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Don’t blame federal antitrust policy for medical supply shortages

 |  April 15, 2020

By Sean Pugh, Faegre Drinker

As the saying goes, when you’re a hammer, everything looks like a nail. This old adage certainly applies to pundits who focus on antitrust issues. Already some are trying to link fallout from the COVID-19 coronavirus pandemic to alleged failures of antitrust enforcement. We should expect to hear more of these claims in the future, especially once politicians move from crisis mode to evaluating the nation’s response to the virus. But prescriptions to change antitrust policy should be based on facts, not myopic conjecture guided by prior assumptions.

Take, for example, an op-ed last month in The Washington Post arguing that the objectives of antitrust policy have failed us in this pandemic. Roger Martin, former dean of the Rotman School of Management at the University of Toronto, claims that American businesses’ “obsession with efficiency” has made the United States weak by undermining its ability to react to the pandemic. The U.S. doesn’t have access to the test kits, masks, and ventilators currently needed, Martin argues, because it wasn’t efficient to mass produce these items domestically. According to Martin, this outsourcing and the failure to build redundancy into the system is a result of lax antitrust enforcement which has focused on economic efficiency to the exclusion of other considerations. The implication is that antitrust policy needs to change to factor in other objectives.

Certainly, shortages in needed medical supplies is a problem that has come home to roost in this crisis. However, Mr. Martin’s diagnosis misses the mark. Economic efficiency doesn’t make our country weak. It frees up resources to be used for other productive purposes. We’d have less of everything we now need if businesses were running bloated, inefficient operations. 

Nor is the outsourcing cited by Martin an indictment of antitrust policy and its focus on economic efficiency. Rather it illustrates how economic and environmental regulations that distort incentives can push production overseas, which in times of crisis can strain supply lines. If policymakers are concerned about the foreign production of critical medical supplies in a crisis, they should examine the impact of these regulations on that problem, not the nation’s antitrust policies.

In addition to using the pandemic to challenge the objectives of antitrust policy, pundits also allege that failures of merger control have undermined the nation’s response to the pandemic, which they claim support calls for stronger antitrust enforcement. For example, some are pointing to the 2013 merger of two ventilator manufacturers, Covidien and Newport Medical Instruments, as an explanation for the apparent shortage of ventilators needed to treat those now ill with the coronavirus. Indeed, according to Tim Wu, Columbia Law School professor and one of the leading voices of the hipster antitrust movement, the Federal Trade Commission’s failure to block the allegedly anticompetitive merger illustrates why the antitrust laws need a major overhaul by Congress.

By allegedly failing to properly evaluate the proposed transaction and challenge the merger, the FTC is accused of allowing Covidien to eliminate an upstart competitor. The merger, so it’s claimed, then enabled Covidien to terminate the contract that Newport Medical previously had with the U.S. government to supply it with portable ventilators for cheap. 

In particular, the agency has been criticized for granting the merger “early termination.” That is, after reviewing the information submitted in the merger filings (and perhaps with some additional calls to third parties), the FTC concluded that the acquisition did not warrant further examination because it posed no competitive concerns. This is not to say that the FTC did no investigation, but rather that the Commission’s preliminary analysis indicated either that the companies did not truly compete (i.e., they manufactured different types of ventilators) or that the market included sufficient competitors that would constrain the merged firm from reducing supply in order to increase prices. 

The story about the contract cancellation also does not appear to be a failure of antitrust. Covidien and the federal government mutually agreed to terminate the contract once it became clear that the Newport ventilators could not be produced at the cost specified in the contract and after the FDA refused to approve the ventilators for neonatal use, which the contract also required. Perhaps this contributed in some way to a shortage of ventilators, but it is not something that stronger antitrust enforcement would have prevented.

Nevertheless, critics now claim that but for the FTC allowing the merger, the U.S. would not be experiencing such stark shortages of ventilators today. House Antitrust Subcommittee Chairman David Cicilline and FTC Commissioner Rebecca Slaughter each released statements calling for a retrospective review. The American Antitrust Institute, despite acknowledging that the public lacks information to judge whether the FTC was incorrect in its analysis of the transaction, issued a statement arguing that the merger highlighted the need for stricter antitrust standards. AAI also cited the merger to call for lowering merger reporting requirements, even though the transaction had been large enough to be reported under existing merger notification rules. 

In the weeks and months to come, and as the damage caused by the virus mounts, the desire to find culprits for the carnage, whether legitimate or not, will only increase. Critics of antitrust enforcement, intent on not letting a serious crisis go to waste, can be expected to claim additional connections between the pandemic and alleged failures of antitrust policy. Businesses, particularly those in the healthcare industry, should expect to face greater antitrust scrutiny as it relates to the epidemic, whether deserved or not. Policymakers, however, should proceed with caution before jumping to conclusions that lax antitrust enforcement has undermined the nation’s response to the pandemic. Despite the rhetoric of some in the antitrust community, not everything is a competition policy problem.