Unintended Consequences: Lessons From an Anti-Fraud Reform

The Issue:

When individuals abuse government programs, governments often respond with reforms that involve stricter monitoring or punishments for violators. This is viewed as a way of improving program effectiveness and reducing costs. But these reforms can have unintended consequences that could limit the efficacy of any increased enforcement and may even lead to undesirable side effects. Recent research by Katherine Meckel of Texas A&M University illustrates an example of this problem when there was an effort to reduce fraud by grocery stores that were participating in the Supplemental Nutrition Program for Women, Infants, and Children (WIC).

Reforms can have unintended consequences that could limit the efficacy of any increased enforcement and may even lead to undesirable side effects.

The Facts:

• The Supplemental Nutrition Program for Women, Infants, and Children (WIC) program provides low-income pregnant women and mothers of young children with vouchers to obtain high-nutrition food staples. Using these vouchers, eligible households can obtain specified products such as milk, eggs, and cheese, at participating stores. Researchers have found that participation in the program is associated with healthier births, more nutritious diets, and better educational outcomes down the road (see here for a full description of WIC and research regarding its impact.)
• The program provides vouchers for a fixed quantity of food, such as a gallon of milk, rather than money or a coupon for a specific monetary value. The provision of vouchers for a fixed quantity of certain types of food means that participants have no incentives to seek out stores that offer lower prices for these items. Meckel found that, as a consequence of this structure of the program, small single-outlet grocery stores in Texas charged much higher prices – up to 50 percent higher – to WIC customers using vouchers as compared to customers who paid cash. She found no similar type of price differentials for WIC customers and cash customers among grocery stores that were part of a large chain. The small grocery stores were able to charge WIC-customers higher prices for the same goods, and effectively engage in fraud, because the use of paper vouchers allowed them to record WIC purchases separately from those by cash customers. Paper vouchers made it difficult for the government to have oversight of the program.
• Partly to facilitate better oversight and reduce instances of store fraud, federal legislation passed in 2010 requires WIC providers to transition to an electronic system by 2020. The use of electronic benefit cards instead of paper vouchers facilitates the comparison of prices paid by WIC customers and cash customers using scanner data. Meckel's study focused on an early rollout of this transition in Texas. She found that the change to the electronic system led to a convergence in prices paid by WIC customers and cash customers, as stores were no longer charging WIC customers higher prices. Thus, the reform achieved its stated goal and prices charged to the government for WIC purchases were reduced.
• But this reform also had unintended consequences that worked against the ultimate goals of the WIC program. The higher prices charged to WIC customers for the eligible products prior to the reform served as a subsidy that made it worthwhile to stock “healthy foods” in the small stores where shelf space was at a premium. In the absence of this "subsidy", between 10 percent and 26 percent of the single-outlet grocery stores dropped their participation in the WIC program. There was no change, however, in the participation of chain grocery stores in the WIC program.
• The reform reduced the participation of eligible mothers in WIC. Single-outlet grocery stores predominated in the high-poverty neighborhoods that the WIC program targeted. The reduction in the number of these types of stores that participated in WIC led to a decreased likelihood that there was at least one store that offered WIC in poor neighborhoods. This, in turn, reduced WIC participation by eligible mothers by 2 to 6 percent.
• The reforms also had an indirect effect on store customers who did not receive WIC benefits. Once they were no longer charging different customers different prices for the same items, the single-outlet stores that continued to sell WIC products raised the prices on these goods by 9 to 10 percent for everyone. This made these healthy foods more expensive for those who did not participate in the WIC program. The prevalence of the single-outlet stores in high-poverty neighborhoods meant that this adverse effect was felt most among the poor.
• Overall, the WIC program continued to provide benefits to its participants, but the effort at fraud reduction reduced the efficacy of the program. The transition to the electronic system reduced the number of stores carrying WIC-eligible products, lowered the number of eligible beneficiaries participating in the program, and raised prices for non-WIC customers for the WIC-eligible products among stores that continued to sell them. Meckel estimates that the costs to WIC participants as well as the higher costs to non-participants who shopped at the single-outlet stores outweighed the benefits of the reduction in the cost of the WIC program brought about by the reform by about 3 to 4 percent.