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ANALYSIS: DOJ Clears Big U.S. PPE Distributors to Cooperate

April 7, 2020, 1:55 PM

The Department of Justice announced April 4 that it will not challenge collaborative efforts by the five of the biggest U.S. medical distributors to source and distribute medical personal protective equipment (PPE).

But what remains to be seen—and what regulators will have to consider—is whether concentrated markets will learn to coordinate more easily after the crisis has passed. At a minimum, compliance efforts after the crisis will need to account for new close relationships between collaborators at all levels of the company.

McKesson Corp., Owens & Minor Inc., Cardinal Health Inc., Medline Industries Inc., and Henry Schein Inc. asked the DOJ on March 30 for a “Business Review Letter” stating whether the DOJ would seek enforcement against their efforts with federal agencies to coordinate national distribution of critically scarce PPE.

The DOJ’s response on April 4, a five-day turnaround, is the first concrete results of the Department’s joint statement with the Federal Trade Commission pledging expedited responses to businesses seeking guidance on procompetitive collaborations. The antitrust agencies pledged to get back to businesses about whether planned cooperative action presents competitive concerns within one week.

The federal coordinated effort through the country’s biggest medical distributors is an emergency measure, and emblematic of the steps markets may have to take to respond to the Covid-19 crisis. And the U.S. antitrust authorities’ approach to quickly analyzing and clearing emergency collaborations is similar to the approach many other antitrust regulators worldwide have announced.

Project Airbridge

The distributors described a plan to cooperate with the U.S. Government to source and distribute PPE and laboratory supply shortages and address bottlenecks in normal international supply chains. They proposed to help the Department of Health and Human Services (HHS) and the Federal Emergency Management Agency (FEMA) to both source and competitively price scarce medical products.

“Our collective efforts are focused on, and limited to, facilitating the government’s efforts to guide PPE and medications to the places where they are needed most,” the distributors said in their request to the DOJ. "[I]n other respects, the Requesting Parties will continue to pursue their respective business strategies as before.”

Particularly, the distributors cited their participation in “Project Airbridge,” which is “a public-private partnership between the federal government and U.S. healthcare distributors, such as the Requesting Parties, led by senior staff in the White House.” The project involves acquiring additional supplies through the distributor’s manufacturing connections overseas, the distributors said.

DOJ Oversight

In his response for the agency, Antitrust Division Chief Makan Delrahim said that the division would not seek enforcement against the distributors’ cooperative participation in public/private partnerships to source medical equipment.

“Based on the information and representations you provided, the direct and continuing observations of Antitrust Division personnel, and after an expedited review, the Department presently does not intend to challenge the Requesting Parties’ efforts to expedite and increase manufacturing, sourcing, and distribution of PPE and medications,” Delrahim said.

Delrahim stressed that the circumstances leading to the distributor’s cooperation are “exceptionally pressing and unlikely to recur frequently.” He added that antitrust division personnel are involved in the government’s efforts and observe them (along with supervision and participation by FEMA and HHS) on an ongoing basis. Delrahim stressed that the distributors are acting “largely under the explicit direction, and in the presence of, the U.S. Government and its agents,” suggesting that government oversight reduces the likelihood of public harm from competitors cooperating.

Delrahim said that the parties have committed to a number of safeguards, including: (1) not using any collaboration to increase prices, reduce output, reduce quality, or otherwise engage in COVID-19 profiteering; 2) making all reasonable efforts to share any competitively sensitive information only with a requesting government agency, and not with any other party or competitor; 3) limiting cooperation to the “time period necessary to assist FEMA and other government agencies in responding to COVID-19 shortages;” 4) formally dissolving this competitor collaboration and immediately notifying the Department when the government’s initiatives end; and 5) working with the DOJ to determine appropriate sequestration of competitively sensitive material that was produced during the collaboration period.

What’s Next?

“The collaboration is limited only to Coronavirus-related efforts and will only last for as long as such efforts are necessary for the welfare of our country,” the distributors pledged.

When extraordinary efforts to acquire sufficient PPE and testing supplies are over, however, the industry will be left with a risk of cartel activity and attendant legal liability.

Even if the information exchanged during the collaboration is sequestered following the crisis, people are the most important part of any business. In the process of collaborating, the distributors can’t help but learn who supplies each, something about negotiating style, channels, and business pricing.

Furthermore, this is already a concentrated industry with a higher risk of coordinated conduct. The health care supply chain market is mostly divided among 10 or fewer large players in the U.S., and five of them are involved in this effort. Over the past decade, private antitrust actions have alleged that supply companies have agreed to set prices or keep out competitors in submarkets of health care supply, like dental supply and suture. If market disruption during the crisis drives out smaller players, even more important industries could consist of a few large players.

This points to the vulnerable underbelly of any collaborations now, as vital as it may be to replace rough market forces with regulation or cooperation at the moment. Unwinding the experience and personal bonds made during industry collaboration isn’t as easy as cleaning up any information that was exchanged. And market participants that cooperate will need to be vigilant about going back to business as usual when the crisis ends.

Only time will tell what distribution chains, labor markets, and service industries will look like on the other side of this crisis. Where we allow the market to organize society, we’ll need to make sure that it’s competitive in the future.

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