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3M billed government $7.63 for 85-cent earplugs. It now has $1 billion COVID contract

As a protective gear shortage forced emergency workers to use the same disposable masks for weeks, a stockpile of N95s masks has sat unused in TSA storage, according to interviews and documents reviewed by the Star Tribune. (Star Tribune/TNS)

The company that has been awarded the largest single COVID-19 federal contract once boasted it charged the Defense Department $7.63 for earplugs that cost 85 cents a pair to produce.

That company, 3M, was awarded a $1 billion contract on April 15 for “medical and surgical instruments, equipment and supplies” by the Federal Emergency Management Agency. The IDIQ contract — “indefinite delivery, indefinite quantity” — was awarded without taking competing bids from other vendors.

It is also the largest federal contract 3M has been awarded among at least 47 others it has signed with various federal agencies to produce protective gear for the COVID-19 outbreak such as medical gloves, gowns and particularly respirator masks. The masks are critically needed for doctors, nurses, first responders and essential workers.

A FEMA official, speaking on condition of not being identified, said that the contract would cover the cost of procuring additional N95 respirator masks, some of which would be obtained under the Defense Production Act. Contracts awarded under DPA have fewer requirements for public reporting.

But the lack of transparency raises questions about whether U.S. taxpayers will be overcharged for the equipment, as they were for the earplugs, said Mandy Smithberger, director of the Center for Defense Information at the nonpartisan government watchdog group the Project on Government Oversight.

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“Already we’re talking about an inherently risky contracting vehicle,” Smithberger said, referring to the open-ended IDIQ award. “The risk of overcharges will increase when you don’t have transparency for a company that has a track record of ripping off taxpayers.”

The 3M contract is just one of more than 20,400 contracts for pandemic-related supplies or services that the U.S. government has signed since March 13, when the White House declared a national emergency due to the coronavirus.

More than 6,000 of those contracts, worth a total of $8.5 billion, like the 3M contract, were awarded without seeking competing bids, according to the Federal Procurement Data System, a government database that tracks all federal spending.

The total amount of the COVID-19 goods and services federal contracts tops $20 billion — the same amount that was spent over more than 10 years to rebuild the Gulf Coast after Hurricane Katrina.

Jeff Cortese, who worked on the Katrina Fraud Task Force after the 2005 hurricane, said the government’s decision to not seek competitive bids for the contracts is sometimes necessary for speed but carries risk.

“That tragedy was a magnet for legitimate and illegitimate businesses from around the country,” Cortese said. In the Katrina response, as has happened with the pandemic, initial government contracts were quickly awarded and often without putting them out for competitive bids in order to get aid flowing.

“Sometimes you have to loosen the rules around the procurement process,” Cortese said. “You want to do that in order to ensure that we deliver what is needed, to those who need it most, as quickly as possible. But that doesn’t come without a cost.”

Government investigators estimate that at least $500 million, and potentially as much as $1.4 billion, in Katrina federal spending was lost to fraud or waste, in schemes ranging from individuals falsely claiming relief checks to contractors filing fake invoices to vendors overcharging the government. Investigators faced a consistent lack of record-keeping, which made enforcement difficult, Cortese said.

“A lack of transparency makes the investigation incredibly difficult,” he said.

3M has been awarded at least $247 million in contracts to produce respirator masks for FEMA, the Federal Bureau of Prisons, the U.S. Forest Service, the Department of Veterans Affairs and other agencies, according to FPDS.

In addition, the firm was awarded two major contracts by the Department of Defense under the Defense Production Act, for $76 million and $126 million respectively, to produce millions more N95 masks.

What 3M is charging the U.S. government per mask is not publicly available, and 3M would not provide either its production price per mask, nor its selling price per mask to the government, to McClatchy.

The company makes a range of N95 masks that can vary from as little as 68 cents to $3.40 per mask, according to price lists that 3M posts online for regular consumers, not government contracts, to prevent third-party sellers from price gouging.

When McClatchy asked 3M for the unit price specifics for its Defense Department contracts, the company did not provide them.

“You will need to request any specific details regarding the contract from the U.S. government,” 3M spokeswoman Fanna Haile-Selassie said in an email.

Subsequent attempts by McClatchy to get the contract information through email requests to the agencies involved and later through a Freedom of Information Act request were not successful. The FOIA officers could not process the information request without contract numbers, which the government did not provide.

Rep. Katie Porter, D-Calif., is considering adding new Defense Production Act reporting requirements to any future coronavirus aid bill because she said Congress is also not receiving adequate information about the government contracts.

The lack of transparency has left Congress “no way of knowing how, or even if, that money is being spent. We need to fix that immediately,” Porter said. “Bringing these secret contracts under the DPA into the open will increase accountability and help deter bad actors from gaming the system in the first place.”

Defense Department spokesman Air Force Lt. Col. Michael Andrews said the awards and vendors are undergoing government scrutiny to prevent waste.

“Vendors have undergone thorough vetting, including validation of satisfactory record of past performance and determination of responsibility in providing these products in a timely manner and at a reasonable price,” Andrews said. The prices paid were based on “historical data, current price lists, and catalogs.”

3M has a long proven history of providing government supplies, and in a statement he told McClatchy “we take very seriously our work with the U.S. government and are committed to providing the best quality products at fair prices.”

However, during depositions this spring in the United States District Court for the Northern District of Florida, 3M officials had to read aloud from internal company emails about the amount they had charged the government for earplugs compared to what it had cost to make them.

“CAE pays the bills,” read one 3M correspondence, referring to combat arms earplugs, according to deposition transcripts that were obtained by McClatchy. “85 cent cost, $7.63 selling price. “

The email between company officials continues that 3M “seeded it into new recruit issue program in US DOD. What more does he need to know? LOL.”

In a statement to McClatchy, 3M would not say whether there is a similar disparity on the prices it is charging the U.S. government for COVID-19 medical supplies.

“3M has not changed our prices as a result of the pandemic,” the company said.

The company emphasized that the pricing for its combat arms earplugs reflected the military-specific design requirements, unlike the masks, which are commercially produced.

“We worked in close coordination with the U.S. military on the (earplugs), and its design reflected the direction and feedback of individuals acting on the military’s behalf. Its price also reflected the time, research and development, among other aspects, that it took to create a new technology that was specified for the military,” the 3M statement said.

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© 2020 McClatchy Washington Bureau

Distributed by Tribune Content Agency, LLC.