Archives For Medical Devices

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Geoffrey A. Manne, (President, ICLE; Distinguished Fellow, Northwestern University Center on Law, Business, and Economics); and Dirk Auer, (Senior Fellow of Law & Economics, ICLE)]

Back in 2012, Covidien, a large health care products company and medical device manufacturer, purchased Newport Medical Instruments, a small ventilator developer and manufacturer. (Covidien itself was subsequently purchased by Medtronic in 2015).

Eight years later, in the midst of the coronavirus pandemic, the New York Times has just published an article revisiting the Covidien/Newport transaction, and questioning whether it might have contributed to the current shortage of ventilators.

The article speculates that Covidien’s purchase of Newport, and the subsequent discontinuation of Newport’s “Aura” ventilator — which was then being developed by Newport under a government contract — delayed US government efforts to procure mechanical ventilators until the second half of 2020 — too late to treat the first wave of COVID-19 patients:

And then things suddenly veered off course. A multibillion-dollar maker of medical devices bought the small California company that had been hired to design the new machines. The project ultimately produced zero ventilators.

That failure delayed the development of an affordable ventilator by at least half a decade, depriving hospitals, states and the federal government of the ability to stock up.

* * *

Today, with the coronavirus ravaging America’s health care system, the nation’s emergency-response stockpile is still waiting on its first shipment.

The article has generated considerable interest not so much for what it suggests about government procurement policies or for its relevance to the ventilator shortages associated with the current pandemic, but rather for its purported relevance to ongoing antitrust debates and the arguments put forward by “antitrust populists” and others that merger enforcement in the US is dramatically insufficient. 

Only a single sentence in the article itself points to a possible antitrust story — and it does nothing more than report unsubstantiated speculation from unnamed “government officials” and rival companies: 

Government officials and executives at rival ventilator companies said they suspected that Covidien had acquired Newport to prevent it from building a cheaper product that would undermine Covidien’s profits from its existing ventilator business.

Nevertheless, and right on cue, various antitrust scholars quickly framed the deal as a so-called “killer acquisition” (see also here and here):

Unsurprisingly, politicians were also quick to jump on the bandwagon. David Cicilline, the powerful chairman of the House Antitrust Subcommittee, opined that:

And FTC Commissioner Rebecca Kelly Slaughter quickly called for a retrospective review of the deal:

The public reporting on this acquisition raises important questions about the review of this deal. We should absolutely be looking back to figure out what happened.

These “hot takes” raise a crucial issue. The New York Times story opened the door to a welter of hasty conclusions offered to support the ongoing narrative that antitrust enforcement has failed us — in this case quite literally at the cost of human lives. But are any of these claims actually supportable?

Unfortunately, the competitive realities of the mechanical ventilator industry, as well as a more clear-eyed view of what was likely going on with the failed government contract at the heart of the story, simply do not support the “killer acquisition” story.

What is a “killer acquisition”…?

Let’s take a step back. Because monopoly profits are, by definition, higher than joint duopoly profits (all else equal), economists have long argued that incumbents may find it profitable to acquire smaller rivals in order to reduce competition and increase their profits. More specifically, incumbents may be tempted to acquire would-be entrants in order to prevent them from introducing innovations that might hurt the incumbent’s profits.

For this theory to have any purchase, however, a number of conditions must hold. Most importantly, as Colleen Cunningham, Florian Ederer, and Song Ma put it in an influential paper

“killer acquisitions” can only occur when the entrepreneur’s project overlaps with the acquirer’s existing product…. [W]ithout any product market overlap, the acquirer never has a strictly positive incentive to acquire the entrepreneur… because, without overlap, acquiring the project does not give the acquirer any gains resulting from reduced competition, and the two bargaining entities have exactly the same value for the project.

Moreover, the authors add that:

Successfully developing a new product draws consumer demand and profits away equally from all existing products. An acquiring incumbent is hurt more by such cannibalization when he is a monopolist (i.e., the new product draws demand away only from his own existing product) than when he already faces many other existing competitors (i.e., cannibalization losses are spread over many firms). As a result, as the number of existing competitors increases, the replacement effect decreases and the acquirer’s development decisions become more similar to those of the entrepreneur

Finally, the “killer acquisition” terminology is appropriate only when the incumbent chooses to discontinue its rival’s R&D project:

If incumbents face significant existing competition, acquired projects are not significantly more frequently discontinued than independent projects. Thus, more competition deters incumbents from acquiring and terminating the projects of potential future competitors, which leads to more competition in the future.

…And what isn’t a killer acquisition?

What is left out of this account of killer acquisitions is the age-old possibility that an acquirer purchases a rival precisely because it has superior know-how or a superior governance structure that enables it to realize greater return and more productivity than its target. In the case of a so-called killer acquisition, this means shutting down a negative ROI project and redeploying resources to other projects or other uses — including those that may not have any direct relation to the discontinued project. 

Such “synergistic” mergers are also — like allegedly “killer” mergers — likely to involve acquirers and targets in the same industry and with technological overlap between their R&D projects; it is in precisely these situations that the acquirer is likely to have better knowledge than the target’s shareholders that the target is undervalued because of poor governance rather than exogenous, environmental factors.  

In other words, whether an acquisition is harmful or not — as the epithet “killer” implies it is — depends on whether it is about reducing competition from a rival, on the one hand, or about increasing the acquirer’s competitiveness by putting resources to more productive use, on the other.

As argued below, it is highly unlikely that Covidien’s acquisition of Newport could be classified as a “killer acquisition.” There is thus nothing to suggest that the merger materially impaired competition in the mechanical ventilator market, or that it measurably affected the US’s efforts to fight COVID-19.

The market realities of the ventilator market and its implications for the “killer acquisition” story

1. The mechanical ventilator market is highly competitive

As explained above, “killer acquisitions” are less likely to occur in competitive markets. Yet the mechanical ventilator industry is extremely competitive. 

A number of reports conclude that there is significant competition in the industry. One source cites at least seven large producers. Another report cites eleven large players. And, in the words of another report:

Medical ventilators market competition is intense. 

The conclusion that the mechanical ventilator industry is highly competitive is further supported by the fact that the five largest producers combined reportedly hold only 50% of the market. In other words, available evidence suggests that none of these firms has anything close to a monopoly position. 

This intense competition, along with the small market shares of the merging firms, likely explains why the FTC declined to open an in-depth investigation into Covidien’s acquisition of Newport.

Similarly, following preliminary investigations, neither the FTC nor the European Commission saw the need for an in-depth look at the ventilator market when they reviewed Medtronic’s subsequent acquisition of Covidien (which closed in 2015). Although Medtronic did not produce any mechanical ventilators before the acquisition, authorities (particularly the European Commission) could nevertheless have analyzed that market if Covidien’s presumptive market share was particularly high. The fact that they declined to do so tends to suggest that the ventilator market was relatively unconcentrated.

2. The value of the merger was too small

A second strong reason to believe that Covidien’s purchase of Newport wasn’t a killer acquisition is the acquisition’s value of $103 million

Indeed, if it was clear that Newport was about to revolutionize the ventilator market, then Covidien would likely have been made to pay significantly more than $103 million to acquire it. 

As noted above, the crux of the “killer acquisition” theory is that incumbents can induce welfare-reducing acquisitions by offering to acquire their rivals for significantly more than the present value of their rivals’ expected profits. Because an incumbent undertaking a “killer” takeover expects to earn monopoly profits as a result of the transaction, it can offer a substantial premium and still profit from its investment. It is this basic asymmetry that drives the theory.

Indeed, as a recent article by Kevin Bryan and Erik Hovenkamp notes, an acquisition value out of line with current revenues may be an indicator of the significance of a pending acquisition in which enforcers may not actually know the value of the target’s underlying technology: 

[Where] a court may lack the expertise to [assess the commercial significance of acquired technology]…, the transaction value… may provide a reasonable proxy. Intuitively, if the startup is a relatively small company with relatively few sales to its name, then a very high acquisition price may reasonably suggest that the startup technology has significant promise.

The strategy only works, however, if the target firm’s shareholders agree that share value properly reflects only “normal” expected profits, and not that the target is poised to revolutionize its market with a uniquely low-cost or high-quality product. Relatively low acquisition prices relative to market size, therefore, tend to reflect low (or normal) expected profits, and a low perceived likelihood of radical innovations occurring.

We can apply this reasoning to Covidien’s acquisition of Newport: 

  • Precise and publicly available figures concerning the mechanical ventilator market are hard to come by. Nevertheless, one estimate finds that the global ventilator market was worth $2.715 billion in 2012. Another report suggests that the global market was worth $4.30 billion in 2018; still another that it was worth $4.58 billion in 2019.
  • As noted above, Covidien reported to the SEC that it paid $103 million to purchase Newport (a firm that produced only ventilators and apparently had no plans to branch out). 
  • For context, at the time of the acquisition Covidien had annual sales of $11.8 billion overall, and $743 million in sales of its existing “Airways and Ventilation Products.”

If the ventilator market was indeed worth billions of dollars per year, then the comparatively small $108 million paid by Covidien — small even relative to Covidien’s own share of the market — suggests that, at the time of the acquisition, it was unlikely that Newport was poised to revolutionize the market for mechanical ventilators (for instance, by successfully bringing its Aura ventilator to market). 

The New York Times article claimed that Newport’s ventilators would be sold (at least to the US government) for $3,000 — a substantial discount from the reportedly then-going rate of $10,000. If selling ventilators at this price seemed credible at the time, then Covidien — as well as Newport’s shareholders — knew that Newport was about to achieve tremendous cost savings, enabling it to offer ventilators not only to the the US government, but to purchasers around the world, at an irresistibly attractive — and profitable — price.

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.”

If achievable, Newport thus stood to earn a substantial share of the profits in a multi-billion dollar industry. 

Of course, it is necessary to apply a probability to these numbers: Newport’s ventilator was not yet on the market, and had not yet received FDA approval. Nevertheless, if the Times’ numbers seemed credible at the time, then Covidien would surely have had to offer significantly more than $108 million in order to induce Newport’s shareholders to part with their shares.

Given the low valuation, however, as well as the fact that Newport produced other ventilators — and continues to do so to this day, there is no escaping the fact that everyone involved seemed to view Newport’s Aura ventilator as nothing more than a moonshot with, at best, a low likelihood of success. 

Curically, this same reasoning explains why it shouldn’t surprise anyone that the project was ultimately discontinued; recourse to a “killer acquisition” theory is hardly necessary.

3. Lessons from Covidien’s ventilator product decisions  

The killer acquisition claims are further weakened by at least four other important pieces of information: 

  1.  Covidien initially continued to develop Newport’s Aura ventilator, and continued to develop and sell Newport’s other ventilators.
  2. There was little overlap between Covidien and Newport’s ventilators — or, at the very least, they were highly differentiated
  3. Covidien appears to have discontinued production of its own portable ventilator in 2014
  4. The Newport purchase was part of a billion dollar series of acquisitions seemingly aimed at expanding Covidien’s in-hospital (i.e., not-portable) device portfolio

Covidien continued to develop and sell Newport’s ventilators

For a start, while the Aura line was indeed discontinued by Covidien, the timeline is important. The acquisition of Newport by Covidien was announced in March 2012, approved by the FTC in April of the same year, and the deal was closed on May 1, 2012.

However, as the FDA’s 510(k) database makes clear, Newport submitted documents for FDA clearance of the Aura ventilator months after its acquisition by Covidien (June 29, 2012, to be precise). And the Aura received FDA 510(k) clearance on November 9, 2012 — many months after the merger.

It would have made little sense for Covidien to invest significant sums in order to obtain FDA clearance for a project that it planned to discontinue (the FDA routinely requires parties to actively cooperate with it, even after 510(k) applications are submitted). 

Moreover, if Covidien really did plan to discreetly kill off the Aura ventilator, bungling the FDA clearance procedure would have been the perfect cover under which to do so. Yet that is not what it did.

Covidien continued to develop and sell Newport’s other ventilators

Second, and just as importantly, Covidien (and subsequently Medtronic) continued to sell Newport’s other ventilators. The Newport e360 and HT70 are still sold today. Covidien also continued to improve these products: it appears to have introduced an improved version of the Newport HT70 Plus ventilator in 2013.

If eliminating its competitor’s superior ventilators was the only goal of the merger, then why didn’t Covidien also eliminate these two products from its lineup, rather than continue to improve and sell them? 

At least part of the answer, as will be seen below, is that there was almost no overlap between Covidien and Newport’s product lines.

There was little overlap between Covidien’s and Newport’s ventilators

Third — and perhaps the biggest flaw in the killer acquisition story — is that there appears to have been very little overlap between Covidien and Newport’s ventilators. 

This decreases the likelihood that the merger was a killer acquisition. When two products are highly differentiated (or not substitutes at all), sales of the first are less likely to cannibalize sales of the other. As Florian Ederer and his co-authors put it:

Importantly, without any product market overlap, the acquirer never has a strictly positive incentive to acquire the entrepreneur, neither to “Acquire to Kill” nor to “Acquire to Continue.” This is because without overlap, acquiring the project does not give the acquirer any gains resulting from reduced competition, and the two bargaining entities have exactly the same value for the project.

A quick search of the FDA’s 510(k) database reveals that Covidien has three approved lines of ventilators: the Puritan Bennett 980, 840, and 540 (apparently essentially the same as the PB560, the plans to which Medtronic recently made freely available in order to facilitate production during the current crisis). The same database shows that these ventilators differ markedly from Newport’s ventilators (particularly the Aura).

In particular, Covidien manufactured primarily traditional, invasive ICU ventilators (except for the PB540, which is potentially a substitute for the Newport HT70), while Newport made much-more-portable ventilators, suitable for home use (notably the Aura, HT50 and HT70 lines). 

Under normal circumstances, critical care and portable ventilators are not substitutes. As the WHO website explains, portable ventilators are:

[D]esigned to provide support to patients who do not require complex critical care ventilators.

A quick glance at Medtronic’s website neatly illustrates the stark differences between these two types of devices:

This is not to say that these devices do not have similar functionalities, or that they cannot become substitutes in the midst of a coronavirus pandemic. However, in normal times (as was the case when Covidien acquired Newport), hospitals likely did not view these devices as substitutes.

The conclusion that Covidien and Newport’s ventilator were not substitutes finds further support in documents and statements released at the time of the merger. For instance, Covidien’s CEO explained that:

This acquisition is consistent with Covidien’s strategy to expand into adjacencies and invest in product categories where it can develop a global competitive advantage.

And that:

Newport’s products and technology complement our current portfolio of respiratory solutions and will broaden our ventilation platform for patients around the world, particularly in emerging markets.

In short, the fact that almost all of Covidien and Newport’s products were not substitutes further undermines the killer acquisition story. It also tends to vindicate the FTC’s decision to rapidly terminate its investigation of the merger.

Covidien appears to have discontinued production of its own portable ventilator in 2014

Perhaps most tellingly: It appears that Covidien discontinued production of its own competing, portable ventilator, the Puritan Bennett 560, in 2014.

The product is reported on the company’s 2011, 2012 and 2013 annual reports:

Airway and Ventilation Products — airway, ventilator, breathing systems and inhalation therapy products. Key products include: the Puritan Bennett™ 840 line of ventilators; the Puritan Bennett™ 520 and 560 portable ventilator….

(The PB540 was launched in 2009; the updated PB560 in 2010. The PB520 was the EU version of the device, launched in 2011).

But in 2014, the PB560 was no longer listed among the company’s ventilator products:  

Airway & Ventilation, which primarily includes sales of airway, ventilator and inhalation therapy products and breathing systems.

Key airway & ventilation products include: the Puritan Bennett™ 840 and 980 ventilators, the Newport™ e360 and HT70 ventilators….

Nor — despite its March 31 and April 1 “open sourcing” of the specifications and software necessary to enable others to produce the PB560 — did Medtronic appear to have restarted production, and the company did not mention the device in its March 18 press release announcing its own, stepped-up ventilator production plans.

Surely if Covidien had intended to capture the portable ventilator market by killing off its competition it would have continued to actually sell its own, competing device. The fact that the only portable ventilators produced by Covidien by 2014 were those it acquired in the Newport deal strongly suggests that its objective in that deal was the acquisition and deployment of Newport’s viable and profitable technologies — not the abandonment of them. This, in turn, suggests that the Aura was not a viable and profitable technology.

(Admittedly we are unable to determine conclusively that either Covidien or Medtronic stopped producing the PB520/540/560 series of ventilators. But our research seems to indicate strongly that this is indeed the case).

Putting the Newport deal in context

Finally, although not dispositive, it seems important to put the Newport purchase into context. In the same year as it purchased Newport, Covidien paid more than a billion dollars to acquire five other companies, as well — all of them primarily producing in-hospital medical devices. 

That 2012 spending spree came on the heels of a series of previous medical device company acquisitions, apparently totally some four billion dollars. Although not exclusively so, the acquisitions undertaken by Covidien seem to have been primarily targeted at operating room and in-hospital monitoring and treatment — making the putative focus on cornering the portable (home and emergency) ventilator market an extremely unlikely one. 

By the time Covidien was purchased by Medtronic the deal easily cleared antitrust review because of the lack of overlap between the company’s products, with Covidien’s focusing predominantly on in-hospital, “diagnostic, surgical, and critical care” and Medtronic’s on post-acute care.

Newport misjudged the costs associated with its Aura project; Covidien was left to pick up the pieces

So why was the Aura ventilator discontinued?

Although it is almost impossible to know what motivated Covidien’s executives, the Aura ventilator project clearly suffered from many problems. 

The Aura project was intended to meet the requirements of the US government’s BARDA program (under the auspices of the U.S. Department of Health and Human Services’ Biomedical Advanced Research and Development Authority). In short, the program sought to create a stockpile of next generation ventilators for emergency situations — including, notably, pandemics. The ventilator would thus have to be designed for events where

mass casualties may be expected, and when shortages of experienced health care providers with respiratory support training, and shortages of ventilators and accessory components may be expected.

The Aura ventilator would thus sit somewhere between Newport’s two other ventilators: the e360 which could be used in pediatric care (for newborns smaller than 5kg) but was not intended for home care use (or the extreme scenarios envisioned by the US government); and the more portable HT70 which could be used in home care environments, but not for newborns. 

Unfortunately, the Aura failed to achieve this goal. The FDA’s 510(k) clearance decision clearly states that the Aura was not intended for newborns:

The AURA family of ventilators is applicable for infant, pediatric and adult patients greater than or equal to 5 kg (11 lbs.).

A press release issued by Medtronic confirms that

the company was unable to secure FDA approval for use in neonatal populations — a contract requirement.

And the US Government RFP confirms that this was indeed an important requirement:

The device must be able to provide the same standard of performance as current FDA pre-market cleared portable ventilators and shall have the following additional characteristics or features: 

Flexibility to accommodate a wide patient population range from neonate to adult.

Newport also seems to have been unable to deliver the ventilator at the low price it had initially forecasted — a common problem for small companies and/or companies that undertake large R&D programs. It also struggled to complete the project within the agreed-upon deadlines. As the Medtronic press release explains:

Covidien learned that Newport’s work on the ventilator design for the Government had significant gaps between what it had promised the Government and what it could deliverboth in terms of being able to achieve the cost of production specified in the contract and product features and performance. Covidien management questioned whether Newport’s ability to complete the project as agreed to in the contract was realistic.

As Jason Crawford, an engineer and tech industry commentator, put it:

Projects fail all the time. “Supplier risk” should be a standard checkbox on anyone’s contingency planning efforts. This is even more so when you deliberately push the price down to 30% of the market rate. Newport did not even necessarily expect to be profitable on the contract.

The above is mostly Covidien’s “side” of the story, of course. But other pieces of evidence lend some credibility to these claims:

  • Newport agreed to deliver its Aura ventilator at a per unit cost of less than $3000. But, even today, this seems extremely ambitious. For instance, the WHO has estimated that portable ventilators cost between $3,300 and $13,500. If Newport could profitably sell the Aura at such a low price, then there was little reason to discontinue it (readers will recall the development of the ventilator was mostly complete when Covidien put a halt to the project).
  • Covidien/Newport is not the only firm to have struggled to offer suitable ventilators at such a low price. Philips (which took Newport’s place after the government contract fell through) also failed to achieve this low price. Rather than the $2,000 price sought in the initial RFP, Philips ultimately agreed to produce the ventilators for $3,280. But it has not yet been able to produce a single ventilator under the government contract at that price.
  • Covidien has repeatedly been forced to recall some of its other ventilators ( here, here and here) — including the Newport HT70. And rival manufacturers have also faced these types of issues (for example, here and here). 

Accordingly, Covidien may well have preferred to cut its losses on the already problem-prone Aura project, before similar issues rendered it even more costly. 

In short, while it is impossible to prove that these development issues caused Covidien to pull the plug on the Aura project, it is certainly plausible that they did. This further supports the hypothesis that Covidien’s acquisition of Newport was not a killer acquisition. 

Ending the Aura project might have been an efficient outcome

As suggested above, moreover, it is entirely possible that Covidien was better able to realize the poor prospects of Newport’s Aura project and also better organized to enable it to make the requisite decision to abandon the project.

A small company like Newport faces greater difficulties abandoning entrepreneurial projects because doing so can impair a privately held firm’s ability to raise funds for subsequent projects.

Moreover, the relatively large share of revue and reputation that Newport — worth $103 million in 2012, versus Covidien’s $11.8 billion — would have realized from fulfilling a substantial US government project could well have induced it to overestimate the project’s viability and to undertake excessive risk in the (vain) hope of bringing the project to fruition.  

While there is a tendency among antitrust scholars, enforcers, and practitioners to look for (and find…) antitrust-related rationales for mergers and other corporate conduct, it remains the case that most corporate control transactions (such as mergers) are driven by the acquiring firm’s expectation that it can manage more efficiently. As Henry G. Manne put it in his seminal article, Mergers and the Market for Corporate Control (1965): 

Since, in a world of uncertainty, profitable transactions will be entered into more often by those whose information is relatively more reliable, it should not surprise us that mergers within the same industry have been a principal form of changing corporate control. Reliable information is often available to suppliers and customers as well. Thus many vertical mergers may be of the control takeover variety rather than of the “foreclosure of competitors” or scale-economies type.

Of course, the same information that renders an acquiring firm in the same line of business knowledgeable enough to operate a target more efficiently could also enable it to effect a “killer acquisition” strategy. But the important point is that a takeover by a firm with a competing product line, after which the purchased company’s product line is abandoned, is at least as consistent with a “market for corporate control” story as with a “killer acquisition” story.

Indeed, as Florian Ederer himself noted with respect to the Covidien/Newport merger, 

“Killer acquisitions” can have a nefarious image, but killing off a rival’s product was probably not the main purpose of the transaction, Ederer said. He raised the possibility that Covidien decided to kill Newport’s innovation upon realising that the development of the devices would be expensive and unlikely to result in profits.

Concluding remarks

In conclusion, Covidien’s acquisition of Newport offers a cautionary tale about reckless journalism, “blackboard economics,” and government failure.

Reckless journalism because the New York Times clearly failed to do the appropriate due diligence for its story. Its journalists notably missed (or deliberately failed to mention) a number of critical pieces of information — such as the hugely important fact that most of Covidien’s and Newport’s products did not overlap, or the fact that there were numerous competitors in the highly competitive mechanical ventilator industry. 

And yet, that did not stop the authors from publishing their extremely alarming story, effectively suggesting that a small medical device merger materially contributed to the loss of many American lives.

The story also falls prey to what Ronald Coase called “blackboard economics”:

What is studied is a system which lives in the minds of economists but not on earth. 

Numerous commentators rushed to fit the story to their preconceived narratives, failing to undertake even a rudimentary examination of the underlying market conditions before they voiced their recriminations. 

The only thing that Covidien and Newport’s merger ostensibly had in common with the killer acquisition theory was the fact that a large firm purchased a small rival, and that the one of the small firm’s products was discontinued. But this does not even begin to meet the stringent conditions that must be fulfilled for the theory to hold water. Unfortunately, critics appear to have completely ignored all contradicting evidence. 

Finally, what the New York Times piece does offer is a chilling tale of government failure.

The inception of the US government’s BARDA program dates back to 2008 — twelve years before the COVID-19 pandemic hit the US. 

The collapse of the Aura project is no excuse for the fact that, more than six years after the Newport contract fell through, the US government still has not obtained the necessary ventilators. Questions should also be raised about the government’s decision to effectively put all of its eggs in the same basket — twice. If anything, it is thus government failure that was the real culprit. 

And yet the New York Times piece and the critics shouting “killer acquisition!” effectively give the US government’s abject failure here a free pass — all in the service of pursuing their preferred “killer story.”

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Geoffrey A. Manne, (President, ICLE; Distinguished Fellow, Northwestern University Center on Law, Business, and Economics).]

There has been much (admittedly important) discussion of the economic woes of mass quarantine to thwart the spread and “flatten the curve” of the virus and its health burdens — as well as some extremely interesting discussion of the long-term health woes of quarantine and the resulting economic downturn: see, e.g., previous work by Christopher Ruhm suggesting mortality rates may improve during economic downturns, and this thread on how that might play out differently in the current health crisis.

But there is perhaps insufficient attention being paid to the more immediate problem of medical resource scarcity to treat large, localized populations of acutely sick people — something that will remain a problem for some time in places like New York, no matter how successful we are at flattening the curve. 

Yet the fact that we may have failed to prepare adequately for the current emergency does not mean that we can’t improve our ability to respond to the current emergency and build up our ability to respond to subsequent emergencies — both in terms of future, localized outbreaks of COVID-19, as well as for other medical emergencies more broadly.

In what follows I lay out the outlines of a proposal for an OPTN (Organ Procurement and Transplantation Network) analogue for allocating emergency medical resources. In order to make the idea more concrete (and because no doubt there is a limit to the types of medical resources for which such a program would be useful or necessary), let’s call it the VPAN — Ventilator Procurement and Allocation Network.

As quickly as possible in order to address the current crisis — and definitely with enough speed to address the next crisis — we should develop a program to collect relevant data and enable deployment of medical resources where they are most needed, using such data, wherever possible, to enable deployment before shortages become the enormous problem they are today

Data and information are important tools for mitigating emergencies

Hal’s post, especially in combination with Julian’s, offers a really useful suggestion for using modern information technology to help mitigate one of the biggest problems of the current crisis: The ability to return to economic activity (and a semblance of normalcy) as quickly as possible.

What I like most about his idea (and, again, Julian’s) is its incremental approach: We don’t have to wait until it’s safe for everyone to come outside in order for some people to do so. And, properly collected, assessed, and deployed, information is a key part of making that possible for more and more people every day.

Here I want to build on Hal’s idea to suggest another — perhaps even more immediately crucial — use of data to alleviate the COVID-19 crisis: The allocation of scarce medical resources.

In the current crisis, the “what” of this data is apparent: it is the testing data described by Julian in his post, and implemented in digital form by Hal in his. Thus, whereas Hal’s proposal contemplates using this data solely to allow proprietors (public transportation, restaurants, etc.) to admit entry to users, my proposal contemplates something more expansive: the provision of Hal’s test-verification vendors’ data to a centralized database in order to use it to assess current medical resource needs and to predict future needs.

The apparent ventilator availability crisis

As I have learned at great length from a friend whose spouse is an ICU doctor on the front lines, the current ventilator scarcity in New York City is worrisome (from a personal email, edited slightly for clarity):

When doctors talk about overwhelming a medical system, and talk about making life/death decisions, often they are talking about ventilators. A ventilator costs somewhere between $25K to $50K. Not cheap, but not crazy expensive. Most of the time these go unused, so hospitals have not stocked up on them, even in first-rate medical systems. Certainly not in the US, where equipment has to get used or the hospital does not get reimbursed for the purchase.

With a bad case of this virus you can put somebody — the sickest of the sickest — on one of those for three days and many of them don’t die. That frames a brutal capacity issue in a local area. And that is what has happened in Italy. They did not have enough ventilators in specific cities where the cases spiked. The mortality rates were much higher solely due to lack of these machines. Doctors had to choose who got on the machine and who did not. When you read these stories about a choice of life and death, that could be one reason for it.

Now the brutal part: This is what NYC might face soon. Faster than expected, by the way. Maybe they will ship patients to hospitals in other parts of NY state, and in NJ and CT. Maybe they can send them to the V.A. hospitals. Those are the options for how they hope to avoid this particular capacity issue. Maybe they will flatten the curve just enough with all the social distancing. Hard to know just now. But right now the doctors are pretty scared, and they are planning for the worst.

A recent PBS Report describes the current ventilator situation in the US:

A 2018 analysis from the Johns Hopkins University Center for Health Security estimated we have around 160,000 ventilators in the U.S. If the “worst-case scenario” were to come to pass in the U.S., “there might not be” enough ventilators, Dr. Anthony Fauci, director of the National Institute of Allergy and Infectious Diseases, told CNN on March 15.

“If you don’t have enough ventilators, that means [obviously] that people who need it will not be able to get it,” Fauci said. He stressed that it was most important to mitigate the virus’ spread before it could overwhelm American health infrastructure.

Reports say that the American Hospital Association believes almost 1 million COVID-19 patients in the country will require a ventilator. Not every patient will require ventilation at the same time, but the numbers are still concerning. Dr. Daniel Horn, a physician at Massachusetts General Hospital in Boston, warned in a March 22 editorial in The New York Times that “There simply will not be enough of these machines, especially in major cities.”

The recent report of 9,000 COVID-19-related deaths in Italy brings the ventilator scarcity crisis into stark relief: There is little doubt that a substantial number of these deaths stem from the unavailability of key medical resources, including, most importantly, ventilators.  

Medical resource scarcity in the current crisis is a drastic problem. And without significant efforts to ameliorate it it is likely to get worse before it gets better. 

Using data to allocate scarce resources: The basic outlines of a proposed “Ventilator Procurement and Allocation Network”

But that doesn’t mean that the scarce resources we do have can’t be better allocated. As the PBS story quoted above notes, there are some 160,000 ventilators in the US. While that may not be enough in the aggregate, it’s considerably more than are currently needed in, say, New York City — and a great number of them are surely not currently being used, nor likely immediately to need to be used. 

The basic outline of the idea for redistributing these resources is fairly simple: 

  1. First, register all of the US’s existing ventilators in a centralized database. 
  2. Second (using a system like the one Hal describes), collect and update in real time the relevant test results, contact tracing, demographic, and other epidemiological data and input it into a database.
  3. Third, analyze this data using one or more compartmental models (or more targeted, virus-specific models) — (NB: I am the furthest thing from an epidemiologist, so I make no claims about how best to do this; the link above, e.g., is merely meant to be illustrative and not a recommendation) — to predict the demand for ventilators at various geographic levels, ranging from specific hospitals to counties or states. In much the same way, allocation of organs in the OPTN is based on a set of “allocation calculators” (which in turn are intended to implement the “Final Rule” adopted by HHS to govern transplant organ allocation decisions).   
  4. Fourth, ask facilities in low-expected-demand areas to send their unused (or excess above the level required to address “normal” demand) ventilators to those in high-expected-demand areas, with the expectation that they will be consistently reallocated across all hospitals and emergency care facilities according to the agreed-upon criteria. Of course, the allocation “algorithm” would be more complicated than this (as is the HHS Final Rule for organ allocation). But in principle this would be the primary basis for allocation. 

Not surprisingly, some guidelines for the allocation of ventilators in such emergencies already exist — like New York’s Ventilator Allocation Guidelines for triaging ventilators during an influenza pandemic. But such guidelines address the protocols for each facility to use in determining how to allocate its own scarce resources; they do not contemplate the ability to alleviate shortages in the first place by redistributing ventilators across facilities (or cities, states, etc.).

I believe that such a system — like the OPTN — could largely work on a voluntary basis. Of course, I’m quick to point out that the OPTN is a function of a massive involuntary and distortionary constraint: the illegality of organ sales. But I suspect that a crisis like the one we’re currently facing is enough to engender much the same sort of shortage (as if such a constraint were in place with respect to the use of ventilators), and thus that a similar system would be similarly useful. If not, of course, it’s possible that the government could, in emergency situations, actually commandeer privately-owned ventilators in order to effectuate the system. I leave for another day the consideration of the merits and defects of such a regime.

Of course, it need not rely on voluntary participation. There could be any number of feasible means of inducing hospitals that have unused ventilators to put their surpluses into the allocation network, presumably involving some sort of cash or other compensation. Or perhaps, if and when such a system were expanded to include other medical resources, it might involve moving donor hospitals up the queue for some other scarce resources they need that don’t face a current crisis. Surely there must be equipment that a New York City hospital has in relative surplus that a small town hospital covets.

But the key point is this: It doesn’t make sense to produce and purchase enough ventilators so that every hospital in the country can simultaneously address extremely rare peak demands. Doing so would be extraordinarily — and almost always needlessly — expensive. And emergency preparedness is never about ensuring that there are no shortages in the worst-case scenario; it’s about making a minimax calculation (as odious as those are) — i.e., minimizing the maximal cost/risk, not mitigating risk entirely. (For a literature review of emergency logistics in the context of large-scale disasters, see, e.g., here)

But nor does it make sense — as a policy matter — to allocate the new ventilators that will be produced in response to current demand solely on the basis of current demand. The epidemiological externalities of the current pandemic are substantial, and there is little reason to think that currently over-taxed emergency facilities — or even those preparing for their own expected demand — will make procurement decisions that reflect the optimal national (let alone global) allocation of such resources. A system like the one I outline here would effectively enable the conversion of private, constrained decisions to serve the broader demands required for optimal allocation of scarce resources in the face of epidemiological externalities

Indeed — and importantly — such a program allows the government to supplement existing and future public and private procurement decisions to ensure an overall optimal level of supply (and, of course, government-owned ventilators — 10,000 of which already exist in the Strategic National Stockpile — would similarly be put into the registry and deployed using the same criteria). Meanwhile, it would allow private facilities to confront emergency scenarios like the current one with far more resources than it would ever make sense for any given facility to have on hand in normal times.

Some caveats

There are, as always, caveats. First, such a program relies on the continued, effective functioning of transportation networks. If any given emergency were to disrupt these — and surely some would — the program would not necessarily function as planned. Of course, some of this can be mitigated by caching emergency equipment in key locations, and, over the course of an emergency, regularly redistributing those caches to facilitate expected deployments as the relevant data comes in. But, to be sure, at the end of the day such a program depends on the ability to transport ventilators.

In addition, there will always be the risk that emergency needs swamp even the aggregate available resources simultaneously (as may yet occur during the current crisis). But at the limit there is nothing that can be done about such an eventuality: Short of having enough ventilators on hand so that every needy person in the country can use one essentially simultaneously, there will always be the possibility that some level of demand will outpace our resources. But even in such a situation — where allocation of resources is collectively guided by epidemiological (or, in the case of other emergencies, other relevant) criteria — the system will work to mitigate the likely overburdening of resources, and ensure that overall resource allocation is guided by medically relevant criteria, rather than merely the happenstance of geography, budget constraints, storage space, or the like.     

Finally, no doubt a host of existing regulations make such a program difficult or impossible. Obviously, these should be rescinded. One set of policy concerns is worth noting: privacy concerns. There is an inherent conflict between strong data privacy, in which decisions about the sharing of information belong to each individual, and the data needs to combat an epidemic, in which each person’s privately optimal level of data sharing may result in a socially sub-optimal level of shared data. To the extent that HIPAA or other privacy regulations would stand in the way of a program like this, it seems singularly important to relax them. Much of the relevant data cannot be efficiently collected on an opt-in basis (as is easily done, by contrast, for the OPTN). Certainly appropriate safeguards should be put in place (particularly with respect to the ability of government agencies/law enforcement to access the data). But an individual’s idiosyncratic desire to constrain the sharing of personal data in this context seems manifestly less important than the benefits of, at the very least, a default rule that the relevant data be shared for these purposes.

Appropriate standards for emergency preparedness policy generally

Importantly, such a plan would have broader applicability beyond ventilators and the current crisis. And this is a key aspect of addressing the problem: avoiding a myopic focus on the current emergency in lieu of more clear-eyed emergency preparedness plan

It’s important to be thinking not only about the current crisis but also about the next emergency. But it’s equally important not to let political point-scoring and a bias in favor of focusing on the seen over the unseen coopt any such efforts. A proper assessment entails the following considerations (surely among others) (and hat tip to Ron Cass for bringing to my attention most of the following insights):

  1. Arguably we are overweighting health and safety concerns with respect to COVID-19 compared to our assessments in other areas (such as ordinary flu (on which see this informative thread by Anup Malani), highway safety, heart & coronary artery diseases, etc.). That’s inevitable when one particular concern is currently so omnipresent and so disruptive. But it is important that we not let our preparations for future problems focus myopically on this cause, because the next crisis may be something entirely different. 
  2. Nor is it reasonable to expect that we would ever have been (or be in the future) fully prepared for a global pandemic. It may not be an “unknown unknown,” but it is impossible to prepare for all possible contingencies, and simply not sensible to prepare fully for such rare and difficult-to-predict events.
  3. That said, we also shouldn’t be surprised that we’re seeing more frequent global pandemics (a function of broader globalization), and there’s little reason to think that we won’t continue to do so. It makes sense to be optimally prepared for such eventualities, and if this one has shown us anything, it’s that our ability to allocate medical resources that are made suddenly scarce by a widespread emergency is insufficient. 
  4. But rather than overreact to such crises — which is difficult, given that overreaction typically aligns with the private incentives of key decision makers, the media, and many in the “chattering class” — we should take a broader, more public-focused view of our response. Moreover, political and bureaucratic incentives not only produce overreactions to visible crises, they also undermine the appropriate preparation for such crises in the future.
  5. Thus, we should create programs that identify and mobilize generically useful emergency equipment not likely to be made obsolete within a short period and likely to be needed whatever the source of the next emergency. In other words, we should continue to focus the bulk of our preparedness on things like quickly deployable ICU facilities, ventilators, and clean blood supplies — not, as we may be wrongly inclined to do given the salience of the current crisis, primarily on specially targeted drugs and test kits. Our predictive capacity for our future demand of more narrowly useful products is too poor to justify substantial investment.
  6. Given the relative likelihood of another pandemic, generic preparedness certainly includes the ability to inhibit overly fast spread of a disease that can clog critical health care facilities. This isn’t disease-specific (or, that is, while the specific rate and contours of infection are specific to each disease, relatively fast and widespread contagion is what causes any such disease to overtax our medical resources, so if we’re preparing for a future virus-related emergency, we’re necessarily preparing for a disease that spreads quickly and widely).

Because the next emergency isn’t necessarily going to be — and perhaps isn’t even likely to be — a pandemic, our preparedness should not be limited to pandemic preparedness. This means, as noted above, overcoming the political and other incentives to focus myopically on the current problem even when nominally preparing for the next one. But doing so is difficult, and requires considerable political will and leadership. It’s hard to conceive of our current federal leadership being up to the task, but it’s certainly not the case that our current problems are entirely the makings of this administration. All governments spend too much time and attention solving — and regulating — the most visible problems, whether doing so is socially optimal or not.   

Thus, in addition to (1) providing for the efficient and effective use of data to allocate emergency medical resources (e.g., as described above), and (2) ensuring that our preparedness centers primarily on generically useful emergency equipment, our overall response should also (3) recognize and correct the way current regulatory regimes also overweight visible adverse health effects and inhibit competition and adaptation by industry and those utilizing health services, and (4) make sure that the economic and health consequences of emergency and regulatory programs (such as the current quarantine) are fully justified and optimized.

A proposal like the one I outline above would, I believe, be consistent with these considerations and enable more effective medical crisis response in general.

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Julian Morris, (Director of Innovation Policy, ICLE).]

SARS-CoV2, the virus that causes COVID-19, is now widespread in the population in many countries, including the US, UK, Australia, Iran, and many European countries. Its prevalence in other regions, such as South Asia, much of South America, and Africa, is relatively unknown. The failure to contain the virus early on has meant that more aggressive measures are now necessary in order to avoid overwhelming healthcare systems, which would cause unacceptable levels of mortality. (Sadly, Italy’s health system has already been overwhelmed, forcing medical practitioners to engage in the most awful triage decisions.) Many jurisdictions, ranging from cities to entire countries, have chosen to implement mandatory lockdowns. These will likely have the desired effect of slowing transmission in the short term, but they cannot be maintained indefinitely. The challenge going forward is how to contain the spread of the virus without destroying the economy. 

In this post I will outline the elements of a proposal that I hope might do that. (I’ve been working on this for about a week and in the meantime some of the ideas have been advanced by others. E.g. this and this. Great minds clearly think alike.)

1. Identify those who have had COVID-19 and have recovered — and allow them to go back to work

While there are some reports of people who have had COVID-19 becoming reinfected, this seems to be very rare (a recent primate study implies reinfection is impossible) and the alleged cases may have been a result of false negative tests followed by relapse by patients. The general presumption is that having the disease is likely to confer immunity for several months at least. Moreover, people with immunity who no longer show symptoms of the disease are very unlikely to transmit the disease. Allowing those people to go back to work will lessen the burden of the lockdown without appreciably increasing the risk of infection

One group of such people is readily identifiable, though small: Those who tested positive for COVID-19 and subsequently recovered. Those people should be permitted to go back to work immediately.

2. Where possible, test, trace, treat, isolate

The town of Vo in Northern Italy, the site of the first death in the country from COVID-19, appears to have stopped the disease from spreading in about three weeks. It did so through a combination of universal testing, two weeks of strict lockdown, and quarantine of cases.  Could this be replicated elsewhere? 

Vo has a population of 3,300, so universal testing was not the gargantuan exercise it would be in, say, the continental US. Some larger jurisdictions have had similar success without resorting to universal testing and lockdown. South Korea managed to contain the spread of SARS-CoV2 relatively quickly through a combination of: social distancing (including closing schools and restricting large gatherings), testing anyone who had COVID-19 symptoms (and increasingly those without symptoms), tracing and testing of those who had contact with those symptomatic individuals, treating those with severe symptoms, quarantining those who tested positive but had no or only mild symptoms (the quarantine was monitored using a phone app and strictly enforced), and publicly sharing detailed information about the known incidence of the virus. 

A study of 181 cases in China published in the Annals of Internal Medicine found that the mean incubation period for COVID-19 is just over 5 days and only about 1 in 100 cases take longer than 14 days. By implication, if people have been strictly following the guidelines on avoiding contact with others, washing/sanitizing hands, sanitizing other objects, and avoiding hand-to-face contact, it should be possible, after two weeks of lockdown, to identify the vast majority of people who are not infected by testing everyone for the presence of SARS-CoV2 itself.

But that’s a series of big ifs. Since it takes a few days for the virus to replicate in the body to the point at which it is detectable, people who have recently been infected might test negative. Also, it is unlikely to be feasible logistically to test a significant proportion of the population for SARS-CoV2 in a short period of time. Existing tests require the use of RT-PCR, which is expensive and time consuming, not least because it can only be done at a lab, and while the capacity for such tests is increasing, it is likely around 50,000 per day in the entire US. 

Test, trace, treat, and isolate may be a feasible option for towns and even cities that currently have relatively low incidence of SARS-CoV2. However, given the lethargic progress of testing in places such as the US, UK and India, and hence poor existing knowledge of the extent of infection, it will not be a universal panacea.

3. Test as many people as possible for the presence of antibodies to SARS-CoV2

Outside those few places that have dramatically ramped up testing, it is likely that many more people have had COVID-19 than have been tested, either because they were asymptomatic or because they did not require clinical attention. Many, perhaps most of those people will no longer have the virus in their system but they should still have antibodies (indicating immunity). In order to identify those people, there should be widespread testing for antibodies to SARS-CoV2. 

Antibody tests are inexpensive, quick, and some can be done at home with minimal assistance. Numerous such tests have already been produced or are in development (see the list here). For example, Chinese manufacturer Innovita has produced a test that appears to be effective; in a clinical trial of 447 patients, it identified the presence of antibodies to SARS-CoV2 in 87.3 % of clinically confirmed cases of COVID-19 (i.e. there were approximately 13% false negatives) but zero false positives. Innovita’s test was approved by China’s equivalent of the FDA and has been used widely there. 

Scanwell Health, a San Francisco-based startup, has an exclusive license to produce Innovita’s test in the U.S. and has already begun the process for obtaining approval from the US FDA under its Emergency Use Authorization. Scanwell estimates that the total cost of the test, including overnight shipping of the kit and support from a doctor or nurse practitioner from Lemonaid Health, will be around $70. One downside to Scanwell Health’s offering, however, is that it expects it to take 6-8 weeks to begin shipping testing kits once it receives authorization from the FDA

So far, the FDA has approved at least one SARS-CoV2 antibody test, produced by Aytu Bioscience in Colorado. But Aytu’s test is designed for use by physicians, not at home. In Europe, at least one antibody test, produced by German company PharmACT, is already available. (That test has similar characteristics to Innovita’s.) Another has been approved by the MHRA in the UK for physician use and is awaiting approval for home use; the UK government has ordered 3.5 million of these tests, with the aim of distributing 250,000 per day by the end of April. 

Unfortunately, some people who have antibodies to SARS-CoV2 will also still be infectious. However, because different antibodies develop at different times during the course of infection, it may be possible to distinguish those who are still infectious from those who are no longer infectious. Specifically, immunoglobulin (Ig) M is present in larger amounts while the viral load is still present, while IgG is present in larger amounts later on (see e.g. this and the figure below). So, by testing for the presence of both IgM and IgG it should be possible to identify a large proportion of those who have had COVID-19 but are no longer infectious. (The currently available antibody tests result in about 13 percent false negatives, making them inappropriate as a means of screening out those who do not have COVID-19. But they produce zero false positives, making them ideal for identifying those who definitely have or have had COVID-19). In essence, people whose IgG test is positive but IgM test is negative can then go back to work. In addition, people who have had COVID-19 symptoms, are now symptom-free, and test positive for antibodies, should be allowed to go back to work.

4. Test for SARS-Cov2 among those who test negative for antibodies — and ensure that everyone who tests positive remains in isolation

Those people who test negative for SARS-CoV2 using the quick antibody immunoassay, as well as those who are positive for both IgG and IgM (indicating that they may still be infectious) should then be tested for SARS-CoV2 using the RT-PCR test described above. And those who test negative for SARS-CoV2 should then be permitted to go back to work. But those who test positive should be required to remain in isolation— and seek treatment if necessary.

5. Repeat steps 3 and 4 until nobody tests positive for COVID-19

By repeating steps 3 and 4, it should be possible gradually to enable the vast majority of the population to return to work, and thence to a life of greater normalcy, within a matter of weeks.

6. Some (possibly rather large) caveats

All of this relies on: (a) the ability rapidly to expand testing and (b) widespread compliance with isolation requirements. Neither of these conditions is by any means guaranteed, not least because the rules effectively discriminate in favor of people who have had COVID-19, which may create a perverse incentive to violate not only the isolation requirements but all the recommended hygiene practices — and thereby intentionally become infected with SARS-CoV2 on the presumption that they will then be able to go back to work sooner than otherwise. So, before this is rolled out, it is important to ensure that there will be widespread testing for COVID-19 in a timeframe shorter than the likely total time for contracting and recovering from COVID-19.

In addition, if test results are to be used as a means of establishing a person’s ability to travel and work while others are still under lockdown, it is important that there  be a means of verifying the status of individuals. That might be possible through the use of an app, for example; such an app might also provide policymakers to make better resources allocation decisions too. 

Also, at-risk individuals should be strongly advised to remain in isolation until there is no further evidence of community transmission. 

7. The Mechanics of Testing

Given that there are not currently sufficient tests available for everyone to be tested in most locations, one obvious question is: who should be tested? As noted above, it makes sense initially to target those who have had COVID-19 symptoms and have recovered. Since only those people who have had such symptoms—and possibly their physician if they presented with their symptoms—will know who they are, this will rely largely on trust. (It’s possible that self-reporting apps could help.) 

But it may make sense initially to target tests more narrowly. The UK is initially targeting the antibody detection kits to healthcare and other key workers—people who are essential to the continued functioning of the country. That makes sense and could easily be applied in other places. 

Assuming that key workers can be supplied with antibody detection kits quickly, distribution should then be opened up more widely. No doubt insurance companies will be making decisions about the purchase of testing kits. Ideally, however, individuals should be able to buy kits such as Scanwell’s without going through a bureaucratic process, whether that be their insurance company or the NHS. And vendors should be free to price kits as they see fit, without worrying about the prospect of being subject to price caps such as those imposed by Medicaid or the VA, which have the perverse effect of incentivising vendors to increase the list price. Finally, in order to increase the supply of tests as rapidly as possible, regulatory agencies should be encouraged to issue emergency approvals as quickly as possible. Having more manufacturers with a diverse array of tests available will increase access to testing more quickly and likely lead to more accurate testing too. Agencies such as the FDA should see this as their absolute priority right now. If the Mayo clinic can compress 6 months’ product development into a month, the FDA can surely do its review far more quickly too. Lives—and the economy—depend upon it.

The New York Times today has an article on approval of medical devices.  The take is that venture capitalists want a more efficient process.  The tradeoff mentioned is between faster approval for investor returns versus safety of devices if they are approved faster.  There is no mention in the article of the benefits to patients and consumers of more rapid availability of medical devices.  The entire literature following the Peltzman analysis delays in drug approval is totally ignored.

Medical Devices

Paul H. Rubin —  18 April 2011

The GAO has recently issued a report on medical devices.  The thrust of the report is that “high-risk” medical devices do not receive enough scrutiny from the FDA and that recalls are not handled well.  This report and other evidence indicates that the FDA is likely to require more testing of devices.  As of now, most medical devices are approved on a fast track that requires significantly less testing than that required for new drugs.  (As I have discussed in a forthcoming Cato Journal article, medical devices are also subject to more immunity from state produce liability lawsuits.)

The GAO report is remarkable.  The GAO defines its mission as

“Our Mission is to support the Congress in meeting its constitutional responsibilities and to help improve the performance and ensure the accountability of the federal government for the benefit of the American people. We provide Congress with timely information that is objective, fact-based, nonpartisan, nonideological, fair, and balanced.”

But the report on medical devices is entirely unbalanced.  It deals only with procedures for approval and the recall process (both of which are judged inadequate.)  There is no discussion of either costs or benefits.   That is, no evidence is presented that there is any actual harm from the “flawed” approval and recall processes.  Even more importantly, there is no evidence presented about the benefits to consumers from easy and rapid approval of medical devices.

As is well known, virtually all economists who have studied the FDA drug approval process have concluded that it causes serious harm by delaying drugs.  The import of the GAO Report is that we should duplicate that harm with medical devices.  This is an odd and perverse way of providing a “benefit” to the American people.