Chapter 3) and are referred to in this report as “non-exempt.” They comprise the vast majority of infant formulas sold in the United States. Infant formulas designed for a subset of infants that have specialized nutrient needs (e.g., cows’ milk protein allergy, prematurity and inborn errors in metabolism) are exempt from FDA guidelines surrounding the nutrient requirements and quality factor studies required of infant formula (as described in Chapter 3), and thus are referred to as “exempt”.

Non-exempt infant formula

As described in Chapter 3, non-exempt infant formula must meet all known nutritional requirements for a healthy term-born infant (Abrams and Bergner, 2023). The nutrient composition of nonexempt formulas designed for healthy term-born infants can be found in Appendix F. All non-exempt infant formulas contain the same base categories of ingredients necessary to meet infant needs and remain stable during shelf life: a protein source, a fat source, a carbohydrate source, vitamins and minerals and necessary stabilizers and/or emulsifiers. Many infant formulas also add nonrequired or optional “bioactive” ingredients, such as prebiotics, probiotics, and such ingredients as milk fat globule membrane (MFGM) that are often found in some form in breast milk (see Figure 4-1). These optional ingredients are often associated with a higher price and are the subject of many marketing messages (Cheung et al., 2023; Neuberger, 2010). Hypoallergenic infant formula (described below) is exempt but easily accessible in stores and online and follows the same compositional construction pattern as non-exempt formula, depicted in Figure 4-1.

infant formulas are exempt (as described below). Thus, 94 percent of nonexempt U.S. formula sold falls into the dairy category.

Exempt infant formula

As described in Chapter 3, exempt infant formulas are infant formulas that are exempt from certain FDA regulations (e.g., nutrient requirements) as they are for infants with inborn errors of metabolism, low birth weight, or other unusual medical or dietary conditions (21 CFR § 107.3). A list of all currently marketed exempt infant formulas can be found on the FDA website (FDA, 2019a; see also Appendix H). The committee refers to exempt infant formula in four different categories based on FDA classifications:

1. extensively hydrolyzed and amino acid-based formulas, often referred to as hypoallergenic;

2. formula for premature infants;
3. metabolic formula, such as infant formulas designed for use by infants with identified inborn errors of metabolism; and
4. formula for uncommon medical conditions, such as infant formula for infants with kidney disease or post-surgical chylothorax (FDA, 2019a).

The exempt infant formula category also includes multi-nutrient fortifiers, both those made from donated breast milk and those based on cow’s milk (intact and hydrolyzed proteins). The following section describes each of the four types of exempt infant formula.

Table 4-1 shows the categories of infant formula that are marketed in the United States, as well as the formats and availability of these infant formulas. The first category of exempt infant formula is extensively hydrolyzed (casein or whey) protein and amino acid–containing formulas, which are often referred to as hypoallergenic. These infant formulas in the U.S. market are lactose free, although it is not a requirement. These infant formulas are widely available in stores and online.

The second category of exempt infant formulas, metabolic infant formulas, are often designed to meet the nutritional requirements of infants and toddlers (ages 1–2 years) with any one of several inherited meta-

bolic disorders. For example, phenylketonuria (PKU) is a rare inherited disorder caused by a change in the gene that encodes for phenylalanine hydroxylase, the enzyme responsible for breaking down phenylalanine in the body (Williams et al., 2008). In its classic form, resultant high levels of phenylalanine can cause severe brain injury (van Spronsen et al., 2021). The metabolic formula designed for infants with PKU is devoid of phenylalanine, with remaining essential amino acids added. Because inherited metabolic disorders are rare, metabolic products are manufactured less often than non-exempt infant formulas and often in a single plant. They are only prepared as a powder to increase the shelf life. While a letter of medical necessity is legally required for purchase of metabolic products, these products are nevertheless available for purchase at some online retailers without such a letter. Moreover, the caregivers of infants with metabolic disorders are often unable to switch products or provide other sources of nutrition during times of shortage.

The third category of exempt infant formula is for infants with uncommon diseases. These infant formulas include, for example, Similac PM 60/40 for infants with impaired renal function (Abbott Nutrition, n.d.a.), Calcilo XD for infants with hypercalcemia (high levels of calcium in the blood) (Abbott Nutrition, n.d.b.), and Enfaport for infants with conditions such as chylothorax (Reckitt MeadJohnson, n.d.). Although healthy infants can use these products without any adverse effects for short periods, these infant formulas are typically deficient in critical nutrients such as sodium, iron, and calcium. Infants with uncommon diseases for whom these infant formulas are intended cannot safely use any alternative infant formulas. Some infant formulas in this category may be obtained at the retail level (e.g., Similac PM 60/40), although their availability may be limited.

The fourth category of exempt infant formula is infant formula for premature infants (designed for infants born less than 37 weeks gestation and most often for infants born of very low birth weight (less than 1,500 g) (AAP, 2020). These infants have elevated requirements for energy and essential nutrients to facilitate their rapid growth and development, which are not met by non-exempt infant formulas (AAP, 2020). These exempt infant formulas are usually hypercaloric (e.g., 0.8 kcal/mL or 24 kcal/oz for use in-hospital and 74 kcal/dL or 22 kcal/oz for transitional infant formulas intended for use in larger preterm infants and after hospital discharge); they also contain higher concentrations of protein, electrolytes, vitamins, and minerals per 100 kcal than non-exempt infant formula (Koletzko et al., 2021; Young et al., 2016). All infant formulas in the United States that are designed for very low birth weight preterm infants contain the long-chain polyunsaturated fatty acid DHA and a significant fraction of the fat source as medium-chain triglycerides to support fat absorption (Klein, 2002). These post-discharge products at 22 kcal/oz are

largely available at the retail level and will generally not cause harm to full-term healthy infants consuming them. Families of premature infants have limited options for switching infant formulas in times of a shortage; however, skilled clinicians (e.g., neonatal dietitians) with knowledge of formula composition could make adaptations in the hospital setting by concentrating formulas designed for term-born infants. It is important to note that hypoallergenic and post-discharge/premature infant formulas are available for purchase without a prescription outside the hospital setting.

The exempt infant formula category also includes multi-nutrient fortifiers designed to be added to breast milk to meet the elevated energy and nutritional requirements of the very low birth weight and/or very preterm (28–32 weeks) and extremely preterm (less than 28 weeks) infants (Klein, 2002). The use of breast milk, compared with use of infant formula, is associated with improved early feeding tolerance; a reduction in sepsis, retinopathy of prematurity, and necrotizing enterocolitis; and improved neurodevelopment (Anderson et al., 1999; Belfort et al., 2016; Fang et al., 2016; Horta et al., 2015; Parker et al., 2021; Patel et al., 2013; Quigley et al., 2019). Therefore, the World Health Organization (WHO) and the American Academy of Pediatrics (AAP) recommend the use of appropriately fortified breast milk (preferably the mother’s own milk or pasteurized human donor milk if the mother’s own milk is not available, insufficient, or contraindicated) as the optimal way to feed very low birth weight infants (Parker et al., 2021; WHO, 2022).

As a result of evidence and recommendations, there has been a significant shift in how very low birth weight and preterm infants are enter-ally fed in tertiary neonatal intensive care centers in the United States from predominantly infant formula feeding to promotion of nutrient-fortified breast milk and the use of pasteurized donor breast milk when the mother’s own milk is unavailable (Parker et al., 2020; Xu et al., 2020). Owing to concerns about the sterility of powders, and specifically the risk of Cronobacter sakazakii in the high-risk hospitalized preterm infant population that is also immunocompromised, WHO, AAP, and the Centers for Disease Control and Prevention (CDC) have recommended that powdered products not be used in the neonatal intensive care unit if a nutritionally appropriate one can be provided as a commercially sterile liquid (AAP, 2002; CDC, 2002; Flores et al., 2011; WHO, 2012).

Pasteurized donor milk

As noted above, pasteurized donor milk is the optimal way to feed preterm infants born with very low birth weight whenever the mother’s own milk is unavailable while infants are at risk of necrotizing enterocolitis (Quigley et al., 2019). While the supporting evidence is sparse, there is considerable interest in using pasteurized

donor human milk for other hospitalized patient populations such as for infants with some types of intestinal disorders or as a supplement in Level 1 nurseries for healthy term-born infants with or without medical indication until breastfeeding is established (Parker et al., 2020, 2021). Pasteurized donor milk can be safely purchased from for-profit companies or from any member of the not-for-profit Human Milk Banking Association of North America. However, processes involved in producing donor milk such as container changes, freeze thawing,¹ and heat treatment (e.g., pasteurization) are known to affect both the essential nutrient and bioactive composition of the milk (Castro et al., 2021; Ewaschuk et al., 2011; O’Connor et al., 2015; Pitino et al., 2019, 2023). Thus, it is unclear whether pasteurized donor human milk will meet all of the nutrient requirements of infants without vitamin and mineral supplementation for the infant or nutrient fortification of milk as occurs in the hospital setting with very low birth weight infants.

Consumer Segments

This section of the report describes the consumer segments that use infant formula in the care of infants who are partially or fully fed infant formula, and their experiences with obtaining infant formula and navigating options for feeding infants prior to the 2022 infant formula shortage. As described above, some infant formula consumers require this food source because other options are not suitable. Breastfeeding and the use of infant formula interact and an essential component of characterizing caregivers’ use of infant formula is understanding the external factors that shift the balance between breastfeeding and the use of infant formula.

As of 2020, about 2.5 million infants (0–12 months of age) in the United States were using infant formula as a source of nutrition; close to half of them were 6 months of age or younger. More than 1 million infants (0–6 months of age) are estimated to have used infant formula as an exclusive source of food (Decker et al., 2023; Osterman et al., 2023).² Once infant formula has been introduced into an infant’s diet, it is difficult to replace with breast milk. CDC recommends that cow’s milk not be introduced until 12 months of age (CDC, 2022). For infants who are dependent on

___________________

¹ Freeze thawing human donor milk includes storing it at minus 20°C and placing the donor human milk in the refrigerator to thaw 1 day before processing it for use (Haiden and Ziegler, 2017).

² Computations are based on U.S. Census data reporting 3,791,712 live births in 2018 (Osterman et al., 2023), and the National Health and Nutrition Examination Survey study finding that the proportion of infants 0 to <6 months exclusively fed infant formula was 44.8 percent from 2013 to 2018 (Decker et al., 2023).

metabolic infant formulas, breast milk may not be a viable alternative and the metabolic exempt infant formula is their only appropriate food source.

Most infants in the United States who are not fully breastfed are fed infant formula, which affects the number of consumers relying on infant formula. In the most recent national data (2020) reported by CDC, 83.1 percent of infants start out consuming their mother’s breast milk, and by 1 and 6 months of age, respectively, 79.5 percent and 58.2 percent of infants continued to receive at least part of their nutrition through breastfeeding (CDC, 2023a). Stopping breastfeeding earlier can make families more vulnerable to local or national shortages in the availability of infant formula by reducing their infant feeding options; however, many caregivers report not being able to provide breast milk for as long as intended because of substantial structural and other barriers to breastfeeding and pumping (ACOG Committee, 2021; CDC, 2023a; Pérez-Escamilla et al., 2023).

Those who breastfeed partially are less reliant on infant formula, or not at all if exclusively breastfeeding, although comprehensive support for their breastfeeding requires a combination of interventions at the national and state policy, health system, and individual levels (Pérez-Escamilla, 2020; Pérez-Escamilla et al., 2023; Rollins et al., 2016; Segura-Pérez et al., 2021). A public policy intervention to support breastfeeding may include paid maternity and paternity leave. At the health system level, WHO’s Baby-Friendly Hospital Initiative includes implementation of the “Ten Steps to Successful Breastfeeding,” which is a collection of policies and clinical practices to support breastfeeding in birthing units (Pérez-Escamilla, 2020; Pérez-Escamilla et al., 2016, 2023; Rollins et al., 2016). The main interventions at the individual level are peer and skilled support. Globally, the primary reasons that caregivers who initiate breastfeeding begin to supplement with infant formula or stop breastfeeding are self-reported insufficient milk supply and unresolved breastfeeding difficulties (Balogun et al., 2015; Odom et al., 2013; Pérez-Escamilla et al., 2023; Segura-Pérez et al., 2022). It is well-established by several systematic reviews that skilled lactation support helps breastfeeding parents to breastfeed exclusively and longer in the first 6 months postpartum (Chetwynd et al., 2019; McFadden et al., 2017, 2019; Rollins et al., 2016; Patel and Patel, 2016; Pérez-Escamilla et al., 2023; Sinha et al., 2015).

There are many aspects of the U.S. cultural, economic, and medical environment that are not supportive of breastfeeding, especially for certain socioeconomic groups (HHS, 2011; Pérez-Escamilla et al., 2023; Segura-Pérez et al., 2021; Tomori, 2022). Addressing these gaps is outside of the scope of this report. However, without adequate breastfeeding support for mothers who can breastfeed, it becomes essential that (1) an adequate supply of safe infant formula is available, and (2) caregivers

have unlimited access to free, evidence-based, and unbiased care and support for infant formula feeding.

Acquiring and providing safe infant formula

Many factors affect a caregiver’s ability to acquire and safely provide infant formula. While considering the vulnerability framework and the consumer segment of the supply chain, the committee identified factors that affected the ability to provide safe infant formula. A comprehensive analysis was not performed by the committee, but some of the factors that were identified could impede a safe and adequate supply of infant formula at the household level and are listed below.

Food insecurity affects caregivers’ ability to purchase infant formula. Food insecurity is linked with early cessation of breastfeeding (Gallo et al., 2019) and can create or exacerbate disparities in vulnerability to a shortage of available infant formula (CBPP, n.d.a.). Between 2020 and 2021, minoritized populations had the highest percentage of food-insecure households (22.4 percent of Black households and 20.8 percent of Hispanic households, compared with 9.3 percent of White households) (Kim-Mozeleski et al., 2023; Rabbitt et al., 2023).

Despite the significant economic impacts of the COVID-19 pandemic, food insecurity remained relatively steady because of the increases in food assistance program availability, flexibility, and benefits (Long, 2023). Food insecurity increased in 2022 to 12.8 percent when COVID-19 era food assistance benefits and flexibilities abruptly ended. Although Hardy and Logan (2021) had forecasted that Black populations would experience a much longer economic recovery period after the COVID-19 pandemic, this was not the case, as policies focused on an equitable recovery (e.g., tax credit improvements, the Supplemental Nutrition Assistance Program (SNAP) expansion, Medicaid expansion) blunted the differential in recovery expected by individuals with low income, American Indians, and Indigenous persons, compared with more affluent and White U.S. residents (USDT, 2023).

The ability to acquire infant formula requires economic resources for commuting to stores and purchasing formula, which can be expensive. Infant formula can become costly for families who are exclusively or primarily feeding infant formula. Even the least expensive infant formula available can cost at least $1,000 per year, and the cost is potentially greater than twice that amount for name-brand formulas including those with optional ingredients (Abrams and Daniels, 2019).

To safely prepare powdered infant formula, clean water is needed. An example of an event that reduced the access to clean water was the Flint, Michigan, clean water crisis. Factors such as economic instability and systemic racism (see Box 4-1) further complicated the impact of the infant formula shortage in Flint (CDC, 2020; EPA, 2024a; City of Flint,

Michigan, 2023). Families of low-income, Native American, and minoritized populations needing to find infant formula for their infants also had to navigate how to acquire bottled water to prepare the infant formula (NASEM, 2023e).

The committee also notes that WIC plays a large role in assisting individuals to overcome many of the barriers that low-income or minoritized individuals face. This is discussed in greater detail below.

Special Supplemental Nutrition Program for Women, Infants, and Children (WIC) consumers

WIC is a federal nutrition assistance program administered by the U.S. Department of Agriculture (USDA) for pregnant and postpartum women and children under age 5 who have low incomes and are at nutritional risk. In 2022, 39 percent of infants born in the United States participated in WIC (USDA, 2024a), and, despite providing larger food packages for breastfeeding individuals and breastfeeding support (see Appendix I), 87 percent of infant WIC participants (0–12 months of age) were either partially fed infant formula (24 percent) or fully formula fed (63 percent) (USDA, 2023a).³

Therefore, WIC participants consume more than half of the infant formula sold in the United States, and the cost of the infant formula WIC provides is covered by federal funding (USDA, 2022a). The amount of infant formula provided through the WIC food package, however, may not be enough to fully formula feed an infant, and it is estimated that a WIC participant would still pay nearly $200 annually out of pocket on infant formula (Abrams and Daniels, 2019).

Many studies have assessed associations between WIC participation and maternal and child health and nutrition outcomes. A systematic review of the evidence found associations with improved birth outcomes, lower infant mortality, and better child cognitive development; WIC participation is also associated with purchasing healthier foods and with improved diet quality in pregnant people and children (Caulfield et al., 2022).

Native populations and minoritized populations are more likely to be eligible for WIC and to participate in the program than White people (Kessler et al., 2023). As a result, WIC may help to mitigate health disparities for pregnant and postpartum people and young children of color (Neuberger et al., 2024; Testa and Jackson, 2021). In 2022, nearly 3 million participants identified as Hispanic/Latino, and 1.4 million participants identified as Black (Zvavitch et al., 2024).

___________________

³ Infants classified as partially breastfed receive about half the amount of infant formula compared to fully formula fed infants, based on Food Package V (Hodges et al., 2024).

___________________

⁴ The Code is an international health policy framework to promote and protect breastfeeding and was adopted by the World Health Assembly of the World Health Organization in 1981.

been shown to influence normative beliefs and values surrounding infant feeding and, in doing so, reduce breastfeeding practices and increase the use of infant formula both overall and beyond the first year of life (Hastings et al., 2020; Pérez-Escamilla et al., 2023; Piwoz and Huffman, 2015). Parents who are exposed to and agree with marketing messaging are more likely to feed their infants infant formula over breast milk than parents with less exposure and agreement (Romo-Palafox et al., 2020).

Consumer and Medical Education

Inadequacies in the quality of teaching about nutrition in U.S. medical schools has been a public health concern for decades (NRC, 1985). In the United States, pediatricians receive relatively limited education regarding non-exempt infant formula nutrition (Essel, 2022). Nutrition education in general is severely limited in U.S. medical schools, with approximately 80 percent of medical educators agreeing that more nutrition education is needed (Abrams and Daniels, 2019; Adams et al., 2015; Crowley et al., 2019; NRC, 1985). Infant feeding has specifically been noted to be a critical nutrition topic to be incorporated into medical education (Abrams and Daniels, 2019; NRC, 1985). Some infant formula companies have attempted to fill the gap and offer education to health care providers; however, this education carries a risk for bias and may not include enough information about the benefits of breastfeeding or discussion of other brands and products. Furthermore, there is increasing international pressure from professional and health care organizations for health care providers to limit interactions with the infant formula industry, including participation in educational opportunities (Becker et al., 2022; Boyle and Shamji, 2021; Mayor, 2019; Wright and Waterston, 2006). Physician and medical education on non-exempt infant formula provided by entities outside of the infant formula industry is limited.

In addition to a lack of formal education about infant formula nutrition, health care providers are subject to marketing messaging and are targets of marketing campaigns, as well (Clark and Ghebreyesus, 2022; Rollins et al., 2023). A marketing practice called “medical detailing” is when manufacturers rely on hospitals and individual health care providers to recommend infant formula brands and products (Oliveira et al., 2004). In a setting in which there is direct marketing by manufacturers to health care providers, or where health care providers do not feel very knowledgeable about infant nutrition (Baker et al., 2021b; Harvard T.H. Chan School of Public Health, n.d.), they may default to particular products (e.g., the WIC contract product, or a product they used with their own children) in their recommendations (Rollins et al., 2023).

___________________

⁵ Most of these qualitative studies of parents’ experiences were conducted in countries other than the United States.

of educating families have not resulted in acceptable rates of proper infant formula preparation (Altazan et al., 2019). Only 12 percent of U.S. mothers surveyed in the Infant Feeding Practices II Survey reported ever receiving instruction from a doctor, health worker, or birth class about how to safely prepare and store infant formula (CDC, 2021a).

Formula Introduction in Hospitals

It is important to note the interplay between infant formula introduced in the hospital and families’ likelihood of providing breast milk and ability to maintain breastfeeding undisrupted after leaving the hospital. Many hospitals still routinely supplement breastfed infants with infant formula, which is associated with reduced duration of breastfeeding (CDC, 2021b; Chantry et al., 2014; Eilers et al., 2020; Pérez-Escamilla et al., 2023; Whipps et al., 2021). In addition, manufacturer sales representatives are present in some hospitals, and some scholars argue that direct relationships between hospital health care providers and the infant formula sales representatives influence health care providers’ decisions (Bobbie, 2023b; Rhodes et al., 2022). These relationships often are framed as professional collaborations or expert advice to doctors to address common infant behaviors, such as fussiness, as a manifestation of a medical issue such as an allergy, which can lead to over-diagnosis (Boyle et al., 2016; Mehta et al., 2022; Rollins et al., 2023). Any effect on duration of breastfeeding affects the likelihood, and the degree, to which a family can provide breast milk during an infant formula shortage.

Hospital Feeding Preparation

Infant formula is generally provided in ready-to-feed format by bottle or supplemental nursing system for healthy term-born infants in the hospital. Often, these infant formulas are provided to institutions by the manufacturer free of charge, except in facilities designated as “Baby Friendly Hospitals” that “pay market value for formulas that they use very sparingly” (Steele and Collins, 2018). Brand loyalty, a term introduced by Tucker (1964), can help explain the marketing behavior or infant formula brands and loyal purchasing. For example, brand loyalty occurs when a specific brand of infant formula is known to the family, and if the infant is tolerating the infant formula, it is often purchased after discharge, beginning the development of brand loyalty.

Many preterm and sick infants who require an extended hospital stay will require either multi-energy and nutrient fortification of their own mother’s milk (breast milk multi-nutrient fortifiers), pasteurized donated breast milk, or nutrient concentrated infant formulas (e.g., 72–74 kcal/100

mL versus standard 64–68 kcal/100 mL) to meet their elevated nutritional requirements (Young et al., 2016). Given that feeds are administered in a warm environment, it is important that they be prepared safely to reduce the likelihood of contamination and bacterial growth (CDC, 2023c).

The Pediatric Nutrition Practice Group of the Academy of Nutrition and Dietetics has championed an authoritative guide on breast milk and infant formula storage, handling, and preparation techniques for health care facilities (Steele and Collins, 2018). This guide is widely used to develop hospital-specific policies on the preparation and handling of infant formula. Recommendations include a separate room for milk/formula preparation, written guidelines on how long feeds can be held at what temperature, monitoring of the same, specific guidance on hang times for tube feedings, and nutrition education of parents for mixing and administering feeds after discharge.

Infant formula supplementation should only be provided when the parent’s own milk is unavailable (e.g., parent choice, maternal illness) or if medically indicated, especially for preterm infants at risk of necrotizing enterocolitis (Abrams et al., 2014; Lucas and Cole, 1990). Often these infant formulas are provided to institutions free of charge (Steele and Collins, 2018).

Associations between prelacteal feeds and breastfeeding have been characterized in low- and middle-income countries (Pérez-Escamilla et al., 2023).⁶ Equivalent national data are not available from high-income countries.

CHARACTERIZING THE SUPPLY CHAIN

This section of the report describes the infant formula supply chain, including supply chains upstream and downstream from the production of the finished infant formula product,⁷ and product availability in homes (see Figure 4-3). This chapter also describes the flow of information through the supply chain as well as imports and trade restrictions.

Figure 4-3 illustrates the sources of materials used to create infant formulas by U.S. manufacturers, as well as the contributions of non-U.S. manufacturers to the total supply of infant formula available to U.S. consumers (in green). Imported products from foreign brands also contribute to the U.S. formula supply. This diagram also illustrates the complex-

___________________

⁶ Prelacteal feeding is the introduction of foods and/or liquids other than breast milk given before breastfeeding is established during the first few days after birth (WHO, 2009).

⁷ Upstream refers to the ingredients, packaging, and other materials used in the manufacturing of infant formula. Downstream refers to distribution channels for the final infant formula product after production.

ity of the distribution system for infant formula in terms of the several types of distribution channels and the complexity of serving healthy infants through the marketplace (in blue), hospitalized infants (in red), and infants supported by WIC (in yellow). In addition, there is some leakage of infant formula from WIC families to ineligible families (dashed yellow line).

Upstream Supply Chain

Although nearly all infant formula consumed in the United States is produced domestically, many of the ingredients are or have recently been imported from abroad. These include vegetable oils, whey protein concentrates; vitamins; minerals; special additives, such as probiotics; and “infant formula base powder” (Harmonized System [HS] Classification Code 9903.19.23), which is a dry mixture of protein, fat, and carbohydrates to which manufacturers add vitamins, minerals, and special additives to create a final product. It is difficult to map where ingredients come from using publicly available product-level trade data; however, we present a few examples of critical nutrients and the countries from which the United States imports them.

Figure 4-4 shows a select number of ingredients used to deliver critical nutrients in infant formula and the frequency with which they are imported from China, a leading supplier of infant formula inputs. While the United States imports these vitamins and minerals from diverse countries, China is by far the largest supplier of nearly all of them. Some of these micronutrients may be used as ingredients in products other than infant formula, such as dietary supplements.

The landscape for infant formula ingredient sourcing is further complicated by the possibility that the countries from which the United States imports these ingredients import the ingredients themselves or import raw materials to refine them from other countries. In addition, infant formula industry experts explained in a public session that premixes of critical nutrients have become common, presenting a challenge for manufacturers that wish to diversify supply chains (NASEM, 2023c), both because it is difficult for manufacturers to trace the ultimate source of ingredients in premixes that they import and because the supply side of the market for premixes appears to be concentrated itself. The committee could not identify the HS product code—an international trade code that is used to describe a product (Department of Commerce, n.d.)—for these premixes needed to view the data on import flows, possibly because premixes often are customized and may plausibly enter the country under a range of dif-

ferent product codes. The committee likewise was unable to find data on imports of infant formula base powder to identify key country sources.

Prior to the 2022 shortage, FDA regulations required infant formula manufacturers to maintain records of lot numbers for ingredients, as well as documentation of quality testing by the supplier or by the formula manufacturer (21 CFR § 106.100). However, FDA does not require reporting of this information unless responding to an event, such as suspected foodborne illness, that requires tracing back to upstream ingredients (FDA, 2023b).

Packaging

In addition to ingredients, the upstream supply chain also includes packaging materials for infant formula.

Types of packaging

Infant formulas in the United States are packaged in a variety of containers of different sizes that are composed of various contact materials. The packages are designed to protect the product against oxygen, moisture, and light (Pascall et al., 2022). Liquid infant formulas (e.g., concentrates, ready-to-feed, and liquid multi-nutrient milk fortifiers) are frequently packaged in plastic (e.g., polypropylene) or aseptic packaging and come in flexible pouches or sachets of various sizes. For example, 2-oz (59-mL) ready-to-feed formula packaged in plastic nursettes are popular for institutional use as they are single-use, commercially sterile, and a nipple can be attached; single use (e.g., 6- and 8-oz ready-to-feed) and larger-sized options (e.g., 32-oz ready-to-feed, 13-oz concentrates) are commonly used after hospital discharge (Connecticut State Department of Health, 2020; Minnesota Department of Health, 2022).

Liquids are commercially sterile, which serves the additional purpose of preventing spoilage. Commercial sterilization is achieved by either: (1) traditional retort sterilization, which involves heating the container to 240^°F for 15 to 20 minutes after it is filled and sealed using pressurized hot water; or (2) ultrahigh-temperature sterilization at 275^° to 300^°F for 1 second or less (direct or indirect heating), which takes place in-line prior to the product being transferred, through aseptic filling, into sterile containers (Jiang and Guo, 2021).

Powdered infant formulas are packaged in plastic tubs with resealable lids, fiber boxes (e.g., refills), and metal cans (often with a plastic lid for use after opening). Packages generally contain a measuring-scoop size for that specific product. The size of the containers ranges from single-use sachets to 31.4-oz refillable boxes. While there are heating steps during processing, the heating is insufficient to produce a commercially sterile product (CDC, 2023c; FDA, 2023a). The sifted final powdered product is

transferred to a filler hopper in the powder packaging line (often by large totes). Filling of both non-exempt and exempt infant formula including human milk fortifiers into containers can occur at the same facility where the formula is manufactured or offsite at an infant formula manufacturer-owned facility or third-party FDA-regulated facility. The filler hopper feeds the powder into the can-filling line under a nitrogen atmosphere, which prevents oxidation of the milk fat (Jiang and Guo, 2021). Containers are then sealed after they are filled with powdered formula.

The location of the scoop varies by packaging. Some packages include a click-in holder for the formula scoop (often on the underside of the lid). It is also very common to have no holder for the scoop. Thus, the scoop arrives buried within the powder, and can also become easily reburied in the powder with subsequent use. Health care institutions are recommended to only use a powdered infant formula when a nutritionally suitable sterile liquid product is unavailable (WHO, 2012). However, several exempt infant formulas, most notably the metabolic formulas, are only available in a powdered form.

Regulation of food contact material

Infant formula packaging is regulated by FDA. FDA considers infant formula packaging to be a food contact article made up of food contact materials (FDA, 2023c,d; 21 U.S.C § 348(h)) which, in turn, comprise “food contact substances.” Components of packaging that come into contact with infant formula include scoops, lids, container liners, and totes used to collect and store powdered formula prior to packaging. FDA’s focus on packaging is to determine whether each food contact substance that comprises the components of packaging is authorized for its specific intended use in the packaging (FDA, 2023e). For example, FDA’s evaluation of an infant formula scoop included in a can of powdered formula would examine the regulatory status of each of the food contact substances that make up the scoop including the polypropylene base, the colorant, and the stabilizer.

As described in 21 C.F.R. § 106.40(b), any substance used in packaging material for infant formula that is reasonably expected to become a component of food as a result of its intended use must be authorized or exempt for its intended use by one of the following: a food additive regulation, an issued Threshold of Regulation exemption, have Generally Recognized as Safe status, be subject to a prior sanction, or be subject to an effective Food Contact Substance Notification (FCN) (FDA, 2015). If a food contact substance used in infant formula packaging is not already authorized or exempt for its intended use, additional premarket authorization such as an FCN may be required. FCNs are manufacturer-specific

for the intended use and only valid for the manufacturer listed in the notification (FDA, 2021).

Infant formula manufacturers heavily rely on the vendors of packaging material to provide the information that FDA requires to determine if the food contact material is safe for its intended use (e.g., provide a declaration of compliance) (see Public Access File).⁸ FDA published guidance for the industry regarding preparation of FCN submissions for food contact substances that are intended to contact infant formula or human milk (FDA, 2019b). Specifically, this guidance provides direction on how to address infants’ dietary exposure and safety assessment considerations related to the migration of a food contact substance from packaging and other food contact articles that are intended to contact infant formula.

Challenges with packaging of infant formula

The committee became aware of several challenges associated with packaging that could affect the timeliness of a new infant formula entering the market or a change being made in response to supply chain issues in sourcing packaging materials through a public session with former infant formula industry employees on November 10, 2023, correspondence with the Infant Nutrition Council of America, and additional written comments (see Public Access File). These challenges relate to sourcing food-grade materials that meet good manufacturing practices required for infant formula (21 CFR § 106) and logistics to verify new food contact materials and substances. Infant formula manufacturers are reliant on third-party vendors that provide packaging materials to assist with FCNs, and as far as the committee is aware, no U.S. infant formula manufacturers produce their own packaging materials. In addition, all currently approved food contact materials may not meet FDA guidelines for preparation of FCN submissions for food contact substances that may contact infant formula or human milk (FDA, 2019b).

While the intention of these guidelines was to facilitate the preparation of a complete and timely review of FCN submissions, infant formula manufacturers have requested clarity on various aspects of these guidelines (e.g., information to be included in the Food Master Files used to share confidential information). In addition, infant formula manufacturers reported that a 2020 extension of the review period for a major change to an infant formula (including packaging) from 90 to 180 days was slowing entry of products to the market (FTC, 2024). Ongoing packaging chal-

___________________

⁸ Public Access File available by request via the National Academies. https://www.nationalacademies.org/our-work/challenges-in-supply-market-competition-and-regulation-of-infant-formula-in-the-united-states (accessed April 11, 2024).

lenges experienced by infant formula manufacturers in considering new packaging materials, and monitoring those in use currently, include:

1. Ensuring container seal integrity (and ways to verify it);
2. Minimizing foreign matter contamination (e.g., manufacturing debris from cans); and
3. Lead time necessary to secure a new type of container (e.g., could be up to a year) and the requirement to conduct shelf-life testing of the product in this new packaging once received for the Infant Formula Notification to FDA.

Emerging challenges, in addition to producing safe packaging, include the need for the infant formula industry to explore alternative materials, such as bioplastics or chemical recycling, to progress on sustainability and Extended Producer Responsibility, which is

The identification of microplastics in infant formula and a determination of how to measure these microplastics and what levels are acceptable are also important future challenges (Li et al., 2020; Zhang et al., 2023).

Manufacturing of Infant Formula

This section of the report describes the production of infant formula, starting with the manufacturing processes followed by market concentration.

Production

Infant formulas are currently available as liquids (concentrated or ready-to-feed) and powders, each type made through a complex but different process. Part of the reason for a different manufacturing process is that liquids must be sterile until opened, whereas powders are not (Beuchat et al., 2013; Bourdichon et al., 2021; CDC, 2023c; FDA, 2023a; Finn et al., 2013). The equipment used to produce liquids differs from that of powders; hence, manufacturing lines used to produce liquid and powdered infant formulas are not interchangeable (NASEM, 2023a). Further, certain products such as hypoallergenic infant formulas (extensively hydrolyzed amino acid based) are produced on designated lines where extra cleaning procedures are introduced to avoid contamination with

intact proteins. Because of the specialization of the manufacturing process, manufacturing plants generally focus on specific products rather than an entire infant formula product line.

Liquid infant formula products include ready-to-feed products and liquid concentrates; the liquid concentrates need to be mixed in equal volumes with water prior to feeding. The manufacturing and packaging processes for liquid infant formulas vary, but typical processes involve the sequential mixing of ingredients. For example, in the case of bovine milk–based infant formula, the process commences with the mixing of cow’s milk (e.g., non-fat cow milk, whey protein concentrate), filtered water, and lactose with vitamin and mineral premixes (Jiang and Guo, 2021). Vegetables oils and, potentially, sources of long-chain polyunsaturated fatty acids (e.g., docosohexanoic acid [DHA] and arachidonic acid) are then homogenized with an emulsifier (e.g., lecithin) to create a stable emulsion between the lipid and water-soluble phases (Jiang and Guo, 2021). During this process, heat is applied to facilitate mixing (e.g., to reduce viscosity and enhance homogenization), and reduce the bacterial content of raw ingredients (Jiang and Guo, 2021). The resulting infant formula is cooled and maintained in temperature-controlled tanks, where analytical testing is done to ensure that the final infant formula meets specified nutrient levels (Jiang and Guo, 2021).

Cans, plastic nursettes, or bottles are filled with the resultant infant formula and sealed and heated at 250^°F for 15 to 20 minutes using pressurized hot water. This process and critical control points, called retort sterilization, destroys bacteria present in the final product and enables storage of the unopened product at room temperature without microbial spoilage. The heating process can induce Maillard reactions, a form of non-enzymatic browning where the ε-amino group of lysine residue of milk proteins reacts with milk lactose, thus making the infant formula unusable (Jiang and Guo, 2021). The committee is aware of the use of ultrahigh-temperature sterilization (275–300^°F for seconds) for at least one breast milk–based fortifier. Some infant formulas may also be sterilized, stored in large pre-sterilized tanks, cooled, and then dispensed into the pre-sterilized product containers aseptically.

To produce powdered infant formula, the liquid product is heated again and then transferred to specialized dryers, often spray dryers (Jiang and Guo, 2021). Specifically, the concentrated liquid formula is sprayed (atomized) under pressure into a chamber (usually a vertical tower with a conical bottom) with circulating hot air, which produces a fine powder of uniform diameter. The temperature of the air in the chamber is 340^° to 480^°F, while the product temperature remains below 212^°F. Heat-sensitive ingredients may be added at this stage to some infant formulas. After-wards, containers are filled with powdered infant formula and sealed as

part of a product monitoring process that includes instruments to verify weight and seal integrity.

Low-moisture foods are not inherently sterile, and these foods, including infant formula, are not free of risk of foodborne disease (Beuchat et al., 2013; Bourdichon et al., 2021; Finn et al., 2013). Additionally, the combination of wet and dry processing of infant formula provides an environment where microbial contamination can occur (FDA, 2023h; Mullane et al., 2007). As described in FDA’s compliance manual (2023f):

Different types of powdered infant formula may require special handling and ingredients to avoid contamination (e.g., with partially hydrolyzed and intact protein). Metabolic and hypoallergenic infant formula, in particular, may require extreme care and isolation of ingredients and dedicated lines or careful decontamination of lines prior to manufacture. For this reason, some types of infant formula may be produced in batches, just once or twice per year. Depending on the age and design of the plants, production lines may or may not be able to be shut down or be repurposed individually (NASEM, 2023d). Also depending on plant design, ingredients may need to pass through areas of the plant outside of the individual line where a final product is manufactured. Thus the unique manufacturing requirements of different powdered formulas can reduce flexibility to address a shortage of one product with another within a plant, especially exempt infant formula products.

Issues of infant formula production safety are related to bacterial contamination and contamination with other components, such as heavy metals including lead and arsenic, and pesticides and other organic contaminants (Mielech et al., 2021). FDA has developed criteria for each of these contaminants and has an ongoing working group focusing on heavy metal and other contaminants (FDA, 2023a,f). Nonetheless, clear understanding of the relative role of infant formula companies, FDA, and importers in monitoring and responding to contamination issues is an important component of any comprehensive assessment of infant formula safety.

___________________

⁹ See Gowrisankaran and Holmes (2002), Holmes and Stevens (2014), Klepper (1996), and Vernon (1966) for a discussion of product and industry life cycles, concentration, and capital-intensity in maturing manufacturing industries.

¹⁰ An international organization that works with governments, policy makers, and citizens from 38 mid- to high-income member countries, including the United States, to establish evidence-based international standards and solutions to social, economic, and environmental issues (OECD, n.d.)

(75 percent), but substantially higher than in Australia, France, and Germany (Russ and Baker, 2022).

Although each country’s market is different, a 2014 assessment of the global market by the consulting firm Coriolis, commissioned by the New Zealand Board of the Pacific Economic Cooperation Council, attributes the high degree of concentration to the complexity of the product, patents and intellectual property, regulations, government market interventions, and resulting economies of scale and consolidation (NZPECC, 2014). The authors note that consolidation is particularly

Analysis of Euromonitor Passport data by Baker et al. (2021a) largely bears out this assessment across many countries.

In 2014, Coriolis emphasized China as one notable exception to this trend, where it observed several major local dairy food producers with associated infant formula brands, as well as a host of small and medium-sized startups (NZPECC, 2014). However, similar to its actions to promote consolidation in the airline industry in the 1990s, China’s government has since promoted consolidation in the commercial milk formula industry to address safety concerns (Master, 2023; Reuters, 2013). While as many as 400 brands competed for market share prior to tightening of regulations (Master, 2023), new product registration in China declined by 40 percent between 2016 and 2021 (Lyubomirova, 2023). By 2022, the largest five producers accounted for about two-thirds of the market, and observers expect new rules introduced in June 2023 to tighten standards for nutrient content, testing, marketing, and licensing to cause more smaller firms to exit the market (Lyubomirova, 2023).

U.S. sales concentration

Within the United States, firms manufacture an average of 524 million kg of infant formula each year (CRS, 2022). FDA reports that the market share of the top-two infant formula suppliers to the U.S. market, Abbott (Similac) and RBMJ (Enfamil), were 27 percent and 39 percent, respectively, for a total of 66 percent in 2022 (FDA, 2023b). Previously, in 2021, the market share for Abbott was 40 percent and the market share of RBMJ was 31 percent, suggesting that RBMJ absorbed more than half of the decline in Abbott’s market share during the year of the infant formula shortage. This two-firm estimate of market concentration for infant formula is somewhat lower than the estimate for combined commercial milk sales (infant formula and commercial milk formula) in

the Euromonitor Passport data reported by Russ and Baker (2022). Nestlé (Gerber) accounted for 8 percent of the U.S. market, and smaller firms including private labels (many of which contract with Perrigo for manufacturing) accounted for 12 percent in 2021 (Lincicome and Beaumont, 2023). Nestlé exited from the U.S. infant formula market in 2022.

It is important to note that while U.S. sales remain highly concentrated, multiple analyses indicate that they are less concentrated than they were historically. Using the Herfindahl-Hirschman Index (HHI), a tool for measuring market concentration used by the U.S. Department of Justice and the Federal Trade Commission, USDA found that the infant formula market was more concentrated in 1987 (HHI = 4,332) than it was in 2022 (HHI = 2,972). USDA reports data from the Government Accountability Office and USDA Economic Research Service (ERS) showing that the market share of the top two infant formula producers was 87 to 90 percent in 1987 (Ross Laboratories and RBMJ), 80 percent in 1994, and 87 percent in 2000 (Oliveira et al., 2001). All three market share percentages from 1987, 1994, and 2000 are higher than estimates of the two-firm concentration ratio for infant formula in 2021 or 2022 shown by FDA (FDA, 2023b).

Nonetheless, there is precedent in other industries of the federal government’s investment in building supply chain resilience. For example, the Resilient Food Systems Infrastructure program, which is overseen by the USDA Agricultural Marketing Service, aims to build resilience in the middle of the food supply chain by working with states to make competitive grants available to domestic food and farm businesses to support infrastructure in the middle of the supply chain; some funding may also be used to develop or strengthen supply chain coordination. The Department of Commerce’s National Institute for Standards and Technology supports and collaborates with the semiconductor industry and has gathered information to inform the planning and design of programs to increase investment in semiconductor manufacturing facilities.

U.S. production capacity

For the resilience of supply chains, it is not principally the concentration of sales across firms, but the concentration of production capacity across plants that can magnify the effect of a shock to any one plant and thus to the aggregate supply of infant formula. Approximately 99 percent of all infant formula sold in the United States was produced domestically before 2022 (FDA, 2023b). Table 4-2 describes the number of manufacturing sites by manufacturer.

FDA collects information on the number and location of the facilities that produce each infant formula product, including exempt and metabolic formula, as these are included in the required filings during new product notifications (21 CFR § 106). Under the Major Change reporting

TABLE 4-2 Number of Manufacturing Facilities Located in the United States, by Infant Formula Manufacturer, as of April 2024

NOTE: The committee did not distinguishing between manufacturing facilities and testing facilities that do not produce product suitable for consumption. RBMJ = Reckitt BenckiserMead Johnson.

^a The committee was unable to confirm the numbers of facilities with the company, but identified sources that suggested these numbers.

SOURCES: Abbott Nutrition, 2022; Bobbie, 2023a; RBMJ, n.d.; FDA, 2023g; Nestlé, 2022a,b; SEC, 2017, 2024a,b.

requirement,¹¹ FDA has information on how many lines within each facility have been used at some point to manufacture any particular product. FDA noted during a public session with the National Academies in September 2023 that it has this information in their possession but do not have the analytical infrastructure to synthesize the information (NASEM, 2023f). FDA also noted that it did not have information about infant formula manufacturing discontinuations (NASEM, 2023f). During the same public session, FDA also said that it does not request that companies report when approved lines are discontinued or provide monthly or annual production of various categories of products (e.g., non-exempt dairy infant formula, metabolic infant formula, hypoallergenic infant formula) (NASEM, 2023f).

Prior to 2022, there did not appear to be any regulatory requirement for resiliency risk management planning to protect the infant formula market from external shocks such as climate-related events. In other industries, regulators require that companies submit resilience plans (EPA, 2024b) and in some instances, different requirements for resilience are applied to large companies; for example, the Federal Reserve System has a different set of requirements for banks that are “too-big-to-fail” (Board

___________________

¹¹ “Major change” is defined as “any new formulation, or any change of ingredients or processes where experience or theory would predict a possible significant adverse impact on levels of nutrients or bioavailability of nutrients, or any change that causes an infant formula to differ fundamentally in processing or in composition from any previous formulation produced by the manufacturer” (21 CFR § 106.3).

of Governors, 2020). Overall, the following evidence emerges regarding concentration of sales and production capacity:

• Infant formula as an industry has existed for more than a century and is in a period of consolidation nationally and globally, with a small number of dominant firms accounting for large national market shares in many advanced economies, including in the United States.
• The concentration of U.S. infant formula sales appears to be no higher than it has been for nearly 40 years, prior to the inception of WIC’s competitive bidding process for obtaining infant formula.
• Large economies of scale have led to the concentration of production capacity in a limited number of plants, some of which are large relative to the size of the U.S. market.
• Modern design and tightly observed safety protocols may allow some lines within a plant to continue operating if adulteration is identified on another line within the facility, but some large manufacturing sites are very old and may not have these capacities.
• Tariff and non-tariff barriers have kept the U.S. market relatively closed to imports of formula, such that even during a period of shortage it is very difficult to obtain large quantities of infant formula produced overseas.
• There are gaps in authorities and information that FDA collects and has the capability to process, which could be useful in resiliency risk management planning.

Downstream Supply Chain—Product Flow

This section describes the distribution of infant formula to vendors, such as retailers and hospitals, after it leaves the manufacturer’s plant as a final product. While some nuances are described below, generally infant formula moves from the production facility to the manufacturer’s distribution center, then to the vendor’s distribution center, and finally to the selling location.

Distribution

Distribution refers to the process of getting the product from manufacturing plants to locations where consumers can purchase or access it. Once a manufacturer makes the infant formula, it typically moves the infant formula from the production facility to one of possibly many distribution centers (NASEM, 2023a). Smaller manufacturers may use a third-party distributor to distribute their products (NASEM, 2023a), while

larger infant formula manufacturers typically have several distribution centers across the country, strategically placed to efficiently cover their entire geographic region, and often with a distribution center supplying to multiple neighboring states (NASEM, 2023a).

Large food, merchandise, and pharmacy retail chains and hospitals operate their own distribution centers (Luther, 2022). Products destined to be sold through these channels typically move from a manufacturer or a third-party distribution center to the large retail chain or hospital distribution center and from there to the individual retail store or hospital (NASEM, 2023a). Smaller retailers obtain their products from independent third-party distributors who receive their supplies from manufacturers (NASEM, 2023a). For some smaller retailers, product may flow from a third-party distribution center to a wholesaler and then to the store. The specific distribution process depends on such factors as the size of the store and whether it is in an urban or rural location (NASEM, 2023a). Smaller retailers may engage with more than one distributor for the same product. The products are moved using manufacturer- and retail-contracted transportation companies (both trucking and rail delivery) (NASEM, 2023a). International product that is approved for sale in the United States is shipped mainly by sea freight, but occasionally by air freight (NASEM, 2023a). They are then cleared by customs and sent to the manufacturers’ distribution centers (NASEM, 2023a). Once through customs, the international products are distributed in a manner similar to as those manufactured in the United States (NASEM, 2023a).

Both retail (online and physical stores) and non-retail vendors (e.g., hospitals) place orders with the manufacturer that are processed and shipped from the manufacturer’s distribution centers (NASEM, 2023a). WIC-authorized vendors purchase products from distributors on a list maintained by the WIC state agency (7 C.F.R. § 246.12(g)(10)). In addition to in-state distributors, a WIC state agency may also list distributors outside of their states (NASEM, 2023g). See the section Providing Infant Formula to WIC Participants for more information on distribution of infant formula to WIC participants.

Disruptions in infant formula supply can be local, regional, or national. A disruption caused by a partial or complete shutdown of a plant of a large manufacturer creates a national shortage (FTC, 2024). Regional or local shortages may occur because of disruptions to distributors or vendor locations.

A national shortage reduces overall supply of infant formula products (FTC, 2024). Manufacturers may then begin to ration the available stock to different customers. The exact allocation mechanisms used by manufacturers to different channels of distribution following the 2022 shortage

is unknown; however, allocating scarce quantity based on past sales is a common approach (NASEM, 2023b).

For products moving through distribution centers of large chains, allocation to various outlets is usually made in a centralized fashion by stakeholders along the supply chain to optimize availability across various outlets. Large chains have better visibility into stock levels of each store and can do such allocations optimally. When the product moves through an independent distributor to small outlets (e.g., retailers and hospitals), the distributor often has little to no visibility into stock position at the outlet they serve. It is unclear how distributors allocate the scarce stock they have on hand.

Vendors

The committee considered both retail and hospitals as vendors of infant formula products.

Retail

Infant formula that is received at the retailer’s distribution centers is stored in a climate-controlled area or in a fully controlled ambient warehouse (NASEM, 2023a). Retail stores can then order infant formula from the distribution center or warehouse when needed (NASEM, 2023a). The order amounts are determined based on the shelf space a retailer chooses to allocate to various brands, forecasted demand, and actual consumption. Infant formula is commonly placed on the retail shelf, or if there has been previous theft, the products may be placed in a secure location (NASEM, 2023a).

Shelf space dedicated to infant formula at the stores varies among retailers and is influenced by their estimate of demand for various types of infant formula and brands, including private labels (NASEM, 2023a). WIC-authorized vendors are required to maintain a minimum stock of some WIC products but make their own determinations about how to allocate shelf space (NASEM, 2023a). A food retail expert shared with the committee during a public session that stores generally keep 3–4 days of expected sales worth of inventory and sometimes more of the core WIC products, while distributors may keep 2–3 weeks’ worth of inventory available (NASEM, 2023a).

Hospitals

As mentioned above, infant formula typically moves through the supply chain from manufacturers to distributors to hospitals, as well as retailers. The amount of non-exempt infant formula that is distributed to hospitals is determined by product purchased, with input from registered dietitians, and by relative usage (NASEM, 2023a). Hospitals can also receive infant formula directly from manufacturers using company

distributors, such as Vizient (NASEM, 2023a). It should be noted that neonatal intensive care unit formula is generally provided by the manufacturer to the hospital free of charge, based on the hospital contract.

A large hospital participating in an information-gathering session at the National Academies indicated that they contract directly with manufacturers (NASEM, 2023a). However, specialized health care product distributors (e.g., Cardinal Health) often serve smaller and medium-sized hospitals (NASEM, 2023a). Smaller and medium-sized hospitals may have contracts with distributors or manufacturers arranged by intermediaries, such as a group purchasing organization (GPO) (e.g., Vizient), though these intermediaries never handle the actual product themselves (NASEM, 2023a). GPOs require their members to obtain products from authorized distributors (NASEM, 2023a). The specialized health care product distributors have override systems in place to prevent hoarding during times of supply shortages, rationing products when needed by capping orders at a percentage of past individual customer purchases (NASEM, 2023a).

Product Available in Homes for Consumers

The infant formula supply chain goes beyond having the product in retail establishments; it must also be available in the household to feed to infants (Figure 4-3). There are consumers who are unable to access infant formula because they do not live near grocery stores or they have limited access to transportation (Blackman et al., 2022; USDA, 2009; Zhang and Debarchana, 2016). In addition, in rural areas, smaller stores are more prevalent than larger stores, and small stores tend to have higher prices, lower stocks, and sell fewer types of infant formula than larger retailers (USDA, 2009). Where the Internet is available, infant formula can be purchased online through retailer websites, and at least one manufacturer has a subscription-based model, selling direct to consumers’ homes (NASEM, 2024a). Furthermore, materials for proper preparation of infant formula, such as clean water and a means to properly heat it (e.g., stove or microwave), are needed to safely feed infants in the home.

Information and Money Flow

As described above, for large manufacturers, products typically move from the production facility to a manufacturer’s distribution center, to the retail chain distribution center, to the selling location. From an information flow perspective, a vendor will order infant formula with their distribution centers that, in turn, will periodically place (re-)orders with manufacturers. Manufacturers may also get point-of-sale information

from large retail chains, which may be useful in production and replenishment decision making.

From a money flow perspective, a manufacturer sells the product to the retailer at a wholesale price.¹² Manufacturers provide a national-level wholesale price list for their products that vary only by volume, so larger-volume purchases receive a bulk discount (Oliveira et al., 2010). The wholesale price is a function of the type of product, size, labor, packaging, and other factors.

When selling to a distributor, manufacturers typically sell products at a wholesale price, and then the distributor sells the product to the retailer at a higher price. In this pathway, the retail price for the consumer includes two markups—one by the distributor that purchases from the manufacturer and another by the retailer that purchases from the distributor. Retailers determine the prices of the various products that should be clearly marked on the shelf display (Hockert, 2014; NASEM, 2024a; Oliveira et al., 2004). Retail prices are a function of several factors, including but not limited to wholesale prices, demand, local competition, and the cost of transporting the infant formula to the store (Oliveira et al., 2004). For hospitals that participate in a GPO, the contracting process is a bit different. GPOs negotiate prices with the manufacturers on behalf of their members (NASEM, 2024a). They also negotiate handling and delivery fees with the distributor, which is then added to the wholesale price offered by the manufacturer, which is the total price paid by the GPO member (NASEM, 2024a).

While information about orders flows upstream sequentially through each party, manufacturers and distributors rarely have visibility into consumer sales from the selling outlets. The distribution nodes in the supply chain present a challenge to policy makers seeking to address local or widespread shortages for several reasons. While the manufacturers know to which distributor locations they sent their product, they may not always have knowledge of, and typically do not have control over, where a distributor will send infant formula for final retail sale (INCA, 2023).

Imports and Trade Restrictions

According to the Congressional Research Service (CRS) the United States imported 4.3 million kg of infant formula in 2021 (CRS, 2022). This amount is less than 1 percent of the estimated 524 million kg consumed annually, on average, between 2012 and 2021 (CRS, 2022). In 2021, major sources of these imports were Ireland (2.3 million kg), Chile (1.2 million

___________________

¹² Wholesale price is the price charged to a retailer, whereas retail price is the price that a retailer charges to a customer

kg), the Netherlands (0.55 million kg), and Brazil (0.18 million kg), with much smaller amounts from Venezuela, Serbia, Mexico, Australia, Denmark, and the United Kingdom (CRS, 2022).

It is often difficult to disentangle the role that trade barriers play in determining an observed level of imports relative to supply and demand. Trade barriers that close off a market from trade come in two forms, tariffs and non-tariff measures (NTMs). Tariffs on imports of finished infant formula in most countries are 17.5 percent for imports up to a threshold quota (CRS, 2022). For quantities above that aggregate quota, a higher tariff takes effect: $1.035 per kg plus 14.9 percent (USITC, 2024). Imports from Mexico are exempt from the quota (USITC, 2024). Imports from certain free-trade-area partners and certain developing countries are exempt from duty-free tariffs (until the quota is reached) (CRS, 2020).¹³ Tariffs generally shelter domestic producers from foreign competition (Irwin, 2006). In the presence of large, fixed costs involved in getting products approved for the U.S. market, tariffs can reduce the likelihood that an overseas producer exports to the United States during normal times, as it reduces the expected profits from entry (Alessandria and Choi, 2019).

U.S. producers of infant formula also have to pay tariffs when importing inputs, especially dairy-based inputs (USDA, 2016). Tariffs on inputs required for production make the final product less cost-competitive compared to competing imported goods, unless the final good is also protected by a tariff. Tariffs on inputs into production are also likely to make U.S. exports of infant formula less cost-competitive in the global market. For example, Cox (2021) found that tariffs on steel products resulted in a lower global market share for U.S. industries that use these products as inputs.

Non-tariff barriers facing overseas producers wanting to serve the U.S. market are considerable. A tariff-rate quota as described above is one type of NTM. However, non-tariff barriers more broadly can emerge as a by-product of standards that deviate from international norms, even when the domestic standards (i.e., quality factors) are designed solely with the intention to protect infant health. Non-tariff barriers facing exporters to the United States include, but are not limited to,

• Requirements in some provisions of infant formula manufacturing and quality control regulations in 21 CFR § 106 that may diverge from norms in other countries with a safe supply of infant formula, possibly because they have not been fully updated for some years.

___________________

¹³ These countries include Australia, Bahrain, Canada, Chile, Colombia, Israel, Jordan, Korea, Mexico, Morocco, Panama, and Singapore. See https://hts.usitc.gov/ (accessed April 12, 2023).

These include the specifications of the growth monitoring study and protein efficiency ratio requirements in 21 CFR § 106.96.

• The 90-day new infant formula notification requirement prior to the introduction of a new infant formula to the U.S. market in 21 CFR § 106.120, which in the event of a shortage can delay newly introduced imports of infant formulas with a history of safe usage in other high-income countries. However, FDA can use enforcement discretion to relax certain regulatory requirements (that would not pose a risk to safety) in order to alleviate these potential negative outcomes.
• Labeling requirements in 21 CFR § 107 that require ingredients to be listed in a particular order, particular wording for the expiry date, directions for use, format for nutrient content, and use of a descriptive statement about iron that diverge from standards in other high-income economies.
• Composition requirements that may differ from standards in other high-income economies by focusing on minimum, rather than average, levels of certain nutrients.
• Small differences in requirements for certain nutrients, especially iron, in 21 CFR § 107 and in requirements specific to infant formulas eligible for use in WIC.
• Generally Recognized as Safe (GRAS) notification for any ingredients included in infant formulas that are not already categorized as GRAS or approved food additives for infant formula in the United States.
• Inspection requirements where FDA or FDA-recognized facility inspections are not already taking place.

These requirements are justified as steps to ensure the safety and quality of infant formula sold in the U.S. market; however, they are also viewed as hurdles that may inhibit importation of infant formula. The United States has been very active in preventing non-tariff barriers to trade in infant formula at the World Trade Organization (Russ et al., 2021). In addition to these hurdles to suppliers seeking to export to the United States, regulations limit the types of businesses that can import infant formula; for example, 7 CFR § 6.23 describes restrictions on the types of entities that are eligible to import non-cheese dairy products within the quota amount. As a result of these requirements, not all retailers who wish to start importing infant formula are easily able to do so.

___________________

¹⁴ https://www.fns.usda.gov/wic (accessed March 11, 2024).

___________________

¹⁵ https://www.fns.usda.gov/wic/wic-food-packages (accessed March 11, 2024).

___________________

¹⁶ Estimate was calculated based on CDC birth data and USDA WIC participation data: https://www.cdc.gov/nchs/products/databriefs/db477.htm (accessed April 12, 2024); https://www.fns.usda.gov/pd/wic-program (accessed April 12, 2024).

¹⁷ https://wicbreastfeeding.fns.usda.gov/ (accessed April 12, 2024).

from differences in the characteristics of these two income-qualifying populations (self-selection biases) or to WIC influences on infant feeding choices. For example, mothers of WIC-participating infants were more likely to have lower education (college graduate: 6.9 vs. 28.8 percent), to be younger (under age 30 years: 57.2 vs. 39.2 percent) and to be unmarried (56.2 vs. 25.8 percent) compared to nonparticipating eligible mothers (Zhang et al., 2021). Adjustment for such differences in sociodemographic characteristics considerably attenuates these differences in breastfeeding rates (Zhang et al., 2021).

A systematic review found that a common limitation of published studies is the lack of control for bias and concluded that WIC participation had little or no influence on breastfeeding initiation, duration, or exclusivity and that the 2009 WIC package was positively associated with breastfeeding exclusivity and that WIC breastfeeding support services were positively associated with initiation and duration (Gross et al., 2023). A study in upper Minnesota compared data for counties with and without WIC peer counselors and reported a significant improvement of breastfeeding rates, particularly in rural counties, where breastfeeding rates at 3 and 6 months increased 4.1 to 5.2 percentage points (Interrante et al., 2024). This last study is a model of needed research; it used robust methods and was a collaboration between a state WIC office and an academic institution.

To improve breastfeeding further, the Committee to Review WIC Food Packages (NASEM, 2017) recommended changes to the food package and other aspects of the WIC program that “provide substantial support to both exclusively and partially [breastfeeding] dyads, remove barriers to partial [breastfeeding] choices within the first 30 days postpartum, and increase flexibility in determining the amount of formula offered to partially breastfed infants” (Rasmussen et al., 2017). The recommended changes are part of the newly released (April 2024) update to the WIC Food Packages (USDA, 2024a).

How WIC Participants Obtain Infant Formula

When an eligible family enrolls in WIC or renews its benefits, a competent professional authority in the WIC clinic conducts a nutrition risk assessment, selects an appropriate WIC food package, and tailors it if needed (USDA, 2023b). The brand of non-exempt infant formula available to WIC participants is determined through a competitive bidding process, which is described in the section on competitive bidding below. The primary contract brand is an iron-fortified cow’s milk-based infant formula that is suitable for routine issuance to the majority of generally healthy, full-term infants, and is issued as the first choice. An alternative

contract-brand infant formula may be issued, such as a soy-based infant formula based on the nutrition risk assessment or other factors. State WIC agencies may require medical documentation to issue these alternatives, but usually they do not (USDA, 2023b). As described below, exempt infant formula and non-contract, non-exempt infant formula may be issued with medical documentation, as needed.

The amount of infant formula available to participants who are not fully breastfeeding is provided at two levels: partial (infant is receiving some breast milk) and full (infant receiving minimal or no amount of breast milk). The amount of infant formula that is provided changes with the infant’s age. It increases when the infant turns 4 months of age, then decreases when the infant turns 6 months of age and complementary foods are provided (7 CFR § 246.10). Participants’ food packages can be changed by WIC staff if parents increase or decrease the level of breastfeeding, such as moving from fully breastfeeding to partially or fully infant formula feeding. Non-exempt infant formula is provided until the infant reaches 12 months of age, at which time WIC provides cow’s milk or non-dairy alternatives, aligned with recommendations of organizations such as AAP (2023). WIC does not provide follow-on formulas for older children.

The brand and amount of infant formula that WIC participants can redeem is encoded on their electronic benefit transfer (EBT) card, which is provided by and updated as needed by WIC staff. Caregivers can use their EBT card at a WIC-authorized vendor to redeem infant formula and other items in their WIC food package. If parents or caregivers need more infant formula than is provided as part of an infant’s WIC benefits, they can purchase it with another form of payment, including SNAP benefits at a SNAP-approved retailer.

Some infants need exempt infant formulas for medical reasons (e.g., an inborn error of metabolism), which are prescribed by a health care professional. These infant formulas are not covered by the contracts resulting from competitive bidding for non-exempt formula, so WIC does not obtain discounts on them, and participants are not limited to the contract brand for exempt formulas (USDA, 2023b). State WIC agencies are required to coordinate with other programs that might provide exempt infant formulas and, for WIC participants who are also enrolled in Medicaid, Medicaid is expected to be the primary payor. WIC must cover costs not covered by Medicaid or other agencies (7 CFR § 246.10(e)(3)(vi)).

To obtain non-exempt, contract-brand infant formula that does not meet WIC’s requirements (contained in 7 CFR § 246.10(e)(12)) or non-contract-brand formula, for medical reasons, WIC participants must provide medical documentation. However, states may waive this requirement for non-contract infant formulas to accommodate religious eating

patterns. State WIC agencies may also require medical documentation for any contract-brand infant formula other than the primary-contract infant formula and may decline to issue some non-contract-brand infant formulas even with medical documentation (7 CFR § 246.16a(c)(9)). Medical documentation must be provided by a health care professional licensed to write prescriptions under state law and must include the name of the authorized infant formula along with other information (7 CFR § 246.10(d)).

Role of WIC in the Infant Formula Market

Competitive Bidding

During the 1980s, infant formula prices increased, which meant that fewer participants could be served by the limited funding available. To address this problem, legislation was enacted in 1989 (P.L. 100-460, P.L. 101-147) to require state WIC agencies to continuously operate a cost containment system for the procurement of infant formula, with some limited exceptions (42 USC § 1786(h)(8)). Under the legislation and USDA’s implementing regulations, cost containment systems must be either a single-supplier competitive system where a state agency receives rebates from manufacturers for infant formula redeemed by participants with WIC benefits at retail stores, or an alternative cost containment system that has been shown to yield a savings equal to or greater than what would have been generated by a single-supplier competitive system. As of April 2024, no WIC state agencies operate an alternative cost containment system. Infant formula companies bid on WIC contracts by offering rebates on the lowest national wholesale price of a standard number of units of infant formula redeemed by a WIC participant. These rebates amount to a discount to WIC, reducing food costs and allowing WIC to serve more participants with its federal funding.

Companies bid aggressively for WIC contracts. In aggregate, the rebates reduce federal spending on WIC by roughly $1 billion to $2 billion annually (CBPP, n.d.b). Nonetheless, WIC spends an estimated $515 million on infant formula after the contribution of rebates (Kline et al., 2020). Market or policy changes that increase infant formula prices or decrease rebates could result in WIC not being fully funded.

Over the 35 years during which WIC’s competitive bidding process has been in place, only a few companies have dominated the U.S. infant formula market, and only a few companies have bid on WIC contracts (see Table 4-3). Apart from a few years in the 1990s when there were four bidders, there have typically been three.

Three infant formula manufacturers bid on states’ early WIC contracts:

SOURCES: Betson et al., 2009; Jones, 2010; Nestlé, n.d.; Perrigo, n.d.; Wyeth, n.d.

Mead Johnson, Ross Laboratories, and a smaller manufacturer, Wyeth. Nestlé, the world’s largest manufacturer of infant formula, acquired Carnation in 1989, entered the U.S. market and began bidding on WIC contracts in 1990. Between 1990 and 1996, there were four companies that bid on WIC contracts, but Wyeth stopped bidding on WIC contracts in 1996 (and switched to producing generic formula) (Betson, 2009; Neuberger et al., 2022). Between 1996 and 2023, three companies received state WIC contracts. Since Nestle exited the market in 2022, only two companies have bid on WIC contracts (see Table 4-3).

The competitive bidding process is governed by detailed statutory and regulatory rules (7 CFR § 246.16a). These rules cover the requirements for companies to be permitted to bid; the bid solicitation and award process; the process by which the winning bidder will be selected, which relies on the lowest total monthly net price or the highest monthly rebate for a standardized number of units of infant formula; and how price changes and partial redemptions must be handled. The procurement and contracting process is conducted by state WIC agencies, usually in partnership with a different state entity that specializes in procurement.

Some states, territories, and Indian tribal organizations, notably those with smaller programs, have formed alliances to conduct the bidding process, and the winning bidder serves all of the entities in the alliance. As of October 1, 2003, alliances are capped (at 100,000 infants), but alliances that existed as of July 1, 2004, are grandfathered in and may exceed this

limit to include state WIC agencies serving fewer than 5,000 infants as of October 1, 2003 (7 CFR § 246.16a(c)(3)).

State WIC agencies must provide milk- and soy-based infant formulas. State WIC agencies and alliances that served a monthly average of more than 100,000 infants during the preceding year must use separate bid solicitations for milk- and soy-based infant formulas. Smaller state WIC agencies and alliances use a single bid solicitation, which must require the bidders that do not produce a soy-based infant formula to subcontract with another manufacturer to supply a soy-based infant formula under the contract. In this case, the bid solicitation must require that the winning bidder pay the state agency a rebate on the soy-based infant formula supplied by the subcontractor that is issued by the state agency (7 CFR § 246.16a(c)(2)(ii)).

To bid, infant formula companies must be registered with the Secretary of Health and Human Services (HHS) under the Federal Food, Drug, and Cosmetic Act (FDCA) (21 USC § 301 et seq.) and must certify with the state health department that their infant formulas comply with the FDCA and the related regulations. In addition, bidders must be responsive. Through rulemaking that took effect in February 2024, USDA defines responsive as a bidder that submits a bid by the deadline and meets both regulatory requirements and those in the bid solicitation (USDA, 2023b). Between October 23, 2000, and February 12, 2024, bidders also had to be responsible, which USDA described as meeting “the eligibility requirements under the applicable statute and regulations and any additional technical requirements set forth in the bid solicitation,” so long as the technical requirements are capable of being evaluated objectively on a yes/no or pass/fail basis (USDA, 2000). USDA has eliminated the requirement that bidders must be responsible.

Companies submit bids on the “primary contract brand” of their choosing, which is a non-exempt infant formula that meets WIC’s nutrient requirements and is suitable for routine issuance to the majority of generally healthy, full-term infants (7 CFR § 246.16a(c)(4)). The state’s default is then to issue the primary contract infant formula, with all other infant formulas issued as alternatives. Bidders must provide powder, liquid concentrate, and ready-to-feed forms of the primary contract-brand formula and specify a rebate for each form.

A set list of infant formulas produced by the winning bidder that meet WIC’s nutrition requirements are called “contract-brand infant formulas,” and the rebates apply to them, as well as to any non-exempt infant formulas introduced by that manufacturer during the contract (7 CFR § 246.16a(c)(7)). The rebates also apply to soy-based infant formulas provided by a subcontractor. State WIC agencies have the discretion to approve for issuance some, none, or all of the contract-brand infant formulas that are not the primary contract brand.

viding infant formula to WIC participants. It also illustrates (left to right) the process by which that manufacturer provides infant formula to WIC-authorized vendors, which is then redeemed by WIC participants using an EBT card. The dashed green lines indicate the flows of money among USDA, the holder of the state WIC contract, and the WIC-authorized vendors. The solid green line illustrates the flow of information back to the state that occurs when the EBT card is used to redeem infant formula. The items in orange boxes illustrate the movement of infant formula from the selected manufacturer to WIC-authorized vendors via two distribution networks, one controlled by larger vendors to their own, usually larger, retail locations and the other by third-party distributors to smaller vendors, for whom meeting WIC needs may not be a priority. It is noteworthy that WIC does not regulate this distribution process, nor does it have information about the supply of infant formula at vendor locations until WIC participants inform WIC staff. General distribution network is synonymous with third-party distribution network.

WIC participants visit WIC-authorized vendors to use their EBT card to redeem infant formula. No cash is exchanged at the time of this transaction, but it initiates a series of events that lead to payment for the purchased infant formula (Figure 4-6). The WIC-authorized vendor invoices the state WIC agency for the infant formula redeemed by WIC participants at their locations. In response, the state WIC agency pays these retailers the wholesale price plus the retail markup of the redeemed infant formula. The state WIC program then invoices the contract-holding infant formula manufacturer for the rebate on each container of infant formula redeemed.

WIC-authorized vendors are required to meet minimum stocking requirements so participants will find WIC-approved foods available to purchase when they arrive to shop. Under federal rules, vendors must stock at least two different fruits, two different vegetables, and at least one whole-grain cereal (7 CFR § 246.12(g)(3)(i)). In addition, the vendor must obtain infant formula only from sources included on a list the state WIC agency is required to maintain. This list includes distributors, retailers of infant formula licensed in the state, and manufacturers registered with FDA (7 CFR § 246.12(g)(10)). Although federal rules do not require state WIC agencies to set minimum stocking requirements for infant formula, testimony provided to the committee indicates that they generally do (NASEM, 2023a).

___________________

¹⁸ An oligopoly is referred to in this report as a market in which a large fraction of control over an industry’s production lies in the hands of a few large manufacturers.

from 74.97 percent to 113.95 percent across states and alliances (see Public Access File).¹⁹

In a public meeting, a state WIC administrator expressed concern that the number of WIC bidders has dwindled to just two companies (NASEM, 2023g). A key feature of head-to-head Bertrand competition is that even the threat of a possible new bidder can provide competitive pressure on pricing (de Blas and Russ 2015)—or in this case, rebates.²⁰ For instance, since Nestlé recently sold Gerber Good Start to Perrigo, a manufacturer that does not have a history of bidding on WIC contracts, observers may be concerned that one of the last three companies that routinely bid in WIC contracts has bowed out of the market. However, as long as Perrigo maintains active production in the facility, it is plausible that bidders on WIC contracts may be mindful of the possibility that the Good Start brand could become a competitor again under its new owner, should the bids leave a wide enough opening.

WIC’s impact on consumer prices for infant formula

WIC’s subsidy for infant formula, the high market share of infant formula the program provides, and the way this share is obtained, could have consequences for the price of infant formula paid by nonparticipants. When considering WIC’s effect on prices, it is important to distinguish between wholesale prices, which are set by infant formula companies through a nationwide wholesale price list that varies mainly by volume, and retail prices, which are set by retailers (NASEM, 2024b). Retailer markups are separate from manufacturer decisions on rebates and wholesale prices. The infant formula rebates obtained by WIC apply specifically to the wholesale price of infant formula. WIC pays any of the wholesale price not covered by the rebate, as well as the retail markup charged by the WIC-authorized vendor.

Because WIC participants obtain the infant formula that WIC provides at no charge, their WIC-subsidized redemptions are not sensitive to price-competition between brands at the retail level. Economic theory predicts that if there were no other countervailing interventions, the subsidy alone could result in higher wholesale prices; however, the effect of the subsidy must be considered in conjunction with the impact of competitive bidding. WIC participants’ lack of price sensitivity also may permit retailers to increase their markups of the contract brand compared to other brands of infant formula when setting shelf prices. Infant formula

___________________

¹⁹ This average includes each alliance only once and is not weighted by the number of infants to which the rebate applies. Puerto Rico’s rebate is 30.0 percent.

²⁰ Bertrand competition is a model of competition in which at least two or more symmetric firms produce a homogeneous good and compete in prices (Jann and Schottmüller, 2015).

can cost between $1,000 and $2,000 a year (Abrams et al., 2019). Purchasing infant formula at regular retail prices is challenging for low-income families that do not participate in WIC or participate in WIC and need additional infant formula.

Because some have expressed concern that WIC’s competitive bidding process drives up the cost of formula for non-WIC consumers, the committee surveyed the empirical literature to understand the balance of these complex factors as they manifest in the marketplace. Some of these studies use structural models to understand the implications of removing the current WIC competitive bidding process or instituting other modes of procurement. All of the studies begin with the observation that the infant formula market has a handful of large manufacturers supplying the vast majority of market share, with high measured, variable (not necessarily overall, given high fixed costs) profit margins.

Wang (2023) and Abito et al. (2022) calculated that the three largest manufacturers in the United States—Abbott, RBMJ, and (until recently) Nestlé—accounted for more than 90 percent of retail sales of non-exempt infant formula (73 percent for bulk sales, where private-label store brands are more prevalent). An et al. (2023) imputed a price–cost margin of 50 percent, while Wang (2023) estimated margins between 57 and 71 percent. Thus, economists studying the market for infant formula characterize the market as an oligopoly.

As explained earlier in this chapter, much of infant formula marketing aims to differentiate a particular brand or product as unique in the health or other benefits that it provides. This marketing strategy, and the variation in additives that manufacturers include, indicates the non-exempt infant formulas offered by different manufacturers are heterogeneous in the eyes of consumers, even if very similar in composition. Thus, non-WIC consumers may be sensitive to differentials in prices across brands but also influenced by perceived distinctions or additives. However, during the WIC competitive bidding process, states, for the most part, view the primary contract infant formula brands offered by different manufacturers as interchangeable and are required to award the contract based on price alone. The WIC competitive bidding process, therefore, changes the competitive environment from an oligopoly—where consumers see different brands of non-exempt infant formula as imperfect substitutes—to an oligopoly with winner-take-all, head-to-head price competition, also called Bertrand competition with perfect substitutes.²¹

Head-to-head competition makes it likely that WIC’s competitive bidding process reduces price-cost markups or variable profit margins

___________________

²¹ Kucheryavyy (2012) and de Blas and Russ (2015) provided technical analyses of these modeling frameworks.

for manufacturers, and, in fact, several researchers observed this empirically or imputed it through structural models. Wang (2023) estimated that variable profit margins fall between 2 and 5 percentage points for manufacturers in states where they supply the WIC contract. Noting that manufacturer rebate bids are on average 85 percent of the wholesale price, An et al. (2023) calibrated a structural model with bidding data and outcomes, calculating that manufacturers have negative profits on WIC sales in more than half of their WIC contract markets. These estimates suggest that WIC does, in fact, reduce the pricing power of manufacturers within the auction process. The price pressure on the manufacturers attributable to the contracting process reduced government expenditures on WIC by about $1.6 billion in fiscal year 2021 (Hodges et al., 2024).

Several economic studies have found that the WIC competitive bidding program does not contribute to increases in wholesale prices of infant formula. Betson (2009) argued that the competitive bidding process is necessary to prevent manufacturers from responding to WIC subsidies of infant formula purchases by increasing prices. Betson estimated that infant formula prices would be double their observed level had the WIC competitive bidding process not been instituted (Betson, 2009). Subsidies make WIC participants less responsive to price differentials between brands, which would enable infant formula manufacturers to raise their wholesale prices if selling to retailers in the absence of competitive bidding. Betson (2009) conjectures that adding the WIC competitive bidding process very likely dampened the growth of wholesale prices that would have resulted had WIC continued without it. This is because the competitive bidding process requires the contract holder to pay higher rebates if the manufacturer increases the wholesale price. Davis (2012) provided more definitive empirical evidence supporting Betson’s (2009) claim that wholesale prices move one-to-one with rebate bids, meaning the WIC competitive bidding process was neutral with respect to wholesale pricing behavior. For one time period (1999–2007) within his longer historical sample, Davis (2012) found that rebate bids, on average, increased even more than wholesale prices, meaning that WIC’s competitive bidding process reduced the average level of wholesale prices. Preliminary simulations by An et al. (2023) show that, given WIC subsidies of infant formula purchases, the competitive bidding process reduces profits between 42 and 75 percent. In open session, Davis also observed that the inelasticity of demand for the contract brand among WIC customers also may reduce marketing expenditures by the WIC contract holder (NASEM, 2024b).

Since market share swings to the contract winner among non-WIC households, some have expressed concern that non-WIC households subsidize the supply of infant formula provided to WIC recipients by the manufacturer who wins the contract (FTC, 2024). This is not consistent

with the finding by Davis (2012) that WIC rebates move at least one-to-one with wholesale prices, making them neutral toward, or in some years, even suppressing regional wholesale prices.

Although WIC’s competitive bidding process does not appear to increase wholesale prices, research indicates that the WIC contract choice does appear to reduce consumers’ sensitivity to increases in price on contract products, allowing retailers (or distributors) to increase markups. While Davis (2012) showed neutrality or somewhat lower wholesale prices resulting from WIC bidding processes, Oliveira et al. (2004) found that winning a WIC contract results in retail prices on the contract brand rising between 3.4 and 19.0 percentage points, with non-contract brands also seeing pursuant price increases. The size of the increase in prices rises with the fraction of WIC recipients in the local market and averaged about 10 cents per container. Preliminary estimates from An et al. (2023) showed that prices at retail stores are roughly 8 percent higher on WIC contract products compared with non-WIC contract products.

Rebates are required to rise with wholesale prices once a contract is in place (7 CFR § 246.16a(c)(7)(iv)), but there are no similar restrictions on pricing by retailers. State WIC agencies must establish maximum price reimbursement levels for infant formula along with other WIC-authorized foods, but these are based on the range in retail prices across similar WIC-authorized vendors and would thus be driven upward by higher retail markups for contract-brand infant formula. No portion of the increase in retail price for non-WIC households is covered by public subsidies, but greater price sensitivity among these consumers (owing to the absence of the subsidy) would move them to purchase cheaper brands. The ability of retailers to increase prices might be mitigated to some degree if consumers received enough information about the similarities across standard infant formula products to make them more price sensitive.

Overall, the following evidence emerges regarding the WIC program’s effect on the infant formula market:

• By subsidizing infant formula for the majority of low-income infants, WIC renders participants largely insensitive to prices.
• Alone, this price insensitivity would tend to lead to higher consumer prices, and studies have found that retail prices are higher for WIC contract infant formulas than other formulas.
• However, price competition by manufacturers during bidding allows the WIC program to counteract the upward pressure of the subsidy effect on wholesale prices. As a result, studies have consistently found that wholesale prices are likely lower than they would be if the WIC program’s competitive bidding process were eliminated but the subsidy to participants remained.

cost, other factors affect caregivers’ ability to feed their infants, such as food insecurity and access to clean water.

The U.S. infant formula market is highly concentrated in several ways, but concentration of production facilities is the key vulnerability with regard to supply disruptions. The production of infant formula is complex, and certain types of infant formula are at higher risk of contamination than others. Although domestic plants may have multiple production lines, technical constraints mean that some facilities or individual lines within facilities are not able or flexible enough to switch production between different products. Modern design and safety protocols may allow some lines to continue operating if adulteration is identified within the facility, but this is challenging in older facilities. Concentrated production potentiates, or enhances, the possibility that any supply disruption leads to a shortage and means that buffering strategies have to be more extensive to be effective.

The committee considered both the upstream and downstream supply chain of infant formula market. Infant formulas may contain imported components. The upstream supply chain for this product includes, often imported, ingredients (e.g., vitamin premixes); packaging; and labels. The downstream supply chain involves distribution from the manufacturer directly to the vendor (i.e., retailer or hospital) or via a distributor, and for hospitals may involve a GPO. Individuals not participating in WIC may purchase infant formula wherever it is sold, whereas WIC participants must purchase from a WIC-authorized vendor.

About half of the infant formula purchased each year is provided, at no charge, to WIC participants. The infant formula brand issued by a state WIC program is determined by a competitive bidding process. WIC’s competitive bidding reduces infant formula costs for the U.S. government by $1 billion to $2 billion dollars annually, enabling WIC to serve more participants with a given federal funding level.

The bidding process also appears to lead to lower wholesale prices for infant formula than if WIC’s subsidies were to remain in place without it; reduce profit margins for infant formula manufacturers; yield rebates that are sometimes higher than the wholesale price in about half of contracts, leading to negative profit for manufacturers on WIC infant formula sales; increase market share in the state’s non-WIC market; and be associated with increases in retail markups. Since the winning bidder becomes the sole provider of non-exempt infant formula to participants statewide, it attracts non-WIC consumers too, who purchase infant formula at full price, which seems to be a main driver of the substantial rebates that companies offer.

Although the infant formula market is dominated by just six companies globally and three in the United States, concentration in the United

States is not an outlier when compared to other high- and upper-middle-income countries. While there has been concern that WIC’s competitive bidding process contributes to concentration, the U.S. market is less concentrated than it was before WIC’s competitive bidding process was implemented. In contrast, WIC’s competitive bidding process strongly influences concentration of sales at the state level, as the WIC contract brand dominates sales to all consumers. State-level sales concentration potentiates the effect of any supply disruption to the contract brand because other brands are less widely available.

There is some evidence that it is challenging for smaller infant formula companies to increase their market share by bidding on WIC contracts because they would have to be able to provide three forms of milk-based formula (powder, liquid concentrate, and ready-to-feed). It is unclear, however, whether smaller companies would grow relative to larger ones even in the absence of WIC bidding in light of global market concentration and oligopolistic competition in a consolidating industry. Moreover, tariffs and the FDA regulatory framework for new infant formula products may create unintended barriers to expansion. The committee did not find evidence indicating whether tariffs on infant formula contribute to sales concentration by preventing firms in other countries from serving the U.S. market, or whether tariffs on ingredients used in infant formula prevent entry or expansion of newer domestic firms, but manufacturing experts repeatedly mentioned the FDA notification process for new infant formula as a barrier.

When these factors were considered together, key features of the U.S. infant formula market and consumers prior to the 2022 infant formula shortage emerge as vulnerabilities:

• Low breastfeeding rates relative to other countries, which means that more families are affected by an infant formula supply disruption;
• Concentration in production, which increases both the likelihood and magnitude of a supply disruption; and
• Sales concentration within states, which results in uneven effects of supply disruptions and increases the importance of emergency preparedness.

In the subsequent chapter, the committee describes the factors that led to the 2022 infant formula shortage, actions taken by the government to address the shortage, as well as the supply chain during and after the 2022 infant formula shortage.

This page intentionally left blank.