The corporate monopolies behind the national baby formula shortage - WBUR News

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“There are parents across the country who are driving from pharmacy to supermarket to chain store just to try to find food that they need to feed their infants," Amanda Starbuck says.

The reason? Corporate monopolies, poor quality control and federal regulation.

Just three companies control the entire infant formula market in the United States.

And half of all the formula sold in the U.S. gets to families through the federal Special Supplemental Nutrition Program for Women, Infants and Children (WIC).

“But the way [the] WIC lays out the actual contracting, the USDA gives the money to each state, and then each state chooses one of these manufacturers, and gives them the contract for the whole state," Matt Stoller, director of research at the American Economic Liberties Project, says.

"It means that every retailer in the state is basically going to carry only that brand. Because half of your customers [aren't] ... able to look at any other manufacturers’ items.”

Today, On Point: Corporate monopolies, infant formula and hungry babies.

Guests

Matt Stoller, director of research at the American Economic Liberties Project. Author of the newsletter BIG about the politics of market power and antitrust. Author of Goliath: The Hundred Year War Between Monopoly Power and Democracy. (@matthewstoller)

Also Featured

Rachel Taylor, mom of 2-month-old in Baltimore, Maryland.

Debbie Loesch, runs a nonprofit called Angels of Long Island, which helps families in crisis.

Interview Highlights with Matt Stoller

On the monopoly on baby formula

"So what are the components of this? There's a couple of components, but this is basically a monopoly problem. And when you look at shortages in almost every instance, it's usually because you have one or two or three suppliers of some vital good. And, oh, one of the factories, often they're regulated. They're not taking care of the factory. Then it goes out and gets shut down and boom, there's a shortage. And that is what happened here.

"It's also what underpins the pharmaceutical shortage. But basically this is a little more complicated. Because there are two aspects to the shortage. One is ... Abbott Labs. Which is a $200 billion company. And domestic baby formula represents less than 5% of their revenue. So they don't really care that much about this division. And their factory was a mess. They had old equipment. It was dirty. The FDA told them multiple times, You've got to clean this up. This is the factory that eventually the FDA said, okay, we're shutting this factory down until you clean it up.

"There was an FDA inspection in September. They said, hey, you guys are wearing dirty shoes in the sterile rooms that make infant formula. Then a whistleblower said, look, they're falsifying records. They're not looking into consumer complaints when babies get sick. And then there was another inspection in January and February. And finally, the FDA just shut the factory down. And so that's kind of problem one.

"But over the last four weeks, this according to the White House and the FDA, there's been more baby formula produced then there was before the factory shut down. Because they probably knew this is a big part of the supply and they got the other producers to amp up production. So why do we have a shortage? And it gets to the second problem, which is that there's a distribution bottleneck, the government, because of how the government is essentially the power buyer in this market, it's essentially the Wal-Mart of baby formula.

"It buys a lot of the baby formula that people people need, roughly half comes through the USDA's Women, Infant and Children program. And the way that they structure the program is they effectively say, give us a better price for formula. And every state gets a good price from one of the two, three. But there's really two formula makers. And we'll give you a monopoly in the state. And so you have all of these states where there's one formula maker for the entire state, essentially.

"I mean, there's just no point, if you're a retailer, like why would you stock any formula but the one that over half of your customers can buy? So what happens is these these are long term contracts. And so you have shortages in states where Abbott is the dominant or monopoly supplier, whereas in other states you don't have shortages.

"So this is a regional problem, it's not necessarily a problem of just not having enough formula. It's a problem of having, you know, some shortage of formula nationally, but mostly having the distribution system set up so that there's a very brittle distribution system and there are regional problems now."

On how three companies came to control the baby formula market

"There's hoarding that goes on in situations like that. So that actually, it's like a bank run. It actually accelerates the problem. Because there's artificially elevated demand, because people are afraid. So what happened with formula is in the 1970s, there were a series of scandals. Because, you know, formula is food for infants. But ... infants have very specific needs. They're the most vulnerable population. And so there were scandals where babies were not getting the nutrition they needed and they had really serious developmental problems.

"And so in 1980, Congress passed the Infant Formula Act, which regulates formula very aggressively. So it sort of sits between food and medicine in terms of the regulatory schema. And that makes it really hard for newcomers to get into the market. Because you have to prove, We are not going to poison babies. And from the perspective of the regulator, the FDA, their job is not necessarily to make sure there's enough supply. Everybody assumed there'd be enough supply.

"And it's not to make sure that the price is low, because they don't really care. It's to make sure that the formula that exists doesn't harm babies. And so from their perspective, when you know Abbott and and Nestlé and Mead Johnson are making enough formula and it's regulated, they don't want to let someone else in because why would they take that risk? There's no point.

"So the regulators have been holding back new entrants into the market because it's not their mandate to make sure that there's resiliency in the market. And so you've seen this kind of tremendous consolidation. And then in the 1980s and 1990s, they designed this WIC program, which existed before, but they designed the specific rebating program because they said, Oh, this is a more cost effective way for states to be able to buy infant formula."

On the fragility of the baby formula system

"This is really just a distraction from people who don't like domestic production. That's what these arguments are about. Because the real issue here is just the consolidation. Do you want three domestic manufacturers or do you want three global manufacturers? You end up in the same place or even worse, when you're dependent on just a few manufacturers abroad. So I think it's important to recognize that the issue here is about the fragility of the system as a whole.

"And when we're talking about formula, or something that's vital ... drugs or medical supplies, anything that kind of is life sustaining. We need a lot of producers, and we also need them to be near us in case something breaks down, which we just saw. The whole global shipping and air system just kind of broke down. So like, I don't think we wanted to be dependent on factories abroad anymore. You know, that's even worse than being dependent on factories domestically. We want resiliency and we want multiple types of production. And that, I think, is kind of the core of it."

Is there a better way to break down monopoly power?

"Yeah. I mean, so one of the listeners talked about the immense marketing that's going on to try to keep women from breastfeeding. And that's global, too. You know, these formula makers lobby the W.H.O. to recommend against breastfeeding. And that's just political corruption, right? Breastfeeding is great. You shouldn't be doing that. Shouldn't try to get infants on formula if they can do breastfeeding. Formula is great, but this is clearly financially motivated.

"So what you have to do is basically break the power of Abbott Labs, like we need indictments. They violated multiple laws. Someone needs to break out some handcuffs. ... We need to break their power. This company should be much smaller and much simpler. The CEO of this company should not have their formula division be a rounding error on their balance sheet. Like, we need focused companies. If babies don't have formula, the CEO of that company should be right on it. And it's like clear that that wasn't the case here. So first of all, we just need to get rid of these giant conglomerates and simplify these companies.

"Then what you need to do is change the rebating system so that there are no rebates. And essentially it's just an auction system over the wholesale price. And the government should just pay more money, right? I mean, what we're talking about is $2 billion. This is a rounding error for the government. And we all agree that babies should be fed, right? So just pay the money. ... So it'll cost $3 billion. To pay to have babies fed is worth it. We all agree on that.

"So this is not that hard. It is a political problem. It is. And, you know, there are other things we should do. Like we should just say that large buyers, retailers, should not be able to only stock one formula or one good that is essential for life preservation. They should be required to buy from at least three sources. Maybe 20% has to come from three different sources. That's a way to actually break these monopolies across a whole range of of areas. So you just need much more active management of market structures to make sure that there's diversity and resiliency in the distribution system writ large."