs. 28.8 percent), tobe younger (less than 30 years: 57.2 vs. 39.2 percent) and to be unmar-ried (56.2 vs. 25.8 percent) compared to nonparticipating eligible mothers(Zhang et al., 2021). Adjustment for such differences in sociodemographiccharacteristics considerably attenuates these differences in breastfeedingrates (Zhang et al., 2021). A systematic review found that a common limitation of publishedstudies is the lack of control for bias and concluded that WIC participa-tion had little or no influence on breastfeeding initiation, duration orexclusivity and that the 2009 WIC package was positively associatedwith breastfeeding exclusivity and that WIC breastfeeding support ser-vices were positively associated with initiation and duration (Gross et al,2023). A study in upper Minnesota compared data for countries with andwithout WIC peer counselors and reported a significant improvement ofbreastfeeding rates, particularly in rural counties, where breastfeedingrates at 3 and 6 months increased 4.1 to 5.2 percentage points (Interranteet al, 2024). This last study is a model of needed research; it used robustmethods and was a collaboration between a state WIC office and an aca-demic institution. To improve breastfeeding further, the Committee to Review WICFood Packages (NASEM, 2017) recommended changes to the food pack-age and other aspects of the WIC Program that “provide substantial sup-port to both exclusively and partially [breastfeeding] dyads, remove bar-riers to partial [breastfeeding] choices within the first 30 days postpartum,and increase flexibility in determining the amount of formula offered topartially breastfed infants” (Rasmussen et al., 2017). The recommendedchanges are part of the newly released (April 2024) update to the WICFood Packages (89 FR 28488).How WIC Participants Obtain Infant Formula When an eligible family enrolls in WIC or renews its benefits, a com-petent professional authority in the WIC clinic conducts a nutrition riskassessment, selects an appropriate WIC food package, and tailors it ifneeded (88 FR 86545). The brand of non-exempt infant formula avail-able to WIC participants is determined through a competitive biddingprocess, which is described in the section on competitive bidding below.The primary contract brand is an iron-fortified cow’s milk-based infantformula that is suitable for routine issuance to the majority of generallyhealthy, full-term infants, and is issued as the first choice. An alternative PREPUBLICATION COPY—Uncorrected Proofs

DEMAND AND SUPPLY 113contract-brand infant formula may be issued, such as a soy-based infantformula based on the nutrition risk assessment or other factors. State WICagencies may require medical documentation to issue these alternatives,but usually they do not (88 FR 86545). As described below, exempt infantformula and non-contract, non-exempt infant formula may be issued withmedical documentation, as needed. The amount of infant formula available to participants who are notfully breastfeeding is provided at two levels: partial (infant is receivingsome breast milk) and full (infant receiving minimal or no amount ofbreast milk). The amount of infant formula that is provided changes withthe infant’s age. It increases when the infant turns 4 months of age, thendecreases when the infant turns 6 months of age and complementaryfoods are provided (7 CFR § 246.10). Participants’ food packages can bechanged by WIC staff if parents increase or decrease the level of breast-feeding, such as moving from fully breastfeeding to partially or fullyinfant formula feeding. Non-exempt infant formula is provided until theinfant reaches 12 months of age, at which time WIC provides cow’s milkor non-dairy alternatives, aligned with recommendations of organizationssuch as AAP (AAP, 2023). WIC does not provide follow-on formulas forolder children. The brand and amount of infant formula that WIC participants canredeem is encoded on their electronic benefit transfer (EBT) card, whichis provided by and updated as needed by WIC staff. Caregivers can usetheir EBT card at a WIC-authorized vendor to redeem infant formula andother items in their WIC food package. If parents or caregivers need moreinfant formula than is provided as part of an infant’s WIC benefits, theycan purchase it with another form of payment, including SNAP benefitsat a SNAP-approved retailer. Some infants need exempt infant formulas for medical reasons (e.g.,an inborn error of metabolism), which are prescribed by a health care pro-fessional. These infant formulas are not covered by the contracts result-ing from competitive bidding for non-exempt formula, so WIC does notobtain discounts on them, and participants are not limited to the contractbrand for exempt formulas (88 FR 86545). State WIC agencies are requiredto coordinate with other programs that might provide exempt infantformulas and, for WIC participants that are also enrolled in Medicaid,Medicaid is expected to be the primary payor. WIC must cover costs notcovered by Medicaid or other agencies (7 CFR § 246.10(e)(3)(vi)). To obtain non-exempt, contract-brand infant formula that does notmeet WIC’s requirements (contained in 7 CFR § 246.10(e)(12)) or non-con-tract brand formula, for medical reasons, WIC participants must providemedical documentation. However, states may waive this requirement fornon-contract infant formulas to accommodate religious eating patterns. PREPUBLICATION COPY—Uncorrected Proofs

114 INFANT FORMULA REGULATIONState WIC agencies may also require medical documentation for any con-tract-brand infant formula other than the primary-contract infant formulaand may decline to issue some non-contract-brand infant formulas evenwith medical documentation (7 CFR § 246.16a(c)(9)). Medical documenta-tion must be provided by a health care professional licensed to write pre-scriptions under state law and must include the name of the authorizedinfant formula along with other information (7 CFR § 246.10(d)). Role of WIC in the Infant Formula MarketCompetitive Bidding During the 1980s, infant formula prices increased, which meant thatfewer participants could be served by the limited funding available. Toaddress this problem, legislation was enacted in 1989 (PL 100-460; PL101-147) to require state WIC agencies to continuously operate a cost con-tainment system for the procurement of infant formula, with some lim-ited exceptions (42 USC § 1786(h)(8)). Under the legislation and USDA’simplementing regulations, cost containment systems must be either asingle-supplier competitive system where a state agency receives rebatesfrom manufacturers for infant formula redeemed by participants withWIC benefits at retail stores, or an alternative cost containment systemthat has been shown to yield a savings equal to or greater than whatwould have been generated by a single-supplier competitive system. Asof April 2024, no WIC state agencies operate an alternative cost contain-ment system. Infant formula companies bid on WIC contracts by offeringrebates on the lowest national wholesale price of a standard number ofunits of infant formula redeemed by a WIC participant. These rebatesamount to a discount to WIC reducing food costs and allowing WIC toserve more participants with its federal funding. Companies bid aggressively for WIC contracts. In aggregate, therebates reduce federal spending on WIC by roughly $1 billion to $2 billionannually (CBPP, n.d.b). Nonetheless, WIC spends an estimated $515 mil-lion on infant formula after the contribution of rebates (Kline et al., 2020).Market or policy changes that increase infant formula prices or decreaserebates could result in WIC not being fully funded. Over the 35 years during which WIC’s competitive bidding processhas been in place, only a few companies have dominated the U.S. infantformula market, and only a few companies have bid on WIC contracts(see Table 4-3). Apart from a few years in the 1990s when there were fourbidders, there have typically been three. Three infant formula manufacturers bid on states’ early WIC contracts:Mead Johnson, Ross Laboratories, and a smaller manufacturer, Wyeth. PREPUBLICATION COPY—Uncorrected Proofs

DEMAND AND SUPPLY 115TABLE 4-3 History of the Companies That Have Participated inthe WIC Competitive Bidding Process to Procure Infant Formula,Established in 1989.Manufac- Events before Events in Events in Events in Events inturer 1990 1990s 2000s 2010s 2020sMoores & Ross Labs Changed ContinuingRoss Milk merged with name to Ab- to bid on(1903) Abbott Labs ïƒ bott Nutri- ïƒ WIC con- (1964) tion (2007) tractsMade infantformulasince 1925Mead-John- Acquired by Split from Became a Continuingson (1906) Bristol-Myers Bristol-Myers division to bid on Squibb (1967) ïƒ Squib’s of Reckitt WIC con-Made infant pharmaceuti- Benkiser tractsformula cal business (2017)since 1910 (2009)John Wyeth Changed Stopped Acquired by Acquired No longerand Brother names to bidding Pfizer as Wy- by Nestlé exists(1860) Wyeth-Ayerst on WIC eth Nutrition as Nestlé Laboratories contracts (2009) WyethMade infant and then Wy- (1996) Nutritionformula eth Pharma- (2012)since 1915 ceuticals Returned to the infant formula market as a manufactur- er of store brandsNestlé (1960); Not in U.S. Acquired Changed Sold manu-Switzerland market Carnation brand facturing (1990) and ïƒ name to facilitiesMade infant entered the Gerber and Gerberformula U.S. market (2010) brand tosince 1867 Perrigo and exited the U.S. market (2022) continued PREPUBLICATION COPY—Uncorrected Proofs

116 INFANT FORMULA REGULATIONTABLE 4-3 Continued Manufac- Events before Events in Events in Events in Events in turer 1990 1990s 2000s 2010s 2020s L. Perrigo Did not make Entered Acquired Acquired Company infant formula infant PBM (1887) formula ïƒ Holdings Nestlé’s U.S. market (2010) business Made infant (1998) (2022) formula Executed since 1998 a tax Has not inversion bid on WIC Makes only to become contracts store and pri- Perrigo vate brands of Company infant formula plc (2013), registered in IrelandSOURCE: Developed by the Committee on Challenges in Supply, Market Competition, andRegulation of Infant Formula in the United States. Betson et al., 2009; Jones, 2010; Nestlé,n.d.; Perrigo, n.d.; Wyeth, n.d.Nestlé, the world’s largest manufacturer of infant formula, acquired Car-nation in 1989, entered the U.S. market and began bidding on WIC con-tracts in 1990. Between 1990 and 1996 there were four companies that bidon WIC contracts, but Wyeth stopped bidding on WIC contracts in 1996(and switched to producing generic formula) (Betson, 2009; Neubergeret al., 2022). Between 1996 and 2023, three companies received state WICcontracts. Since Nestle exited the market in 2022, only two companieshave bid on WIC contracts (see Table 4-3). The competitive bidding process is governed by detailed statutoryand regulatory rules (7 CFR § 246.16a). These rules cover the require-ments for companies to be permitted to bid; the bid solicitation and awardprocess; the process by which the winning bidder will be selected, whichrelies on the lowest total monthly net price or the highest monthly rebatefor a standardized number of units of infant formula; and how pricechanges and partial redemptions must be handled. The procurementand contracting process is conducted by state WIC agencies, usually inpartnership with a different state entity that specializes in procurement. Some states, territories, and Indian Tribal Organizations (ITO), nota-bly those with smaller programs, have formed alliances to conduct thebidding process and the winning bidder serves all of the entities in thealliance. As of October 1, 2003, alliances are capped (at 100,000 infants),but alliances that existed as of July 1, 2004, are grandfathered in and mayexceed this limit to include state WIC agencies serving fewer than 5,000infants as of October 1, 2003 (7 CFR § 246.16a(c)(3)). PREPUBLICATION COPY—Uncorrected Proofs

DEMAND AND SUPPLY 117 State WIC agencies must provide milk- and soy-based infant formu-las. State WIC agencies and alliances that served a monthly average ofmore than 100,000 infants during the preceding year must use separatebid solicitations for milk- and soy-based infant formulas. Smaller stateWIC agencies and alliances use a single bid solicitation, which mustrequire the bidders that do not produce a soy-based infant formula tosubcontract with another manufacturer to supply a soy-based infant for-mula under the contract. In this case, the bid solicitation must require thatthe winning bidder pay the state agency a rebate on the soy-based infantformula supplied by the subcontractor that is issued by the state agency(7 CFR § 246.16a(c)(2)(ii)). To bid, infant formula companies must be registered with the Secre-tary of Health and Human Services (HHS) under the Federal Food, Drug,and Cosmetic Act (FDCA) (21 USC § 301 et seq.) and must certify withthe state health department that their infant formulas comply with theFDCA and the related regulations. In addition, bidders must be responsive.Through rulemaking that took effect in February 2024, USDA definesresponsive as a bidder that submits a bid by the deadline and meets bothregulatory requirements and those in the bid solicitation (88 FR 86545).Between October 23, 2000, and February 12, 2024, bidders also had to beresponsible, which USDA described as meeting “the eligibility require-ments under the applicable statute and regulations and any additionaltechnical requirements set forth in the bid solicitation,” so long as thetechnical requirements are capable of being evaluated objectively on ayes/no or pass/fail basis (65 FR 51213). USDA has eliminated the require-ment that bidders must be responsible. Companies submit bids on the “primary contract brand” of theirchoosing, which is a non-exempt infant formula that meets WIC’s nutrientrequirements and is suitable for routine issuance to the majority of gener-ally healthy, full-term infants (7 CFR § 246.16a(c)(4)). The state’s defaultis then to issue the primary contract infant formula, with all other infantformulas issued as alternatives. Bidders must provide powder, liquid con-centrate, and ready-to-feed forms of the primary contract brand formulaand specify a rebate for each form. A set list of infant formulas produced by the winning bidder thatmeet WIC’s nutrition requirements are called “contract brand infant for-mulas,” and the rebates apply to them, as well as to any non-exemptinfant formulas introduced by that manufacturer during the contract (7CFR § 246.16a(c)(7)). The rebates also apply to soy-based infant formulasprovided by a subcontractor. State WIC agencies have the discretion toapprove for issuance some, none, or all of the contract brand infant for-mulas that are not the primary contract brand. PREPUBLICATION COPY—Uncorrected Proofs

118 INFANT FORMULA REGULATION Once bids have been opened, the state WIC agency or alliance mustaward the contract to the bidder offering the lowest total monthly netprice for infant formula. Program rules specify how to calculate the netprice for each bid. It must be calculated for a standardized number ofunits of infant formula, based on the total number of ounces by physicalform needed to give the maximum allowance to the average monthlynumber of infants using each form during at least the most recent 6months (7 CFR § 246.16a(c)(5)). In addition, the rebate percentage foreach physical form must be applied to the lowest national wholesale costper unit for a full truckload of the infant formula on the date of the bidopening. After the contract is awarded, the state WIC agency must calcu-late the percentage discount for all other contract brand infant formulasapproved for issuance. Once the bids have been opened, if the wholesaleprice is changed, the rebates must be adjusted so the net price to the stateWIC agency will not change. Contracts usually last 3–5 years before beingrebid. They are usually for a set period of time, with optional extensionsthat can be activated by the state or with mutual consent.Providing Infant Formula to WIC Participants The next part of the process is for the winning bidder to distributeinfant formula to WIC vendors authorized by the state agency. This pro-cess relies, as it does for WIC foods, on approximately 38,000 WIC-autho-rized vendors in fiscal year 2020 (Hodges et al., 2024). These are indi-vidual stores or chains (e.g., grocery stores, big-box retailers, pharmacies)that have been approved by state WIC agencies and enter into a vendoragreement with the state WIC program. They must be able to process EBTcard transactions and ensure that only the correct items are redeemed.Retailers must meet minimum stocking requirements and typically pro-vide ample shelf space for the WIC contract brand infant formulas. As is the case for the infant formula supply chain more generally (seeFigure 4-3), the manufacturer holding the WIC contract typically distrib-utes infant formula from the manufacturing facility to the manufacturer’sdistribution system and then to the vendor’s distribution centers, andthen ultimately to the WIC-authorized vendors (see Figure 4-6) (NASEM,2023a; INCA, 2023). It is noteworthy that the distribution process operatesindependently of USDA or the state WIC agency. The state WIC agencyneither controls nor has information about the flow of infant formulafrom the contract-holding manufacturer to the shelves of WIC-authorizedvendors. Figure 4-6 illustrates (top to bottom) the policy and regulatory pro-cesses by which competitive bidding for infant formula results in a singlemanufacturer within a given state holding the multiyear contract for pro- PREPUBLICATION COPY—Uncorrected Proofs

Congress: requires competitive bidding for infant formula USDA: issues regulations for competitive bidding for infant formula State notified by vendor of infant formula redemption State Conducts Manages Issues EBT card to WIC participant bidding rebate process process Reimburses vendor for wholesale price + retail markup Pays rebate on Infant formula * wholesale price in vendors’ Infant formula EBT Infant formula Infant formula Infant formula own distribution Infant formula on shelves card redeemed company company network in company’s WIC-authorized by WIC eligible to bid with the state warehouse Infant formula vendors participant on WIC contract WIC contract in general distribution network FIGURE 4-6 Process by which infant formula is supplied to WIC participants and the infant formula rebate is paid to state WICPREPUBLICATION COPY—Uncorrected Proofs agencies. *WIC invoices the company for the redeemed infant formula. NOTE: EBT = electronic benefit transfer; WIC = Special Supplemental Nutrition Program for Women, Infants, and Children; USDA = U.S. Department of Agriculture. SOURCE: Developed by the Committee on Challenges in Supply, Market Competition, and Regulation of Infant Formula in the 119 United States.

120 INFANT FORMULA REGULATIONviding infant formula to WIC participants. It also illustrates (left to right)the process by which that manufacturer provides infant formula to WIC-authorized vendors, which is then redeemed by WIC participants usingan electronic benefits transfer (EBT) card. The dashed green lines indicatethe flows of money among USDA, the holder of the state WIC contract,and the WIC-authorized vendors. The solid green line illustrates the flowof information back to the state that occurs when the EBT card is usedto redeem infant formula. The items in orange boxes illustrate the move-ment of infant formula from the selected manufacturer to WIC-authorizedvendors via two distribution networks, one controlled by larger vendorsto their own, usually larger, retail locations and the other by third-partydistributors to smaller vendors, for whom meeting WIC needs may notbe a priority. It is noteworthy that WIC does not regulate this distributionprocess, nor does it have information about the supply of infant formulaat vendor locations until WIC participants inform WIC staff. General dis-tribution network is synonymous with third-party distribution network. WIC participants visit WIC-authorized vendors to use their EBTcard to redeem infant formula. No cash is exchanged at the time of thistransaction, but it initiates a series of events that lead to payment forthe purchased infant formula (Figure 4-6). The WIC-authorized vendorinvoices the state WIC agency for the infant formula redeemed by WICparticipants at their locations. In response, the state WIC agency paysthese retailers the wholesale price plus the retail markup of the redeemedinfant formula. The state WIC program then invoices the contract-holdinginfant formula manufacturer for the rebate on each container of infantformula redeemed. WIC-authorized vendors are required to meet minimum stockingrequirements so participants will find WIC-approved foods available topurchase when they arrive to shop. Under federal rules, vendors muststock at least two different fruits, two different vegetables, and at leastone whole-grain cereal (7 CFR § 246.12(g)(3)(i)). In addition, the vendormust obtain infant formula only from sources included on a list the stateWIC agency is required to maintain. This list includes distributors, andretailers of infant formula licensed in the state and manufacturers reg-istered with the FDA (7 CFR § 246.12(g)(10)). Although federal rules donot require state WIC agencies to set minimum stocking requirements forinfant formula, testimony provided to the committee indicates that theygenerally do (NASEM, 2023a). PREPUBLICATION COPY—Uncorrected Proofs

DEMAND AND SUPPLY 121The Effect of WIC’s Competitive Bidding Process on theInfant Formula Market Using the WIC program’s role as the largest purchaser of formulato obtain a price discount reduces federal costs, allowing the programto serve more people with a given level of federal funding. Simultane-ously, the competitive bidding process has other effects on the marketwith implications for supply chain resiliency. There are two main waysin which the WIC program affects the infant formula market: by subsi-dizing the cost of formula for a large segment of low-income families,who would otherwise be among the most price-sensitive consumers, andthrough its use of competitively bid single-supplier contracts at the statelevel. The effect of each of these factors on the infant formula market iscomplex and has not always been described with nuance in the existingliterature.WIC’s role in market concentration For most years since the WIC pro-gram’s competitive bidding process was established in 1989, there havebeen two or three bidders overall. Because smaller companies have notbid on WIC contracts, there has been conjecture that WIC’s competitivebidding process contributes to concentration of companies in the U.S.market (NASEM, 2024b). In particular, some argue that minimum volumerequirements and requirements to provide multiple forms of infant for-mula (e.g., powder, liquid concentrate, and ready-to-feed) may limit theability of smaller companies to grow by bidding on WIC contracts. It isunclear, however, whether the scale of smaller companies would increaserelative to the dominant firms in the absence of WIC bidding, given theconcentrated oligopolistic18 structure of the industry at the national andglobal levels, which is described in the earlier section on market concen-tration. Moreover, this level of concentration at the national level is notoutside international norms when compared to other high- and upper-middle-income countries that do not have programs with competitivebidding like WIC. Davis (2012) and An et al. (2023) show that the smallest manufactur-ers, or manufacturers with the highest fixed costs, are most likely to findbidding on WIC contracts unprofitable. It is, however, unclear if the WICcontracting mechanism is a barrier to market entry by new (small) firms.Market entry, in general, would largely depend on the size of the marketand the level of fixed and variable costs, which may be affected by regula-tory barriers and tariffs on imported inputs. 18 An oligopoly is referred to in this report as a market in which a large fraction of controlover an industry production lies in the hands of a few large manufacturers. PREPUBLICATION COPY—Uncorrected Proofs

122 INFANT FORMULA REGULATION Nonetheless, the infant formula manufacturer that holds the WICcontract tends to dominate the state market, providing infant formula tonearly all WIC participants and to most non-WIC participants, as well.USDA studied the effect of a change in the WIC contract brands in 30states over the period between 2004 and 2009 and found that the manu-facturer holding the WIC contract accounted for 84 percent of all milk-based infant formula sold in supermarkets (Oliveira et al., 2011). USDAalso found that when a contract changed, the winner’s share of the statemarket increased by an average of 74 percentage points (Oliveira et al.,2011). Similarly, Huang and Perloff (2009) found that contract winnersexperience an increase in local market share of more than 50 percentagepoints. Davis (2012), likewise, found spillover effects of winning the WICcontract on sales to non-WIC customers, increasing market share in thisgroup by 50–60 percentage points. More recent estimates are roughly thesame order of magnitude. Abito et al., (2022) estimated that the contractwinner’s market share increases by 29-35 percentage points among house-holds not participating in the WIC program. Wang (2023) estimates thatwinning a WIC contract increases local market share by 50 percentagepoints. The tendency of families not participating in WIC to purchase theWIC contract brand of infant formula appears to result from several fac-tors, including the following: • WIC-authorized vendors providing ample shelf space and prominent product placement for it (Huang and Perloff, 2014); • hospitals providing the contract brand infant formula to all formula-fed patients due to volume and discounts and so that WIC participants do not have to switch when they leave; • pediatricians recommending the contract brand to all patients to avoid having to tailor their recommendations for WIC participants; • WIC participants purchasing additional infant formula for their infants; • former WIC participants retaining brand loyalty; and • WIC participants talking about the brand with friends or family members (Oliveira et al., 2011).As discussed, some hospitals provide WIC-brand infant formula to newmothers so that they won’t have to switch infant formulas after they leavethe hospital. It may be easier for hospitals to provide the WIC-brandinfant formula to all new mothers (Oliveira et al., 2011). Consumers maynot feel sufficiently knowledgeable to switch brands from whatever thehospital provided or perceive that the formula provided by the hospitalis of higher quality (Huang et al., 2013). PREPUBLICATION COPY—Uncorrected Proofs

DEMAND AND SUPPLY 123 Thus, the WIC program’s competitive bidding process results in state-level infant formula markets being dominated by one manufacturer. Asa result, a disruption in a single manufacturer’s supply of infant formulawill affect states unevenly. A disruption to the supply of the WIC contractbrand will result in a more widespread shortage within a state, and themore limited availability of other brands will make it harder for consum-ers using any brand to find an alternative. By concentrating state infantformula markets and reducing the availability of alternatives to the WICcontract brand, WIC’s competitive bidding process has a potentiatingeffect on shortages of the WIC contract brand and results in other brandsbeing less available to buffer such a shortage in that state. While WIC pays a reduced price for infant formula, the increasednon-WIC purchases of the WIC contract brand are at full price. Attractinga substantial share of the non-WIC market appears to be a key driver ofthe aggressive bids on the WIC contract (NASEM, 2023b; Hodges et al.,2024). Davis drew a direct line between this spillover on non-WIC con-sumer demand for the WIC contract formulas and the bidding behavior ofmanufacturers, informing the committee in public session of his researchindicating that there is a correlation between the level of the WIC rebatebids and the size of the non-WIC market within the entity soliciting bids(NASEM, 2024b). In 2013, rebates averaged 92 percent of the wholesale price, whichmeans that WIC was paying, on average, only 8 percent of the wholesaleprice plus the retail markup (Davis and Oliveira, 2015). Since then, rebatesincreased for a period, but recently have been comparable to that level.USDA found that the average rebate on non-exempt milk-based pow-dered infant formula in new contracts initiated between October 1, 2018,and September 30, 2022, was 113 percent of the wholesale price (Hodgeset al., 2024), a 23 percent increase from 2013. When the rebate exceeds thewholesale price, it offsets part or all of the retail markup as well. If therebate exceeds the entire retail price of infant formula, it offsets the cost ofother WIC foods. As noted above, attracting non-WIC customers appearsto be a key driver of bids. When companies offer rebates that exceed thewholesale cost of non-exempt milk-based powdered infant formula, theydo not receive revenue from redemptions of this formula to WIC par-ticipants, but they still experience the market share gains associated withholding the WIC contract and may receive revenue from other formulasredeemed by WIC participants. USDA shared with the committee thatrebates offered in more recent winning bids and they have decreased.For contracts initiated between October 1, 2022, and October 29, 2023, theaverage rebate on non-exempt milk-based powdered infant formula foralliances and geographic states was 92.58 percent, with rebates ranging PREPUBLICATION COPY—Uncorrected Proofs

124 INFANT FORMULA REGULATIONfrom 74.97 percent to 113.95 percent across states and alliances (see PublicAccess File).19 In a public meeting, a state WIC administrator expressed concernthat the number of WIC bidders has dwindled to just two companies(NASEM, 2023g). A key feature of head-to-head Bertrand competitionis that even the threat of a possible new bidder can provide competitivepressure on pricing (de Blas and Russ 2015)—or in this case, rebates.20For instance, since Nestlé recently sold Gerber Good Start to Perrigo, amanufacturer that does not have a history of bidding on WIC contracts,observers may be concerned that one of the last three companies thatroutinely bid in WIC contracts has bowed out of the market. However, aslong as Perrigo maintains active production in the facility, it is plausiblethat bidders on WIC contracts may be mindful of the possibility that theGood Start brand could become a competitor again under its new owner,should the bids leave a wide enough opening.WIC’s impact on consumer prices for infant formula WIC’s subsidy forinfant formula, the high market share of infant formula the program pro-vides, and the way this share is obtained, could have consequences for theprice of infant formula paid by non-participants. When considering theWIC’s effect on prices, it is important to distinguish between wholesaleprices, which are set by infant formula companies through a nationwidewholesale price list that varies mainly by volume, and retail prices, whichare set by retailers (NASEM, 2024b). Retailer markups are separate frommanufacturer decisions on rebates and wholesale prices. The infant for-mula rebates obtained by WIC apply specifically to the wholesale priceof infant formula. WIC pays any of the wholesale price not covered bythe rebate, as well as the retail markup charged by the WIC-authorizedvendor. Because WIC participants obtain the infant formula that WIC pro-vides at no charge, their WIC-subsidized redemptions are not sensitiveto price-competition between brands at the retail level. Economic theorypredicts that if there were no other countervailing interventions, the sub-sidy alone could result in higher wholesale prices; however, the effectof the subsidy must be considered in conjunction with the impact ofcompetitive bidding. WIC participants’ lack of price sensitivity also maypermit retailers to increase their markups of the contract brand comparedto other brands of infant formula when setting shelf prices. Infant formula 19 This average includes each alliance only once and is not weighted by the number ofinfants to which the rebate applies. Puerto Rico’s rebate is 30.0 percent. 20 Bertrand competition is a model of competition in which at least two or more symmetricfirms produce a hom*ogenous good and compete in prices (Jann and Schottmüller, 2015). PREPUBLICATION COPY—Uncorrected Proofs

DEMAND AND SUPPLY 125can cost between $1,000 and $2,000 a year (Abrams et al., 2019). Purchas-ing infant formula at regular retail prices is challenging for low-incomefamilies that do not participate in WIC or participate in WIC and needadditional infant formula. Because some have expressed concern that WIC’s competitive bid-ding process drives up the cost of formula for non-WIC consumers, thecommittee surveyed the empirical literature to understand the balance ofthese complex factors as they manifest in the marketplace. Some of thesestudies use structural models to understand the implications of removingthe current WIC competitive bidding process or instituting other modes ofprocurement. All of the studies begin with the observation that the infantformula market has a handful of large manufacturers supplying the vastmajority of market share, with high measured, variable (not necessarilyoverall, given high fixed costs) profit margins. Wang (2023) and Abito et al. (2022) calculated that the three largestmanufacturers in the United States—Abbott, RBMJ, and (until recently)Nestle—accounted for more than 90 percent of retail sales of non-exemptinfant formula (73 percent for bulk sales, where private label store brandsare more prevalent). An et al. (2023) imputed a price–cost margin of 50percent, while Wang (2023) estimated margins between 57 and 71 percent.Thus, economists studying the market for infant formula characterize themarket as an oligopoly. As explained earlier in this chapter, much of infant formula marketingaims to differentiate a particular brand or product as unique in the healthor other benefits that it provides. This marketing strategy, and the varia-tion in additives that manufacturers include, indicates the non-exemptinfant formula offered by different manufacturers are heterogeneous inthe eyes of consumers, even if very similar in composition. Thus, non-WIC consumers may be sensitive to differentials in prices across brandsbut also influenced by perceived distinctions or additives. However, dur-ing the WIC competitive bidding process, states, for the most part, viewthe primary contract infant formula brands offered by different manufac-turers as interchangeable and are required to award the contract based onprice alone. The WIC competitive bidding process, therefore, changes thecompetitive environment from an oligopoly—where consumers see dif-ferent brands of non-exempt infant formula as imperfect substitutes—toan oligopoly with winner-take-all, head-to-head price competition, alsocalled Bertrand competition with perfect substitutes.21 Head-to-head competition makes it likely that WIC’s competitivebidding process reduces price-cost markups or variable profit margins 21 Kucheryavyy (2012) and de Blas and Russ (2015) provided technical analyses of thesemodeling frameworks. PREPUBLICATION COPY—Uncorrected Proofs

126 INFANT FORMULA REGULATIONfor manufacturers, and, in fact, several researchers observed this empiri-cally or imputed it through structural models. Wang (2023) estimatedthat variable profit margins fall between 2 and 5 percentage points formanufacturers in states where they supply the WIC contract. Noting thatmanufacturer rebate bids are on average 85 percent of the wholesale price,An et al. (2023) calibrated a structural model with bidding data and out-comes, calculating that manufacturers have negative profits on WIC salesin more than half of their WIC contract markets. These estimates suggestthat WIC does, in fact, reduce the pricing power of manufacturers withinthe auction process. The price pressure on the manufacturers attributableto the contracting process reduce government expenditures on WIC byabout $1.6 billion in fiscal year 2021 (Hodges et al., 2024). Several economic studies have found that the WIC competitive bid-ding program does not contribute to increases in wholesale prices ofinfant formula. Betson (2009) argued that the competitive bidding processis necessary to prevent manufacturers from responding to WIC subsidiesof infant formula purchases by increasing prices. Betson estimated thatinfant formula prices would be double their observed level had the WICcompetitive bidding process not been instituted (Betson, 2009). Subsidiesmakes WIC participants less responsive to price differentials betweenbrands, which would enable infant formula manufacturers to raise theirwholesale prices if selling to retailers in the absence of competitive bid-ding. Betson (2009) conjectures that adding the WIC competitive biddingprocess very likely dampened the growth of wholesale prices that wouldhave resulted had WIC continued without it. This is because the competi-tive bidding process requires the contract-holder to pay higher rebates ifthe manufacturer increases the wholesale price. Davis (2012) providedmore definitive empirical evidence supporting Betson’s (2009) claim thatwholesale prices move one-to-one with rebate bids, meaning the WICcompetitive bidding process was neutral with respect to wholesale pric-ing behavior. For one time period (1999–2007) within his longer historicalsample, Davis (2012) found that rebate bids, on average, increased evenmore than wholesale prices, meaning that WIC’s competitive biddingprocess reduced the average level of wholesale prices. Preliminary simula-tions by An et al. (2023) show that, given WIC subsidies of infant formulapurchases, the competitive bidding process reduces profits between 42and 75 percent. In open session, Davis also observed that the inelasticityof demand for the contract brand among WIC customers also may reducemarketing expenditures by the WIC contract holder (NASEM, 2024b). Since market share swings to the contract winner among non-WIChouseholds, some have expressed concern that non-WIC households sub-sidize the supply of infant formula provided to WIC recipients by themanufacturer who wins the contract (FTC, 2024). This is not consistent PREPUBLICATION COPY—Uncorrected Proofs

DEMAND AND SUPPLY 127with the finding by Davis (2012) that WIC rebates move at least one-to-one with wholesale prices, making them neutral toward, or in some years,even suppressing regional wholesale prices. Although WIC’s competitive bidding process does not appear toincrease wholesale prices, research indicates that the WIC contract choicedoes appear to reduce consumers’ sensitivity to increases in price oncontract products, allowing retailers (or distributors) to increase mark-ups. While Davis (2012) showed neutrality or somewhat lower wholesaleprices resulting from WIC bidding processes, Oliveira et al. (2004) foundthat winning a WIC contract results in retail prices on the contract brandrising between 3.4 and 19.0 percentage points, with non-contract brandsalso seeing pursuant price increases. The size of the increase in prices riseswith the fraction of WIC recipients in the local market and averaged about10 cents per container. Preliminary estimates from An et al. (2023) showedthat prices at retail stores are roughly 8 percent higher on WIC contractproducts compared with non-WIC contract products. Rebates are required to rise with wholesale prices once a contract isin place (7 CFR § 246.16a(c)(7)(iv)), but there are no similar restrictionson pricing by retailers. State WIC agencies must establish maximum pricereimbursem*nt levels for infant formula along with other WIC-authorizedfoods, but these are based on the range in retail prices across similar WIC-authorized vendors and would thus be driven upward by higher retailmarkups for contract-brand infant formula. No portion of the increase inretail price for non-WIC households is covered by public subsidies, butgreater price-sensitivity among these consumers (owing to the absence ofthe subsidy) would move them to purchase cheaper brands. The ability ofretailers to increase prices might be mitigated to some degree if consum-ers received enough information about the similarities across standardinfant formula products to make them more price-sensitive. Overall, the following evidence emerges regarding the WIC pro-gram’s effect on the infant formula market: • By subsidizing infant formula for the majority of low-income infants, WIC renders participants largely insensitive to prices. • Alone, this price insensitivity would tend to lead to higher consumer prices, and studies have found that retail prices are higher for WIC contract infant formulas than other formulas. • However, price competition by manufacturers during bidding allows the WIC program to counteract the upward pressure of the subsidy effect on wholesale prices. As a result, studies have consistently found that wholesale prices are likely lower than they would be if the WIC program’s competitive bidding process were eliminated but the subsidy to participants remained. PREPUBLICATION COPY—Uncorrected Proofs

128 INFANT FORMULA REGULATION While this evidence may seem counterintuitive, and the literature onthe impact of WIC often fails to distinguish between wholesale and retailprices, two hypothetical situations help illustrate why studies are so con-sistent on these points. If the WIC program were eliminated entirely, andall consumers were price-sensitive, wholesale and retail prices on WICcontract products might be slightly lower than they are and might beaccompanied by more industry expenditure on marketing to consumersand health care professionals. In contrast, if WIC’s competitive biddingprocess were eliminated but the program’s subsidy remained in place,wholesale prices, and in turn retail prices, would likely be a great dealhigher than they are, again with more industry expenditure on marketingto consumers and health care professionals. FINAL REMARKS For families that choose or need to rely on infant formula, the U.S.market of non-exempt infant formulas, made for healthy, term infants,contains products that differ in protein source, degree of protein hydro-lysis, carbohydrate source, fat source, and inclusion of non-requiredoptional components, but they are overall generally similar, especially ina crisis situation such as a major shortage. It can be difficult for consum-ers and health care providers to choose among them or identify substituteproducts, and health care providers are under-prepared and ill-equippedto provide evidence-based guidance to caregivers on infant formula sub-stitutions and safe preparation methods. In addition to non-exempt infantformulas, there are exempt infant formula products made for infants withmedical needs (e.g., cow’s milk protein allergy, prematurity, inborn errorsof metabolism). Caregivers of infants with medical needs rely on exemptformulas and have a particularly limited set of feeding options becausethe use of other formulas or human milk can lead to severe health prob-lems even if used for a short period. Breastfeeding plays a role in reducing the number of families that relyon infant formula. Structural barriers in the United Sates, including theprovision of infant formula in the hospital and direct marketing to con-sumers, lack of paid maternity leave, and lack of social support, result inlower breastfeeding rates than in other similar countries. Despite provid-ing some breastfeeding support (see Appendix I) and an enhanced foodpackage to breastfeeding participants, breastfeeding rates are even loweramong low-income families served by the WIC program. Infant formulacan be costly for families who are primarily formula feeding, with theyearly supply of a milk-based powder formula for an exclusively formula-fed infant costing an estimated $1,000 to $2,000, depending on the age ofthe infant as well as the number and amount of feedings. In addition to PREPUBLICATION COPY—Uncorrected Proofs

DEMAND AND SUPPLY 129cost, other factors affect caregivers’ ability to feed their infants, such asfood insecurity and access to clean water. The U.S. infant formula market is highly concentrated in severalways, but concentration of production facilities is the key vulnerabilitywith regard to supply disruptions. The production of infant formula iscomplex, and certain types of infant formula are at higher risk of contami-nation than others. Although domestic plants may have multiple produc-tion lines, technical constraints mean that some facilities or individuallines within facilities are not able or flexible enough to switch productionbetween different products. Modern design and safety protocols mayallow some lines to continue operating if adulteration is identified withinthe facility, but this is challenging in older facilities. Concentrated produc-tion potentiates, or enhances, the possibility that any supply disruptionleads to a shortage and means that buffering strategies have to be moreextensive to be effective. The committee considered both the upstream and downstream sup-ply chain of infant formula market. Infant formulas may contain importedcomponents. The upstream supply chain for this product includes, oftenimported, ingredients (e.g., vitamin premixes); packaging; and labels. Thedownstream supply chain involves distribution from the manufacturerdirectly to the vendor (i.e., retailer or hospital) or via a distributor, and forhospitals may involve a GPO. Individuals not participating in WIC maypurchase infant formula wherever it is sold, whereas WIC participantsmust purchase from a WIC-authorized vendor. About half of the infant formula purchased each year is provided, atno charge, to WIC participants. The infant formula brand issued by a stateWIC program is determined by a competitive bidding process. WIC’scompetitive bidding reduces infant formula costs for the U.S. governmentby $1 to $2 billion dollars annually, enabling WIC to serve more partici-pants with a given federal funding level. The bidding process also appears to lead to lower wholesale pricesfor infant formula than if WIC’s were to subsidies remain in place withoutit; reduce profit margins for infant formula manufacturers; yield rebatesthat are sometimes higher than the wholesale price in about half of con-tracts leading to negative profit for manufacturers on WIC infant formulasales; increase market share in the state’s non-WIC market; and be associ-ated with increases in retail markups. Since the winning bidder becomesthe sole provider of non-exempt infant formula to participants statewide,it attracts non-WIC consumers too, who purchase infant formula at fullprice, which seems to be a main driver of the substantial rebates compa-nies offer. Although the infant formula market is dominated by just six compa-nies globally and three in the United States, concentration in the United PREPUBLICATION COPY—Uncorrected Proofs

130 INFANT FORMULA REGULATIONStates is not an outlier when compared to other high- and upper-middle-income countries. While there has been concern that WIC’s competi-tive bidding process contributes to concentration, the U.S. market is lessconcentrated than it was before WIC’s competitive bidding process wasimplemented. In contrast, WIC’s competitive-bidding process stronglyinfluences concentration of sales at the state level, as the WIC contractbrand dominates sales to all consumers. State-level sales concentrationpotentiates the effect of any supply disruption to the contract brandbecause other brands are less widely available. There is some evidence that it is challenging for smaller infant formulacompanies to increase their market share by bidding on WIC contractsbecause they would have to be able to provide three forms of milk-basedformula (powder, liquid concentrate, and ready-to-feed). It is unclear,however, whether smaller companies would grow relative to larger oneseven in the absence of WIC bidding in light of global market concentra-tion and oligopolistic competition in a consolidating industry. Moreover,tariffs and the FDA regulatory framework for new infant formula prod-ucts may create unintended barriers to expansion. The committee did notfind evidence indicating whether tariffs on infant formula contribute tosales concentration by preventing firms in other countries from servingthe U.S. market, or whether tariffs on ingredients used in infant formulaprevent entry or expansion of newer domestic firms, but manufacturingexperts repeatedly mentioned the FDA notification process for new infantformula as a barrier. When these factors were considered together, key features of the U.S.infant formula market and consumers prior to the 2022 infant formulashortage emerge as vulnerabilities: • Low breastfeeding rates relative to other countries, which means that more families are affected by an infant formula supply disruption; • Concentration in production, which increases both the likelihood and magnitude of a supply disruption; and • Sales concentration within states, which results in uneven effects of supply disruptions and increases the importance of emergency preparedness. In the subsequent chapter, the committee will describe the factors thatled to the 2022 infant formula shortage, actions taken by the governmentto address the shortage, as well as the supply chain during and after the2022 infant formula shortage. PREPUBLICATION COPY—Uncorrected Proofs

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