Special Supplemental Nutrition Program for Women, Infants and Children (WIC): Food Delivery Systems

SUMMARY: This proposed rule would amend the regulations governing the

Special Supplemental Nutrition Program for Women, Infants and Children.

It would strengthen the requirements for operation of vendor management

systems by establishing mandatory selection criteria; limitation of

vendors; training requirements; criteria to be used to identify high-

risk vendors; and monitoring requirements, including compliance buys.

In addition, the rule would strengthen food instrument accountability

and sanctions for participants who violate program regulations. It

would also streamline the vendor appeals process. The rule is intended

to ensure greater program accountability and efficiency in food

delivery and related areas, and to promote a decrease in vendor

violation of program requirements and loss of program funds.

DATES: To be assured of consideration, written comments must be

postmarked on or before September 14, 1999. Since comments are being

accepted simultaneously on several separate rulemakings, commenters on

this proposed rule are asked to label their comments ``Food Delivery

Systems.'' In addition, due to the inherent problems associated with

the large volume of comments this rule is expected to generate,

electronic transmissions, including data faxes, will not be accepted.

ADDRESSES: Comments may be mailed to Patricia Daniels, Director,

Supplemental Food Programs Division, Food and Nutrition Service, USDA,

3101 Park Center Drive, Room 540, Alexandria, Virginia 22302, (703)

305-2746. All written submissions will be available for public

inspection at this address during regular business hours (8:30 a.m. to

5:00 p.m.) Monday through Friday.

FOR FURTHER INFORMATION CONTACT: Barbara Hallman, at (703) 305-2730.

SUPPLEMENTARY INFORMATION:

Executive Order 12866

This proposed rule has been determined to be ``significant'' and

was reviewed by the Office of Management and Budget (OMB) under

Executive Order 12866.

Regulatory Flexibility Act

This rule has been reviewed with regard to the requirements of the

Regulatory Flexibility Act (5 U.S.C. 601-612). Pursuant to that review,

Shirley R. Watkins, Under Secretary, Food, Nutrition and Consumer

Services, has certified that this rule would not have a significant

impact on a substantial number of small entities. This rule would

modify vendor selection, training, monitoring, sanction and appeal

procedures and/or systems. The effect of these changes would fall

primarily on State agencies. Local agencies and vendors would also be

affected, some of which are small entities. However, the impact on

small entities is not expected to be significant.

Executive Order 12372

The WIC Program is listed in the Catalog of Federal Domestic

Assistance Programs under 10.557. For the reasons set forth in the

final rule in 7 CFR part 3015, Subpart V, and related Notice (48 FR

29115), this program is included in the scope of Executive Order 12372

which requires intergovernmental consultation with State and local

officials.

Executive Order 12988

This proposed rule has been reviewed under Executive Order 12988,

Civil Justice Reform. This proposed rule is intended to have preemptive

effect with respect to any State or local laws, regulations or policies

which conflict with its provisions or which would otherwise impede its

full implementation. This rule is not intended to have retroactive

effect unless so specified in the EFFECTIVE DATE paragraph of the

preamble of the final rule. Prior to any judicial challenge to the

application of the provisions of the final rule, all applicable

administrative procedures must be exhausted.

Unfunded Mandates Reform Act of 1995

Title II of the Unfunded Mandates Reform Act of 1995 (UMRA) (2

U.S.C. 1531-38) establishes requirements for Federal agencies to assess

the effects of their regulatory actions on State, local and tribal

governments and the private sector. Under section 202 of the UMRA, the

Food and Nutrition Service (FNS) generally must prepare a written

statement, including a cost benefit analysis, for proposed and final

rules with ``Federal mandates'' that may result in expenditures to

State, local or tribal governments, in the aggregate, or the private

sector, of $100 million or more in any one year. When such a statement

is needed for a rule, section 205 of the UMRA generally requires FNS to

identify and consider a reasonable number of regulatory alternatives

and adopt the most cost-effective or least burdensome alternative that

achieves the objectives of the rule.

This proposed rule contains no Federal mandates (under the

regulatory provisions of Title II of the UMRA) for State, local and

tribal governments or the private sector of $100 million or more in any

one year. Thus, the rule is not subject to the requirements of sections

202 and 205 of the UMRA.

Paperwork Reduction Act of 1995

The following constitutes a 60-day notice issued by FNS.

Send comments and requests for copies of this information

collection to Lori Schack, Desk Officer, Office of Information and

Regulatory Affairs, Office of Management and Budget (OMB), Washington,

DC 20503. A copy may be sent to Barbara Hallman, Branch Chief,

Supplemental Food Programs Division, Food and Nutrition Service, USDA,

3101 Park Center Drive, Room 540, Alexandria, Virginia 22302, (703)

305-2746.

Comments and recommendations on the proposed information collection

must be received by August 16, 1999. A comment to OMB is best assured

of having its full effect if OMB receives it within 30 days of

publication.

OMB Number: 0584-0043.

Expiration Date: 05/31/99.

Type of Request: Revision of a currently approved reporting and

recordkeeping requirements.

Abstract: In accordance with the Paperwork Reduction Act of 1995

(44 U.S.C. 3501-20) (Paperwork Reduction Act), the reporting and

recordkeeping burden associated with this proposed rule will be used by

FNS as a principal source of information about how each State agency's

food delivery system operates. This proposed rule would primarily

strengthen and improve vendor management, food instrument

accountability, and participant sanctions in the WIC Program. It

addresses vendor selection, training, monitoring and high-risk

identification and food instrument reconciliation and security. The

collection and recordkeeping of this information is necessary to

determine compliance with Federal regulations.

Section 246.4(a) currently requires State agencies to submit

changes to State Plans annually as a prerequisite to

[[Page 32309]]

receipt of funds from FNS. State Plans address specific State agency

program operations such as: a description of the food delivery system,

including the system for the monitoring; the system for the control and

reconciliation of food instruments; State agency efforts to identify

the disposition of food instruments; and efforts to identify dual

participation. FNS estimates that addressing the additional State plan

requirements that would be required by this proposal will take each

State agency 3 hours annually, for a total of 264 personhours (88 State

agencies x 3 personhours per State agency) for this provision

annually.

Proposed section 246.12(i)(1) and (4) would require State agencies

to conduct annual vendor training and to document the contents and

receipt of vendor training, in part to assure that vendors have

knowledge of program rules and procedures. FNS estimates that

developing the content of vendor training materials will take each

State agency an average of 8 personhours per State agency or 704 total

personhours annually (8 hours x 88 State agencies). FNS further

estimates that participation in the annual training will take each

State agency and vendor an average of 2 hours for a total of 90,176

personhours annually (2 hours x 88 State agencies plus 2 hours x

45,000 vendors). Finally, FNS estimates that it will take each State

agency and each vendor approximately 15 minutes to document receipt of

the training for a total estimated annual burden of 11,272 (.25 hours

x 88 State agencies plus .25 hours x 45,000 vendors).

Proposed section 246.12(j)(3) would require State agencies to

monitor 10 percent of its vendor population each year. The monitoring

would be required to be targeted to high-risk vendors. Proposed section

246.12(j)(3)(i) would require the State agency to document the reason

why it has granted a waiver from compliance buys or inventory audits

for vendors identified as high risk. This will allow FNS to identify

whether a State agency has taken appropriate monitoring action against

high-risk vendors, thus enabling FNS to better evaluate State agency

compliance with high-risk monitoring requirements. FNS estimates that

10 percent of the total vendor population, or 4,500 vendors, will be

identified as high-risk and that of those, 5 percent or 225 vendors

will require a waiver from compliance buys or audits. FNS estimates it

will take 2 personhours for the State agency to document each waiver,

resulting in a national total of 450 personhours (225 waivers x 2

hours per waiver) required for this provision annually.

Proposed section 246.12(j)(4) would require that State agencies

provide documentation for all monitoring visits, including compliance

buys, inventory audits, and routine monitoring visits. FNS estimates

that 10 percent or 4,500 vendors will receive compliance buys. FNS

estimates that the average State agency will perform three compliance

buys per vendor for a total of 13,500 compliance buys annually (4,500

vendors x 3 compliance buys per vendor). FNS further estimates that

each buy will require 2 hours to document, for a national total of

27,000 personhours (13,500 compliance buys x 2 hours of documentation

for each buy) spent on this provision annually.

Section 246.12(q) would require State agencies to identify the

disposition of all food instruments as issued or voided, and as

redeemed or unredeemed. Section 246.23(a)(4) would be amended to make

State agencies liable for all redeemed food instruments that are

unaccounted for, unless the State agency could demonstrate the reasons

for the failure to fully account for them. For example, a State agency

may not be able to account for food instruments damaged in computerized

processing, or by water damage. FNS estimates that each State agency

will spend 40 hours a year completing this task and that a total of

3,520 personhours will be required for this provision annually (88

reports x 40 hours per report).

The proposed reporting requirement in section 246.19(b)(5) would

mandate that State agencies target areas specified by FNS during local

agency reviews. This would allow FNS to effectively focus State agency

attention on problem areas of program management needing intensive

review and correction. State agencies review all of their local

agencies once every 2 years. This means that half (1000) of all (2000)

local agencies will be reviewed annually. FNS estimates that State

agencies will be required to address targeted areas during local agency

reviews once every 4 years. This means that an average of 250 (1000 x

\1/4\) targeted reviews will be performed annually. FNS further

estimates that it will take 2 hours for the State agency to address

targeted areas during management evaluations and report the results of

the targeted reviews to FNS. Therefore, 500 total personhours (250

targeted reviews per year x 2 hours per review) is estimated for this

provision.

The proposed amendments to section 246.23(c)(1) would require State

agencies to maintain on file documentation of the disposition of cases

involving improperly obtained benefits. FNS estimates that this effort

will take each of the 88 State agencies an average of 5 personhours per

year, for a national total of 440 personhours (5 hours of recordkeeping

a year x 88 State agencies) estimated for this provision annually.

Respondents: State agencies and vendors.

Estimated Number Respondents: State Agencies: 88 and Vendors:

45,000.

Estimate of Burden: The proposed estimates of the reporting burden

by this rule are detailed below.

--------------------------------------------------------------------------------------------------------------------------------------------------------

Estimated avg. Estimated

Proposed section and title Estimated number of respondents Reports filed Total annual number of total person-

annually responses person-hours hours

--------------------------------------------------------------------------------------------------------------------------------------------------------

246.4(a) State Plan............................ 88..................................... 1 88 3 264

246.12(i)(1) Development of Vendor Training.... 88..................................... 1 88 8 704

246.12(i)(1) Actual Vendor Training............ 88--State.............................. 88 2 176

45,000--Vendors........................ 45,000 2 90,000

246.12(i)(4) Documenting Training Receipt...... 88..................................... 1 88 .25 22

45,000................................. 45,000 .25 11,250

246.12(j)(3) Waiver from Compliance Buys/Audits 88..................................... 1 225 2 450

246.12(j)(4) Documenting Monitoring Visits..... 88..................................... 1 13,500 2 27,000

246.12(q) Disposition of Food Instruments...... 88..................................... 1 8 40 3,520

[[Page 32310]]

246.19(b)(5) Targeted Reviews of Local Agencies 88..................................... 1 250 2 500

246.23(c)(1) Disposition of Participant Claims. 88..................................... 1 88 5 440

--------------------------------------------------------------------------------------------------------

Total...................................... 90,792................................. .............. 104,503 .............. 134,326

--------------------------------------------------------------------------------------------------------------------------------------------------------

In accordance with the Paperwork Reduction Act, this proposed

regulation invites the general public and other public agencies to

comment on the information collection burdens that would result from

the adoption of the proposals in the rule.

Comments are invited on: (a) Whether the proposed collection of

information is necessary for the proper performance of the functions of

the agency, including whether the information will have practical

utility; (b) the accuracy of the agency's estimate of the burden of the

proposed collection of information including the validity of the

methodology and assumptions used; (c)ways to enhance the quality,

utility and clarity of the information to be collected; and (d) ways to

minimize the burden of the collection of information on those who

respond, including through the use of appropriate automated,

electronic, mechanical, or other technological collection techniques or

other forms of information technology.

All responses to this proposed rule will be summarized and included

in the request for OMB approval. All comments will also become a matter

of public record.

This proposed rule contains information collection requirements

which are subject to review by OMB under the Paperwork Reduction Act.

The reporting and recordkeeping requirements established by this

rulemaking in sections 246.4(a), 246.12(i)(1), 246.12(i)(4),

246.12(j)(3), 246.12(j)(4), 246.12(q), 246.19(b)(5), 246.23(c)(1), and

246.25(c) are pending review by OMB.

References

(1) WIC State Agency Guide to Vendor Monitoring and Fraud and

Abuse Control: Grant No. FNS-59-3198-0-96 (April 1982). Prepared by

Arthur W. Burger and Steven Stollmack, ANALOGS, Incorporated. This

study identifies methods for reducing vendor fraud and abuse in the

WIC Program.

(2) Applied Research on Vendor Abuse: Grant No. FNS-59-3198-1-

117 (June 1985). Produced by David Kornetsky, Nancy Wogman, and the

Massachusetts WIC Program. This study worked with a consortium of

ten State agencies to design a high-risk vendor identification

system.

(3) WIC Compliance Buy Handbook: produced by USDA (June 1985).

This handbook provides guidance for State agencies in conducting WIC

compliance investigations.

(4) National Vendor Audit: Audit Report 27661-2-Ch, Special

Supplemental Food Program for Women, Infants and Children--Vendor

Monitoring and Food Instrument Delivery Systems (June 15, 1988).

Conducted by the Office of Inspector General (OIG), USDA.

(5) Vendor Management Study (1990): Contract No. 53-3198-5-33

(December 1990). Conducted for FNS by Professional Management

Associates. This study surveyed the 50 geographic WIC State agencies

and the District of Columbia, excluding Vermont and Mississippi,

which provide benefits exclusively through home food delivery and

direct distribution, respectively.

(6) WIC Vendor Issues Study: Contract No. 53-3198-9-53 (May

1991). Conducted for FNS by Aspen Systems Corporation. This study

investigated the extent of program losses due to fraud and program

noncompliance from vendor overcharging in the WIC Program.

(7) The WIC Files: Case Studies of Vendor Audits and

Investigations in the WIC Program (June 1991). Produced by the

vendor managers of Southeast Region in cooperation with the Florida

WIC Program.

(8) National Association of WIC Directors (NAWD) National Vendor

Management Roundup Survey (1995). This survey, designed by FNS and

the NAWD Vendor Committee representatives, provided profile date on

State agency vendor management information systems.

(9) Vendor Activity Monitoring Profile (VAMP, 1996): Produced

annually by the USDA. This report analyzes WIC State agency vendor

monitoring activities. The report discusses the safeguards that

exist to prevent vendor fraud and program noncompliance from

occurring.

1. Background

Major final amendments to the WIC Program regulations regarding

food delivery systems were last published on May 28, 1982 at 47 FR

23626 in response to audits and management evaluations disclosing

problems in the food delivery area which could result in loss of WIC

Program funds. The May 1982 regulations have not brought about an

acceptable level of improvement in vendor management. Since 1982, the

Program has grown in size and complexity. The Fiscal Year 1983

appropriation for the WIC Program was approximately $1.16 billion

dollars. The appropriation has grown to $3.9 billion dollars in Fiscal

Year 1999. As the Program has expanded, so has the potential for loss

through misuse of program funds and violation of program regulations.

State agencies have responded to this need with varying levels of

effort and success. Both the OIG's National Vendor Audit in 1988 and

the WIC Vendor Issues Study in 1993 indicated that significant levels

of vendor violations continue to persist.

In response to the National Vendor Audit, the Department published

a proposed rule on December 28, 1990 at 55 FR 53446 to strengthen State

agency operations in vendor management and related food delivery areas.

The Department provided a 120-day comment period that closed on April

29, 1991. During the comment period, 1,066 comments were received from

State and local agencies, vendors and associated groups, public

interest groups, members of Congress, members of the public, and WIC

participants. They indicated that significant modifications to the

December 1990 proposed rulemaking were still required, and that the

extent of such modifications would warrant another opportunity for

public input. In addition, several members of Congress requested that

the rule be proposed again in light of its potential impact on certain

State agency food delivery systems.

In response to the commenters' requests, the Department's intent is

to propose new food delivery regulations once more. The Department has

made changes to the 1990 proposal based on suggestions of commenters

and subsequent State agency vendor experiences and the 1990 Vendor

Management Study, ``The WIC Files'' and the WIC Vendor Issues Study.

a. Characteristics of This Proposal

This proposal would provide State agencies with detailed design

standards for effective vendor management systems, as opposed to the

more generally worded requirements and emphasis on broad goals which

characterize current WIC food delivery

[[Page 32311]]

regulations. The emphasis in current regulations on general objectives

has not yielded the necessary improvements in vendor management. In

March 1988, the House Surveys and Investigations Staff released a

report on the WIC Program. In that report, they stated that

``knowledgeable fraud investigators believe, at a minimum, the program

needs more stringent regulations and penalties to deter fraud by

vendors. * * *'' In addition, in May 1988 the General Accounting Office

initiated a review of efforts to minimize fraud and abuse in the WIC

Program. The scope of that review includes identification of efforts

that the Department of Agriculture and State and local WIC agencies are

taking to detect and prevent fraud and abuse in the WIC Program.

Therefore, this proposal would mandate procedures and criteria by which

State agencies must manage vendors to effectively control fraud and

program noncompliance. It would define critical vendor management

terms; establish staffing requirements for vendor management; and

strengthen vendor authorization, agreements, training, monitoring, and

high-risk identification. Related food delivery areas such as food

instrument disposition and security, and State agency corrective action

plans are also addressed. This proposal stresses the interaction and

continuity between various food delivery areas. It not only would

strengthen the individual steps in the process of vendor management--

selection, training, monitoring, and high-risk identification, but also

would increase overall system effectiveness by meaningfully tying these

steps together. It would allow State agencies as much flexibility as

possible within the framework of the mandated standards to take into

account the distinct individual characteristics of each State agency's

management system and to facilitate further experimentation and

innovation.

In addition, the proposal recognizes the emergence of technology in

the retail food delivery area relative to electronic benefits transfer

(EBT). An EBT system for WIC, as demonstrated in the Wyoming Pay West

System, can contribute to improved accountability. Some of the

vulnerabilities for fraud and program noncompliance inherent with

printed food instruments can be reduced by the food-item-based type EBT

system used in WIC. With an EBT system, food package benefits are

issued and redeemed through a computer chip on the EBT card or a

computerized account accessed with the card. The participant is issued

an EBT card at the local level instead of paper checks or vouchers. The

EBT card or computerized account contains the participant's Personal

Identification Number (PIN) and lists the authorized supplemental

foods. The PIN ensures that only the participant or proxy uses the card

to obtain the authorized supplemental foods.

At the vendor, the participant selects the authorized supplemental

foods just as she would if paper checks or vouchers were used. At the

check-out counter, the participant enters the PIN into the Point of

Sale terminal located at the counter. A proper PIN alerts the computer

and the store that the participant is authorized to access the food

benefits. The cashier then scans each of the selected food items. The

Universal Product Code (UPC) listed on the food item is checked against

the authorized supplemental foods listed in the participant's account

to determine if that food item is allowable. If the computer indicates

that the food item is allowable, the item is automatically subtracted

from the participant's list of food items. At the same time, the

vendor's bank account is automatically credited for the amount of the

purchase.

Through the use of the UPC, the opportunity for overcharging,

substitution, and charging for food items not received is substantially

reduced in an EBT environment. If, when the food item's UPC is scanned,

the computer does not accept it as an authorized supplemental food for

the participant, the food item will not be accepted as part of the WIC

transaction.

Another benefit of using an EBT system is greater assurance that

only participants receive WIC foods. Since the proper PIN must be

entered in order to initiate the transaction at the check-out counter,

there is added assurance, through the computer's verification of the

PIN, that the individual is a participant or her proxy.

Because EBT and scanning substantially reduce program violations

both for vendors and participants, proposed section 246.12(a) would

provide FNS discretion on a case-by-case basis to modify regulatory

provisions which FNS determines unnecessarily duplicate the

accountability capabilities inherent in the particular EBT system. In

addition, this proposal would amend certain regulatory requirements to

recognize the different operations of EBT. For example, proposed

section 246.12(q) would be amended to clarify that a PIN rather than a

redeemed food instrument may be matched to a valid issuance and

enrollment record (see section 19 of this preamble); and proposed

section 246.12(h)(3)(iv) would clarify that a PIN may be used in lieu

of a signature on the food instrument at the time it is exchanged for

authorized foods (section 12 of this preamble).

Readers should note that as part of the March 18, 1999 final rule

regarding vendor sanctions (64 FR 13311), the definition of food

instrument was amended to include EBT cards.

b. Comments on the December 28, 1990 Proposal

Many commenters expressed general agreement or disagreement with

the Department's decision to strengthen food delivery and related areas

through the rule. General supporters of the December 1990 proposal

commented that it would make positive improvements in vendor management

and related areas. They stated that existing State agency food delivery

systems need standardization, and that much of the proposal would serve

to formalize systems that exist in many State agencies. Those in

general opposition to the proposal believed that it: (1) failed to take

into account the diversity of State agency vendor management systems,

and (2) inappropriately promoted a ``one size fits all'' approach to

vendor management.

Many opponents thought that WIC food delivery regulations should

continue to outline broad vendor management goals, rather than detailed

standards. Commenters were concerned about the resource implications of

the proposal. In particular, some State agencies felt that the

proposal's requirements would overburden their administrative

resources. Vendors expressed concern about the resource burden

associated with the training requirement. They also commented that the

proposal unfairly punished all vendors for the program noncompliance of

a few, and that the current system works well for the most part, and

should not be changed.

The Department acknowledges the commenters' general concerns

regarding the December 1990 proposal and agrees that any

standardization of State vendor management practices must take into

account the current diversity and needs of existing State agency

systems. In designing this current proposal, the Department has

attempted to acknowledge these differences, while at the same time

addressing the fundamental need for a more effective approach to State

agency vendor management.

The Department still firmly believes in the need for a system of

more standardized vendor management practices than currently exists.

[[Page 32312]]

Differences in State agency vendor management systems have resulted in

inconsistent treatment of vendors across State agencies and within

State agencies, as well as unacceptable levels of vendor fraud and

program noncompliance. The variations in vendor management practices

are significant. Some State agencies have established very specific

criteria for vendor selection which allow them to authorize only the

best qualified vendors by excluding those which have indicators of high

risk for fraud or program error. Vendor selection criteria in other

State agencies are weak and ineffective, resulting in the authorization

of more vendors than are needed to adequately ensure participant

access, reasonable food costs, and effective management. Some State

agencies have established strong training programs for authorized

vendors that require annual face-to-face contact with each vendor.

Other State agencies provide no periodic training for their vendors.

For these State agencies, face-to-face training is often limited to an

initial authorization visit, and vendors may operate for years before

they receive additional training. Some State agencies have aggressively

pursued covert compliance investigations as a method of identifying

abusive vendor practices. Other State agencies do not perform

compliance investigations at all, or perform them only nominally.

The Department recognizes the concerns expressed by commenters that

any effort toward standardization must provide State agencies with the

flexibility to pursue innovation. The Department is convinced, however,

that because the Program has increased in size and in complexity,

standardization and strengthening of basic vendor management practices

must occur in order to address current food delivery problems and

ensure that the WIC Program operates effectively in the future.

Many commenters objected to the December 1990 rulemaking's emphasis

on detailed design standards for vendor management versus the goal

oriented standards that exist in current regulations. They stated that

currently mandated regulatory standards adequately address State agency

vendor management needs. It should be noted that more specific design

standards for vendor management were proposed in the past. On January

23, 1981 (46 FR 7846), the Department published a proposed food

delivery regulation in response to OIG audits of WIC food delivery

systems conducted in 1979 and 1980. These audits identified problems

with State agency food delivery systems, including deficiencies in the

areas of vendor monitoring, overcharge detection, and vendor sanctions.

The January 23, 1981 rule proposed a number of design standards for

State agency food delivery systems including: specific selection

criteria for vendor authorization; limited timeframes for vendor

agreements; periodic mandatory training of all authorized vendors; and

mandatory compliance investigations of a specific percentage of each

State agency's authorized vendor population. Comments received on the

January 23, 1981 rule expressed concerns much like those expressed

almost a decade later in the December 1990 proposal: that the proposal

was overly detailed, not cost-effective, and could adversely affect

participants. Commenters urged the Department to outline food delivery

requirements in terms of broad goals rather than specific design

standards. In response, the Department dropped its detailed design

proposals, and in May 1982, published a final food delivery rule which

instead focused on a few carefully selected cost-effective procedures,

and outlined the remaining vendor management requirements as broad

State agency goals.

In the intervening sixteen years since the publication of the May

1982 final food delivery rule, State agencies have had ample

opportunity to develop and implement effective systems for vendor

management within the framework of the current food delivery

regulations. However, the 1988 National Vendor audit and, to a lesser

extent, the 1991 Vendor Issues Study, indicate that many State agencies

have continued to experience the same problems identified earlier. As

such, the Department must conclude that the current approach leaves

much room for improvement. In light of this experience, this proposal,

like the December 1990 proposal, would mandate more detailed design

standards for State agency food delivery systems.

Many commenters stated that the provisions outlined in the December

1990 proposal were too resource-intensive for State agencies. The

Department acknowledges that the December 1990 proposal, as well as

this one, would require some State agencies to devote additional

resources to vendor management, although it is possible that some State

agencies could actually experience a decreased burden. Nevertheless,

the need for State agencies to address problems in this area of

greatest program vulnerability continues to be imperative. As with the

December 1990 proposal, this rule would not propose simply to add new

requirements. Rather, it would replace many current requirements with

more effective procedures. For example, State agencies would no longer

be required to do representative monitoring, that is, on-site

monitoring visits to at least 10 percent of all authorized vendors.

Instead, the Department proposes that State agencies perform either

covert compliance buys or inventory audits focused on their high-risk

vendors (up to 10 percent of all authorized vendors), a potentially

more focused way of detecting vendor noncompliance than the current

representative monitoring requirement. Compliance buys have been shown

to be the most effective means of detecting and minimizing vendor

noncompliance. The 1988 National Vendor audit of WIC vendor management

referenced the need to require compliance buys in WIC regulations. In

this report, the Inspector General stated that ``We believe that

compliance purchases are the most effective method to identify that a

vendor is abusing the WIC Program''. While a shift in resources may be

necessary to address the proposed compliance buy and inventory audit

requirements, such a shift may be accomplished by reducing their

routine monitoring efforts, which frequently include annual

representative monitoring visits to all authorized vendors. The 1996

VAMP Report indicated that out of a universe of 45,397 vendors, 51

percent received on-site monitoring visits annually.

The Department has addressed the resource concerns expressed by

commenters by lessening some of the requirements proposed in the

December 1990 rule. The requirement for annual face-to-face vendor

training in the December 1990 proposal would be reduced to one face-to-

face training session each agreement period, which could run for a time

period up to 3 years. Requirements for food instrument disposition and

security and many reporting requirements would also be clarified and/or

reduced.

Like the December 1990 proposal, this proposal would not only

establish additional specific vendor management requirements, but would

also strengthen the State agencies' ability to take successful action

against violative vendors, possibly reducing the long-term

administrative burdens. For example, the proposed selection criteria

would help to prevent the authorization of vendors with a past history

of noncompliance. The proposed mandatory training would help lower the

frequency of cashier errors and reduce the level of improperly redeemed

food instruments. The

[[Page 32313]]

Department also proposes to place limits on appeal rights and

procedures.

Although vendor sanctions were addressed in the December 1990

proposed rule, they are not included in this proposal. On March 18,

1999, the Department published a final rule at 64 FR 13311 establishing

mandatory uniform sanctions across WIC State agencies for the most

serious WIC violations, including specific WIC violations that result

in disqualification from the Food Stamp Program (FSP) in addition to

the WIC Program. That rule also allows State agencies to establish

State agency sanctions in addition to the mandated WIC sanctions.

Finally, that rule mandates the disqualification of any WIC vendor who

has been disqualified from the FSP. This proposal would make a number

of other changes to conform the sanction requirements to other changes

proposed in this rule.

c. Comments Solicited

The Department encourages comments on this proposal and would like

to know which provisions have support, as well as which cause concern.

This proposal has been modified from the December 1990 proposal. Only

those timely comments in response to this second proposal will be

considered in the development of a final rule. Commenters are asked to

indicate at the outset that they are commenting on the Food Delivery

Systems rule and to cite the section number (e.g., 246.12(g)(2)(iv)) of

each provision addressed. Comments prove most helpful when they are

specific, stating the reasons for support or opposition, suggesting

modifications which would resolve a commenter's concerns, and providing

relevant background information and State agency-specific data as

appropriate. Due to the inherent problems associated with the large

volume of comments this rule is expected to generate, electronic

transmissions, including data faxes, will not be accepted. All comments

postmarked during the comment period will be carefully considered.

Specific changes are discussed in the following sections of this

preamble. While provisions are generally addressed in their order of

appearance in the regulatory text, considerable cross-referencing and

occasional repetition have proven necessary due to the close

interrelationship between areas of the vendor management and food

delivery processes.

Most of the regulatory provisions relative to food delivery systems

appear in section 246.12 of the regulations. The rulemaking proposes

numerous significant changes to this section. The standard procedure

would be to print only the proposed amendments to this section.

However, each of the steps in the management process addressed in

section 246.12 are thoroughly integrated. Proposed changes cannot be

fully understood and meaningfully assessed except in the context of the

management function to which they apply. In addition, section 246.12

has been completely reorganized. The preamble will indicate both the

current cites and the new cites for changed provisions. Therefore, the

Department is printing section 246.12 in its entirety. However,

comments are solicited only on the substantive changes and deletions to

the text; these are discussed in the preamble.

d. Impact of this proposal on affected entities

The following chart summarizes the effect of this proposal on

vendors, participants and State agencies. The chart also provides an

estimate of the costs and benefits associated with this proposal. It is

estimated that the proposal would reduce waste, fraud and program

noncompliance by 50 percent, resulting in savings of approximately $25

to $50 million. The savings would allow more participants to be served.

BILLING CODE 3410-30-P

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2. Definitions (Section 246.2)

Food delivery systems vary significantly in structure from State

agency to State agency. However, the discussion of issues must be based

on a common understanding of key terms. In order to clarify some

frequently used terms, the Department is proposing definitions for 14

terms related to vendor management.

``Authorized supplemental foods'' would be defined as those

supplemental foods authorized by the State or local agency for a

particular participant.

``Compliance buy'' is proposed to be defined as a covert, on-site

investigation in which a representative of the Program poses as a

participant, transacts one or more food instruments, and does not

reveal his or her identity during the visit. This definition would

exclude on-site buys used by some State agencies in which WIC staff or

their agents pose as participants, purchase foods, and then introduce

themselves to the vendor at the end of the transaction to discuss the

results as a training mechanism.

A ``high-risk vendor'' would be defined as a vendor identified as

having a high probability of violating program requirements through

application of criteria mandated by the Department and any additional

criteria the State agency may choose to establish. This definition

would allow State agencies the flexibility to continue identifying

high-risk vendors using their own criteria, in addition to the criteria

that would be mandated by the Department by this rule. Criteria

developed by the State agency are subject to approval by FNS through

the State Plan process.

A ``home food delivery contractor'' would be defined to mean a sole

proprietorship, a partnership, a cooperative association, or a

corporation that contracts with a State agency to deliver authorized

supplemental foods to the residences of participants under a home food

delivery system. Adding this definition is necessary to accommodate the

proposal to limit the term ``vendor'' to retail food delivery systems

(see further discussion under the definition of ``vendor'').

This proposal would define ``inventory audit'' as an examination of

food invoices or other proofs of vendor purchases to determine if the

vendor purchased sufficient quantities of authorized supplemental foods

to have sold the amounts of such foods to WIC participants for which

the vendor has requested payment from the State agency during a given

period of time. These audits are useful for identifying vendors who:

buy food instruments from unauthorized vendors or from participants and

submit them to the State agency for payment, without having provided to

participants the quantities of authorized supplemental foods prescribed

on the food instruments; and/or exchange food instruments for non-food

items, or unauthorized foods.

This proposed rule would also define ``proxy'' to mean any person

designated by a participant to act on her behalf and, in the case of an

infant or child, the parent or caretaker who applies on behalf of the

infant or child. Traditionally, proxy has been used in program

regulations only to refer to a person designated by a participant to

transact food instruments. This definition would make clear that when

proxies are referred to in program regulations that parents and

caretakers applying on behalf of infants and children are also

included.

``Routine monitoring'' would mean overt, on-site monitoring during

which program representatives identify themselves to vendor personnel.

Such monitoring is used for technical assistance purposes.

Routine monitoring contrasts with compliance buys, which are

defined as covert investigations, and with inventory audits, which

entail a review of specific records. The proposed requirements for a

specific number of compliance buys or inventory audits (see section 14

of this preamble) necessitates a clear distinction between these

activities and all other forms of monitoring, which would be

encompassed by the term ``routine monitoring.'' This term would replace

the term ``representative monitoring,'' which is used in current

regulations and has proven to be confusing because it implies a method

for selecting vendors to be reviewed (i.e., random selection) that

yields a representative sample.

The term ``vendor'' would be defined as a sole proprietorship, a

partnership, a cooperative association, or a corporation operating an

individual retail site authorized to provide supplemental foods to

participants under a retail food delivery system. Under this

definition, each individual retail site would still be considered a

separate vendor. The Department proposes to use the term ``vendor''

only in retail food delivery systems. Currently, the term also applies

in home food delivery and direct distribution food delivery systems.

However, experience has shown that most of the vendor requirements are

inappropriate in those systems. Rather than create numerous exceptions

to the vendor requirements, this proposed rule would limit the use of

``vendor'' to retail food delivery systems.

Although mobile vendors can be problematic, they may be the only

means to ensure services to WIC participants in outlying areas, or to

homeless persons. The proposed definition would permit State agencies

to authorize mobile stores when necessary to meet the special needs

established in their State Plan. The definition is meant to preclude

the general use of temporary food stands and trucks, or other mobile

food sales operations without fixed locations, from consideration for

routine authorization because their mobility makes it impracticable to

monitor them adequately; because their sanitation and refrigeration

capabilities are generally limited and problematic; and, because it is

difficult to limit their areas of operation. State agencies must

present clear rationales for the specific areas or locales proposed for

mobile store service coverage in their State Plans.

The term ``vendor authorization'' would be defined as the process

by which vendors who initially apply for authorization or subsequently

apply for reauthorization are assessed, selected, and enter into an

agreement with the State agency. This definition is proposed to clarify

that the regulatory requirements for authorization apply equally to

both new and reapplying vendors.

``Vendor limiting criteria'' would be defined as those criteria

established by the State agency and approved by FNS as part of the

State Plan process to determine the maximum number and distribution of

vendors to be authorized in its jurisdiction. These criteria must be

designed to result in a number and geographical distribution of

authorized vendors that ensures adequate participant access, and allows

for effective State agency management. Limiting criteria establish the

number and distribution of vendors to be authorized and are not

intended to have any bearing on which specific vendors will be

authorized.

This proposal would define ``vendor overcharge'' as a pattern of

intentionally or unintentionally charging participants more for

authorized supplemental foods than non-WIC customers or charging more

than the current shelf price or contract price. The definition would

clarify that inadvertent mistakes that result in excess charges to the

Program are considered overcharges; that is, the State agency would not

have to establish that the vendor intended to overcharge in order to

determine that this form of program noncompliance has taken place. It

would also take into account

[[Page 32316]]

State agencies which contract for a set price for supplemental foods

with vendors during the life of the agreement.

The term ``vendor selection criteria'' would be defined as the

criteria mandated by the Department in section 246.12(g)(3), and any

additional criteria established by the State agency and approved by FNS

as part of the State Plan process, to select individual vendors for WIC

authorization. Application of these criteria is meant to ensure

systematic selection of only vendors who are best qualified to provide

food benefits to participants in a manner consistent with the WIC

Program's mission and effective program operations. While selection

criteria may have the incidental effect of limiting the number of

vendors who are authorized, their primary purpose is to determine the

best qualified vendors, not the number, of such vendors.

``Vendor violation'' is proposed to be defined as any intentional

or unintentional action of a vendor (with or without management

knowledge) which violates the Program statute or regulations or State

agency policies or procedures. This definition would clarify that

vendors should be held accountable for violations, whether they are

deliberate attempts to violate program regulations, or inadvertent

errors, since both ultimately result in increased food costs and fewer

participants being served. This definition clarifies that it would not

be necessary for the State agency to ascertain the intent behind an

action which, whether inadvertent or deliberate, has the same negative

effect on the Program. The Department acknowledges that the inherent

complexity of the WIC transaction is such that, even with training and

supervision, cashiers may occasionally make unintentional errors. While

this definition would include both intentional and unintentional

actions (with or without management knowledge), this does not mean that

a minor unintentional action by a cashier without management knowledge

would result in disqualification. State agencies have a wide range of

actions that they may take as a result of a vendor violation, including

assessing a claim, requiring increased training, identifying the vendor

as a high-risk vendor subject to monitoring, assessing administrative

fines, and imposing a sanction.

The Department believes that a vendor is not relieved of the

responsibility for an employee's continuing noncompliant actions just

because the vendor's management was unaware of the violations. Allowing

vendors with continuing violations to sustain their authorization by

simply permitting them to remove an employee who violates program

regulations would result in few disqualifications, since the claim that

the violation was caused by a dishonest employee, who has since been

fired, is one of the most common defenses used during vendor appeals

(see ``The WIC Files''). Removing such an employee does not mitigate

the effects of chronic vendor error and mismanagement on program costs,

nor does it lessen the vendor's responsibility to provide effective

oversight and appropriate employee training.

``WIC'' would be defined as the Special Supplemental Nutrition

Program for Women, Infants and Children authorized by section 17 of the

Child Nutrition Act of 1966.

3. Vendor Management Staffing (Section 246.3(e)(5))

Proposed section 246.3(e)(5) would require that State agencies

which anticipate 50 or more authorized vendors as of October 1 of each

fiscal year devote a full-time staff year to vendor management. State

agencies would have the option of designating a single full-time vendor

management specialist or to assign vendor management duties to more

than one staff person, provided the total time spent on vendor

management is equivalent to one staff year. The State agency would

identify these positions as part of the staffing pattern already

required by section 246.4(a)(4). State agencies which anticipate fewer

than 50 vendors as of October 1 of each fiscal year would be required

by this proposal to designate a staff person responsible for vendor

management. No standards for the amount of time this person would

devote to these duties are proposed in this rulemaking.

The requirements for staffing of vendor management are being

proposed because, although, according to the 1990 WIC Vendor Management

Study, at least 37 percent of geographical State agencies had a

designated full-time vendor management position, a wide range exists in

State agency staff devoted to vendor management. In some State

agencies, vendor management responsibilities are not clearly assigned

to specific staff, resulting in the increased possibility of vendor

noncompliance due to insufficient resource allocation, imprecisely

fixed management responsibility, and the lack of an expert in this

highly technical area of program management. The results of the 1988

National Vendor Audit and the requirements proposed elsewhere in this

rulemaking make it necessary for State agencies to focus increased

attention on vendor management. The Department is, therefore, proposing

this minimum vendor management staffing requirement to promote

assignment of adequate resources to, as well as to assign specific

responsibility for, vendor management functions, particularly among

State agencies with 50 or more vendors.

4. State Plan Requirements (Section 246.4)

Section 246.4(a)(14)(ii) is proposed to be amended to require the

State agency to describe its vendor limiting criteria. Limiting

criteria are discussed in more detail in section 8 of this preamble.

Section 246.4(a)(14)(iv) would be amended to require State agencies

which choose to delegate any aspect of vendor monitoring to describe

their system of quality control to ensure uniformity and quality of

local agency or contractor efforts. In addition, section

246.4(a)(14)(iv) requires State agencies to include in their State Plan

the criteria used to determine which vendors will receive routine

monitoring visits. Section 246.4(a)(14)(vi) would be amended to require

a description of the system the State agency will use to account for

the disposition of food instruments, in accordance with section

246.12(q), rather than the current requirement of a description of the

State agency's system for reconciliation of food instruments in section

246.14(a)(14)(vi). This change is discussed further in section 19 of

the preamble.

Two paragraphs are proposed to be added to the section of the State

Plan that addresses food delivery systems in recognition of the

emphasis this rule would place on vendor training and food instrument

security. These provisions would require descriptions of the State

agency's vendor training procedures (section 246.4(a)(14)(xii) and

section 12 of this preamble) and the system for ensuring the security

of food instruments (section 246.4(a)(14)(xiii) and section 18 of this

preamble). The provision on food instrument security would replace the

current requirement concerning food instrument control in section

246.4(a)(14)(vi).

State agencies would be required by proposed section

246.4(a)(14)(xiv) to include in their State Plans a description of

their criteria for making participant access findings. In addition,

proposed section 246.4(a)(14)(xv) would require State agencies wishing

to authorize mobile stores to include in their State Plans the special

needs necessitating this action.

[[Page 32317]]

Finally, proposed section 246.4(a)(15) would be amended to require

a description of the State agency's system to prevent and identify dual

participation as required by section 246.7(l)(1)(i) and (ii), including

the amendments proposed to be made to that section and discussed in

section 5 of this preamble.

5. Prevention and Identification of Dual Participation (Section

246.7(l))

This rulemaking proposes to amend section 246.7(l)(1) to strengthen

intra-State agency and inter-State agency dual participation detection

efforts within the WIC Program, and between WIC and the Commodity

Supplemental Food Program (CSFP) (7 U.S.C. 612c note), by requiring the

identification of all suspected dual participants at least quarterly.

In addition, in cases of dual participation resulting from intentional

misrepresentations, State agencies would be required to pursue the

collection of improperly obtained benefits in accordance with proposed

section 246.23(c)(1). If the participant failed to make full

restitution, the State agency would be required to disqualify the

participant from both programs for one year in accordance with proposed

section 246.12(u)(2). If full restitution is made prior to the end of

the disqualification period, the State agency may permit the

participant to reapply for the Program. Proposed changes to the

participant claims and disqualification procedures are discussed in

section 22 of this preamble.

Dual participants are persons simultaneously participating in the

Program in one or more WIC clinics or persons participating in the

Program and CSFP during the same period of time. The Department's

Office of Inspector General recommended at least quarterly reporting

after finding in the 1988 National Vendor Audit that some State

agencies have inadequate systems for preventing and detecting dual

participation and sometimes fail to take action against possible dual

participants whom they have identified. This proposal would further

strengthen integrity by requiring State agencies to work together to

attempt to identify dual participation between contiguous local service

areas located across State agency borders if geographical and other

factors make it likely that participants travel regularly between such

locations.

The Department also wishes to clarify that dual enrollment does not

necessarily constitute dual participation. However, as a sound

management practice, State agencies should create accountability

systems to identify and correct situations in which a participant is

enrolled and receiving benefits from one WIC or CSFP agency, but

continues to be enrolled (but not receiving benefits) in another.

Although such a participant may not technically be receiving dual

benefits, the potential for dual participation exists and should be

eliminated by removing the participant from one of the enrollment

rosters. The Department is not addressing controls on enrollment in

this proposal.

Nor does this proposal mandate that specific minimum data matching

criteria be used to identify dual participants. Because the Department

has limited evidence of the effectiveness of the various criteria

currently used by State agencies, the Department is not mandating

specific matching criteria. It seems likely, however, that social

security numbers are the most effective and readily available personal

identifiers. State agencies have long had authority to require social

security numbers as a condition of participation, pursuant to the Tax

Reform Act of 1976 (codified at section 205(c)(2)(C)(i) of the Social

Security Act, 42 U.S.C. 405(c)(2)(C)(i)). The Department recommends but

does not require that social security numbers be used whenever possible

to identify dual participation. However, section 7(b) of the Privacy

Act of 1974 (5 U.S.C. 552a note) requires that notice be given of the

planned use of social security numbers by State agencies. Therefore,

State agencies should consult with their State's attorneys before using

social security numbers to identify dual participation.

Section 246.23(c)(2) of this proposal includes a new provision that

would authorize FNS to establish a claim against State agencies when

they have not complied with the requirements to identify dual

participants, if the State agency has not taken steps to recover funds

from or disqualify certain dual participants.

6. General Food Delivery System Requirements (Sections 246.12(a)

Through 246.12(d))

The Department proposes to reorganize the food delivery system

requirements in section 246.12 in recognition of the new definition of

vendor that applies only in the retail food delivery system context.

Under the proposal, the general requirements for food delivery systems

would be grouped in section 246.12(a)-(d). The special requirements for

retail food delivery systems would be in section 246.12(e)-(l), the

home food delivery system requirements in section 246.12(m), the direct

distribution food delivery system requirements in section 246.12(n),

and the remaining general requirements in section 246.12(o)-(v). The

Department is only seeking comments within Section 246.12 on those

areas where substantive changes have been made. These areas include:

paragraph (f) (food instrument requirements); paragraph (g) (vendor

authorization); paragraph (h) (vendor agreements); paragraph (i)

(vendor training); paragraph (j) (monitoring vendors and identifying

high-risk vendors); paragraph (k) (vendor claims); paragraph (q) (food

instrument disposition); paragraph (t) (conflict of interest); and

paragraph (u) (participant violations and sanctions). The specific

proposed changes within this reorganized structure follow.

As discussed in section 1.a of this preamble, proposed section

246.12(a) would be amended to give FNS the authority to modify program

regulations for EBT systems. In addition, the current requirement in

section 246.12(e) that only food vendors authorized by the State agency

may redeem food instruments would be moved to section 246.12(b) and

revised to make clear that it applies whenever food instruments are

redeemed under any of the food delivery systems. Finally, proposed

section 246.12(b) would make clear that each system must ensure

adequate participant access to supplemental foods.

7. Retail Food Delivery Systems: Food Instrument Requirements

(Section 246.12(f))

The current food instrument requirements in sections 246.12(r) that

have relevance only in retail food delivery systems would be moved to

section 246.12(f). Proposed section 246.12(f)(1) would make clear that

food instruments must be used in retail food delivery systems. As

proposed, section 246.12(f)(2) would make clear which food instrument

requirements are applicable only to printed food instruments. This

change is necessary in recognition of the March 18, 1999 final rule

concerning vendor sanctions that amended the definition of food

instruments in section 246.2 to include EBT cards.

In addition, new provisions would be added in section

246.12(f)(2)(i) and (vii) to require printed food instruments to

provide: (1) a list of the supplemental foods authorized to be obtained

with the food instrument, and (2) a signature space in which the

participant or proxy must sign at the time the supplemental foods are

obtained.

[[Page 32318]]

8. Vendor Limiting Criteria (Section 246.12(e)(2))

Under this proposed rule, the vendor authorization requirements

currently found in section 246.12(e) would be moved to proposed section

246.12(g). In addition, the Department proposes to mandate limiting

criteria as described in section 246.12(g)(2). Limiting criteria permit

State agencies to authorize only a sufficient number of vendors in an

area to ensure adequate participant access and effective program

oversight.

There are also other benefits to implementing limiting criteria.

The State agency must apply a significant amount of resources to the

management of each authorized vendor. A case file must be established

and data collected and entered. Each vendor must be visited on-site at

initial authorization. Training would have to be provided annually, as

proposed in section 246.12(i) of this rulemaking. Other costs also

increase with the number of authorized vendors. Compliance buys and

other forms of monitoring would have to be performed as outlined in

proposed section 246.12(j). Reports must be produced and analyzed,

mailings initiated, sanctions applied and tracked, and appeals held as

appropriate. If the State agency authorizes more vendors than necessary

to ensure adequate participant access, the administrative resources

available to manage vendors may not be sufficient to ensure effective

oversight, thus increasing the possibility that program noncompliance

will be undetected and/or forcing curtailment of other critical State

and local agency activities.

Proposed section 246.12(g)(2) mandates that the State agency

establish and implement criteria to limit the number and specify the

distribution of vendors to be authorized. The State agency would not be

required to use specific criteria when limiting vendor numbers. It

would however, be required when developing the criteria to at least

consider the establishment of participant-to-vendor ratios for sub-

areas of its jurisdiction based on factors such as population density,

distribution of participants, location of local agencies and clinics,

and availability of public transportation and road systems to the WIC

population.

The vendor limiting process must balance the need to provide

adequate participant access to authorized vendors and the need for a

vendor population that State agencies can effectively manage given the

administrative resources available to them. Weighing these concerns,

State agencies might, for example, develop one or more participant-to-

vendor ratios. Typically, the State agency would first establish sub-

areas within its jurisdiction based on such factors as the distribution

of caseload, the location of local agencies and clinics, availability

of public transportation and road systems to the WIC population, and

the supply of prospective WIC vendors. Each type of sub-area, in turn,

would be assigned an appropriate participant to vendor ratio.

Theoretically, a State agency with a highly refined methodology might

assign a different ratio to each individual sub-area, but State

agencies will more likely limit themselves to a small set of ratios

capable of addressing the differing needs of particular areas.

Limiting criteria would be required to be implemented consistently

throughout the State agency's jurisdiction, with due consideration for

the varying geographic and other characteristics within the

jurisdiction. The important point in establishing limiting criteria is

that State agencies apply them fairly and with clear rationales

throughout their jurisdictions. The State agency would be required to

establish system to revise and/or reapplying its limitation criteria

whenever it determines that relevant demographic shifts or significant

changes in local caseload allocation, growth, or decline make such

action necessary.

Most State agencies agree that limiting the number and distribution

of vendors is of benefit to the Program. However, some have pointed out

that the resources required to establish limiting criteria and manage

the resultant appeals if a vendor is denied authorization would be

overly burdensome. Moreover, many State agencies do not distinguish

between limiting criteria and selection criteria. Through limiting

criteria, the State agency first decides how many vendors should be

authorized and where, in general terms, they should be located.

Limiting criteria are applied before selection criteria. Only after

these decisions have been made can the State agency apply selection

criteria to determine which specific vendors will be authorized. Many

State agencies believe that vendor numbers can be effectively

controlled through the application of strong selection criteria. This

is true. While selection criteria may have the incidental effect of

limiting vendor numbers and determining vendor distribution, such

criteria establish the number and distribution of vendors which is

based on vendor ability to meet basic authorization qualifications

rather than the need for a vendor in the area.

Many vendors believe that limiting the number and distribution of

authorized vendors is anti-competitive. They feel that any vendor who

meets basic authorization qualifications should be authorized. Vendors

have also expressed concern that implementation of limiting criteria

would not allow smaller stores to effectively compete with the larger

chains for WIC authorization.

The Department does not believe that every vendor who meets basic

authorization qualifications should necessarily be authorized to accept

WIC food instruments. Authorization to accept WIC food instruments must

be governed by the access needs of participants and the qualifications

of the vendor. It must be remembered that, in a few State agencies,

retail stores play little or no role in their WIC food delivery

systems. Those State agencies either purchase all WIC foods through

large-scale competitive procurement and distribute them directly to

participants or contract with home food delivery contractors. On the

other hand, the majority of State agencies deliver WIC benefits through

retail stores, and their cooperation and service contribute

significantly to program operations. The Department gratefully

acknowledges their contributions, in exchange for which vendors benefit

from the considerable volume of food purchases made through WIC in the

retail marketplace, and the additional non-WIC purchases that

participants often make while in the store. The Department also

acknowledges the critical importance of small non-chain stores in

assuring adequate participant access.

Congress established the WIC Program as a preventive nutrition and

health program for pregnant women, infants and young children. The

Program receives annual appropriations from Congress. WIC is not an

entitlement program, with unlimited resources to accommodate changes in

the economy or to serve all eligible persons. Rather, WIC's funding is

discretionary, meaning it is provided a set amount of funding and can

serve only as many participants as this funding allows. Hence, the

Department pursues policies which enhance serving the maximum number of

eligible women, infants, and children with this limited funding.

Vendors are a critically important service component of the Program.

They provide the foods needed by the participants and in turn receive

payment for the foods.

The Department's view is that, in order to use both nutrition

services and administration funds and food dollars effectively and

efficiently for the benefit

[[Page 32319]]

of participants, the State agency must first have the right and

authority to limit the number and determine the geographical

distribution of vendors to be authorized in accordance with its

analysis of how to ensure adequate participant access to the Program.

Second, the State agency must be able to select individual vendors in a

way that will promote efficient use of its food grant through both

reasonable food prices and the reduced possibility of vendor

noncompliance.

State agencies are reminded that they must develop and implement

vendor selection and limitation criteria consistent with the anti-

discrimination provisions of civil rights legislation. However,

Congress has enacted legislation, Public Law 105-336, which requires

that the price a vendor charges for WIC foods be a key factor in

selecting a vendors for authorization. In implementing this

requirement, State agencies may evaluate the food costs of small

vendors on the basis of food cost among peers--other small vendors--

when small vendors are vital to participant access. The use of peer

group cost comparisons mitigate any negative impact on small vendors of

the legislative requirement to select vendors on the basis of cost.

In summary, while any vendor may apply to be authorized as a WIC

vendor, State agencies have the right and the authority to establish

vendor selection and limitation criteria which ensure:

Adequate participant access to the Program;

Maximum usage of funds;

Minimum possibility of vendor misuse or mismanagement of

funds, or fraud;

Consistency with civil rights legislation.

While this approach to vendor authorization may restrict the

ability of a particular retail store to secure or retain WIC

authorization, the Department believes that it is ultimately in the

best interests of the Program.

The smaller vendors who are concerned that their authorization

could be adversely affected by limiting or selection criteria should be

aware that the Department does not foresee dramatic future decreases in

the number of authorized smaller WIC vendors. Smaller vendors will

always be needed to ensure adequate participant access, particularly in

areas where there is a lack of larger chain stores and areas where the

number of vendors is small and transportation is difficult. In these

cases, it should be reiterated that small vendors will compete for WIC

authorization on the basis of their costs relative to other small

vendors serving the same area.

A number of vendors have also expressed concern that limiting

criteria would adversely affect participant access. Section 246.12(b)

would continue to require that all food delivery systems ensure

adequate participant access and proposed section 246.12(g)(1) would

require State agencies to authorize an appropriate number and

distribution of vendors to ensure adequate participant access (as is

currently required in section 246.12(e)(2)). Again, it is important to

stress that smaller vendors are critical to the Program, and where

instrumental in ensuring adequate participant access, will have equal

opportunity to compete for WIC business.

As proposed in section 246.4(a)(14)(ii), the State agency's

limiting criteria would be a mandatory component of the food delivery

system description in its State Plan. The State agency's limitation

system would be subject to public scrutiny and comment as part of the

State Plan development process as is currently required by section

246.4(b). The Department believes that it is at this stage where there

is an opportunity for dialogue between State agencies and their vendor

communities about proposed changes to the State Plan that might affect

them. While the limiting criteria themselves would not be subject to

administrative review, vendors would be able to appeal a denial of

authorization resulting from application of the limiting criteria. For

example, where the limiting criteria provided for four vendors within a

zip code area, a vendor within that zip code area could file an appeal

alleging the State agency incorrectly determined it to be outside that

zip code area. However, the State agency's decision to use zip code

areas as the basis for the limiting criterion or the number of vendors

the State agency determined to be necessary for that area would not be

subject to administrative review. In most cases, though, vendor appeals

will be based on the application of the selection criteria. In general,

the limiting process will be irrelevant to denial of authorization of a

particular vendor because it is a systematic process that establishes

only the desired number of vendors and does not consider the

qualifications of a specific vendor. These qualifications are

considered during the selection process. Denial of an application for

authorization may be appealed by a vendor.

The Department is particularly interested in receiving comments on

the proposed limitation provision. Comments are most helpful when they

are specific, stating the reasons for support or opposition, suggesting

modifications that would resolve commenter's concerns, and providing

relevant background information and State agency-specific data as

appropriate.

9. Retail Food Delivery Systems: Vendor Selection Criteria (Section

246.12(g)(3))

State agency experience (see ``The WIC Files'') has shown that

development and application of good vendor selection criteria during

the authorization process can provide a very cost-effective method of

cost containment and prevention of program noncompliance. Current

regulations do not specifically address the establishment of vendor

selection criteria. They only require vendors to be evaluated in

connection with the biennial assessment of vendor qualifications

mandated by Section 246.12(g). Selection criteria have sometimes been

confused with limiting criteria, because selection criteria may have

the incidental effect of limiting the number of vendors authorized. The

Department wishes to reiterate that, while limiting criteria determine

a specific number and distribution of vendors for an area, selection

criteria determine which vendors meet basic yes/no eligibility

criteria, such as adequate stock and inventory, and prices below a

specified maximum amount.

The Department is proposing in section 246.12(g)(3) to require

State agencies to implement six specific selection criteria. State

agencies would be permitted to supplement the mandatory criteria with

criteria of their own choice. Such State agency-established criteria

must be approved by FNS as part of the State Plan process. The six

proposed mandatory selection criteria are: (1) Competitive price; (2)

minimum variety and quantity of authorized supplemental foods; (3) lack

of a record of a criminal conviction or civil judgment for specified

activities; (4) lack of a history of serious vendor violations; (5)

lack of a history of serious FSP violations; and (6) not currently

disqualified from the FSP or, if subject to a FSP civil money penalty

for hardship, the period of the disqualification that otherwise would

have been imposed has expired.

Competitive pricing (section 246.12(g)(3)(i)) is widely accepted as

a successful cost containment mechanism, facilitating service to

greater numbers of eligible participants. Section 203(l) of Public Law

105-336 now requires all State agencies to

[[Page 32320]]

consider, in selecting retail stores for authorization, the prices the

store charges for WIC foods as compared to other stores' prices for

such foods. The law further provides that State agencies must establish

procedures to ensure that selected stores do not subsequently raise

prices to a level that would make them ineligible for authorization.

The price criterion may consist of assessing applicants based on

either their shelf prices for supplemental foods or their price bids

for supplemental foods, which may be lower than their shelf prices.

Dollar limits could be developed based on historical data such as

average redeemed prices for food instruments or on shelf prices. The

limit calculated for each food package could be a statewide average, or

could vary by area and/or vendor type. For example, a State agency may

decide to establish a higher competitive price in an area in which the

only reasonably located stores have higher prices than the surrounding

areas in order to ensure adequate participant access for that area. The

stores in that area would thus not be penalized for their higher prices

that may be the result of the higher costs of doing business in that

area. As with all limiting and selection criteria, State agencies may

not adopt criteria that will result in inadequate participant access,

such as a competitive price limitation that results in an insufficient

number of vendors located where participants can reasonably be expected

to shop.

Proposed section 246.12(h)(3)(viii) would require that vendor

agreements contain a provision limiting vendors to charging no more

than the competitive price limitation. This change is necessary to

comply with section 203(l) of Public Law 105-336 and to make the use of

competitive price as a selection criterion effective.

State agencies would then need to have a procedure to ensure

authorized vendors comply with the competitive price limitation. Such

procedures could include setting a not-to-exceed limit for the food

instrument (either by printing it directly on the food instrument or

through a bank or system edit), collection of periodic price survey

data from vendors, or surveying price data during monitoring visits.

Some vendors have commented that the ``free market'' approach in

which the ``market'' dictates prices works best and that basing

authorization on competitive price is exclusionary, unfair, and

``against the free enterprise system.'' Some also feel that predatory

pricing of supplemental foods to gain authorization by larger stores

would result in a smaller market share for smaller independent grocers.

Vendors should be aware that this proposal would not result in State

agencies dictating the prices for authorized supplemental foods.

Competitive pricing is already used by most State agencies as a

selection criterion in retail food delivery systems. Prices of

authorized foods are based on the current shelf or ``market'' price

that is charged to non-WIC customers. This price is established by the

vendor. In home food delivery systems and some retail food delivery

systems, prices are based on the lowest ``contract'' or ``bid'' price.

Again, these prices are established by the vendor and based on market

conditions, not WIC Program dictates. Although competitive price has

been used as a selection criterion by most State agencies since the

Program's inception, this has not generally resulted in a lessening of

the market share for smaller independent vendors. It is important,

then, to note that any vendor can improve its position in the vendor

selection process by decreasing prices of its WIC-eligible foods. In

addition, as mentioned earlier in the discussion of limiting criteria,

smaller vendors will always continue to be authorized because they are

needed to ensure adequate participant access, particularly in urban

areas where large chain stores are less likely to be located, and in

rural areas where transportation is difficult.

Finally, the Department has recently noticed a significant increase

in the number of ``WIC-only'' stores authorized under the Program. WIC-

only stores are stores which may only serve WIC participants and are

sustained through their WIC business. While the free market environment

allows establishment of such entities, the Department is concerned that

such stores may profit through use of unreasonably high prices of the

foods charged to the WIC Program. Congress has expressed its concern

regarding the costs of foods under the Program by requiring all State

agencies to consider price when selecting vendors. As such, the

Department will pay particularly close attention to implementation of

the competitive price requirement in States where ``WIC-only'' stores

exist.

The second selection criterion (section 246.12(g)(3)(ii)), minimum

variety and quantity of authorized supplemental foods, would require

the vendor to have supplies of such foods that are adequate, as

quantitatively defined by the State agency, to ensure that participants

can receive the prescribed amounts and types of foods. Minimum variety

requirements refer to the minimum types and brands of authorized

supplemental foods, e.g., two types of milk (whole and low fat) or two

types of cheese (American and Swiss), that a vendor would be required

by the State agency to keep on the shelf at all times. Minimum quantity

refers to keeping a minimum number of each type or brand of food, e.g.,

three containers for each type of milk or three packages of each type

of cheese, on the shelves at all times. In addition, if the State

agency mandates specific package sizes, the State agency could require

that the vendor stock the required package sizes. The Department

encourages State agencies to take into account the availability of

various package sizes and the shelf space of the whole range of their

vendors in establishing the minimum variety and quantity requirements.

The third selection criterion (section 246.12(g)(3)(iii)) is lack

of a record of certain business-related criminal convictions or civil

judgments, on the part of the vendor itself, or any of its current

owners, officers, directors, or partners. Covered criminal convictions

and civil judgments would include offenses such as fraud, violations of

Federal anti-trust statutes, embezzlement, theft, forgery, and bribery.

The fourth selection criterion (section 246.12(g)(3)(iv)) would

require the lack of a history of serious vendor violations during a

period set by the State agency, but not less than one year and not more

than six years prior to the date of application, resulting from the

acts or omissions of any persons currently associated with the vendor

as an owner, officer, director, or partner. If the vendor violation

also resulted in one of the convictions or civil judgments specified in

section 246.12(g)(3)(iii), the vendor would not be eligible for

authorization as required in section 246.12(g)(3)(iii), and the six-

year cap on considering past WIC history would not apply. In

determining what constitutes ``serious vendor violations,'' the State

agency would be required to include whether the vendor has been subject

to any of the mandatory vendor sanctions established under proposed

section 246.12(l)(1) (current section 246.12(k)(1)) and whether the

vendor has failed to participate in the annual training required by

proposed section 246.12(h)(3)(xi). These are minimum criteria. State

agencies may include other violations under the heading of serious

vendor violations such as failure to provide restitution to the State

agency for overcharge claims, repeated failure to take requested

corrective actions, failure to provide requested data or records to the

State agency, failure to allow monitoring by program personnel,

[[Page 32321]]

and other similar violations. The State agency would also have the

discretion to define how many instances of a violation constitute a

``history of'' serious vendor violations both for the mandatory and

State agency-developed criteria. Some types of violations could be so

serious or so blatant that one instance would warrant nonselection. For

others, the State agency could require a series of repeated instances

or combinations of violations before it decides nonselection is

warranted. The Department would like comments on whether to make

mandatory vendor sanctions imposed by another WIC State agency a

mandatory criterion for nonselection.

The fifth selection criterion would mandate the lack of a history

of serious FSP violations (section 246.12(g)(3)(v)). The State agency

would be required to establish a period of consideration for this

criterion of not less than one year and not more than six years prior

to the date of application unless the FSP offense also resulted in a

conviction or civil judgment outlined in section 246.12(g)(3)(iii), in

which case the provisions in section 246.12(g)(3)(iii) would apply and

the six-year maximum period for consideration of past FSP history would

not apply. The State agency would be required to deny the application

of any vendor when the vendor, or any individual who at the time of

application is associated with the vendor as an owner, officer,

director, or partner, has a history of serious FSP violations during

the period of consideration. The State agency would be permitted to

define serious FSP violations, except that such definition would be

required to include withdrawal of FSP authorization for program

noncompliance, a FSP disqualification which is in effect at any time

during this period, or receipt of a FSP civil money penalty for

hardship during this period. The Department wishes to point out that

the State agency would also have the option to consider FSP violations

which did not result in any of these actions. As with the fourth

criterion, State agencies would also have the discretion to determine

what constitutes a ``history'' of serious FSP violations.

The fourth and fifth criteria would not require that the vendor or

someone associated with the vendor be the subject of a criminal

conviction or civil judgment. Serious vendor violations and serious FSP

violations may include actions that are documented in a monitoring

visit or other review or investigation even if a conviction or judgment

did not result from the investigation. The violation would have to fall

within those defined by the State agency as constituting a history of

serious vendor or FSP violations and the State agency would need to

document the basis and defend its determination in the event the vendor

decides to appeal its nonselection. The sixth criterion (section

246.12(g)(3)(vi)) would require that the vendor currently not be

disqualified from the FSP or, if subject to a FSP civil money penalty

for participant hardship, the period of the disqualification that would

otherwise have been imposed has expired.

The third, fourth, fifth, and sixth selection criteria are intended

to ensure that only vendors with business integrity are authorized to

participate in the Program. Proposed section 246.12(g)(3) would make

clear that State agencies do not have to create an elaborate system of

background checks to identify criminal convictions, civil judgments, or

WIC or FSP violations. They may rely on facts known to them and

representations made by applicant vendors on the vendor application.

State agencies are encouraged to make an effort to check with

appropriate State and Federal authorities to ensure that a record of

the specified criminal convictions, civil judgments, or WIC or FSP

violations does not exist. However, they are not expected to do so on a

routine basis. State agencies would be routinely expected to rely upon

the applicant vendors' responses to questions regarding their records,

and if a State agency had reason to doubt the veracity of such

responses, the State agency would be expected to follow up on the

information.

These selection criteria address the Department's growing awareness

of unauthorized vendors involved in defrauding or abusing the WIC

Program. During investigations, State agencies have sometimes found

unauthorized vendors colluding with authorized vendors to defraud the

WIC Program. For example, one or several unauthorized vendors may

accept WIC food instruments at their store(s) and ``launder'' or pass

them through an authorized WIC vendor in exchange for a portion of

their value. These actions are unlawful and the Department believes

that the responsible vendors should not only be prosecuted under

Federal, State and local law, but that the violations preclude the

vendor from consideration in the vendor authorization process.

Local agencies would not be excluded from providing input into the

selection process. The Department recognizes that local agencies can

provide the State agency with valuable input regarding areas of

participant concentration, vendor reputation in the community, and the

quality of service which vendors provide WIC participants. While

encouraging the State agency to receive input from its local agencies

during the selection process in areas the State agency considers

appropriate, the Department wishes to stress that the State agency must

itself have the documentation necessary to make the final decision

regarding fulfillment of all selection criteria.

``The WIC Files'' indicate that high-risk vendors who are

sanctioned often attempt to circumvent the sanctions by selling their

stores for a nominal fee to a relative or associate who then reapplies

for authorization while the persons responsible at the time of the

sanctions actually maintain control of the stores and their profits.

The Department believes that such vendors should not be authorized. As

such, proposed section 246.12(g)(4) would prohibit authorization of a

vendor if the State agency determines the store has been sold by its

previous owner in an attempt to circumvent a WIC sanction. In

determining whether an owner has attempted to circumvent a sanction,

the State agency may consider whether the applicant store was sold to a

relative by blood or marriage, or was sold for less than its fair

market value. This does not mean the State agency must develop a

comprehensive system for routinely tracking the fair market value and

the family relationships for all vendors. The purpose of the provision

is only to provide State agencies with guidelines to define

``circumvention'' of a sanction and respond accordingly.

10. Retail Food Delivery Systems: Timeframes for Accepting and

Processing Vendor Applications and Collection of FSP Authorization

Numbers (Sections 246.12(g)(6) and 246.12(g)(7))

The Department is proposing in section 246.12(g)(6) to allow State

agencies to limit the time frames for accepting and processing vendor

applications. The Department considers limiting the periods of time

during which applications for authorization will be accepted and

processed preferable to accepting and processing applications on a

continuous basis during the entire year. Limiting periods for

acceptance and processing of vendor applications allows the State

agency to use staff resources during the authorization process most

efficiently since training, collection of price data, and evaluation of

selection criteria can be clustered for more efficient execution. These

advantages far outweigh the disadvantages associated

[[Page 32322]]

with the delay before a vendor may apply. The Department considers that

State agencies have always had the authority to limit application

periods as part of their general responsibility for, and control over,

vendor selection. However, data from the 1995 NAWD National Vendor

Management Roundup Survey indicate that of the 75 WIC State agencies

who responded, only 22 State agencies reported they accepted

applications during a set time of the year.

To emphasize this authority, this proposed rule would expressly

give State agencies the option of limiting their vendor authorization

periods, with the condition that vendor applications must be accepted

and processed at least once every three years. A State agency that

chooses to exercise this option would be required in section

246.12(g)(6) to develop procedures for accepting and processing

individual vendor applications outside of its established periods when

it determines there would be inadequate participant access unless

additional vendors are authorized.

Section 246.12(g)(7), as amended by this proposal, would also

require that the State agency collect the FSP authorization number of

all applicant vendors that participate in the FSP and, except when the

State agency uses a competitive bidding procedure in which vendors bid

on prices for authorized supplemental foods, the current shelf prices

for such foods. The FSP authorization number facilitates the receipt of

information on vendor history from the FSP. Although State agencies are

not required to contact the FSP before authorizing vendors, the

Department strongly encourages State agencies to do so and make use of

this valuable information. Shelf price data provide the State agency

with information it needs to establish whether the prices of authorized

supplemental foods are competitive. Shelf price data can also be used

by the State agency to develop and/or update its competitive price

selection criteria, and to update price data used to identify

overcharging.

11. Retail Food Delivery Systems: Time Limit on Vendor Agreements

(Section 246.12(h)(1))

Current food delivery regulations at section 246.12(g) require that

the State agency perform a review of each vendor's qualifications once

every two years, but do not limit the period of the agreement. Proposed

section 246.12(h)(1) would limit vendor agreements to not more than

three years, and would delete the regulatory requirement for periodic

reviews of vendor qualifications since fixed-period agreements would

render this requirement superfluous. The Department believes that fixed

period agreements enable the State agency to manage its vendor

population on a periodic basis more easily and allows it to be more

responsive to changing program conditions and needs than is the case

with open-ended agreements. According to the 1990 Vendor Management

Study, 78 percent of the geographic State agencies already authorize

vendors for three years or less, making fixed-period agreements the

norm. A vendor would need to reapply at the expiration of each

agreement and would have to meet the selection criteria and the

limiting criteria in effect at the time of reapplication.

In addition, current section 246.12(f) allows local agencies to

establish agreements with vendors. Proposed section 246.12(h)(1) would

require that all vendor agreements be established by the State agency.

The Department believes that all vendor agreements should be executed

by the State agency, rather than local agencies, to ensure consistent

application of vendor authorization standards statewide. Conforming

amendments would also be made to sections 246.4(a)(14)(iii) and

246.12(f) (which would be redesignated as section 246.12(h)).

12. Retail Food Delivery Systems: Vendor Agreement Specifications

(Sections 246.12(h)(2) Through 246.12(h)(4))

This proposed rule would revise current section 246.12(f)(1) to

make clear that State agencies may make exceptions to their standard

vendor agreements only when necessary to meet unique circumstances and

must document the reasons for any exception. One such legitimate reason

would be adjustments to accommodate a State agency's EBT system. The

proposed rule would move this requirement to section 246.12(h)(2).

The Department proposes to reorganize and modify a number of the

requirements for vendor agreements. A few new provisions are proposed.

The provisions that would be changed or added are discussed below in

the order in which they appear in the proposed rule.

Proposed section 246.12(h)(3)(i) would make clear that vendors may

accept food instruments only from participants or their proxies. This

does not represent a change from current program operations.

The Department also proposes to change the provision currently at

section 246.12(f)(2)(i) to address concerns raised by State agencies

about problems with substitutions for supplemental foods designated on

the food instrument. A sentence would be added to prohibit vendors from

substituting other foods, non-food items or cash in lieu of

supplemental food listed on the food instrument. The vendor would also

be prohibited from giving credit, refunds, or exchanges (except for

identical supplemental foods). Credit or rainchecks offered to

participants are usually given because vendors have inadequate WIC food

stocks on hand. Participants should not be inconvenienced by vendors

who do not honor their contractual obligation to maintain adequate WIC

food stocks in their stores. Ultimately, it is the participants who

suffer nutritionally from an incomplete food package. In addition, many

commenters expressed concern about the increased opportunity for

program noncompliance when vendors allow refunds for foods purchased

with WIC food instruments. The rule would permit vendors to exchange a

supplemental food with an identical item. This should address instances

of defective supplemental foods without compromising the nutritional

benefit of the participant's food package. These revisions appear in

proposed section 246.12(h)(3)(ii) and are included in this rulemaking

so as to reflect longstanding WIC policy in program regulations.

This proposed rule would add a new section 246.12(h)(3)(iv)

requiring that the vendor ensure the actual purchase price be entered

on the food instrument prior to the signature by the participant or

proxy. Many State agencies require the vendor to enter the purchase

price prior to participant signature. However, a few State agencies

require the participant to enter the purchase price, citing the

educational value for participants. The proposed language would

accommodate either situation. In addition, this provision would make

clear that the provision applies to printed food instruments only.

Thus, where an EBT system is used and the purchase price is scanned and

entered electronically, rather than entered directly on the food

instrument, the provision would not apply. Proposed section

246.12(h)(3)(iv) would also make clear a PIN may be used in EBT systems

in lieu of the signature requirement.

Current section 246.12(f)(2)(ii) would be moved to section

246.12(h)(3)(viii) and would require vendors to charge State agencies

no more than the price charged other customers (i.e. no surcharge may

be imposed for WIC

[[Page 32323]]

purchases) or the current shelf price, whichever is less. Vendors

subject to contract prices would be able to charge no more than the

contract prices. This proposal would modify the current language to

account for competitively bid vendor selection systems being used by

some State agencies in which vendors are selected on the basis of

specific prices they submit in response to a competitive procurement.

This proposal would also make clear that in no case may the vendor

charge the State agency more than the competitive price limitation.

Proposed section 246.12(h)(3)(ix) would clarify current section

246.12(f)(2)(v) concerning claims collection. Under this new section,

the vendor would be required to reimburse the State agency upon demand,

or have its payment from the State agency reduced, for the value of

each vendor overcharge or other error. It would also allow the State

agency to withhold or collect the entire redemption value of a food

instrument containing an overcharge or other error, rather than just

the amount of the error. Finally, it would permit the State agency to

offset any amount owed by the vendor against subsequent amounts to be

paid to the vendor.

Current regulations at section 246.12(f)(2)(vi) prohibit the vendor

from seeking restitution from participants for food instruments not

paid by the State or local agency. The Department proposes to clarify

in proposed section 246.12(h)(3)(x) that the prohibition would also

apply to any food instrument partially paid by the State agency and to

remove the reference to the local agency in order to conform to the

requirement at proposed section 246.12(h)(1) that only State agencies

may enter into vendor agreements.

Current section 246.12(f)(2)(vii) requires the manager or an

authorized representative of the store (such as a head cashier) to

accept training on program procedures. This proposal would move this

provision to section 246.12(h)(3)(xi) and modify it by requiring

participation in training prior to, or at the time of, the vendor's

initial authorization and at least once annually thereafter. The

initial training of a new vendor would be required to take place at the

site of the vendor (see proposed section 246.12(i)(1)). The proposal

would also make clear that the training after the initial authorization

training is to take place at a time and location designated by the

State agency. However, State agencies would be required to provide

vendors at least one opportunity to attend training on an alternative

date and may offer additional alternative training dates. The

Department encourages State agencies to be understanding of the

particular scheduling limitations of vendors with small staffs when

scheduling training.

The reference to ``head cashier'' would be removed and replaced by

language requiring that a member of management participate in the

training, because a head cashier may not be a store management official

and thus may not possess the necessary authority to accept training

responsibilities for the vendor. Further details on the proposed

training requirements may be found in section 13 of this preamble and

proposed section 246.12(i). Section 246.12(h)(3)(xi) would further

require a vendor agreement provision putting the vendor on notice of

the mandatory selection criterion in section 246.12(g)(3)(iv) making a

history of failing to participate in the annual training a condition of

authorization in the next authorization cycle.

This proposal has made one change to current section

246.12(f)(2)(ix). In proposed section 246.12(h)(3)(xiii), the term

``utilization'' of food instruments would be replaced with the term

``handling'' of food instruments as a clarification for the vendor.

The Department proposes to modify section 246.12(f)(2)(xiii) to

require vendors to retain inventory records that are used for State or

Federal tax reporting purposes, and other records as the State agency

may require. State agencies would have the flexibility to determine

both the length of time for retention of the inventory records and

additional records that must be retained. Vendors would be required to

allow access to these records by representatives of the State agency,

the Department, and the Comptroller General of the United States for

inspection and audit. Vendors must make these records available at any

reasonable time and place. The requirement in current section

246.12(f)(2)(xii), concerning access to food instruments during

monitoring visits, would be included in this access requirement. These

changes would appear in section 246.12(h)(3)(xv).

Currently, section 246.12(f)(2)(xxiii) requires the vendor to

notify the State agency when the vendor ceases operations or ownership

changes and the agreement to be voided in cases of change of ownership.

Strict interpretation of the current section 246.12(f)(2)(xxiii) has

resulted in some State agencies treating corporate reorganizations as

changes in ownership. Such an interpretation has resulted in

terminating agreements with vendors that have undergone corporate

reorganizations even though they did not affect the ownership of the

corporation. This rule would make clear in section 246.12(h)(3)(xvii)

that a change in business structure that does not result in a change in

ownership would not trigger this provision. State agencies should focus

on the substance of the transaction rather than the form of the

transaction. The State agency should ensure that the vendor agreement

is amended to reflect the change in business structure.

This rule would also require vendors to give notice of any change

in a vendor's location. This notice is necessary in light of the role

that location plays in vendor selection and limiting criteria.

In order to give State agencies sufficient time to analyze any

change in ownership, location, or cessation of operations, this rule

would require that vendors give 45 days notice in writing prior to the

effective date of the change. In cases in which the change will trigger

termination of the agreement, the lead time also would give State

agencies time to seek a new vendor when necessary to ensure adequate

participant access.

Proposed section 246.12(h)(3)(xviii) would specify that a vendor

may be sanctioned for vendor violations in addition to claims

collection. Such sanctions would be required to be in accordance with

the State agency's sanction schedule.

The Department also proposes to add in section 246.12(h)(3)(xix) a

provision notifying the vendor that the State agency will terminate the

vendor's agreement if the State agency determines that a conflict of

interest exists between the vendor and the WIC Program, at either the

State or the local level. This change reflects the requirement at

section 246.12(q) of the current regulations (redesignated as section

246.12(t) in the proposed rule) with the addition of a reference to

conflicts with the State agency given their role in vendor

authorization.

The current requirement in section 246.12(f)(2)(xiv) would be

redesignated as section 246.12(h)(3)(xx) and amended to revise the

reference to current section 246.23(d) regarding criminal penalties for

program noncompliance.

Proposed section 246.12(h)(3)(xxi) would specify that WIC

authorization is not a license, and that it does not convey property

rights. Vendors would also be put on notice that in order to continue

to be authorized beyond their current agreement periods they must

reapply for authorization. Further, vendors would be notified that if a

vendor has been disqualified for a

[[Page 32324]]

period of time less than the remaining term of its vendor agreement,

participation in the WIC Program may be resumed upon completion of its

disqualification period for the duration of the agreement without

reapplying. If the vendor agreement expires before the vendor has

served out the full disqualification period, and the vendor wishes to

again participate in the Program after serving the disqualification,

the vendor must apply to be authorized. In all cases, the vendor's new

application would be subject to the State agency's selection and

limiting criteria in effect at the time of the reapplication.

Proposed section 246.12(h)(4) would require that the State agency

include the sanction schedule in the vendor agreement. The sanction

schedule must be consistent with the current vendor sanction

requirements, which would be redesignated as Section 246.12(l), and

include both the mandatory vendor sanctions and any State agency vendor

sanctions. This addition was made to consolidate several paragraphs

that required that specific vendor sanction provisions be included in

the vendor agreement. The Department recommends that State agencies

include the sanction schedule as an addendum to the vendor agreement,

so that it may be amended during the agreement period without having to

amend the entire agreement.

The Department proposes a new section 246.12(h)(5) that would

require State agencies to provide vendors a list of the actions subject

to administrative review and a copy of the State agency's

administrative review procedures. Proposed revisions to vendor appeals

are discussed in section 22 of this preamble.

13. Retail Food Delivery Systems: Vendor Training (Section

246.12(i))

The December 1990 WIC Vendor Management Study indicated that

training is the most frequently used non-investigative method for

ensuring the integrity of the Program. ``The WIC Files,'' a summary of

case studies of vendor investigations produced by the vendor managers

of State agencies in the Southeast Region, found that vendor training

is one of the most effective controls on vendor noncompliance that a

State agency can implement.

The Department proposes in section 246.12(i) to strengthen the

training requirements by requiring annual training for all vendors.

Such training would be required to be face-to-face at least once during

the vendor's agreement period, that is, once every three years or more

frequently in State agencies using shorter agreements. The face-to-face

training could be conducted at any time during the agreement period

except that, in instances where a vendor is new to the WIC Program, the

training would be required to be provided prior to, or at the time of,

initial authorization, and at the site of the new vendor.

The face-to-face training could count towards fulfillment of the

annual training requirement for all vendors. In other years of the

agreement period, the annual training could, for example, consist of a

training video, written material such as a handbook update, or verbal

instructions relayed by audiotape.

The vendor's requirements for both annual and face-to-face training

would be required to be outlined in the vendor agreement (section

246.12(h)(3)(xi)), including the stipulation that a history of

noncompliance with these requirements would bar reauthorization (see

proposed section 246.12(g)(3)(iv)). The vendor agreement would be

required to make clear that the State agency has the sole discretion to

determine the date, time, and place of all training, except that the

vendor would have to be given at least one opportunity to reschedule.

Vendors would be required to sign a receipt that they have received

training. Training could take the form of individual or group sessions

and could be conducted on the vendor's premises or at a State agency-

selected location, except for the initial training, which would be

required to be given at the vendor's site.

The Department believes that it is important that certain basic

topics be covered in the annual training sessions, whether the training

is provided face-to-face or is included in some other form of

presentation, such as a film or printed material. As such, the

Department is proposing in section 246.12(i)(2) that the following

topics must be covered annually: the purpose of the WIC Program; the

varieties of supplemental food authorized by the State agency; the

minimum varieties and quantities of authorized supplemental foods that

must be stocked; the procedures for transacting and submitting food

instruments; the vendor sanction system; the vendor complaint process;

the terms of the vendor agreement; and the State agency's claims

collection procedures. The primary difference between the face-to-face

training that would occur once during the agreement period and the

training that would occur during each of the other years of the

agreement period is how the training is delivered. The content would

remain the same.

At the discretion of the State agency, section 246.12(i)(3) would

permit training to be conducted by a local agency, a contractor, or a

vendor representative. The State agency would be required to provide

supervision and instruction to ensure the uniformity and quality of the

training. Proposed section 246.4(a)(xii) would require that the

oversight system be described in the State Plan.

Proposed section 246.12(i)(4) would require State agencies to

document the content of the annual training, including the vendor

receipts required by section 246.12(h)(3)(xi). By requiring an

acknowledgment of the receipt and understanding of training, the State

agency retains evidence of awareness of program rules and procedures by

vendors. Thus, violative vendors cannot successfully argue during

administrative reviews that they were not appropriately trained on

their responsibilities.

14. Retail Food Delivery Systems: Monitoring Vendors and

Identifying High-Risk Vendors (Section 246.12(j))

The 1988 National Vendor Audit, while not nationally

representative, is consistent with the conclusion that current

regulatory requirements for representative monitoring have not been

effective in controlling program noncompliance. In addition, VAMP data

and findings of the WIC Vendor Issues Study indicate the need to focus

more attention on high-risk vendors. Therefore, this proposed

rulemaking would shift emphasis away from the less effective

representative monitoring and toward high-risk monitoring. This would

concentrate resources on a subset of vendors which have been identified

as having a high probability of abusing the Program and is likely to be

more effective in combating program noncompliance.

As discussed in section 2 of this preamble, the term

``representative monitoring'' has proven to be misleading. It describes

the method by which vendors are selected to be monitored rather than

the type of monitoring actually conducted (see section 246.12(i)(2) of

the current regulations). Representative, or random, selection for

monitoring is intended to yield a sample of vendors that is generally

representative of vendors authorized by the State agency. Because

vendors are selected at random rather than targeted as potential high-

risk vendors, the monitoring technique generally considered to be most

appropriate is routine monitoring, i.e., overt monitoring in which WIC

staff identify themselves to vendor personnel. Routine monitoring

provides

[[Page 32325]]

the State agency with an overview of vendors statewide. It also has

program noncompliance-deterrent and educational functions, and can

adequately address inventory, sanitation, and processing of food

instruments available on the premises for inspection. For these

reasons, the Department proposes to replace the term ``representative

monitoring'' with the term ``routine monitoring'' in the regulations.

Section 246.12(i)(2) of the current regulations requires that the

State agency implement a system to conduct representative monitoring on

at least 10 percent of its authorized vendors each year. The current

section 246.12(i)(1) requires that the State agency also establish a

system for identifying high-risk vendors and take effective action to

follow up on vendors so identified, including monitoring, further

investigation, and sanctioning, as appropriate. Current regulations do

not mandate high-risk identification criteria, a specific technique for

monitoring high-risk vendors, or a specific number of high-risk vendor

that must be monitored. The result of these deficiencies has been

uneven implementation of high-risk identification and monitoring

systems with often limited effectiveness in terms of investigating

high-risk vendors and taking appropriate actions based on the findings.

Given that resources available for monitoring are finite, it is

more logical to concentrate on vendors with a high probability of

program noncompliance than on randomly selected vendors. This is also

consistent with the requirement in section 203(f) of Public Law 105-

336, which requires State agencies to identify vendors that have a high

probability of program noncompliance and to conduct compliance

investigations of these vendors. In order to ensure effective

deployment of monitoring resources for high-risk monitoring, effective

high-risk criteria must be used. This proposal would help ensure that

such criteria are used by State agencies by requiring them to use new

high-risk criteria. Under proposed section 246.12(j)(1), State agencies

would continue to be required to monitor vendors. State agencies would

be permitted to delegate the monitoring to a local agency or

contractor, but would be required to provide supervision and training

to ensure the quality and uniformity of the monitoring.

Under this proposal, State agencies would also be required to

implement high-risk vendor identification criteria specified by FNS

(proposed section 246.12(j)(2)). State agencies could employ indicators

of their own choice in addition to those required by FNS, and this is

highly recommended. Such State-established criteria would be subject to

FNS approval through the State Plan process, and such approval would

involve a review of the civil rights implications of the criteria.

Much has been learned over the years about high-risk vendor

identification through innovation and experimentation by State

agencies; two studies, (the WIC State Agency Guide to Vendor Monitoring

and the Applied Research on Vendor Abuse); the investigative activities

of the Office of Inspector General in connection with the National

Vendor Audit; and the data reported by State agencies through the VAMP

system. While much remains to be learned about high-risk vendor

identification, it is now possible to specify some basic criteria that

are strongly associated with documented vendor noncompliance. For

example, a vendor may routinely submit food instruments at or around

their maximum possible dollar value, or at the same set value for every

food instrument. Given the variation in the types and brands of

authorized supplemental foods that a participant may choose, a small or

no cost variation among a vendor's food instrument claims signals a

possible problem meriting further review. Indicators used in the WIC

Program to detect potentially high-risk vendors may not violate civil

rights laws by classifying vendors as potentially high-risk solely on

the basis of their minority status.

Section 246.12(j)(2) of this proposal establishes FNS's authority

to mandate minimum criteria. However, the criteria themselves would not

be included in the regulations. Public disclosure of the high-risk

criteria would undermine their usefulness in identifying high-risk

vendors and would interfere with timely changes to the criteria as

knowledge about the effectiveness of various criteria increases. This

flexibility also ensures that State agencies are not required to use

criteria that subsequent analysis reveals to be ineffective or

obsolete. The Department will inform the State agencies of changes in

the minimum mandated high-risk criteria through its announcement of

requirements for the annual summary of the results of vendor

monitoring, which has been mandated by the WIC Program regulations

since 1982 and would continue to be required by section 246.12(j)(4).

While there is a need for flexibility in establishing criteria to

be used as part of high-risk identification systems, the Department

also recognizes the State agencies' operational need for a certain

level of stability in required high-risk identification criteria.

Changes in criteria inevitably require modification of data collection

procedures and management information systems. Therefore, the required

criteria would not be changed more frequently than once every two

years, and State agencies would be informed one year in advance of all

such changes. The Department does not envision a proliferation of

mandatory criteria over time or the frequent replacement of criteria.

The more likely event is greater specificity in established criteria as

experience indicates how they can be most effectively employed.

The Department wishes to stress that the mandated criteria would

represent the minimum number of criteria a State agency must utilize in

its high-risk identification system. State agencies would continue to

have flexibility to use criteria which they have found to be effective

in addition to those criteria established by the Department.

In this proposal, State agencies would be required by section

246.12(j)(3)(i) to annually conduct compliance buys or inventory audits

on at least 10 percent of the number of vendors authorized by the State

agency as of October 1 of each fiscal year. The number would not need

to be adjusted based on fluctuations in the vendor population during

the fiscal year. State agencies would be required to conduct buys or

audits for all high-risk vendors up to the 10 percent minimum. Under

proposed section 246.12(j)(3)(i), a State agency would be allowed to

waive the investigation of a high-risk vendor if it documents that the

vendor is under investigation by a Federal, State, or local enforcement

agency or that another compelling reason based on good program

management exists for not conducting a compliance buy or inventory

audit. This would include investigations by the Department's Office of

Inspector General and FSP investigations by FNS, but not a routine

action like a health inspection.

If fewer than 10 percent of the State agency's total vendor

population is identified as high-risk and are not exempted from

monitoring, section 246.12(j)(3)(ii) would require the difference to be

made up with vendors not so identified. These vendors would have to be

selected at random as a means of testing the effectiveness of the State

agency's high-risk identification system. Random selection also should

result in a cross-section of all vendors being reviewed, thereby

precluding a disparate over-selection of small and

[[Page 32326]]

minority-owned vendors. Conducting compliance buys or inventory audits

on the population the State agency has identified as high-risk should

result in detection of a higher percentage of violative vendors than

those performed on a random sample of the entire vendor population. If

the random sample and the high-risk population yield similar

percentages of violative vendors and the State agency has used a large

enough random sample to be statistically valid, the State agency should

reassess its high-risk detection system.

When more than 10 percent of the total vendor population has been

identified as high-risk, section 246.12(j)(3)(iii) would require the

State agency that elects not to exceed the 10 percent minimum to

prioritize vendors in order to review those with the greatest potential

for program noncompliance and loss. Factors such as degree of risk of

program noncompliance (e.g., point systems), location of the vendor

relative to other high-risk vendors and likelihood of successful buys

or audits based on past experience could be considered in establishing

priorities.

The Department chose not to propose that compliance buys or

inventory audits be performed on all high-risk vendors. Since high-risk

identifiers can be manipulated, the high-risk identification process

could be driven by the objective of minimizing compliance buy and audit

activity rather than the need to identify vendors with a high

probability of program noncompliance. Conversely, the identification of

too many vendors as high-risk could impose an unreasonable monitoring

burden on the State agency. Finally, as the WIC Program continues to

grow, so will the need for compliance monitoring and accountability.

Given these facts, the Department chose to propose that State agencies

conduct compliance buys on at least 10 percent of their vendors. The 10

percent requirement ensures a minimum presence each year of monitoring

staff as a means of deterrence, as well as detection, of program

violations. When the use of percentages in setting minimum requirements

for compliance buys and inventory audits results in fractional numbers,

State agencies should round upward to the nearest whole number.

This proposal would no longer require State agencies to conduct any

routine monitoring (currently set at a minimum of 10 percent of

authorized vendors annually). The Department strongly recommends that

State agencies continue to conduct routine monitoring to the extent

that resources permit, but recognizes that the routine monitoring

requirement must be relaxed so that State agencies can shift resources

as necessary to meet the proposed high-risk monitoring requirements.

VAMP data show that one-buy investigations are not generally

successful in revealing program violations such as overcharging, and

that State agencies that conduct, on average, three or more compliance

buys per vendor are much more likely to find occurrences of

overcharging. Therefore, the Department also proposes a new requirement

in section 246.12(j)(3)(i) of this rule. For investigations of high-

risk vendors which result in negative compliance buys (i.e. buys in

which no violations occur), the State agency would be allowed to close

the investigation only after three negative compliance buys have

occurred within a 12-month period. These negative compliance buys would

not have to be consecutive in order for the State agency to close the

investigation. For instance, the first buy could be negative, the

second positive, and the third and fourth negative, which would lead to

closing the investigation. Investigations containing a mix of positive

and negative buys could be closed by the State agency after the third

negative buy if the State agency determines that the number of positive

buys was not sufficient to provide evidence of program noncompliance.

An investigation of a high-risk vendor would also be considered to be

complete when the State agency determines that: a sufficient number of

buys has been conducted to provide evidence of program noncompliance or

when an inventory audit has been completed. Investigations on randomly

selected vendors would be considered complete when the State agency

determines there is sufficient evidence to conclude whether the vendor

is in compliance with program requirements.

Proposed section 246.12(j)(5) would establish documentation

requirements for monitoring visits, including compliance buys,

inventory audits, and routine monitoring visits. These are: the

vendor's name and address; the date of the visit; the name(s) and

signature(s) of the reviewer(s); the nature of the problem(s) detected

or the observation that the vendor appears to be in compliance with

program requirements. For compliance buys, State agencies would also be

required to document: the date of the buy; a description of the cashier

involved in each transaction; the types and quantities of items

purchased; and, if available, the shelf price or contract price, and

the price charged for each item purchased; and the final disposition of

all items as either destroyed, donated, provided to other authorities,

or kept as evidence. Recognizing that shelf prices or contract prices

are sometimes difficult to obtain during a compliance buy, proposed

section 246.12(j)(5) would permit the collection of shelf price or

contract price data before or after the compliance buy visit. State

agencies are encouraged, however, to collect shelf prices the same day

as the compliance buy whenever possible to ensure that the State agency

cannot be challenged during an administrative review that the prices

are not truly reflective of shelf prices on the day of the compliance

buy. This defense has been used by vendors during previous

administrative reviews (see ``The WIC Files'').

The current requirement in section 246.12(i)(4) of documenting how

the vendor plans to correct any detected deficiencies would be dropped.

The Department believes that the requirements that State agencies

assess claims and sanction vendors when appropriate adequately address

the need to follow up on deficiencies noted in monitoring visits and

that to require documentation of the follow-up in the monitoring report

is duplicative and unnecessary. However, since the report will form the

basis for any sanction, it is important that the report clearly

document any deficiencies found. Thus, this proposed rule would retain

that requirement.

a. Compliance Buy Techniques

Compliance buys are usually the best method of high-risk monitoring

because they can identify and document a broad range of major program

noncompliance. The fact that the program noncompliance is identified

on-site and witnessed by the compliance monitor provides a strong case

which can withstand the challenges of vendor appeal. As discussed in

section 2 of this preamble, a compliance buy is an undercover visit to

a vendor in which a person acting on behalf of the Program poses as a

WIC participant and transacts food instruments in order to determine

whether program noncompliance is taking place. The rationale and

methodology for different types of compliance buys are outlined in the

WIC Compliance Handbook issued in June, 1985. The most common type of

buy is a ``safe buy,'' in which only allowed foods, either in the

authorized quantities or in lesser quantities, are purchased. Once the

food instrument is redeemed by the vendor, it is reviewed to see if the

vendor has made the appropriate charge, based on the foods actually

purchased and their prices.

[[Page 32327]]

In other types of buys, the buyer might, for example, attempt to

purchase an ineligible food, purchase a non-food item, purchase less

than the full food package, exchange food instruments for credit, or

sell food instruments at a discount, i.e. trafficking.

The State agency must decide what type(s) of compliance buys to

employ. As stated above, in order for the State agency to conclude that

a high-risk vendor is in compliance with program requirements, proposed

regulations at section 246.12(j)(3)(i) would require three negative

buys. However, it would be up to the State agency to decide how many

positive buys must be conducted before instituting administrative

action against the vendor, except in situations where one incidence of

the violation (i.e. trafficking or the sale of alcohol or tobacco

products) triggers a mandatory sanction.

b. Inventory Audit Techniques

The inventory audit is a method for identifying program

noncompliance in which a vendor's records of foods purchased for a set

period of time, such as food invoices or receipts, are examined and

compared to the amount of the same foods for which the WIC Program paid

the vendor for that same period of time. Proposed section 246.12(k)(3)

would require claims to be assessed when vendor violations are

identified as a result of an inventory audit or other review. In

addition, the March 18 vendor sanction rule requires State agencies to

disqualify vendors for a pattern of claiming reimbursement for the sale

of an amount of a specific supplemental food item which exceeds the

store's documented inventory of that supplemental food item for a

specific period of time.

Inventory audits are usually more expensive to perform than

compliance buys because they require staff with a higher level of

training, and because the volume of information which must be reviewed

in order to establish a claim may require considerably more time. Data

from the 1996 VAMP report reveal that 15 State agencies conducted

inventory audits during Fiscal Year 1996. These audits are useful for

obtaining evidence against suspected vendors who traffic in food

instruments, or otherwise request reimbursement for more food than

inventory records can support, and who are not susceptible to

compliance buys because they have a small clientele and will only

commit violations with known customers. As a result, the Department

expects inventory audits to be used in limited circumstances.

c. Workload Implications

The proposed requirement for compliance buys and inventory audits

exceeds the level of compliance buys currently conducted by a number of

State agencies. The Department further acknowledges that replacement of

the current requirement for 10 percent representative monitoring plus

an unspecified level of high-risk monitoring with the proposed 10

percent targeted monitoring requirement may not be an even exchange

since both compliance buys (given the probable need for more than one

at each vendor) and inventory audits are almost always more expensive

than routine monitoring visits. Data from the 1996 VAMP report indicate

that 33 percent of State agencies annually conducted routine monitoring

at 100 percent of their authorized vendors. For some State agencies,

such visits would appear to be of questionable value when compared to

high-risk monitoring. The considerable resources which extensive

routine monitoring consume could be focused much more effectively on

the conduct of compliance buys and inventory audits. It should also be

noted that some State agencies currently exceed the proposed 10 percent

requirement, thus indicating that it can be met within current and

anticipated levels of State administrative funding.

15. Retail Food Delivery Systems: Vendor Claims (Section 246.12(k))

Current regulations at section 246.12(r)(5) require that the State

agency establish procedures to ensure the propriety of redeemed food

instruments. They require the State agency to design and implement a

system of food instrument review to detect suspected overcharges and to

identify vendors with high levels of suspected overcharges. The 1988

National Vendor Audit demonstrated that these general regulatory

requirements have been ineffective in detecting overcharges in some

State agencies. Furthermore, current regulations do not explicitly

require, and some State agencies do not always take, effective follow-

up action on suspected and documented overcharges. The 1991 Vendor

Issues Study both accounted for over $39 million in vendor overcharges

and found a close correlation between overcharging and other program

violations. Consequently, the Department proposes to strengthen State

agencies' general approach to overcharges.

Two basic types of overcharge detection systems are currently in

operation. Price-based systems use vendors' shelf or contract prices to

develop edit levels that are applied to redeemed food instruments.

Redemption-based systems use edit limits derived from the value of

redeemed food instruments. Both systems can be designed in a number of

different ways. Given the potential for significant variation in each

type of system, it is not possible to make meaningful, practical

comparisons between the two types, or to argue that one type will

always and unconditionally be better than all varieties of the other.

Redemption-based systems are used by more State agencies than

price-based systems. The quality of redemption-based systems varies

significantly according to such factors as whether and how the State

agency establishes vendor peer groups in order to develop a statistical

methodology sensitive to differences in redemption levels between peer

groups; the tolerance levels that the State agency includes in its

analysis in order to minimize the incidence of flagged food instruments

that do not, in fact, include overcharges; and, the frequency with

which its statistical tolerances are updated. Price-based systems also

differ qualitatively according to how they address a number of

variables. Because of the complexity and variability inherent in such

systems, the Department believes that it would not be appropriate to

attempt to govern them at this time through the regulatory process.

Rather, State agencies can expect the effectiveness of whatever system

they choose to be subjected to greater scrutiny by FNS Regional Offices

in the future as part of their review of State Plans and management

evaluations. Improvement in these systems can best be pursued through

careful assessment of each individual system.

The Department does, however, propose through regulation to

strengthen State agencies' general approach to overcharges. First, the

Department proposes at section 246.12(k)(1) to require that State

agencies develop and implement a system to identify overcharges and

other errors on redeemed food instruments at least quarterly. That

section would also list the other types of errors the State agency's

system must detect.

Proposed section 246.12(k)(2) would confirm the State agency's

authority to withhold or collect from vendors the entire redemption

value of food instruments that include an overcharge, as opposed to the

current practice in some State agencies of denying payment for, or

collecting, only the amount of the overcharge itself. A parallel

provision

[[Page 32328]]

would be required to be contained in the vendor agreement by proposed

section 246.12(h)(3)(ix).

Proposed section 246.12(k)(4) would require State agencies to

initiate collection actions within 90 days of the date of detection of

an overcharge or other error. The Department believes that timely

claims assessment and collection will provide an incentive for vendors

to correct problems within their organization in a more timely manner.

While State agencies have a number of options in pursuing vendor

claims, the Department encourages State agencies to exercise their

authority to demand repayment of the entire redeemed value of each food

instrument containing an overcharge or other error, to offset claims

when possible, and to sanction vendors for chronic violations or for

failure to pay claims without sufficient justification. These actions

can act as powerful deterrents to overcharging.

16. Retail Food Delivery Systems: Vendor Sanctions (Section

246.12(l))

As discussed earlier in this preamble, on March 18, 1999, the

Department published a final rule amending the vendor sanction

provisions. Among other things, that rule establishes mandatory

disqualification periods for certain vendor violations and requires any

vendor disqualified from the FSP to be disqualified from WIC, unless

such disqualification would result in inadequate participant access.

That rule also establishes a formula for calculating civil money

penalties in lieu of disqualification. These changes are reflected in

the text of this rule for reference only.

Vendor and participant sanctions are currently addressed in section

246.12(k). This proposed rule would split these requirements into

different paragraphs for clarity: Section 246.12(l) for vendor

sanctions and section 246.12(u) for participant sanctions. Except for

the deletion of the participant sanctions section, proposed section

246.12(l) is only a redesignation, with no substantive changes, from

section 246.12(k) as it appeared in the March 18 final rule. Prior to

the publication of the final rule, the Department published a proposed

rule on April 20, 1998, which provided the public with a 90-day comment

period on the provisions in current 246.12(k). Consequently, the

Department will not consider any comments at this time on proposed

section 246.12(l).

17. Home Food Delivery Systems and Direct Distribution Food

Delivery Systems (Sections 246.2, 246.12(m), 246.12(n), 246.12(o),

and 246.12(s))

The requirements for home food delivery and direct distribution

food delivery systems currently found at section 246.12(s) and (t)

would be moved to section 246.12(m) and (n). Both sections would be

amended to delete the requirements concerning food instruments. The

food instrument requirements that would apply to all food delivery

systems have been grouped together in sections 246.12(p), (q), and (r);

the current requirement for uniform food instruments continues to be

found at section 246.12(b). The Department recognizes that food

instruments are not used in all home food delivery and direct

distribution food delivery systems. The food instrument provisions only

apply to those food delivery systems using food instruments.

Finally, the current requirement for participant and vendor

complaints (section 246.12(j)) and prompt payment of vendors (section

246.12(m)) would be moved to sections 246.12(o) and (s), respectively,

and references would be added to home food delivery contractors.

18. Food Instrument Security (Section 246.12(p))

The 1988 National Vendor Audit and management evaluations indicate

that some local agencies fail to maintain adequate security for food

instruments received from the State agency and fail to track the food

instruments they distribute to clinics. Both of these problems increase

the chance of theft and misuse. Examples of the kind of misuse that can

occur are provided in ``The WIC Files.'' These include employee fraud

and collusion. The Department believes that local agencies and clinics

must take appropriate measures to keep food instruments (whether manual

or computer-generated, and including on-line check stock or EBT cards)

secure. In response to this concern, the Department is proposing to

strengthen the current requirement at section 246.12(l) that State

agencies control and provide accountability for the receipt and

issuance of food instruments. Proposed section 246.12(p) would require

the State agency to develop minimum standards for ensuring the security

of food instruments, including: maintenance by the local agency of a

perpetual inventory recording receipt of food instruments from the

State agency and, if applicable, distribution to clinics; monthly

physical inventory of food instruments on hand by the local agency and,

if applicable, by clinics; reconciliation of perpetual and physical

inventories of food instruments; and maintenance of all such food

instruments under lock and key by the local agency and clinic, except

for supplies needed for immediate use. State agencies should also be

mindful of the various security risks associated with data files, such

as fabrication of records and food instruments. The reference to the

control of supplemental foods would be dropped as this is already

covered in current section 246.12(t) (proposed section 246.12(n)).

19. Food Instrument Disposition (Sections 246.12(q), 246.13(h), and

246.23(a)(4))

Current regulations at section 246.12(n) require State agencies to

identify disposition of all food instruments as validly redeemed, lost

or stolen, expired, duplicate, voided, or not matching issuance

records. State agencies are also required to be able to demonstrate the

capability to match redeemed food instruments with valid certification

records. As the 1988 National Vendor Audit observed, State agencies do

not always attempt to account for all redeemed food instruments, and

they sometimes fail to take effective follow-up action on instruments

found not to have been validly redeemed. The reconciliation process as

established in section 246.12(n) is itself deficient because it does

not require that the accountability loop be completed by determining

that all redeemed food instruments are supported by a valid

certification record. This section also refers to ``reconciliation of

each food instrument issued with food instruments redeemed and

adjustment of previously reported financial obligations to account for

actual redemptions and other changes in the status of food

instruments.'' Finally, the term ``reconciliation'' itself has been the

source of confusion among State agencies.

First, these provisions would be moved to section 246.12(q) and the

term ``reconciliation'' would be replaced by the more general phrase

``accounting for the disposition of,'' which is generally applicable to

all of the activities addressed in this paragraph of the regulations.

State agencies would continue to be required to account for the

disposition of all food instruments as either issued or voided, and as

redeemed or unredeemed. The first two categories would allow the State

agency to identify which food instruments are paid or deobligated.

Instead of the

[[Page 32329]]

current requirement in section 246.12(n) that obligations be adjusted

to account for actual redemptions, subsection (h) of the financial

management system requirements in proposed section 246.13 would be

amended to require the State agency to adjust projected expenditures to

account for redeemed food instruments and other changes. The current

food instrument reconciliation requirement in section 246.13(h) would

be removed as duplicative. Second, proposed section 246.12(q) would

require State agencies to match redeemed food instruments not only

against issuance information, but also against a current masterfile of

enrolled persons. Typically, the food instrument would contain a unique

serial number, as currently required, and a participant identification

number. A successful identification of the disposition of all food

instruments would entail matching these numbers on the redeemed food

instrument with their counterparts in the issuance report or file, and

matching the participant identification number on the food instrument

against the enrollment master file. Achieving a complete accounting for

all food instruments is not expected to require State agencies to

radically alter their current structure of reports. For most State

agencies, it is the enrollee's certification record which triggers the

production of each enrollee's food instruments and an issuance record.

Other State agencies may find it necessary to reprogram their systems

in order to link certification or enrollment records with food

instrument issuance and redemption. In an EBT system, the PIN encoded

on the card would be required to be linked to the issuance and

enrollment record to indicate that a redemption was valid. Merely

having the ``capability to reconcile'' redeemed food instruments

against valid certifications, as current rules at section 246.12(n)(2)

require, does not provide an adequate level of accountability. The

Department believes that this final step must actually be carried out.

In the past, some State agencies that do not attempt to account for

the disposition of all redeemed food instruments have misinterpreted

section 246.23(a)(4) in the current regulations, which allows the

reconciliation process to be considered complete when ``all reasonable

efforts have been devoted to reconciliation and 99 percent or more of

the food instruments have been accounted for.'' This language has

incorrectly been interpreted to mean that State agencies may stop their

reconciliation efforts when they have reached the 99-percent level. The

current regulatory language was meant only to acknowledge that

accounting for 100 percent of redeemed food instruments may not be

possible due to such factors as mutilation of food instruments and

coding errors. The Department wishes to stress that State agencies'

efforts to account for the disposition of food instruments have never

been considered complete when 99 percent of food instruments had been

accounted for through reconciliation. State agencies are expected to

account for the disposition of 100 percent of their food instruments

utilizing all reasonable management efforts. Therefore, proposed

section 246.23(a)(4) would both continue to assert FNS's intention to

establish claims against a State agency for all food instruments which

have not been accounted for.

In order to account for all food instruments, the State agency

would be required in proposed section 246.12(q) to identify food

instruments as either issued or voided, and as either redeemed or

unredeemed. Redeemed food instruments would be required to be

identified as validly issued, lost, stolen, expired, duplicate, or not

matching valid issuance and enrollment records. FNS would consider the

process of accounting for the disposition of food instruments complete

only if the State agency can demonstrate that all reasonable management

efforts have been made to account for the disposition of 100 percent of

its food instruments.

State agencies should be aware that FNS will carefully scrutinize

their efforts to identify the disposition of food instruments and will

establish a claim against any State agency, pursuant to section

246.23(a)(4), which has not accounted for the disposition of all

redeemed food instruments, including appropriate follow-up action on

food instruments that cannot be matched against valid issuance or

certification records, unless the State agency can demonstrate that it

has: made every reasonable effort to meet this requirement; has

identified the reasons for its inability to account for the disposition

of each redeemed food instrument; and, to the extent considered

necessary by FNS, has undertaken appropriate actions to improve its

procedures.

20. Issuance of Food Instruments and Supplemental Foods (Section

246.12(r))

Proposed section 246.12(r) would consolidate the existing

provisions in Sections 246.12 (o), (p), (r)(7), and (r)(8) concerning

the issuance of food instruments and supplemental foods. The only

change would be to add a reference to supplemental foods in the

requirement that no more than a three-month supply of food instruments

may be issued to any participant at one time.

21. Conflict of Interest (Section 246.12(t))

Current regulations at section 246.12(q) require only that the

State agency ensure the absence of conflict of interest between any

local agency and the vendor(s) under the local agency's jurisdiction.

Section 246.12(t) of this proposal would also require the absence of

conflict of interest between the State agency and any vendor. Reference

to the State agency would be added in recognition of the pivotal role

the State agency plays in authorizing and monitoring vendors. While the

State procurement rules governing home food delivery contracts likely

include conflict of interest provisions, this provision would make

explicit the conflict of interest prohibition for home food delivery

contractors.

In this context, a conflict of interest is generally where an

individual employed by the State agency or local agency has an interest

in a vendor. The interest may be financial, may relate to past,

current, or future employment with the vendor, or may arise from a

family relationship. Such circumstances create, at minimum, the

appearance or potential that the employee's official actions on behalf

of the WIC Program will be improperly influenced by the interest in the

vendor. This discussion is provided for guidance purposes, and is in no

way exclusive. The Department believes that this is an area which is

based more appropriately on State laws or regulations governing

conflict of interest.

22. Participant Violations and Sanctions (Section 246.12(u)) and

Claims Against Participants (Section 246.23(c))

Participant sanctions are currently found in section 246.12(k)(9)

and would be moved to section 246.12(u)(2). The Department proposes to

increase the maximum disqualification period for participant violations

from 3 months to 1 year and to consider actions by proxies as

participant violations. Current regulations require that State agencies

establish a maximum disqualification period of 3 months for

participants. Many State agencies believe this maximum is ineffective

in deterring participant program noncompliance. In addition, the

current regulations do not address program noncompliance by proxies.

Some forms of participant violations require

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collusion on the part of the proxy (which may include a parent, a

caretaker, or another person designated to accept and redeem food

instruments--see the discussion of the proposed definition of proxy in

section 2 of this preamble). Examples of this kind of collusion are

given in ``The WIC Files.''

The Department acknowledges that some may view the proposed 1-year

maximum as contrary to program goals because it could adversely affect

the health of participants. However, the Department wishes to point out

violative participants and proxies subvert the purpose of the Program

so that it cannot achieve its objectives. Since WIC benefits diverted

to other purposes do not benefit participants in the intended way, a

longer disqualification cannot be expected to have additional serious

negative consequences on a participant's nutritional status than

continued program noncompliance would have. This is regrettably true

whether the program noncompliance is by the participant (e.g., a

pregnant woman trafficking food instruments), the participant's parent

or caretaker in the case of an infant or child, or another type of

proxy. WIC funds are better spent on participants whose health and

well-being can be improved through the Program.

The Department is also proposing to expand the list of participant

violations in current section 246.12(k)(9) to include dual

participation (now section 246.12(u)(1)). Dual participation, as

defined in section 246.2 entails ``simultaneous participation in the

Program in one or more than one WIC clinic, or participation in the

Program and in the Commodity Supplemental Food Program (CSFP) during

the same period of time.'' Dual participation is discussed in more

detail in section 5 of this preamble.

Section 17(f)(14) of the Child Nutrition Act (42 U.S.C.

1786(f)(14)) requires the State agency to recover the value of benefits

provided to participants who have defrauded the Program to the extent

that recovery is cost-effective. This mandate is implemented in section

246.23(c) of current regulations. However, the limit on participant

disqualifications, be it the current three months or the proposed year,

may hinder the State agencies' collection efforts because a person who

subsequently becomes eligible may reenter the Program after having been

disqualified for improper receipt of benefits without first making

restitution. Proposed section 246.12(u)(2) would require State agencies

to disqualify participants for one year in cases where a participant

violation gives rise to a claim. In recognition of the hardship that

such a disqualification could place on an infant or child participant,

who could not have committed the violation, the proposed rule would

require the State agency to permit another proxy to be designated

before disqualifying an infant or child participant. In addition, under

the proposal, the State agency could permit a disqualified participant

to reapply if full restitution is made prior to the end of the

disqualification period.

The Department wishes to clarify the difference between a

participant sanction and a participant claim. A participant sanction is

an administrative action taken in response to program violations in

order to protect the integrity of the Program. A participant claim is

an assessment of financial liability for the value of improperly

obtained program benefits. This proposal would also revise section

246.23(c)(1) to require State agencies in all cases to send a letter to

the participant requesting payment for improperly obtained program

benefits and indicating that, if the request for repayment is not

appealed or is unsuccessfully appealed, the participant must be

disqualified for one year, unless the participant is an infant or child

for whom an alternate proxy acceptable to the State agency is found. If

full restitution is made prior to the end of the disqualification

period, the State agency would be allowed to permit the participant to

reapply for the Program. If the participant fails to make payment in

response to this letter, the State agency would be required to assess

the cost-effectiveness of each additional step in the collection

process against the value of the benefits involved and to take such

actions until the recovery process ceases to be cost-effective. To help

facilitate resolution of such claims, the Department proposes to permit

State agencies to allow participants for whom financial restitution

would cause undue hardship to perform in-kind service, determined by

the State agency, in lieu of monetary repayment. While the Department

acknowledges that collection efforts could in many instances prove

prohibitively expensive, it believes that at least an initial, low-cost

effort would always be cost-effective. This paragraph would continue to

permit the State agency to delegate the responsibility for the

collection of participant claims to the local agency, though it would

be moved to proposed section 246.23(c)(3).

23. Vendor Appeals (Section 246.18)

Current regulations at section 246.18 establish minimum

requirements for vendor and local agency appeal rights and State agency

administrative review procedures. The procedural requirements are

intended to establish a simple and fair appeal process at a reasonable

cost to State agencies. Some State agencies have significantly exceeded

the regulatory procedural requirements, for example, by requiring that

the decision makers be administrative law judges and providing for a

verbatim transcription of their administrative review proceedings. In

response to this situation, the Department's Office of Inspector

General recommended in the 1988 National Vendor Audit that the

Department mandate standard administrative review procedures in order

to limit costs. This would prevent State agencies from exceeding the

minimum procedures required by the current regulations. The Department

continues to believe that the procedures mandated by program

regulations are adequate. While the Department is not proposing to

prohibit the use of more elaborate procedures, the Department does not

consider such procedures to be an effective use of the limited

nutrition services and administrative funds and encourages State

agencies to develop administrative review procedures that stick to the

minimum requirements in this section.

To support State agency efforts to control appeal costs, make the

process more manageable, and ensure fairness to vendors, the Department

is proposing to: (1) Limit the types of State agency actions subject to

administrative review; (2) establish abbreviated administrative review

procedures for certain adverse actions; and (3) relax review procedure

timeframes.

Current regulations at section 246.18(a)(1) allow vendors and local

agencies to appeal a denial of an application for authorization, a

disqualification from the Program, and ``any other adverse action which

affects participation.'' The Department considers the phrase ``any

other adverse action which affects participation'' to be inappropriate

for vendor appeals. A vendor could, for example, seek to appeal a State

agency decision to authorize another vendor in the area on the grounds

that the action would reduce the first vendor's volume of WIC business.

In situations such as this, the State agency's responsibility is to

ensure adequate participant access to the Program, not to protect the

individual interests of a vendor. Thus, the

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Department proposes to limit the State agency actions that are subject

to administrative review. Except in certain circumstances discussed

herein, these actions include: (1) A denial of authorization based on

selection criteria or the State agency's

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