It is sometimes said that economics is the study of the scarce allocation of resources. Here’s an allocation problem for you!
We are currently in the early stages of a pandemic the likes of which this country has not seen for a hundred years. Certain areas of the country such as New York City are seeing an incredible surge of Covid-19 patients as hospitals and ICU rapidly fill up.
Other areas of the country have less Covid-19 patients and hospitals are emptying. In addition, due to the cancellation of elective surgery and patients delaying outpatient visits, other areas of the health care system have fewer patients.
The result: across the country, hospitals are laying off employees en masse. This is coming from UI statistics as well as anecdotal reports. Other than workers in accommodation and food service, the sector with the most layoffs is health care. It accounts for 10% of the UI claims in Oregon, and 13% of the UI claims in Michigan. This was actually noted in the national UI report.
There are many more. Just google news search for “hospital furlough”.
Well, it doesn’t take a Ph.D. in economics to have the obvious idea that we can redistribute resources from areas that are hit less hard by COVID to areas that are hit harder. This can help increase patient capacity when the virus as at its apex.
Andrew Cuomo has asked local health departments to share resources, but has not organized anything formally. But resources can be shared across the health departments as well within state boundaries, and across states as well.
As far as I know there is no preparation for the widespread of medical distribution of medical resources, both within and across states. If you know of anything like that, leave a comment or send an email.
On the questions of what industries are the most affected, data is starting to trickle in. The Oregon Employment Department has released some great data on the industry breakdown on who filed for unemployment last week. The raw data is here. Michigan has also released some data, which was summarized by the Upjohn Institute. If you know of any more state data released leave a comment or shoot me an email.
(1) The most affected industry by far is Accommodation and Food Services, which accounts for 47% of the total new claims in Oregon and 32% of the claims in Michigan. Restaurants are completely shut down, and these workers are being laid off right and left.
(2) Surprisingly, the second most affected sector is health care and social assistance ! This was actually noted in the national UI report. It accounts for 10% of the claims in Oregon, and 13% of the claims in Michigan.
On the surface this is puzzling, for it seems like that the health care sector should be bulking up to fight the coronavirus rather than shrinking. At this point I can only speculate, but there have been a number of news reports about hospitals laying off workers because elective surgeries are being canceled.
(3) Not surprisingly, retail workers are being hit hard. 6.4% of the claims in Oregon, and 6.5% in Michigan.
(4) Layoffs are widespread. To see this, for each industry I take the average of weekly claims from Jan 1st to March 7th, i.e. before the virus started affecting employment. In Oregon, manufacturing claims are up 100% over a normal week, Trade and Transportation 209%, Information Tech 355%, Finance 135%, Professional and Business Services 128%, Education 964%, Other Services 455%.
The one thing that everyone agrees on, from doctors, to public health officials, to clueless newspaper op-ed writers, to clueless economic bloggers, is that mass testing for Covid-19 should be a national priority. The case is obvious: to control the spread of the virus, we need to know who has the virus and isolate them. And to return to work, you need to know your colleague is not going to infect you, so everyone at works needs to be tested. Everybody gets tested weekly, and voila, the country gets back on track.
Given its national importance, you would assume that somewhere in the bowels of the United States government there is a small group of smart, highly trained, and dedicated team of professionals working behind the scenes to make this happen. And you would be wrong.
Instead, the response is being lead by the group of criminals, incompetents, bootlickers, and general misanthropes who are intent on using the crisis for financial and political advantage. Their leader, the president, would condemn tens of thousands to die to save his ego, $50, or 150 votes . Again, no serious person can disagree with these obvious statements.
The most serious problem is that, incredibly, but not surprisingly, there is no overall plan to contain the virus. With no overall virus strategy, of course there no plan for the rollout of mass testing. We will have to rely largely upon the uncoordinated movements of hundreds of private companies, local and state governments, and the federal government. Somehow, grasping in the dark, with limited resources, they will have to make do.
And the results are, tragically, just what one would expect. The response of the CDC can only be described as a bureaucratic farce. The American health care system was designed suck the financial blood from the stones that are its patients, not to heal the sick. Our American Chernobyl lurches from one disaster to the next. In these trying times I truly feel for the cognitive dissonance Americans are facing who believe we have the greatest health care system in the world. They should be receiving hazard pay.
After the CDC failed to widely distribute a test kit, dozens of private companies have developed their own and are now ramping up production. Until the past few days we have only had the capacity to test individuals that are hospitalized and health care workers. We have now recovered somewhat, and we are now running about 65,000 tests per day, but the system is creaking. There are long backlogs in testing labs, and serious shortages of the basic materials that labs need to run the tests.
Will the system be able to ramp up to mass testing fast enough? That depends if the companies can increase production fast enough, and if the supply chain holds up. Public health officials have called for 150,000 tests a day, or 4,500,000 per month. For “mass testing”, the ability to test everyone in the United States over the course of a year, that would mean 27.25 million tests per month.
The supply situation
Testing capacity is currently limited by the number of tests kits and associated equipment available, as well as the lab technicians and machines needed to run the tests. Until recently the US only had capacity to test patients hospitalized for coronavirus and health care workers. Only in the past few days has testing been expanded.
The task of running a single test is not straightforward, and consists of a number of separate processes:
Swab the nose of throats with test swabs
Put the swabs in vials with growth media
Vial transported to lab
Technicians extract the virus’s RNA using test extraction kits
Technicians use reagents to turn the RNA into DNA and to amplify the DNA
A PCR test is run, which takes time and materials
Some of the steps can be automated. Expensive automated systems can run many tests at once, but their prohibitive cost means they must be kept in centralized locations that samples are sent to. Smaller testing systems are also available, which may be able to tested at the point of care.
Each of the components in the supply chain have their own complex manufacturing process and their own bottlenecks. Bottlenecks in several areas of the chain are currently preventing widespread testing. Even when samples are taken, there are backlogs in laboratories and it often takes 3 or 4 days to get a result.
The major manufacturer of test swabs is Copan, which has its headquarters and manufacturing facilities in Lombardy, Italy. US government has been airlifting about a million of the swabs per week.
The other manufacturer is Puritan, located in Guilford Maine. They produce a million per week. They are extending its five days a wekk schedule to six days, and running “at least” 20 hours a day. Biggest challenge for Puritan is a shortage of workers.
Extraction kits are now made by a number of companies, including Roche, Quiagen, Thermo Fisher. The extraction kits use reagents with fairly complex chemicals.
Roche currently ships around 400,000 test kits a week to the United States, or 1.6 million per month. Roche is also ramping up its production. Roche’s kits only work with its proprietary machine. The fully automated test can deliver 384 results per eight-hour shift on its cobas 6800 system, and 960 on its larger cobas 8800.
Thermo Fisher’s TaqPath COVID-19 Combo Kit on its Applied Biosystems 7500 Fast Dx real-time PCR hardware in certain high-complexity laboratories nationwide. It can produce about 5 million per month. It plans to initially distribute the available tests to about 200 labs in the United States. Thermo Fisher is based in Waltham Massachusetts.
Qiagen currently produces about 1.5 million kits per month, hopes to produce 6.5 million per month by April, and 10 million per month by June. Qiagen is ramping up its production. These are global production numbers, however, and it is unclear can be used in the United States.
Hologic expects to produce nearly 600,000 of the tests every month by April. Massachusetts based Hologic manufactures the kit assays in San Diego, where it has 900 employees. Hospitals and labs can run the test on Hologic’s Panther Fusion platform, which in a 24-hour span can process up to 1,150 coronavirus tests.
In order to test for the virus, need to convert the RNA into DNA, and then to amplify the DNA. Both need reagents. There are currently shortages of these reagents.
Transcriptase converts RNA to DNA. Primers — short stretches of DNA designed to match up with the viral genetic material — latch onto DNA.
Labs themselves need to source everything else to run the tests. This includes hardware: vortex mixers, microcentrifuges, specially-treated tubes, specially-designed racks, micropipettes to squirt tiny bits of liquid from place to place.
As Covid-19 cases continue to sweep up its exponential growth curve, the health care system is in the race of its life to prepare for the coming crush of patients. Whether we can win this race depends upon how fast new cases grow, the current resources of our health care system, and how fast we can produce and buy the health care materials we need.
Covid-19 attacks the respiratory system, inflaming the lungs and making breathing difficult. Once the virus starts to affect the lungs, one of the only treatments available is mechanical ventilation, which uses a breathing tube to increase the flow of oxygen and to make the process of drawing a breath easier. Ventilators are used to treat a number of diseases other than Covid-19, and most hospitals have several of them. However, there are currently only enough ventilators to treat patients with diseases other than Covid-19.
The sudden realization the the country needs ventilators has set off a mad dash as hospitals, state governors, and the federal governors frantically try to purchase the few remaining ventilators that are on the market, driving up prices. As this is a global pandemic there is worldwide competition for the ventilators, as well as rich private individuals who are looking to purchase them.
The result has been complete and utter chaos, with most states unable to complete their purchases, with the federal government orders for the national stockpile taking priority. Unfortunately, the national stockpile is controlled by our current criminal administration, who is doling out the supplies according to political favor rather than medical need.
Whether we will have enough ventilators in time depends on the measures the country takes to increase production, purchases, and efficient distribution of ventilators.
The scale of the problem is immense. Ventilators are enormously complicated devices produced with thousands of separate parts. They must be operated in specialized rooms with centralized oxygen supply, by trained technicians. We may need to produce or buy 100,000 ventilators, which would almost double the current supply. There is a possibility of creative solutions, modifying ventilators to take more patients, or designing a system of mobile ventilators to travel to hot spots, but at this point these are untested ideas, not rigorous plans.
My basic analysis of the supply situation (details below) is that we unlikely to significantly increase our supplies of ventilators in the next 1-3 months, thus efforts must focus on the efficient distribution of resources between affected regions. Total monthly production of ventilators in the US is only about 1,500, and that is already after dramatically scaling up production lines. With individual states requiring several thousand ventilators each, production cannot meet requirements.
An allocation plan would mean a plan to determine exactly which areas receive the few new ventilators that are on the market. It would mean a plan to quickly move ventilators, associated equipment, and the necessary operators to the localities that are being hit the hardest by Covid-19. It would mean procedures in place that can modify existing ventilators to handle more than one patient.
In the slightly longer term it would in theory be possible to scale up production if the country could mobilize its economy towards this goal. However, the federal government does not want to take control of the supply chain. Although our president has made noises over the past month about using the Defense Production Act (DPA), its actions have made clear it has no intention of actually using it. In fact, President Trump’s theory of invoking the DPA is similar to Michael Scott’s (from The Office) theory of declaring bankruptcy:
Under a non-criminal administration, using the DPA would be an idea solution to the problem. The federal government would become the sole purchaser of all ventilators in the country, banning export and private sales. It would promise to purchase the ventilators whether they were ultimately needed or not. It would determine the national requirements and whether new factories are needed or just new production lines. It could force companies to accept contracts to make ventilators, although hopefully it would not need to do this. It would use the same powers to ensure the supply chain of all the components and natural resources are available. It would provide the financial resources and manpower to make the factories run 24 hours a day, 7 days a week.
Under the current administration, however, the problem with using the DPA is that the federal government will be in charge of all of the ventilators. Due to the level of incompetence and corruption, it is likely they will bungle the response.
Private companies are reluctant to increase production on their own because making ventilators means building factories with high fixed costs and large amounts of uncertainty about demand. If the pandemic dies down in 3 months, they will be left with worthless factories and large stocks of unwanted ventilators. As a result, they have been incredibly slow to increase production.
Number of ventilators needed
The key unknown in the ventilator supply situation is the number of ventilators that will be needed to treat Covid-19 patients. Public health estimates vary, from 70,000 to several hundred thousand. A potential complicating factor is that Covid-19 patients are remaining on ventilators a lot longer than is usual, sometimes upwards of two weeks.
One way to get an estimate on the number of ventilators is to first get an estimate of the number of ICU beds needed. If we know roughly the number of ventilators per ICU bed, we can then back out the number of ventilators. A recent Harvard model estimates the number of ICU beds that will be necessary under a variety of different outbreak scenarios. Under a “moderate” scenario, i.e. 40% of the population is infected over 12 months, 150,000 ICU beds will be needed for Covid-19 patients. If half of ICU patients need ventilators, this mean 75,000 ventilators are needed for Covid-19 patetiens alone.
Some studies suggest that between 1% and 2% of COVID-19 patients require ventilation. One study of patients in Wuhan, China, found that 5 percent of individuals with coronavirus ended up in the ICU, while 2.3 percent needed invasive ventilation (Guan 2020). A separate study on Wuhan found the rate of invasive to non-invasive ventilation is roughly 50-50.
Several studies have estimate the number of total patients that will need to be ventilated due to the virus over the course of the pandemic, ranging from 64,000 for a moderate outbreak, to 320,000 in an intermediate outbreak, to 720,000 in a pandemic similar to the 1918 Spanish flu. A recent AHA webinar estimate the total number of patients needed to be ventilated is 960,000. It is unclear how many patients will need to be ventilated at once, which will determine the number of ventilators necessary.
The United States has approximately 62,000 full featured mechanical ventilators and 98,738 older ventilators available in hospitals. Scraping together ventilators from other health care facilities yields 200,000 ventilators. Many of the are older units may not be capable of sustained use or of adequately supporting patients. This includes the approximately 12,700 in the National Strategic Stockpile.
But remember, these are just the ventilators that are need for Covid-19 patients. Most currently extant ventilators are being used for non Covid-19 patients. To estimate the number of new ventilators that must be produced, we must first calculate the current stock which is free to treat Covid-19 patients — “unoccupied ventilators” and are not already in use. In Illinois, there are 1,467 ventilators available, but 75% (1,093) are in use, leaving 374 available. In New York there are about 9,150 ventilators, but the vast majority are being used. Even with the state’s own emergency stockpile, there are only 2,800 (30%) available. To get a rough estimate of the stock of unoccupied ventilators that can treat Covid-19 patients, we assume 25% of the current stock of ventilators are free, which yields a total of 50,000 unoccupied ventilators. This is at the upper end of a recent study that found that US hospitals could absorb from 26,000 to 56,000 in the event of a pandemic.
Distribution of Ventilators
The distribution of ventilators is a disaster. There is no system for determining who is getting the ventilators, or to shift them to hospitals that need them the most. State governments are competing on the open market with foreign and private bids. An illustration of this is the fact that Tesla recently bought 1,000 ventilators, which they then donated. The National Strategic Stockpile has 12,700 ventilators in reserve, which are currently being doled out by Donald Trump based on political goals.
Individual hospitals are holding back from purchasing ventilators because of their high costs, and the fact that these may only have a short-term spike in demand. Hospitals do not have the financial resources to spend hundreds of thousands of dollars on these new machines. Lower-cost home ventilators can’t generate the precise air delivery needed to treat potentially fatal coronavirus symptoms while hospitals are reluctant to stockpile higher-cost devices in numbers beyond what’s ordinarily needed. Top ICU models are mostly imported from foreign manufacturers.
Production of Ventilators
Production of new ventilators in the United States will be a challenge. About half of production of ventilators in in the United States, while half is imported. Some countries — including Germany — have decreed that life-saving equipment be prioritized for their citizens. There are fewer than a dozen domestic manufacturers that are largely backlogged with international orders; the United States has been slower than other countries at implementing policies for speeding up ventilator production.
US manufacturing facilities in the United States are already at 100 percent production capacity, and producers and are looking to ramp up production by another 15 or 20 percent. Additional production will take months. Companies are adding third shifts and repurposing production lines.
Medtronic is based in Ireland for tax purposes, but most of its market is in the United States. Medtronic produces ventilator in Galway, Ireland, where the company makes “PB980” and “PB840” ventilators. By bolstering and transferring staff to Western Ireland, the facility will also operate on a 24-7 basis. Medtronic has already doubled its production of high end ICU units and produces 1,000 per month. Production is difficult because there are 1,500 unique parts supplied from 14 countries. Medtronic said it is aiming to produce 500 per week.
Ventec produces about 250 mid-range ventilators per month, midway between home ventilators and ICU units. The devices have a reduced need for medical personnel to manage patients.They are trying to ramp up production to 1,000 per month within 90 days.
Total production is thus 1,420 per month.
Although there have been large amounts of headlines touting potential new manufacturers like GM and Tesla, it is unknown if this will actually take place. Companies are wary of investing in building factories that produce ventilators which may not have a demand in the many months it will take to ramp up production. As recently as March 19th, GM put out a statement that “Right now it’s just an internal feasibility study on whether it‘s possible for us to help out in the production of medical equipment”.
Royal Phillips is a major manufacturer of ventilators and is ramping up production, but serves a global market and not just the US; it is unclear how many can be shipped to us.
There are several reasons for the shortage. Part of it is due to widespread buying of masks by anxious citizens. Part is due to the fact that most masks are manufactured in China and other foreign countries, who have now banned masks from being exported due to their own critical medical needs.
The Department of Health and Human Services has stated that it needs about 3.5 billion N95 respirator masks per year, or 291 million per month. The US Strategic National Stockpile currently holds 12 million N95 masks and 30 million surgical face masks.
Beside the critical medical need, it is likely that many workers will need to receive masks before they can return to their jobs. If every one of the 162 million workers in the United States were to receive a mask for every working day, this would require production of 3.5 billion masks per month.
The major manufacturer of N95 masks in the United States is 3M, who is currently producing 35 million respirators a month. The company expects to double its capacity within the next 12 months to 70 million respirators a month. The only other manufacturer I know of is Prestige Ameritech, which has increased its production from 250,000 masks a day to 1 million daily. If you know more about US mask production please comment or send an email.
There is currently no central government agency that is overseeing the medical supply problem in the United States. A centralized agency is necessary because the current system of state-by-state action is failing, for several reasons: (i) states lack the resources of the federal government, as they are constrained by their budgets (ii) states compete against each other for access to resources (iii) there is no shift of resources between states, i.e. to the states hit the hardest (iv) without a centralized response there is duplication of effort in research and strategy (v) for communication purposes it is much easier to have a single agency in charge.
To deal with this challenge, the United States Government must establish a centralized medical production board to direct conversions of industries to medical need and establish priorities in the distribution of materials and services.
The board will coordinate purchases, determining the economical and effective method of procuring items. It will have contract clearance across the federal and state governments, to ensure that agencies aren’t bidding against each other. It will guarantee payment of all output, even if the products are not ultimately needed. Orders will take priority over all private accounts or for export. It will aid in conversion to and construction of hospitals and factories, as well as adding capacity, through loans, grants, and direct ownership.
In the meanwhile, state governors should take emergency action to ensure masks end up in the hands of doctors that need them the most. They can: (1) require that middlemen and manufacturers fulfill only government and hospital orders (2) use emergency powers to commandeer masks from non-essential businesses and non-vulnerable citizens (3) distribute masks and other protective equipment to the areas with the greatest need.
Latest unemployment numbers: For the 29 states I have data, there is a total of 1,822,979 new unemployment claims over the past week. However, of the 29 states, some states only report claims for a few days. If I assume the average claims of the non-reported days are the same, this comes out to 2,800,000 claims for the week for the 29 states. This is about 2.5% of the total civilian labor force in these states. Applying this number to the non-reporting states, this gives a total of 4,146,920 new unemployment claims for the week.
The unemployment numbers are out for last week (i.e., the week ending March 14), and they are up to 281,000, up 33% from the previous week. The Washington Post has the writeup.
Note that the numbers I’ve been tracking are for this this week (i.e., the week ending March 21), and will be released next Thursday morning. The biggest number to come out recently is the one for California, 200,000 in 3 days. The chart below compares the number just for the past 3 days with the average weekly claims during the Great Recession.
WSJ: Stocks down 5%, not surprising. What is a little surprising is yields on government bonds are rising — 10 year treasury now above 1%. Still insanely low, but shows that there are intense liquidity needs.
Oil is down to $27 a barrel. Prices at the pump have still only dropped about 25 cents, but nobody is driving anyway.
FT: The rise in bond yields is people liquidating that need cash.
WSJ: “The U.S. Travel Association projected Tuesday that total spending on travel in the U.S., including transportation, lodging, retail, attractions and restaurants, would plunge by $355 billion for the year—and that 4.6 million American jobs would be lost.”
“Hotel owners in most every major urban market in the U.S. are now experiencing occupancy levels around 20% or less, a rate that will make it challenging to meet payroll, let alone pay other expenses and meet debt obligations, owners said.”
“American Airlines Group Inc., the world’s biggest carrier, will fly to only two long-haul destinations—Tokyo and London. Executives at British Airways, Korean Air and other large airlines have said they are in a battle for survival. Many smaller carriers, which form the bedrock of the 13,000 new jets ordered from Airbus SE and Boeing Co., have less access to new capital, and aren’t expected to survive.”