Even when government gets it right, it gets no credit -- a ventilator story

Steve Kelman spotlights a story of smart acquisition hidden behind a doom-and-gloom headline.

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Sunday afternoon I was looking at the homepage of The New York Times and I saw the headline, "The U.S. Tried to Build a New Fleet of Ventilators. The Mission Collapsed."

The subhead was, "As the coronavirus ravages America’s health care system, a canceled federal contract helps explain the acute shortage of medical equipment." (The article also was on the front page of Monday’s Times.)

Oh wow, I thought, another government contracting horror story.

And that indeed was how the story was pitched. The efforts "highlight the perils of outsourcing projects with critical public-health implications to private companies," the article states; "their focus on maximizing profits is not always consistent with the government’s goal of preparing for a future crisis."

But if you look at the story more carefully, the messages are actually very different ones.

The story begins in 2006, after the 2003 SARS crisis. That year a unit was established in HHS called the Biomedical Advanced Research and Development Authority, with a mandate to prepare medical responses to chemical, biological and nuclear attacks, as well as infectious diseases.

In its very first year, the civil servants in the agency started looking at the supply of ventilators for a disease pandemic. This was a low-visibility problem, to put it mildly. Even for this new agency, ventilators hardly had anywhere near the panache of higher-visibility threats such as bioterrorism or terrorist nukes.

Yet, as so often happens in government, there were public servants whose job it was to think about problems nobody else was thinking about.

"In its first year in operation," the article reports, "the research agency considered how to expand the number of ventilators." Keep in mind how few people were thinking about this issue back then. The agency "estimated that an additional 70,000 machines would be required in a moderate influenza pandemic."

But it wasn’t just that agency officials were aware of the problem. They didn’t simply realize they needed to buy more ventilators. They thought the ventilators they would buy needed to be better and cheaper. There were not only not enough ventilators, but the "ventilators in the national stockpile were not ideal. In addition to being big and expensive, they required a lot of training to use."

So the agency convened a panel of experts in November 2007 to devise a set of requirements for a new generation of mobile, easy-to-use ventilators. The goal was to reduce the price per unit from $10,000 to $3,000. So, although having thought about the problem the easiest thing to do would have been simply to throw money at the problem, these officials thought about the need to innovate in what kinds of ventilators they were buying, a riskier course of action since new ventilator designs might not work. Contrary to the view that bureaucrats avoid risk, that’s not what happened here.

A year later, in 2008, the government organized a source selection to seek "companies that were interested in designing and building the ventilators."

So the first thing the government did right was to pay attention to the problem in the first place and to think innovatively about the need not just to buy more ventilators but to buy better and cheaper ones.

Then the second thing the government did right was to choose a good contractor. Rather than going to a big, established medical device maker from among the contracting usual suspects, they went to Newport Medical Instruments, a small outfit in Costa Mesa, Calif. This was Newport’s first work ever for the government.

The third thing the government did right was not simply to write a blank check to the company. The agency paid the company a fixed price of about $6 million to develop the ventilators; all the other revenues the company would get were to depend on selling the ventilators to the government. "Being a small, nimble company," according to the article, "would help [Newport] efficiently fulfill the government’s needs.

The government hoped the new ventilators would be "so attractive that the commercial market would want to buy them, too," one official said. So the government could negotiate a good deal on the ventilators it would buy itself because the company would have the opportunity for significant non-government sales. This is again a great contracting strategy, though we can’t tell from the article whether the government thought about that from the beginning and understood they did not need to write a blank check.

Newport’s executives, the article stated, "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."

The fourth thing the government did right was to manage the contract well. "Every three months, officials with the biomedical research agency would visit Newport’s headquarters. [The company] submitted monthly reports detailing the company’s spending and progress." The federal officials "would check everything," said. "If we said we were buying equipment, the company said, "they would want to know what it was used for. There were scheduled visits, scheduled requirements and deliverables each month."

In 2011, Newport shipped three working prototypes from the company’s California plant to Washington for federal officials to review. The head of the CDC got a demonstration in a small conference room attached to his office. "I got all excited," he says. "It was a multiyear effort that had resulted in something that was going to be really useful."

In April 2012, a senior HHS official testified before Congress that the program was "on schedule to file for market approval in September 2013." After that, the machines would go into production.

Then, sadly, the effort went south -- but not because of anything the agency did wrong. Only a month after the testimony, Covidien, a large medical equipment supplier, bought Newport. Covidien soon demanded additional funding and a higher sales price for the ventilators. "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."

With the effort stalled out, Covidien asked in 2014 to be released from the contract, which the government granted. That same year the agency awarded a new contract for ventilators to Phillips Electronics, a Dutch giant.

The article for some reason doesn’t explain why, but developing the new ventilator has taken a long time. Six years later, the new ventilators have been approved and will finally be delivered midyear. I can only speculate why. One possibility is that the big company was less nimble than the small one. A more political explanation would be that this was less of a priority in the current administration than in the previous one.

However, be all that as it may, to me the most important story for students of public management (though I will confess of far lower priority to people who understandably care only about whether ventilators are ready or not) is a story of feds doing their jobs very well. Since nobody else is likely to give them credit for a job well done, with this blog post I hereby want to do so.

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