In the U.S. nearly every aspect of the medical supply chain is consolidated and fragile. And that is having deadly ramifications in the age of Covid-19.
By Matt Stoller and cross-posted from his blog, BIG.
The New York Times had an important story about the ventilator market a few days ago, with Nicholas Kulish, Sarah Kliff and Jessica Silver-Greenberg reporting why a government effort to stock up on the machines after the SARS epidemic failed.
In 2006, in attempt to learn from what might happen should a SARS-like disease hit here, civil servants in government decided to stockpile ventilators. They wanted both more ventilators and better ventilators than were on the market. So government officials found a small innovative corporation called Newport Medical, and contracted with the corporation to design a cheaper and better version.
Ventilators at the time typically went for about $10,000 each, and getting the price down to $3,000 would be tough. But Newport’s executives bet they would be able to make up for any losses by selling the ventilators around the world.
“It would be very prestigious to be recognized as a supplier to the federal government,” said Richard Crawford, who was Newport’s head of research and development at the time. “We thought the international market would be strong, and there is where Newport would have a good profit on the product.”
At first the project seemed on track. Newport built a working prototype, and the government was on track to order 40,000 ventilators to put into the national stockpile. Newport would then be able to sell additional units into the health care market, as well as abroad. But in 2012, Covidien, a large medical device manufacturer and distributor, bought up Newport Medical, canceled the Federal contract, and shut down Newport’s ventilator line of business.
The result, in 2020, is that we don’t have enough ventilators in a pandemic.
There are three failures of policy here. I’ll start with the simplest, which is that the merger should have been blocked.
The merger by any standard was a clear-cut antitrust violation. There are two theories as to why Covidien sought to buy Newport. First, Covidien already had a ventilator product, and didn’t want to compete with a lower priced and better version. Covidien bought Newport to take its competitive product out. That’s called a ‘killer acquisition,’ meaning that the goal is to undermine a potentially innovative or lower prices product line.
The second is that roll-ups were part of a broader consolidation trend in the industry in general. “Manufacturers,” as the Times reported, “wanted to pitch themselves as one-stop shops for hospitals, which were getting bigger, and that meant offering a broader suite of products.”
Both theories are likely true. Covidien from 2008-2014 bought 17 other corporations. Covidien pitched itself not just as a device maker, but as a device distributor to hospitals. It even called itself a platform, saying in its press release bleating about the acquisition that the acquisition would strengthen its “ventilation platform” for patients around the world. In other words, Covidien was both trying to take out a potential competitor *and* strengthen its own bargaining posture against hospital purchasers, who were themselves getting bigger…