Later On

A blog written for those whose interests more or less match mine.

How Bad Antitrust Enforcers Kill People

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Matt Stoller comments in BIG on a NY Times story I blogged recently:

How A Merger Killed the Ventilator Market

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.

Antitrust Failure

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.

The merger should have and could have been blocked on many different grounds, the simplest being the killer acquisition theory. Yet the Federal Trade Commission, led by Jon Leibowitz, just waved the illegal merger through without even asking any questions. Now there are calls, by both FTC Commissioner Rebecca Kelly-Slaughter, and antitrust thinkers across the board, to reexamine this merger. In Congress, Antitrust Committee Chairman David Cicilline made this point on Twitter. . .

Continue reading. There’s much more, and it shows the degree to which the US is out of whack. Later in the column:

The roll-up of device makers that Covidien was pursuing was part of a longstanding consolidation in the medical industry that correlated to consolidation more broadly. Because our antitrust laws focus on low consumer prices, what has happened across the economy is the creation of ‘power buyers.’

Most people look at monopolies who made commodities, say, steel, and believe a monopoly manifests by how much that company can raise the price of what it sells. But monopolies can operate on the buying side too. Walmart is a buying monopoly, able to use its market power to push prices down against suppliers and workers. I mean if you sell a large chunk of your product to Walmart, they can tell you what price to take. The price to consumers may be low, but that’s because Walmart is using market power against the supplier and not the consumer. But because our antitrust enforcers don’t see anything but consumer prices, corporations like Walmart became far more powerful from the 1980s to the 2000s.

As Olivia Webb noted, there was a Walmart-ization of the medical industry as well, as hospitals combined purchasing power in cartels called Group Purchasing Organizations. GPOs buy supplies for hospitals, and they are supposed to get better prices. But they often don’t. In 1986 Congress exempted them from anti-kickback laws, so there are huge conflicts of interest in how they operate. GPOs are also big. In 1996, the Clinton administration basically said GPOs wouldn’t be subject to antitrust prosecution. Today, for context, just four GPOs account for 90% of generic pharmaceutical purchasing. GPOs also handle medical devices.

Throughout the 2000s and 2010s, one of the results of these choices, as well as the refusal to enforce merger law or antitrust, was the concentration in these corporations that sell things to hospitals, everything from syringes to software. During the HIV epidemic, a corporation called Retractable Syringes developed a safer syringe that doctors and nurses wanted to prevent accidental needlesticks, but GPOs prevented them from selling their product to hospitals. None of this went unnoticed. Congress held hearings, to no avail, on all sorts of innovative medical devices that couldn’t make it into hospitals. Retractable won a private antitrust lawsuit, but more recently it lost one on appeal. Without legal redress, much of the medical device industry consolidated. Covidien itself was bought by Medtronic a few years ago.

Written by Leisureguy

1 April 2020 at 5:36 pm

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