Three things from the pod this week:
The FDA — slow and bureaucratic — helped cause this crisis
It’s time to rethink insane baby formula regulations that block imports of foreign formula
The Supplemental Nutrition Program for Women, Infants, and Children (WIC) program is distorting the market
Eight kids between Marc and Dany … but baby formula markets are not in What the Hell team’s sweet spot of scholarship. Luckily, two Wall Street Journal reporters did a crack up job of explaining the problem. It’s a complicated tangle of duopoly, regulation, government incompetence and government over-regulation married up to the weird notion that our babies can’t drink subpar European (or other foreign) formula. Here’s the original piece, and its authors, Jesse Newman and Annie Gasparro were game to join us and talk the whole thing through.
When you wade into the details beyond the Soviet-style empty shelves and the crying moms hard pressed to feed their children, it’s… just as ugly. It’s not just that Abbott, one of the two largest manufacturers, had a filthy factory that shut down supplies once discovered. It’s not just that Abbott and Reckitt, the other big manufacturer, have a lock on all 50 states because of massive sole source contracts with the federal government to supply the WIC program. It’s not even just the fact that it costs hundreds — yes hundreds — of millions to start a new baby formula factory in the US. It’s all of that and a few other assorted insanities as well. Plus Covid.
Listen to the pod or just glance through the highlights below, and you’ll likely come to one conclusion: Reform is needed. You won’t be surprised to hear that instead of reform, Nancy Pelosi is talking about indictments, because apparently that’s how we roll here in DC. Comments, suggestions, welcome — don’t hesitate to reach out!
HIGHLIGHTS
(JN- Jesse Newman AG- Annie Gasparro)
How did this happen?
JN: I would say that it was sort of a perfect storm of events and conditions that brought us to this pretty shocking state. Formula is this really unique product, in which there's only a handful of manufacturers in the US that make the stuff, and there's just two companies. There's Abbott Laboratories, which makes Similac, and then a company called Reckitt, that makes Enfamil, and those two companies, they just dominate the market. They make up like 80% of US sales. Then you have Nestle, which makes Gerber products, and a few other much smaller players, and a manufacturer that makes some store brands, so there's some huge concentration in the industry, which means that if something goes wrong for one manufacturer, there aren't that many others that can step in and pick up the slack, and that's exactly what happened.
JN: In February, there was a problem with one of the major producers. Abbott halted production at their biggest factory, which is in Sturgis, Michigan, which is responsible for upwards of like 1/5 of formula in the US. They had to shut down their facility after complaints started to come in beginning a couple of months prior to that in September, of four babies who were infected with a Cronobacter after they consumed the baby formula that Abbott made at its plant in Sturgis, so you had sort of supply chain disruptions already, and then this big manufacturer that was taken offline. I think those are two of the simplest causes of where we are now.
So Made in America is the name of the game?
JN: 98% of what we make, 98% of what we consume is made here in the US. We really don't import all that much. We import a little bit from Mexico, from Chile actually, but there are just huge regulatory barriers to importing formula. Essentially European and other formula manufacturers have to jump through similar hoops that US manufacturers do, except that because they do things differently, there's just all sorts of requirements that don't match up. So labeling requirements — there are some nutritional requirements that aren't quite the same and that means that they not only have to meet the requirements in their home countries, but then they also have to adjust their products and adjust their labeling to meet US specs, which is just a much bigger hurdle than most of them can
All about the Benjamins….
JN: I've been told by former formula executives that when there's European or other manufacturers that look at the US market, they sort of see the dominance of Similac and Enfamil and think, "I'm not going to spend millions of dollars to try to get into this market that two companies really have a strangle hold on," and so they then go and look elsewhere. It is true that there are also import tariffs that are applied to formula from a lot of different countries. Not from all countries. Not from Mexico, but that's just another consideration that has probably limited imports to some degree. So, there's just really high hurdles to importing formula.
It’s all the babies eat?
AG: When the FDA regulates it's, like Jesse was saying, the FDA calls this a sole source of nutrition for the people consuming it. Most of the time that is babies. Formula's also used for people with severe medical issues and allergies, autoimmune diseases, people who can't have food and they rely on formula, often through feeding tubes, so that they can get the nutrients they need. So for the people consuming formula, infants or people that have severe medical issues, this is their sole source of nutrition and it needs to be impeccable when it comes to safety.
FDA requirements?
AG: And so when you're trying to come out with a baby formula in the US, you have to submit the recipe telling them what is in it, all the nutrients that the FDA requires you to have in it and then you also have to have the manufacturing plant inspected. And then you also have to have studies for several weeks of infants who consumed. They call these studies growth studies to prove that the babies who consumed only your formula that you are submitting for approval, that they grow at a normal rate, that they get all the nutrients they need. So, these are just some examples of these high barriers. Not every company is willing to go out and spend the money and spend the time to do all of this research. It's millions upon millions of dollars.
JN: The FDA has set out for something like 30 different nutrients, vitamins, and minerals. They are very specific about the minimum amounts and the maximum amounts of these nutrients that have to be in formula. I mean, no other food is regulated that way and the growth studies that Annie mentioned, they are really, really expensive and that's one of the barriers that we've been told specifically keeps other entrants out of the market, just having to pour millions of dollars into this growth study. That's not something every prospective manufacturer can do.
More about the Benjamins…
AG: I spoke with ByHeart, which is a new baby formula company and they are the first in many years to open their own manufacturing plant. A lot of new companies that have tried to get into the market in recent years, like Happy Baby and Bobbie is another one. They have relied on an existing manufacturer because it was too expensive to open their own plant and ByHeart actually did what we're saying is so hard. They did their own growth studies. They opened their own manufacturing plant and they had to raise $190 million to do this and it took them over six years to actually get there and it just so happens that they opened their plant a couple months ago right as this shortage was hitting. So, it couldn't have been better timing, but they just said how they'd worked years and years to do this and it cost so much money. Just the plant itself was over $40 million to get rolling
European babies like less fancy formula?
JN: We do have a very different standard in the US than European safety body or regulatory body does. Most of the ingredients are the same. There's some slight differentiations on iron content, but like the way that we were describing FDA sets out the minimum and the maximum requirements for various different nutrients, Europe has a slightly different way of setting out the standards for these and so, I think this is causing a huge debate over whether it should be easier to import formula from other different countries, but I think if the system were easier and there were a problem with a European manufacturer, then you would have a lot of critics right now saying that the FDA fell down in its job and wasn't doing what it needed to do to keep formula safe
The role of the WIC program?
AG: Formula is really expensive. And because of that, the WIC program makes a deal with the manufacturers to get it at a huge discount through these rebates. And the way it works is they basically, in exchange for giving that... they get bids. Every few years, formula manufacturers bid for each state's contract. And what's in it for them is that they get a bunch of business, right? They're going to be the market leader in that state if they have the WIC contract. So, the state basically takes whoever's going to give them the best deal. And that's how you end up with this single manufacturer for WIC in each state.
AG: And the result is that you end up seeing a lot more of that formula on shelves because, like you said, the government is such a huge purchaser through WIC. WIC consumers are so big that a store is going to want to stock more of that formula if that's the WIC formula, right? And then they're also required to stock a certain amount because the government wants to make sure that WIC consumers have enough to choose from.
AG: So, the reason that the biggest manufacturers keep getting bigger is because they have the majority of these WIC contracts. They are able to offer the best deals to the states because they have such great scale. Smaller manufacturers could never win because they can't offer those kind of rebates. Sometimes those rebates are 85%.
AG: So, a consumer who's on WIC gets a voucher for free formula. They have to buy this certain brand, these certain sizes, but they get them for free. And the WIC program pays the retailer the wholesale price. And then the manufacturer refunds, through a rebate, somewhere sometimes like 85% of that cost to the WIC program. And the government says that this system, because they get it at such a discount, allows WIC to support up to 20% more consumers. And that's why they've continued to do it this way because these rebates allow the program to go so much farther in helping so many more people. But the downside is that consumers who receive these vouchers for free formula are really confined. And they have to have a medical exemption to get a different brand or a different type of formula.
AG: So, it just really perpetuates this duopoly essentially because the biggest manufacturers have the vast majority of the state contracts. Reckitt with Enfamil, and Abbott with Similac have almost all of them. And honestly, Abbott, part of the reason that the plant shutdown was so just devastating is because Abbott had the contracts in 34 states.
What about those pix of tons of formula at the border?
JN: The government is required and has always been required to care to some degree for families coming across the border and that has always included formula as far as I am aware. So I don't think this is different than it has been prior. So, I think babies have to be taken care of and fed breast milk or formula for the first six months. One way or another, all babies are in need regardless of whether they are born here or elsewhere. And so I don't know. I didn't see the picture, but I think that the government is doing what is my understanding that it always has and that still has a responsibility to do, shortage or not.
AG: And we also have spoken to people who say that the amount of formula that goes to these babies in need is a tiny, tiny, tiny fraction of what the rest of the country consumes and wouldn't put a dent in our shortage that we're experiencing nationwide. And then I also do know, I don't know specifically about the photos that you're talking about, but I know some photos that have been circulating on social media have been disputed as not being infant formula. So, I also think that people have to be very careful about images knowing whether the image is what people say it is.
Have we forgotten mother’s milk?
JN: What we have spent a lot of time talking about have been sort of the supply shocks between the pandemic and Abbott's plant closing, but there's sort of a demand story here as well. Families in this country are very dependent on formula. We had a statistic in the story. I think something like 80% of women start out breastfeeding immediately after they deliver their babies, but by the time they reach by the time children reach the age of one, the vast, vast majority, something between like 70 and 90% will receive some formula. So, that's a big shift. And when we spoke to doctors and public health specialists, they say that shift is largely driven by the social and economic factors. And those mean that is like short maternity leaves, in some cases non-existent maternity leaves or women taking maternity leave without it being paid.
Check out the full transcript here.
SHOWNOTES
Why the Baby-Formula Market Is a Mess: Low Competition, High Regulation — Wall Street Journal, May 20, 2022, Annie Gasparro and Jesse Newman
Why Is There a Baby-Formula Shortage? What to Know and What’s Being Done About It — Wall Street Journal, May 24, 2022, Joseph Pisani
The Baby Formula Shortage and Bad Governance, — Wall Street Journal, May 24, 2022. William Galston
Baby formula shortage: FDA chief admits federal regulators were 'too slow' to act, USA Today, May 25, 2022, Candy Woodall
F.D.A. Chief Details ‘Shocking’ Conditions at Baby Formula Plant, The New York Times, May 25, 2022, Christina Jewett
The Baby Formula Fall Guy, The Wall Street Journal, May 25, 2022, Editorial
The FDA must be held to account for the baby formula crisis, The Washington Post, May 25, 2022, Editorial
FDA learned of suspected infant formula illness four months before recall, Politico, February 18, 2022, Helena Bottemiller Evich
FDA comes to agreement with baby formula factory to resume production, The Washington Post, May 16, 2022, Laura Reiley
THE FDA’S FOOD FAILURE, Politico, April 8, 2022, Helena Bottemiller Evich
Nearly 200 Republicans vote against bill to ease baby formula shortage, The Washington Post, May 19, 2022, Eugene Scott and Felicia Sonmez
Baby-Formula Shortage Leaves Families Desperate, Prompting WIC Program Revamp, Wall Street Journal, May 19, 2022, Annie Gasparro and Jaewon Gang
Pelosi warns baby formula shortage could trigger indictments, NBCNews, May 17, Scott Wong
Our babies are dying. Where are the responsible adults?, The Washington Post, May 26, Dana Milbank