Savings

U.S. safety and savings rules set stage for infant formula shortage

WASHINGTON– A massive recall is largely responsible for the shortage of infant formula in the United States, but experts say the products have long been vulnerable to this type of crisis due to decades-old policies that have allowed a handful companies to corner the market.

These government rules – aimed at ensuring a safe and affordable formula – are under intense scrutiny as President Joe Biden’s administration races to import the formula from Europe.

“There are perfectly good and safe infant formulas available all over the world. We just don’t have access to it,” said Bindiya Vakil, CEO of Resilinc, a supply chain analytics company. “We created this problem by not putting in place an infrastructure for imports.

Federal regulators are expected to soon allow Abbott Nutrition to reopen the Michigan plant that has been closed since February due to contamination concerns. The plant is the largest of its kind in the United States and its closure – combined with pandemic-related supply chain issues – has hampered the supply of popular formulas and specialty formulas for children with rare diseases .

Lawmakers will hold three hearings on the issue this week, calling on business executives, government regulators and outside experts to testify. The attention could spur changes to government safety and contracting rules that have been in place since the 1980s and favor large U.S. manufacturers that can navigate the complex requirements.

Infant formula is one of the few American products essentially untouched by globalization, with 98% of the supply being made domestically. Four companies account for around 90% of the market: Abbott, Reckitt, Nestlé and Perrigo, according to industry figures. This consolidation reflects similar trends in the food industry.

But infant formula was not part of a Biden administration initiative last year that spotlighted dangerously concentrated industries including prescription drugs, airlines, hearing aids and internet services.

Food experts say strict formula regulations set by the Food and Drug Administration have long limited competition.

Beginning in 1980, Congress gave the FDA the power to rigorously enforce the nutritional content of all formulas sold in the United States, imposing additional research and manufacturing standards that have few equivalents around the world. The changes came after some babies were sickened by deficient formulas in the 1970s.

“These are about the strictest food safety guidelines in the United States, and America has some of the strictest guidelines in the world,” said Wendy White, food safety expert at Georgia Tech.

Companies must consult with the FDA before selling a new formula, changing the ingredients of an existing formula, or making major manufacturing changes. The result is that only the largest manufacturers have factories and procedures that comply with federal rules. And potential competitors have little incentive to enter the field, given the declining birth rate in the United States.

“You have to have a lot of expertise, a lot of resources, and a lot of research dollars,” White said.

There are other hurdles for foreign manufacturers looking to compete. The United States has long imposed tariffs and quotas on imports of dairy products from abroad, including Canada, to protect American dairy farmers from competition.

Responding to political pressure, the Biden administration began airlifting shipments of infant formula from Europe. The FDA is also waiving some requirements to encourage more imports from overseas manufacturers who are expected to increase supplies in the coming weeks.

The biggest driver of the US market, by far, is a massive federal nutrition program that provides formula and other foods to low-income women and children. The WIC program represents more than 50% of the U.S. market, providing formula to more than 1.2 million babies, according to the National WIC Association, which represents state and local administrators who run the benefit.

Beginning in 1989, federal law requires states to award contracts to a one-size-fits-all company, based on which can offer the deepest discounts.

The effect is that the contract winners quickly crowd out much of the competition on store shelves. Today, the 50 WIC contracts are held by three companies: Abbott, Reckitt and Nestlé, according to the association. Abbott is the leader, with 34 state contracts.

The competitive effects of these sole-source contracts have been the subject of research for years. A 2011 study by the US Department of Agriculture found that whichever company wins a state’s WIC contract, its market share typically increases by 74%, on average, as recipients of the WIC adopt their brand.

But not everyone is in favor of an overhaul of the system. Brian Dittmeier of the National WIC Association says eliminating sole-source contracts would jeopardize the savings that allow the plan to serve so many Americans. Instead, he says manufacturers should be held accountable for not investing in their own capacity.

“This is a manufacturing failure,” Dittmeier said. “The fact is, there just aren’t enough products to meet the demand that manufacturers have created over the years.” His group supports calls by some lawmakers for a federal antitrust investigation into the industry.

WIC contracts are typically renewed every four years, and market share fluctuates between the handful of players competing against each other.

Dr. Steven Abrams, a pediatrician at the University of Texas at Austin, said Congress should review the WIC program.

“We need to thoroughly examine where the failures have occurred and where we can fix them,” Abrams said. “We have to ask ourselves if we really want to have a situation where there is so much dominance in the program.”

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AP Business Writer Marcy Gordon contributed to this story. Follow Matthew Perrone on Twitter: @AP—FDAwriter.

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The Associated Press Health and Science Department is supported by the Howard Hughes Medical Institute Department of Science Education. The AP is solely responsible for all content.