US pays premium to third-party vendors for N95 masks
By ISAAC STANLEY-BECKER, DESMOND BUTLER AND NICK MIROFF | The Washington Post | Published: April 15, 2020
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WASHINGTON — The Trump administration has awarded bulk contracts to third-party vendors in recent weeks in a scramble to obtain N95 respirator masks, and the government has paid the companies more than $5 per unit, nearly eight times what it would have spent in January and February when U.S. intelligence agencies warned of a looming global pandemic, procurement records show.
The N95 masks are essential protective gear for health-care workers and others at elevated risk of coronavirus infection, and the government has recommended that people across the country wear masks and other face coverings when outside. Demand for the masks has created a frenzied, freewheeling global market that has pitted U.S. states against the federal government and rich nations against poorer ones.
Administration officials leaped into the fray late, then embarked on a voracious spending spree. Though U.S. federal agencies made a small number of relatively modest purchases before the second half of March, the government has ordered more than $600 million worth of masks since then.
Large U.S. companies such as Honeywell and 3M have received the biggest orders, but the Trump administration also has signed high-dollar deals with third-party vendors selling masks for many times the standard price.
The Federal Emergency Management Agency awarded a $55 million contract for N95s this month to Panthera Worldwide LLC, which is in the business of tactical training. One of its owners testified last year that Panthera's parent company had not had employees since May 2018, according to the sworn testimony.
It also has no history of manufacturing or procuring medical equipment, according to a review of records produced as a result of legal disputes involving the company and its affiliates.
Panthera Worldwide's parent company filed for bankruptcy last fall, and the LLC is no longer recognized in Virginia - where it has its main office - following nonpayment of fees, which according to Virginia code results in "the existence of a limited liability company" being "automatically canceled."
James V. Punelli, one of the company's executives, said he is working his military contacts to obtain the masks.
"We've done DoD medical training over the years and through those contacts with that community were brought sources of supply in order to assist in the COVID-19 response," Punelli said in a text message to The Washington Post, referring to the Defense Department. "We made the connection with FEMA and offered these supplies to them."
Asked about delivery of the masks, Punelli said: "We will provide these masks before May 1 for certain, in full and with a very high-quality product." He said the company is registered as an LLC in Delaware and allowed its Virginia registration to lapse "because we're not doing business in Virginia."
According to its website, Panthera offers "elite training and mission support" for the U.S. military and other agencies. But in 2018, it entered into a 42-year lease handing over its principal asset - a 750-acre training facility in West Virginia - to a separate company that now operates the site. The facility features a mock village for training exercises in anti-terrorism and tactical operations.
"They don't have masks. They're not in that line of business," said Robert Starer, a Virginia businessman who leased the training center from Panthera's owners. "Is it possible that they have a relationship with someone in the world who could provide those masks? Who knows."
Starer is now suing the company's two executives - Punelli and Raymond Jones - alleging they overstated the extent of their contracts and customer base, resulting in financial losses for his company. In a complaint filed in Virginia's Hanover County Circuit Court, Starer alleges that the two men misrepresented "estimated revenue" as "actual cash payments . . . based on existing contracts," causing him to suffer cash losses in 2018 and 2019. Punelli and Jones have not responded to the lawsuit, according to an attorney who represents Starer.
Jones did not respond to requests for comment. Punelli said of the lawsuit, "Those frivolous claims are being addressed in due course."
The FEMA contract with Panthera, which was awarded without competitive bidding, has a start date of April 1, according to a summary. Lizzie Litzow, a FEMA spokeswoman, said the Panthera contract is for 10 million masks, adding, "Panthera is not a manufacturer, they are a distributor of N95 masks."
The price that FEMA is paying Panthera per mask, about $5.50, is significantly higher than what the government pays companies such as 3M, which charges as little as 63 cents per N95 mask, with an average cost of about $1.50 for more advanced models, according to a price index. Prestige Ameritech, the largest domestic mask manufacturer, is charging FEMA about 80 cents per mask for the government's order of 12 million N95 respirators, part of a $9.5 million contract that started April 7.
Beyond the premium the federal government is paying to Panthera, the decision to award a contract to an insolvent organization with no apparent expertise in the given field struck experts as unusual.
"Something is amiss there," said Chuck Hagel, a former defense secretary and Republican senator from Nebraska. "This is not how the government procures training or any type of supplies. You just wouldn't do business with somebody like that."
In its bankruptcy filing, Panthera Enterprises estimated that it had as many as 99 creditors and said its liabilities could be as high as $50 million. Punelli said Panthera Worldwide "has no significant debt," but both companies are jointly owned by him and Jones and use the same facilities, according to court records.
Founded as TenX Group in 2011, the parent company is incorporated in Delaware but has its primary office in Leesburg, Virginia, according to court records. It has received a handful of federal contracts in recent years, primarily for training exercises such as "high-risk driving," according to a contract summary from 2018. But Punelli said in sworn testimony in October 2019 that the subsidiary now under contract with FEMA - focused primarily on "activities outside the country" - was bringing in no income. "Not right now," he told a U.S. attorney who asked whether there were any earnings.
Litzow, in response to questions about FEMA's contract with Panthera, said the agency is "bound by law to follow federal acquisition requirements and processes" and did so in this case. "Per these federal acquisition requirements and processes, the Contracting Officer conducted a contractor responsibility determination."
The Department of Health and Human Services began gathering information on global supplies of N95s in January and posted a formal notice Feb. 24 to companies that it was preparing to place large orders, according to a department spokeswoman. On March 21, HHS bought 600 million N95s from five companies, with the largest orders going to 3M and Honeywell.
If the U.S. government had attempted to make large purchases before then, it would have thrown global markets out of whack, according to Stephanie Bialek, a spokeswoman assigned to the agency's Strategic National Stockpile.
"It is never the intent of the SNS to disrupt the supply chain when supply is able to meet demand, even if demand is high," she said. "Making large government purchases at that time likely would have disrupted supplies."
Among members of the public, too, demand for masks has climbed, as the Centers for Disease Control and Prevention has recommended that Americans wear masks and face coverings when in public. On Wednesday, Gov. Andrew Cuomo, D-N.Y., said he would issue an executive order requiring them for all New York residents.
Purchasing records show the Trump administration has placed at least $628 million worth of orders for masks in recent weeks. HHS has placed more than $400 million in mask orders, and the Department of Veterans Affairs has placed orders worth about $82 million.
One of the biggest buyers is FEMA, which has transformed itself into the supply chain manager for the White House coronavirus task force. The agency proposed a deal in recent weeks to obtain an additional 114 million N95 masks from Nutratrade Australia, whose website says it specializes in bulk shipments of grains, dairy products and other foodstuffs. The FEMA proposal was for $591 million worth of N95 masks, at an average cost of $5.19 per mask, according to documents obtained by The Washington Post.
The agency said late Wednesday that it does not have a contract with Nutratrade Australia. A representative for Nutratrade reached Wednesday declined to respond to questions about the proposed contract.
FEMA is importing most of the medical supplies through a process the Trump administration calls "Project Airbridge," and uses chartered cargo flights to slash delivery times and steer shipments directly to hospitals.
The government pays the cost of the flights, but it hands over approximately half of the supplies to large private medical supply companies, which then distribute them to their clients, according to FEMA.
Critics of the arrangement say it amounts to a lavish giveaway to the private companies, but administration officials say they are just trying to get badly needed supplies to hospitals as quickly as possible.
"All the traditional procurement rules are out the window," said Rick Grimm, executive director of the National Institute of Governmental Purchasing, which trains and advises state and local governments on procurement. Grimm said that when the market is unstable, it can invite price manipulation or the possibility "you may end up with an inferior product you can't use."
Jennifer Ehrlich, a spokeswoman for 3M, said the company has not raised its prices and has taken aggressive legal action against vendors selling its products at a significant markup. The company is planning to increase its output from about 1.1 billion masks per year to 2 billion during the next 12 months, Ehrlich said.
The company has filed several lawsuits within the past week against companies it says have been engaged in price-gouging and fraudulent sales, including one company that tried to sell 45 million 3M masks to New York City officials at bloated prices and another that tried to sell "tens of millions of likely nonexistent 3M N95 respirators at grossly inflated prices to the federal Division of Strategic National Stockpile, all the while falsely affiliating itself with 3M."