How the WIC program created the conditions that caused the baby formula shortage : The Indicator from Planet Money Baby formula is in short supply after a voluntary February recall by the manufacturer, Abbott. Today, we explain how the government helped shape the U.S. formula market, and why that structure led to a devastating shortage.

The government program that contributed to the baby formula shortage

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And I'm Darian Woods. Micki Veal (ph) is a graphic designer in Chicago. And just over a week ago, she was scrolling through her Twitter feed when she noticed a lot of people in her timeline talking about the national shortage of infant formula.

WONG: Micki is a mom herself, and she remembers having a rough time with breastfeeding and needing to supplement with formula. So she sprang into action. She set up a Google form to connect parents with people wanting to help and made a digital flyer promoting her new mutual aid effort.

MICKI VEAL: So if you're, you know, in Texas and you're at a Costco or whatever and you see something, and there's somebody that's within, you know, however many miles of you, let's pair you guys up. The Google form just filled up, like, 200 people before I knew it.

WOODS: There are a lot of reasons behind the formula crisis. But one big factor is actually a government nutrition program aimed at helping moms and babies. About half the formula bought in the U.S. gets distributed through this program. And that means that the government has played an outsized role in shaping the market for baby formula.


WONG: Today on the show, we pull back the curtain on this unique market for baby formula in the U.S. and look at whether the shortage means it might be time for an overhaul.


WONG: David Davis is an economist at South Dakota State University. He's been studying the infant formula market for the last two decades.

DAVID DAVIS: This is a really interesting market, right? It's a really interesting confluence of economics and policy and food assistance. I never would have planned to be an expert on baby formula, but here I am.

WOODS: Food assistance is a big part of the formula market because of a national program called WIC, or Women, Infants and Children. This provides money for food and formula as well as health screenings for pregnant women, new moms and kids up to the age of 5.

WONG: Breastfeeding support is a big part of the WIC program, too. But breastfeeding is not always an option for families. For some, it's a physical issue, like when babies are born prematurely. For others, it's a societal issue. Lots of women have to go back to work soon after giving birth, and it can be hard for them to keep nursing when that happens. So WIC parents get assistance in buying formula, which can often be the sole source of nutrition for their babies.

WOODS: David says that in the 1980s, the cost of formula was going up faster than the rate of inflation. And this was particularly an issue for state officials running WIC programs because formula was eating up a huge share of their federal grant money. States started looking for ways to bring down the cost of formula.

DAVIS: A couple of state WIC administrators came up with this idea to start asking for rebates for manufacturers.

WOODS: In other words, the states wanted a better deal on formula. But of course, they had to give the formula companies something in return.

DAVIS: And they offered, in exchange for the rebate, you would get a sole source contract for the state. So you would get the entire state's WIC market.

WONG: To decide which manufacturer would get that sole source contract, states had companies go through a competitive bidding process. They'd have to present sealed bids, and whichever formula maker offered the biggest discount would get that exclusive deal.

WOODS: In 1989, a federal law essentially mandated that state agencies use this competitive bidding process for buying infant formula. And once a company won that exclusive WIC contract for a state, it was all but guaranteed total market dominance in that state thanks to what researchers describe as a kind of spillover effect.

WONG: So here's what would happen. Because WIC is such a large program, grocery stores would dedicate the most shelf space to whichever formula brand had that sole source contract. And then, non-WIC shoppers would end up buying that brand too because that was all they saw when they went to the supermarket. So thanks to this spillover effect, the WIC system of awarding sole source contracts ended up creating a winner-takes-all market for formula in each state.

DAVIS: If you are an infant formula manufacturer and you want to sell your brand of infant formula in that state, you better have the WIC contract. Otherwise, you're probably only going to have about a 15% position in the marketplace or maybe even something less than that.

WONG: This system has gotten even more concentrated as states have banded together to get the best deal for their WIC programs. For example, Washington state is part of a group of 24 states that run their bidding system together. They all go with the same manufacturer, Abbott, which is one of just four companies that dominate the formula industry and is the leader, with more than 40% of the market.

WOODS: Paul Throne is the state WIC director in Washington, and he says that the state's collective buying power got them a very good discount on Abbott's formula.

PAUL THRONE: Honestly, the one we get in Washington is pretty generous.

WONG: What is it?

THRONE: It's 108% on our basic formula.

WONG: What - 108%? So you're making money now?

THRONE: Well, the money does go back into the program for food. We don't use that money for anything else.

WOODS: So formula companies were finding that it was worth paying states in some cases to use their formula for WIC. They would bet that non-WIC customers would see their product on supermarket shelves, and that would help them profit.

WONG: And this system with the competitive bids and the exclusive contracts - it worked pretty well until it didn't. When Abbott voluntarily recalled powder formulas made at its Sturgis, Mich., plant in February, it was devastating for families. Abbott did the recall after four reports of bacterial infections in infants that ate formula made in that factory.

WOODS: Abbott said it found evidence of one of the bacteria in the plant but not in any of its distributed products. Either way, it expanded its recall after the deaths of two infants. In an op-ed in the Washington Post this weekend, Abbott's CEO apologized, quote, "to every family we've let down since our voluntary recall exacerbated our nation's baby formula shortage," end quote. He also pledged a $5 million fund for certain families whose babies are hospitalized because they can't get specialized formula.

WONG: The Abbott recall has been a particular hardship on WIC families because they can only use their benefits on that kind of formula. If they buy a different brand, they have to pay out of pocket.

THRONE: We had over 15,000 babies in Washington state using one or more of these kinds of recalled formulas.

WONG: In the weeks after the recall was announced, Paul's office worked with the federal government to figure out some stopgap measures. They allowed WIC families to get cash refunds on formula that was affected. They expanded the kinds of formulas that families could get with their WIC benefits. But with the Abbott plant in Michigan closed, the crisis kept escalating.

THRONE: We have people call us saying they have gone from store to store or even from county to county. And in eastern Washington, the counties are really big. So if you have to go to two or three counties to find what you need, you might be driving more than 100 miles to make that happen.

WONG: Paul says he's heard some different ideas of how to improve the system to prevent another crisis - maybe having an emergency stockpile of formula or allowing WIC families to keep having more flexibility in what formula they can buy.

THRONE: We do get a tremendous amount of support for the program from the formula rebate. So that's a good thing. On the other hand, we have to rely on one single source for much of our formula. And as we can see, it leaves us vulnerable to a problem in the system.

WOODS: There are all kinds of situations like this where we are reducing our resilience, and we don't realize this until there's a major crisis and we have to do something drastic and fast to fix the situation.

WONG: And that's what's happening now with the infant formula shortage. In response to a market shaped by Food and Drug Administration regulation, import restrictions and this winner-takes-all WIC procurement, the Biden administration is scrambling. Last week, it invoked the Defense Production Act to increase manufacturing of baby formula. And on Sunday, the first of what's expected to be several military flights from Europe arrived with hypoallergenic formula.

WOODS: But lots of parents are still in the lurch. So in the meantime, people like Micki Veal, the mother who put together the Google form - they're helping however they can. Micki has been driving around looking for a formula that she can buy and give away.

VEAL: It's heartbreaking because you'll go in the store, and you'll just see a whole, like - you'll see a whole shelf just cleared out. But I have faith in community. I have faith in the people that have been helping out.

WONG: Last week, Abbott did reach a deal with the FDA that would allow it to restart operations at its plant in Michigan. But it could take another 6 to 8 weeks after reopening for product to arrive on store shelves.


WONG: This episode was produced by Nicky Ouellet and engineered by Josh Newell. It was fact-checked by Corey Bridges. Viet Le is our senior producer. Kate Concannon edits the show. And THE INDICATOR is a production of NPR.

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