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If you pound baby formula makers on quality and demand lower prices, you get shortages.

Posted by John Reed on

The FDA actually took some responsibility for the baby formula shortage in a Congressional hearing. Wonder of wonders. Apparently they FDA head did not get the Biden memo that his administration never takes the blame for anything ever.
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But the FDA head also poured abuse on Abbott Laboratories.
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Memo to government. Drug companies, and I will include baby formula as a drug here rather than just a food, Have much incentive to develop, produce, and sell patented drugs. But when a drug comes off patent—about ten years as a practical matter—that incentive almost all disappears.
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The drug in question then become generic. People who pay for drugs—which today means mainly government—love generics because they are cheap. And although they are cheap, the government pounds on the companies that make and sell them to make them even cheaper. In the case of baby formula about half of it is bought by government for welfare people. To drive the price down even further, they have a rule that each state gives a monopoly on that federal freebie to just one supplier. Abbott won 40% of the states in that low bidder contest.
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The federal government also hounds the generic drug manufacturers to have high quality standards.
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Well, which is it. Low prices or high quality standards? Trying to get both in the same deal a bit like trying to have your cake and eat it, too. But bureaucrats neither know nor care about such things. They have never had a real job. They are quasi politicians who push private businesses around, blame all problems on the businesses, brag about how tough they are on businesses, and break a lot of the china in the china shop in the process.
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What Abbott laboratories or one of them ought to do is announce, ”Because we have been forced to accept a small margin on this product, and we have been shut down for infections that were not our fault, and we have been libeled by dishonest, incompetent bureaucrats at the FDA, we are now going to stop making baby formula or any other product regulated by the FDA effective immediately. The FDA can kiss our ass.”
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That often happens, albeit without such a blunt announcement. Generic drug companies are few and probably getting fewer. Not enough profit margin; too much bureaucratic hassle.
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Capitalism works because of incentives. Socialism does not work because of the lack of incentives.
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You can divide products into two categories: branded products which can be patented medicines or over-the-counter like Bayer aspirin and unbranded generic products.
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Unbranded generic products are by definition commodities which I will define as a product that you can get an identical copy of from multiple suppliers. In a commodity market, the low-cost producer wins. Commodities are sold entirely on price.
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So generic drug companies operate on ultra thin margins and use economies of scale to make an adequate profit. That puts the drug in question in a precarious position. Hardly anyone wants to be in the business of making it, and when some external factor pops up and reduces the margin even further, the manufacturer says—silently behind closed doors—“We’re outa here.”
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So if an external factor like the FDA is limiting market share or raising cots with quality demands or pushing down on margins with forcing the manufacturer to negotiate with each state based solely on price, poof goes that manufacturer, or maybe all manufacturers of that drug.
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I call these “IF” laws. The self-righteous take all credit government says, “IF you sell baby formula you must do this and this and that and that or WE WILL SHUT YOU DOWN and libel you in the process.”
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Government bureaucrats, being incompetent idiots, assume the manufacturers are some sort of captive audience. No, they are not. They can and do often say, “Okay. Given those conditions, we would rather stop making that product than comply. Now please get off our premises.”
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When you pressure someone with an IF law, the result may be that they quit doing that which triggers their coming under jurisdiction of the IF law. Most offshoring is caused by the cumulative weight of all the IF laws, not just lower foreign wages as must people think. It is ALL the hassles of manufacturing in America: litigation, unions, HR rules, taxes, regulations, environmental rules, etc. etc.

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