Rethinking Industry’s Role in a National Emergency

Photographs of doctors and nurses wearing garbage bags to protect themselves from infection are among the most indelible images of the COVID-19 pandemic. They also testify to the limitations of the U.S. Strategic National Stockpile (SNS). By the end of March 2020, as the first surge of COVID-19 exceeded 20,000 new cases detected per day, it was woefully clear that the United States’ emergency stockpile of essential medical supplies could not meet the demand for personal protective equipment (PPE), ventilators, and other materials urgently needed to battle the pandemic and save lives.

Since then, there has been plenty of finger-pointing regarding the inability of the SNS to live up to its mandate. But none of that acknowledges the reality that, because of the scale and rarity of pandemic-level public health crises, no national reserve can reliably provide the materials needed from inventory alone.

In the decade before COVID-19, flu-related hospitalizations in the U.S. averaged 440,000 annually, but in 2020 alone, COVID-19-associated hospitalizations reached 4.1 million. This is a huge spike in need that is nearly 10 times the flu hospitalization annual mean.1 Moreover, public health emergencies of COVID-19’s magnitude are highly unusual in the U.S. or anywhere else, normally occurring decades apart, which makes the demand spike massive but rare.

After all, the demand challenge for the SNS is to be able to handle the following:

1. More severe flus occurring every two to three years, with demand for medical products and equipment being, say, twice the average annual flu hospitalization mean.
2. Epidemics and minor pandemics that may occur, say, once every five to 10 years, with demand being as much as three to four times the mean, although the spike may be regional rather than nationwide.
3. Severe pandemics occurring once every 20 to 40 years, with demand as high as 10 times the annual mean occurring nationwide.

No manufacturer launching a product could handle such a distribution of demand by simply having a huge pile of just-in-case inventory, and neither can the SNS. Instead, it needs a strategically balanced approach to meeting future calls for help, keeping in mind that the outcome is counted in human lives.

Flaws in the Inventory-Based Approach

The inadequacy of the SNS to meet demand for ventilators in a pandemic was recognized long before COVID-19 struck, but efforts to build up inventory were unsuccessful.2 Thus, in early 2020, when COVID-19 struck and the estimates of ventilator demand reached as high as 115,000 additional units, the SNS had only 12,700 ventilators on hand, more than 2,000 of which were unusable. Moreover, the global capacity of ventilator manufacturers at the time, estimated at 40,000 to 45,000 units per year, wasn’t nearly enough to make up the shortfall in a timely fashion, even for the U.S. alone.3

Against this backdrop, the federal government invoked the Defense Production Act of 1950 in an effort to meet the need for ventilators by tapping the domestic manufacturing capabilities of other sectors. As a result, by September, the SNS had an estimated 140,000 ventilators in its inventory. However, physicians consider half of them to be unsuitable for acute respiratory conditions, such as those created by COVID-19, and multiple models are not FDA-approved for children. Only a tenth are the most commonly needed full-featured ventilators.4

The inability of the SNS to fulfill states’ requests for ventilators during the first peak of the COVID-19 pandemic exposed a number of flaws in its approach to fulfilling its mission:

• Maintaining a large inventory of goods such as ventilators over a long period of time requires a large and continuing investment in inspection, repair, and replacement to ensure its viability. Unfortunately, the SNS had cut costs in this area, sacrificing the long-term efficacy of its ventilator inventory on the budgetary altar.
• The prospect of high demand combined with inventory shortages leads to the panic-driven amplification of need and the misallocation of already meager supplies. The SNS not only shipped unusable ventilators to states but also issued contracts for ventilators that were neither needed nor suitable.
• When large amounts of inventory must be purchased in a hurry, quality and specifications are often compromised, and costs can rise precipitously. The rush to meet the demand for ventilators resulted in underspecified units, and the SNS purchased ventilators in various configurations from at least 11 different manufacturers. This gave rise to questions regarding their utility in future emergencies and whether there were enough trained personnel nationwide for all the models, and it raised the specter of even more mishandling of inventory and much higher maintenance costs.5
• While tapping manufacturing capability in other sectors is a sound idea, it cannot be done on the fly. Using auto manufacturers to make ventilators on short notice was unrealistic because of the time and expertise needed to design, develop, and produce medical equipment.6

Managing Surges in Demand

There is a better way to meet huge but rare demand spikes than holding massive amounts of just-in-case inventory. Consider a snow-shovel manufacturer that faces a demand challenge similar to that of the SNS, except that instead of flu, the demand depends on snowfall: Most winters are typical, but every five to 10 years, demand may be three to four times that in a typical year, and every 20 to 30 years, 10 times typical demand.

Maintaining an annual inventory sufficient to cover the demand in a typical year is necessary, but holding enough inventory to cover a spike occurring only every five years or so would be prohibitively expensive. The more inventory the manufacturer holds and the longer it is held, the greater the cost as expenses related to obsolescence, storage, inspection, stock rotation, and replacement rise. Instead, the manufacturer could pay upfront to reserve backup capacity in its supplier network to ensure that sufficient materials and secondary suppliers are available on short notice if the coming winter turns out to be atypical.

What about the 1 in 20 winters when the spike shoots up to 10 times that of a typical year? The economics of reserving or maintaining backup capacity cannot be stretched to cover such a demand, since the cost of holding parts or raw materials will rise and designs and manufacturing equipment may become obsolete.

Instead, the manufacturer turns to a “just in case” standby capability, which is put in place years or perhaps decades in advance of demand. It requires creating relationships, identifying supply sources, and researching new technologies every year to develop and maintain a standby capability that can be turned into the capacity for filling demand, possibly with alternative products, in case demand does rise tenfold or more.

Transforming the SNS

The demand challenge facing the SNS can be met in the same way as in the snow-shovel scenario: using a combination of inventory, capacity, and capability. Taking this approach would transform the national stockpile into a strategic national emergency reserve (SNER), which entails government and industry working together.

For the more frequent severe illnesses or local epidemics, public health needs would be fulfilled — as they are now — using inventory. For the less frequent minor pandemics, in which the need exceeds inventory, domestic backup capacity would be used to quickly manufacture more inventory. It must be domestic, because the ability to import goods from lower-cost countries may be disrupted — or purposely interrupted — in such troubled times. On the extremely rare occasions when need outstrips backup capacity by a huge margin, as in the COVID-19 pandemic, a domestic standby capability would be employed. Such a capability would be composed of pre-identified players from diverse industry sectors that continually develop the product designs and production technology needed to manufacture the necessary goods on a timely basis.

This three-tiered approach using inventory, backup capacity, and standby capability dramatically reduces the high costs of trying to address all three crisis levels using inventory alone. Developing domestic capacity and standby capability has benefits beyond meeting the life-and-death demands that arise during the worst public health crises — it also enables existing domestic manufacturers to continually upgrade their products and production capacity over time.

Here’s how such a response system could work to ensure an adequate supply of ventilators.

Tier 1: Inventory. Like the SNS, the SNER would first use inventory to meet the nation’s needs. But rather than having more ventilators in inventory, the SNER would have far fewer units, possibly in line with the 12,700 units in stock before COVID-19. This is because U.S. hospitals have long had more than enough ventilators for even a severe flu season.7 Moreover, the SNER would plan only for the peak number of ventilators needed at the same time, which would likely be in only one part of the country versus nationwide. The ventilators in the SNER should all be full featured so they could be used in a wide variety of situations and for both children and adults. Moreover, these ventilators should all operate in the same way to minimize training requirements across the country, and they should have swappable parts to ensure that maintenance is easier and less expensive than is the case today.

Tier 2: Capacity. If needs were growing at rates that were likely to exceed inventory, the SNER would tap the capacity of manufacturers already reserved under contractual obligations to produce the needed goods on short notice. In the case of ventilators, whether under the Defense Production Act or by contract, the SNER would order full-featured ventilators in batches, as the pandemic evolved. It would still serve demand at the outset from inventory, moving ventilators (and other stocks, except for consumables) from one region to another as the pandemic moved across the country. In the meantime, inventory would be replenished by manufacturers as the need grew and shifted.

Tier 3: Capability. In a pandemic-level emergency, when need was growing rapidly and threatened to exceed not only inventory but also backup capacity, or when the need developed for goods that were quite different from those in inventory, the SNER would turn to standby domestic capability for creating additional capacity. In the case of ventilators, the consortia — which had to be created on the fly during COVID-19 — would have already been formalized years before the need emerged. Over the years, consortia members would have access to appropriate designs, technologies, and production methods, which would be upgraded over time by university and private-sector researchers. Production facilities, such as 3D-printing farms or alternative capacity in adjacent manufacturing sectors, would also be available to the consortia. In short, the resources, protocols, and responsibilities of the consortia would be well defined and understood years before a major pandemic struck. Such a capability is afforded by developing an industrial commons — collective R&D, engineering, and manufacturing capabilities.

Building Standby Capability at the National Level

Backup capacity is relatively easy to arrange, but gaining access to standby capability on a timely basis is the crucial missing link in the SNS’s current approach to its mission. To forge this link, the SNER will need to develop an industrial commons that is specifically designed not only to respond to the outsized needs of extremely large public health emergencies but also to foster product and production innovation among domestic medical manufacturers.8

Developing an industrial commons will take an ecosystem of expertise to develop and manage a standby capability for pandemics and other major emergencies. It will require public health professionals to specify goods, and manufacturers outside the sector to design and make them. More than that, it also should include suppliers of the advanced materials, tools, production equipment, and components that shape industries; researchers in universities and university hospitals to create and share knowledge; and data analysts to monitor events and provide timely alerts.

To speed the development of its industrial commons, the SNER could partner with existing organizations such as America Makes, an Ohio-based nonprofit. America Makes and its member community of more than 170 organizations, including government departments, private companies, and universities, share a common goal: to serve as a national accelerator for additive manufacturing and 3D-printing technologies. During the pandemic, its members used their 3D-printing capabilities to produce PPE for the Veterans Health Administration.9 America Makes also stores and compiles FDA-approved designs for 3D printing, instigates capability building using open-call projects, and shares knowledge among its members through its Digital Storefront platform.

Technologies such as 3D printing should play an essential role in the SNER’s efforts to fill needs using standby capability.10 Sensing systems enabled by big data and analytics can detect emergencies earlier and help design responses that are more tailored to local needs than a 50-ton shipment of generic medical equipment would be. Additive manufacturing and 3D printing can help lower the higher unit costs of standby capability, as well as response times; drones and other mobility technologies can help speed delivery.

This new approach would have the SNER shoulder the existing responsibilities of the SNS and undertake new ones, such as developing a domestic standby capability and encouraging stress tests or competitions to ensure that it could create capacity in the needed amounts and the right time frame. It would also have visibility of resources — inventory, capacity, and capability — wherever they are. And at all times, not just in times of need, the SNER would serve as the central point of contact for federal agencies, nongovernmental organizations, commercial partners, and the industrial commons as a whole. In public health emergencies, the SNER would ship inventory to the states and coordinate the creation of additional inventory from capacity and capability.

In March 2021, the SNS was back in the headlines: A New York Times investigation exposed questionable purchasing practices, and the Biden administration announced a comprehensive review and audit of the stockpile.11 Whether this review and audit will address the systemic flaws in the way in which the SNS fulfills its mission remains to be seen. But if the SNS is going to fulfill the urgent needs of states in the large-scale public health emergencies that will inevitably occur in the coming years, it will have to reinvent its approach to meet demand and begin using a balanced mix of inventory, capacity, and capability to fulfill its mission. Lives are at stake, and government and industry must work together before the next large-scale public health emergency strikes.