Company Responsible for Tainted Baby Formula Has Monopoly Over Aid Program Sales

Corporate negligence has worsened an ongoing infant formula shortage, and the company responsible has the exclusive rights to sell its formula to the parents of almost half of all newborns who receive federally funded nutritional assistance in the U.S.

Abbott Nutrition is the sole provider of infant formula for U.S. government aid programs in 34 states, seven Indian tribal organizations, four territories and Washington, D.C., according to data obtained from the U.S. Department of Agriculture (USDA).

Beneficiaries in those jurisdictions include 589,295 infants, or 47.42 percent of all infants in the so-called Special Supplemental Nutrition Program for Women, Infants, and Children (WIC), according to the records. The agency numbers were acquired through a Freedom of Information Act (FOIA) request.

Most public health experts recommend that newborns subsist on breastmilk because it has better nutritional value than formula, and because it helps bolster infants’ fragile immune systems. Breastfeeding is associated with lower rates of infant mortality, which hits Black and Indigenous communities hardest.

Infant formula, however, is an acceptable alternative to breastfeeding for parents who can’t or don’t nurse their babies, many of whom don’t have the luxury of taking the time to breastfeed. Academic research has found that most breastmilk formula sales in the U.S. are financed by WIC, which is the primary nutritional assistance program in the United States available to low-income expecting parents and parents of newborns.

Federal law requires state agencies administering WIC to grant one company the exclusive rights to sell infant formula to program beneficiaries through licensed supermarkets. The framework has been in place since 1989, when Congress changed the law in an effort to save money.

Abbott makes the widely used formula brands Similac, Alimentum and EleCare. The company’s facility in Sturgis, Michigan, which is at the heart of the shortage, makes all three, among other nutritional products for infants. The plant has remained shuttered since a voluntary recall of products made at the factory was issued by the firm in February amid investigations by the Food and Drug Administration (FDA) and the issuance of a consumer advisory from the agency.

The recall has exacerbated a nationwide infant formula shortage initially caused by supply chain issues that have impacted numerous industries during the COVID-19 pandemic, as several media outlets have reported in recent days. The formula shortage has been most acutely felt in Minnesota, Connecticut, Hawaii, Iowa, Louisiana, Maryland, North and South Dakota, Rhode Island and Texas, where between 40-54 percent of baby formula products have been out of stock in recent weeks.

Abbott is the sole-source contractor to WIC programs in all of those states, as the records disclosed by USDA demonstrate. In other words, low-income parents in those states must buy Abbott products if they want their infant formula purchases reimbursed by the government.

The advisory and the recall happened because deadly foodborne bacteria were found at the Abbott plant in Sturgis. The presence of Cronobacter sakazakii, which can give newborns fatal bouts of sepsis and meningitis, was detected at the facility by FDA officials after four cronobacter hospitalizations were traced back to the plant. Two of the patients linked to the Sturgis contamination died. The FDA said that cronobacter “may have contributed” to their deaths.

Problems with the Sturgis facility were known to the company, the FDA and other regulators long before the February recall. Consumer complaints related to cronobacter and products manufactured at the plant were lodged with the FDA, the Centers for Disease Control and Prevention, and state and local officials as far back as September 2021.

Officials in Minnesota made federal officials aware of the problem last September after an infant in the state contracted cronobacter. The baby was hospitalized for 22 days and ultimately survived, according to Politico.

Though product samples collected by FDA officials at the Sturgis facility tested negative for cronobacter, four “environmental samples” collected by the agency tested positive for the deadly bacteria amid an investigation that revealed lax attitudes by management toward product safety.

An FDA inspector found in February 2022 that Abbott “did not establish a system of process controls … designed to ensure that infant formula does not become adulterated due to the presence of microorganisms in the formula or in the processing environment,” and that the company failed to “ensure that all surfaces that contacted infant formula were maintained to protect infant formula from being contaminated by any source.”

The FDA has also taken heat itself for failing to act on this issue until earlier this year. Rep. Raja Krishnamoorthi (D-Illinois), chair of the House Oversight Subcommittee on Economic and Consumer Policy, wrote to the agency on March 24, asking why it waited to warn the public of the problem. Krishnamoorthi noted that the FDA detected cronobacter at the Abbott facility in Sturgis eight times between 2019 and 2022.

“FDA must do more to ensure no lives are lost, or babies sickened, due to delayed inspections and late consumer warnings,” the lawmaker said.

The sole-source contractor system has succeeded in saving public money spent on WIC by forcing manufacturers to aggressively compete on offering rebates to public administrators. Policy analysts say that this system has allowed the U.S. government and its state partners to expand the program to 2 million additional beneficiaries annually. Unlike Social Security and Medicare — programs that, by law, have to pay benefits to all those who are eligible — WIC is only available to those who qualify if Congress has allocated funding for the program.

But the sole-source system has had unintended consequences. One academic study found companies that win state auctions are able to mark up the prices of their infant formula products by between 26-35 percent. Another academic study, which was funded by USDA, found that the winners of state auctions end up dominating the market for infant formula, and that not all of those who end up buying the company’s product receive WIC benefits.

This so-called “spillover” effect happens, in part, because the auction winner inevitably dominates retail shelf space — a reality exposed by the current supply shortage. USDA responded to the Abbott recall by enabling states where the company has won sole-source auctions to reimburse WIC beneficiaries who purchase substitutes. Shortage numbers and the geographic locations where shortages are most acute indicate, however, that alternatives have been hard to come by in jurisdictions where Abbott has exclusivity rights to WIC beneficiaries. Retailers have reacted by limiting customer purchases of formula.

In other words, the system has helped dominant suppliers consolidate their oligopoly power. Three corporations sell the vast majority of the infant formula in the U.S. — Abbott, Mead Johnson and Nestlé — and those who don’t qualify for WIC benefits, including many low-income people, suffer as a result. The WIC eligibility cutoff is 185 percent of the federal poverty level. Though the threshold varies by household size, a single parent working 40 hours per week would only be able to make $15.50 per hour to qualify for the program.

Many retailers keep their infant formula behind lock-and-key in response to the desperation that drives formula theft, which has likely gotten worse because of shortages. The price of all major formula brands nationwide has spiked 18 percent in the last year, outpacing inflation by a margin of more than two-to-one.

The system doesn’t have to be structured like this. In many European countries, the price of formula is about half of what it is in the United States, suggesting the presence of stronger consumer protections against monopoly power. And the U.S government could encourage breastfeeding by joining the vast majority of countries in the world, which make employers give their workers some form of paid parental leave.

Some strides have been made in recent years. The Affordable Care Act of 2010 amended labor law to give breastfeeding parents the right to pump breastmilk at work in a private location “other than a bathroom.” Advocates say, however, that many workers who don’t receive basic workplace protections were excluded — roughly 9 million or 60 percent of all breastfeeding parents.

Even if the U.S. government didn’t enact new labor laws, there are still steps that it could take to encourage the consumption of breastmilk by infants. The public health system in Brazil, for example, has developed a national network of breastmilk banks that sustains more than 180,000 babies on an annual basis.

But some incredibly powerful institutions profit from the incumbent system. Several of the world’s largest asset managers — including Vanguard, BlackRock, State Street and Morgan Stanley — are among Abbott’s largest shareholders. The company’s pediatric nutrition products made around $2 billion in the U.S. alone in 2020. Revenue growth, Abbott’s annual report from that year noted, “was led by share growth of Similac®, Abbott’s infant formula brand.”