The art of the deal: California’s alliance could solve the nation’s mask shortage
In SummaryThe governor has overhauled the supply chain to purchase 200 million masks per month for health workers battling the coronavirus.
Gov. Gavin Newsom has assembled an unusual alliance of corporations and nonprofits and leveraged California’s massive buying power to reach a deal that will bring hundreds of millions of masks and other protective equipment to hospital workers battling the coronavirus.
The plan, which Newsom detailed in a press conference today, is supposed to secure 150 million coveted N95 masks and 50 million surgical masks each month, along with personal protective equipment like gowns, shields and gloves.
The governor has already ordered $1.4 billion worth of the masks and other equipment and has freed up $306.8 million in emergency funds to pay for it, according to a letter his department of finance sent to legislators requesting they approve more.
Newsom said the supply will be enough to cover California’s total needs, projected at 500 million masks, and will put an end to the chaos that healthcare workers have encountered as they try to get ahold of the scarce, precious resources. Some also could be distributed to other states.
California, he said, needs to “punch above our weight” and not rely on the national stockpile or compete with other states, so he retooled the supply chain in what he called “a big, bold bet on a new strategy.”
“We’re running into walls or running into each other in terms of competition,” Newsom said. “As a nation state with the capacity to write a check for hundreds of thousands – no, billions — of dollars, we’re in a position to do something bold and big that can be a catalyst to increase supply.”
The strategy not only appears to solve California’s coronavirus mask shortage — it also seems to catapult California into the role of procurer and distributor to the rest of the country. Already, the state has sent 500 ventilators to seven states, with 100 each for hard-hit New York, New Jersey and Illinois on Tuesday.
While New York Governor Andrew Cuomo has become the face of the governors’ fight against COVID-19, if Newsom achieves the audacious goal of obtaining and delivering 200 million masks per month, he will have succeeded where other states – and even the federal government with its enormous purchasing power – have not.
“I was astonished that the federal government was not stepping in and working with international supply chains,” said Lt. Gov. Eleni Kounalakis, a former ambassador who has helped Newsom on foreign issues. “He didn’t wait for the federal government to change its tune. He went on his own.”
Up to this point, California has procured 41.5 million masks, with about one million coming from the federal government.
The announcement came on the heels of a day with the largest death toll thus far in California: 68 people died from the novel coronavirus on Tuesday bringing the total fatalities to 442. There are currently 16,957 positive cases and 2,714 patients with the virus who are hospitalized, with 1,154 in intensive care units.
Catching legislators by surprise
The plan, and its whopping price tag, was a surprise to Sen. Holly Mitchell, a Democrat from Los Angeles, who chairs the Joint Legislative Budget Committee. After Newsom announced the plan on Rachel Maddow’s MSNBC show Tuesday, Mitchell said she and her staff spent today scrambling to get more information so they could decide whether to approve Newsom’s full request.
Outstanding questions included whether California would still be on the hook to pay if a supplier couldn’t follow through.
Another is how the equipment will be distributed. Newsom said the masks are not just for health workers, but also for “grocery workers, our DMV workers, the frontline police walking the streets, doing outreach to the homeless people, knocking on your doors to do wellness checks.”
“How (will) we define who these essential workers are? How are they going to be distributed equitably around the state? How and whom do we hold accountable for that?” Mitchell said.
While she commended Newsom for taking leadership on the supply issue, she also expressed concern over his long-term fiscal plan.
“The definition of an executive order is the governor flying solo… We empowered him to do it,” Mitchell said. But “in your own household, if you don’t have a plan for spending, a billion here, a billion there will fly out the window.”
Newsom taps business relationships
It appears most of the masks will come from freshly inked contracts with private companies, aided by Newsom’s relationships with California’s top corporate leaders.
On Wednesday, Newsom and his aides singled out BYD-America, which manufactures electric buses in Lancaster and has been a beneficiary of California’s efforts to combat climate change.
Mark Ghilarducci, Newsom’s director of the Office of Emergency Services, said BYD “has a direct reachback into China to be able to build a sustainable amount of monthly masks that will be coming in to assist us.”
BYD America is a subsidiary of BYD, a Chinese company, partly owned by Warren Buffett’s Berkshire Hathaway. One month ago, BYD announced that it had completed “world’s largest mass-produced face masks plant,” capable of producing 5 million masks a day, and 300,000 bottles of disinfectant.
Newsom went directly to Tesla founder Elon Musk, bypassing the formality of having to go through intermediaries to discuss the possibility of the Palo Alto-based firm ramping up to develop ventilators.
Similarly, K. R. Sridhar, founder of the San Jose-based Bloom Energy, agreed to repair 170 ventilators sent from the federal stockpile. Bloom, like Tesla, is a recipient of state subsidies to help make the electric grid more reliable and combat climate change.
Newsom is on a first-name basis with both of them.
Newsom also name-dropped McKesson, a major medical supplier, as one of California’s ongoing vendors. Until it recently relocated to Texas, McKesson was based in Newsom’s hometown of San Francisco.
“One of the things he prides himself on is having real relationships with business leaders,” said Ace Smith, Newsom’s long-time political strategist. “He built those over the years. He is able to pick up the phone and persuade them to do things because he has an existing relationship.”
These relationships are allowing California to get around financing roadblocks plaguing other states, said Kevin Klowden, executive director for the Center for Regional Economics and California Center at the Milken Institute, a Los Angeles-based economic think tank.
Most states have laws that prevent them from contracting with foreign companies unless they pay upfront. But Klowden said that California has partnered with private sector companies that can “front the money so that the state is able to step in and pay for these imports where they couldn’t otherwise.”
“California’s figured out an ongoing system of being able to handle this where nobody else has been able to,” said Klowden, who himself has worked to connect multiple overseas and American companies that manufacture protective gear with Newsom’s office.
On top of the massive new supply, Newsom announced that within the next week, California will begin cleaning and reusing masks, with the help of a new sanitation system from science and technology company Battelle certified by the Federal Drug Administration and Centers for Disease Control and Prevention.
Ghilarducci said California will be able to clean up to 80,000 masks a day at six sanitation units across the state, starting “within the next week.” Masks will be able to be cleaned and reused up to 20 times. California hospitals have been saving dirty masks, he said, so there’s already plenty in the queue.
Another partner in Newsom’s unlikely alliance is the Federal Emergency Management Administration.
FEMA will be distributing masks to counties that currently have hot spots or are expected to soon, including Los Angeles, Santa Clara, San Diego, Orange, Riverside, San Joaquin, San Francisco, Alameda, San Mateo and Sacramento counties, Ghilarducci said.
Newsom praised FEMA for its collaboration. He said he wasn’t worried that the federal government may seize supplies, as it has reportedly done at hospitals in other states.
“We’ve just simply had a really outstanding relationship with FEMA and we haven’t had those issues,” Newsom said. But “as I said, we’re always cautious about what we’re reading and what we’re seeing.”
For some members of Newsom’s new supply chain, the announcement came as a surprise, albeit welcome.
Garilducci named five “very, very powerful and very, very helpful nongovernmental” organizations, among them Direct Relief, a Santa Barbara-based nonprofit that provides medical supplies during times of disaster in the U.S. and around the world.
“The governor has apparently done something extraordinary by making arrangements we were not privy to, but we’re delighted,” said Thomas Tighe, Direct Relief’s president and CEO. Though Newsom’s office never told him he was part of the “consortium,” he said he expects that his organization will be the principal nonprofit channel for distribution.
“We fill hundreds of orders each day at no charge, so we could aggregate the material, store it, pack it, wrap it and ship it immediately,” he said.
Direct Relief contracted with manufacturers to produce N-95 masks last year and procured a cache in anticipation of the coming wildfire season in California. When the COVID-19 pandemic hit in Wuhan, Direct Relief sent a load of the Chinese-made masks back to China to help frantic health workers cope with the emergency there, and since has distributed more masks in California.
Working with the California Department of Public Health, the Office of Emergency Services and the governor’s liaison for public-private partnerships, Tighe said Direct Relief has been supplying California and other states throughout the crisis, delivering PPE, for instance, to health workers doing drive-thru coronavirus testing in San Mateo County. The news that a fresh source of new masks might be on the way drew cheers from his organization, he said.
“The challenge is, there’s a global demand for a limited supply, and there are limited suppliers,” Tighe said. “And the main manufacturer stopped exporting as they refocused on containment in China.”
The situation has begun to ease slightly, he said, but over the past two months, the price of an N-95 mask made in China has soared from 50 cents to as much as $9, and international demand has prompted “some horrible scalping and sketchy business.”
The great purchasing power of California
Newsom pushed back against potential criticism that California may end up driving up prices for other states or countries by making such massive purchases.
“We are not just looking at supplies in a scarce marketplace where it’s a zero sum game,” Newsom said.
California’s size uniquely positions the state to disrupt the global supply chain — for the good, said Jeffrey Clemens, an economist at UC San Diego who studies the intersection between health economics and public finance.
“It’s the fact that we are such a big buyer that really gives this some potential weight,” Clemens said.
By signalling to manufacturers around the world that California is in the business of buying massive amounts of protective equipment, and paying generously for it, companies that don’t currently make masks and other equipment will be incentivized to start.
“It only reduces other states’ access to masks over the very short term,” Clemens said. “Over the long run this is precisely what industry needs to see to increase global capacity.”
He said it was encouraging after what he called the “ventilator fiasco” in which the federal government “quasi-nationalized” automakers to help produce ventilators through the Defense Production Act. He said that is a disincentive for other companies to step up.