This story was originally published by ProPublica.
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A House panel says “gullible” White House negotiators overpaid for Phillips ventilators, and it has asked the Department of Health and Human Services Office of Inspector General to investigate evidence of fraud in the deal.
Citing “evidence of fraud, waste, and abuse,” a congressional subcommittee investigating the federal government’s purchase of $646.7 million worth of Philips ventilators has asked the U.S. Department of Health and Human Services Office of Inspector General to launch its own investigation of the deal.
The House subcommittee launched its review after ProPublica stories in March and April showed how a U.S. subsidiary of Royal Philips N.V. received millions in federal tax dollars years ago to develop a low-cost ventilator for pandemics but didn’t deliver it. Instead, as the coronavirus began spreading around the globe and U.S. hospitals were desperate for more, Philips was selling commercial versions of the government-funded ventilator overseas from its Pennsylvania factory. Then in April, despite having not fulfilled the initial contract, the Dutch company struck a much more lucrative deal to sell the government 43,000 ventilators for four times the price.
Under this new deal, ventilators that the Obama administration had agreed to buy for $3,280 each suddenly cost $15,000. When the deal was announced in April, neither HHS nor Philips would say how the more expensive ventilators differed from the cheaper ones.
It turns out that they were “functionally identical,” according to investigators with the House Committee on Oversight and Reform’s Subcommittee on Economic and Consumer Policy, and the “waste of taxpayer funds” may have reached $500 million.
The investigators reviewed thousands of pages of emails and other records obtained from Philips and concluded that “inept contract management and incompetent negotiating by the Trump Administration denied the country the ventilators it needed.” And the subcommittee’s report, which it shared with the inspector general’s office, named names: Peter Navarro, President Donald Trump’s director of trade and manufacturing policy, was the administration’s point man on the deal. In addition, Jared Kushner, the president’s son-in-law and senior adviser, and HHS Secretary Alex Azar participated in calls with Philips’ executives.
In a letter to the inspector general, Rep. Raja Krishnamoorthi, the Illinois Democrat who chairs the subcommittee, wrote: “The Subcommittee requests that you immediately open an investigation into this apparent waste of taxpayer funds, how it was able to happen unchecked, and how to prevent it in the future. Moreover, the Subcommittee requests that your office’s review include an assessment of the reasonableness of the price of the contract and the amount of excess profits received.”
He attached the subcommittee’s 49-page report of its investigative findings.
In a written statement, Philips said that it has been transparent about its ramp-up plans, pricing and allocation policies, and that it cooperated with the subcommittee. “We do not recognize the conclusions in the subcommittee’s report, and we believe that not all the information that we provided has been reflected in the report,” Philips CEO Frans van Houten said. “I would like to make clear that at no occasion has Philips raised prices to benefit from the crisis situation.”
White House Deputy Press Secretary Judd Deere called the House investigators’ report “a stunt that is only meant to politicize the coronavirus.”
“Because of the president’s leadership, the United States leads the world in the production and acquisition of ventilators,” Deere said. “No American who needed a ventilator was denied one, and no American who needs a ventilator in the future will be denied one. Democrats should be ashamed of themselves for this misleading and inaccurate report.”
An HHS spokesperson said the department moved with “deliberate and determined speed” and followed federal contracting rules in reaching the deal. She noted that some of the Philips ventilators are already being used to treat patients with COVID-19.
The federal government’s quest for a cheap, durable ventilator that could be stockpiled for emergencies began a decade ago during the Obama administration. The first deal fell apart after a small California ventilator manufacturer was bought by a much larger competitor, which dropped the project. Philips in 2014 struck a $13.8 million deal with HHS’ Biomedical Advanced Research and Development Authority to develop a low-cost, portable ventilator that would be easy to use by people with limited medical training. (In their report, the congressional investigators wrote that Philips later was granted an additional $547,000 to develop the ventilator.) The original deal included an option to purchase 10,000 of the ventilators for $3,280 each with delivery by June 2019.
HHS under the Obama administration granted one extension, and then the Trump administration allowed several more. When Philips finally won Food and Drug Administration clearance for the stockpile ventilator in July 2019, it also got the green light to sell a commercial version, which the company sold at far higher prices. The government didn’t exercise the option to buy the stockpile ventilators until September 2019. Under the timeline in the original contract, there would have been four waves of deliveries starting in June 2020 and ending in June 2021 and the government would have the power to increase its order in times of need, the House investigators wrote in their report.
Among the most surprising findings of the investigation was an email communication between the company and the government on the day the U.S. reported its first coronavirus case. On Jan. 21, a Philips manager sent a news story about that case to an HHS contracting officer and asked “how we could help out or if you may expect a need to accelerate any shipments.” Yet nobody from the federal government responded to Philips for six weeks, the investigators found.
On March 4, the HHS contracting officer told Philips managers in an email that Azar’s office had directed him to “expedite production of the ventilators.” Philips responded the same day suggesting a contract modification “to allow for the earlier shipments.”
Rather than speed up delivery, though, the modification Philips suggested gave the company until September 2022 to deliver any of the stockpile ventilators. Still, HHS signed off on the deal, the investigators found.
“Philips appears to have duped the Administration into thinking that this amendment, which permits a lengthy delay, was necessary for it to expedite production,” the congressional investigators wrote.
That same month, as the administration sought to cut a new deal, a Philips executive shared with Azar the slide deck he planned to present to Navarro. In the presentation, Philips described the government-funded stockpile ventilator design as “the best solution to confront exactly the pandemic we are facing.”
However, Philips soon steered Navarro and his colleagues to a more expensive option, the $15,000 Trilogy EV300, saying in one email to an associate director in Navarro’s office that this hospital ventilator had “more clinician friendly screens.”
Yet, the House investigators found the screens of the pricier model were identical to the less-expensive stockpile version. “The Administration’s willingness to spend hundreds of millions of extra dollars for non-existent ‘more clinician-friendly screens’ constitutes waste,” they wrote.
The White House negotiators were “gullible,” the investigators wrote, “and conceded to Philips on all significant matters, including price.” The contract called for Philips to make monthly deliveries between April and December 2020 with more than half arriving in the final three months.
Philips spokesman Steve Klink on March 28 told ProPublica that the company had only made the stockpile version of the ventilator in small batches and didn’t want to ramp up production on a model it had never mass produced. Rather, he said, the company wanted to “stick with what we have and ramp up and not lose time because we cannot afford to lose time.” HHS echoed that sentiment in a written statement at that time, saying the agency was purchasing “what was immediately available.”
But the congressional investigators wrote that the records Philips turned over showed that was false. Philips did not have a long track record making the $15,000 Trilogy EV300; the company did not start making that version until March, the month the federal negotiators agreed to buy them. And the White House knew this, the investigators wrote.
“In a March 18, 2020 email to the White House, Philips explained that the Trilogy EV300 was a new product being introduced and that it would take time to build up inventory,” they wrote. “By selecting the $15,000 model, the Administration demonstrated that it either failed the most basic duty of reading what Philips sent it or that it was not concerned about overpaying.”
Navarro and his colleagues never tried to lower the $645 million price and agreed to pay an additional $1.7 million for circuits and filters, the investigators found.
In its statement, Philips said the list price of the EV300 ventilator, stand and accessories that HHS selected is “over $21,000,” so the final price does reflect a discount “while taking into account part of the higher costs for the expedited delivery schedule.”
The records Philips turned over to the congressional subcommittee showed that before May 27, Philips sold 5,339 other Trilogy EV300 ventilators in the U.S. No buyer paid more than HHS did. One Missouri purchaser bought a single ventilator for $9,327, records show.
“It would stand to reason that a purchaser of 43,000 units would be able to negotiate a better deal than a purchaser of a single unit,” the House investigators wrote.
The ranking Republicans on the House committee and subcommittee said they disagreed with the findings of the investigation. In a prepared statement, James Comer of Kentucky, who sits on the House committee, and Michael Cloud of Texas, who sits on the subcommittee, accused the congressional investigators of failing to take “the most basic investigative steps to ensure they get the facts right.”
“Democrats read a few documents produced by the cooperating company and made a bundle of assumptions,” they wrote. “They received no briefings, conducted no transcribed interviews or depositions, and did not try to engage with the Administration to understand their side of the story.”
Krishnamoorthi, the subcommittee chairman, sent his letter and the investigators’ report to Christi Grimm, who remains in charge of the HHS Office of Inspector General, though President Donald Trump has sought to replace her after her office in April wrote about shortages of testing supplies and protective equipment at hospitals.
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