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Note that getting hospitals to agree to long term contracts at prices that are higher than they'd normally pay is basically a backdoor form of raising prices. F

Note that getting hospitals to agree to long term contracts at prices that are higher than they'd normally pay is basically a backdoor form of raising prices. From a financial perspective, there's not a huge difference between a) a hospital paying $0.80/mask for the next year and $0.02/mask for the following decade or b) $0.10/mask with a decade long contract.

lugged 7y ago
If you can make masks for 10c its not price gouging to sell it at a normal markup from those costs. Its not even "basically a backdoor form of raising prices" It's literally just what it costs. Also, I highly doubt this guy is using 10 year contracts. If I was him I would only be selling to those hospitals that sign 100 year contracts with strict non compete clauses and defined rules around sourcing / pricing and failures to comply.
- djyaz1200 7y ago
  Totally agree, he should accept orders from any org willing to sign a long term deal at his usual prices and run the factory 24/7.
- londons_explore 7y ago
  Most companies go bankrupt in a lot less than 100 years... In most cases, the full value of the contract would never be paid.
  - Sabinus 7y ago
    It would still solve the problem of companies not purchasing while they're solvent but not urgently needing masks.
- rch 7y ago
  > 100 year contracts with strict non compete clauses and defined rules around sourcing / pricing and failures to comply. Exactly. IIRC Sysco negotiates 50-99 year contracts with e.g. universities to supply on campus dining. It seems that firms in the healthcare supply chain would do the same.
  - michaelt 7y ago
    Interesting. What does a customer do, in a 50-year contract, if the level of service drops or the product becomes obsolete?
gpm 7y ago
Exactly! Financially the word for this is regulatory arbitrage. Since he was selling the masks at the same price before the crisis though I suspect that long term contracts would not fall afoul of whatever price gouging laws there are. It's also what it sounds like he is already doing, and maybe more socially acceptable.
pdonis 7y ago
> From a financial perspective, there's not a huge difference between a) a hospital paying $0.80/mask for the next year and $0.02/mask for the following decade or b) $0.10/mask with a decade long contract. Yes, there is: the cash flow for the two cases is very, very different. Case b) is doable for a reasonable cash flow. Case a) is impossible unless someone else besides the hospital provides the huge up front amount of cash required to pay $0.80/mask for the first year.
- gpm 7y ago
  Masks aren't a large enough portion of a hospitals budget for cashflow to be a major concern. Besides which loans exist (though we are neglecting to properly account for the future value of money in our napkin math).
  - pdonis 7y ago
    > Masks aren't a large enough portion of a hospitals budget for cashflow to be a major concern. Maybe not under normal circumstances, but these are not normal circumstances. Also, we're talking N95 masks, not ordinary surgical masks.
    - gpm 7y ago
      Compare the cost of masks to the cost of the salary of the people using them. Under no circumstance is the cost of masks a major cashflow concern. Nothing in the article says these are N95 masks, I don't believe you are correct. But also, what does that have to do with my comment?
bluGill 7y ago
If a hospital agrees to purchase so much over time I'd give them a discount. Cash flow works much better if you get it, one time purchases are the most expensive because you have to pay for all of your costs now.

lugged 7y ago

If you can make masks for 10c its not price gouging to sell it at a normal markup from those costs. Its not even "basically a backdoor form of raising prices" It's literally just what it costs. Also, I highly doubt this guy is using 10 year contracts. If I was him I would only be selling to those hospitals that sign 100 year contracts with strict non compete clauses and defined rules around sourcing / pricing and failures to comply.

djyaz1200 7y ago
Totally agree, he should accept orders from any org willing to sign a long term deal at his usual prices and run the factory 24/7.
londons_explore 7y ago
Most companies go bankrupt in a lot less than 100 years... In most cases, the full value of the contract would never be paid.
- Sabinus 7y ago
  It would still solve the problem of companies not purchasing while they're solvent but not urgently needing masks.
rch 7y ago
> 100 year contracts with strict non compete clauses and defined rules around sourcing / pricing and failures to comply. Exactly. IIRC Sysco negotiates 50-99 year contracts with e.g. universities to supply on campus dining. It seems that firms in the healthcare supply chain would do the same.
- michaelt 7y ago
  Interesting. What does a customer do, in a 50-year contract, if the level of service drops or the product becomes obsolete?

gpm 7y ago

Exactly! Financially the word for this is regulatory arbitrage. Since he was selling the masks at the same price before the crisis though I suspect that long term contracts would not fall afoul of whatever price gouging laws there are. It's also what it sounds like he is already doing, and maybe more socially acceptable.

pdonis 7y ago

> From a financial perspective, there's not a huge difference between a) a hospital paying $0.80/mask for the next year and $0.02/mask for the following decade or b) $0.10/mask with a decade long contract. Yes, there is: the cash flow for the two cases is very, very different. Case b) is doable for a reasonable cash flow. Case a) is impossible unless someone else besides the hospital provides the huge up front amount of cash required to pay $0.80/mask for the first year.

gpm 7y ago
Masks aren't a large enough portion of a hospitals budget for cashflow to be a major concern. Besides which loans exist (though we are neglecting to properly account for the future value of money in our napkin math).
- pdonis 7y ago
  > Masks aren't a large enough portion of a hospitals budget for cashflow to be a major concern. Maybe not under normal circumstances, but these are not normal circumstances. Also, we're talking N95 masks, not ordinary surgical masks.
  - gpm 7y ago
    Compare the cost of masks to the cost of the salary of the people using them. Under no circumstance is the cost of masks a major cashflow concern. Nothing in the article says these are N95 masks, I don't believe you are correct. But also, what does that have to do with my comment?

bluGill 7y ago

If a hospital agrees to purchase so much over time I'd give them a discount. Cash flow works much better if you get it, one time purchases are the most expensive because you have to pay for all of your costs now.