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

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/fr%3A99-14953

## Record

- **Collection:** Federal Register
- **Document type:** Proposed Rule
- **Published:** June 16, 1999
- **Citation:** 64 FR 32308

## Text

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.

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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 investigati

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A99-14953. Public record. Not legal advice.