How the Middleman Economy Makes Everything More Expensive

TRecently, the Federal Trade Commission opened an inquiry into practices of pharmacy benefits managers. These are known in the industry under the name PBMs. The PBMs were the middle men who were supposed make drug distribution easier. However, their power and size have increased over the years. Research suggests that they are contributing to rapidly increasing prescription drug costs and taking home more of the resulting inflation. The way that their growth and growing profits puts critical drugs out of reach for many, contributing to avoidable deaths and disease, may be extreme but it’s not an aberration. This is a reflection of how the increasing power and size of middlemen are undermining both the economic health and those it is meant to serve.

For decades, there have been PBMs. They were created to provide real value and facilitate the flow of payment. In the 2000s, however, they started taking on additional roles, negotiating volume “discounts” with drug companies and working with insurers to determine just what drugs they would cover and on what terms. Yet even as PBMs appeared to be negotiating impressive discounts on the “list price” of brand-name drugs, their growing role seems to have contributed to increases in those underlying list prices.

How this is happening can be seen by the rapid rise in insulin prices. Diabetes affects more than 30 million Americans. A quarter need insulin to control their symptoms. The 2020 Study published in the Journal of the American Medical Association It was found that the insulin list price increased by just over 261 percent between 2007-2018. Discounts—such as those negotiated by PBMs—also increased, making it look like PBMs were doing a good job. But, even taking these discounts into consideration, insulin prices increased at a rate three times faster than inflation. The University of California Press also published another study. JAMAThe network found that the insulin product price increased by 40% between 2014-2018, but the actual amount paid to manufacturers fell by one third. The companies that benefitted from the price increase were primarily the middlemen, including the PBMs—whose cut increased by over 150 percent—and pharmacies. The evidence shows that PBMs have been making huge profits, at the expense and disadvantage of their customers. And it is diabetics—one in seven of whom has skipped needed doses of insulin because of the sky-high prices—who are suffering the most from the outside power of these influential middlemen.

Although PBMs may be the main reason why drug prices remain so high, they aren’t the only one. However, experts point to the fact that prices for drugs are often increasing despite existing drug’s decreasing quality. Excessive concentration in the industry doesn’t help. The 2020 report, which is often cited, shows that PBMs have more control than 75 percent and PBMs with the highest market share captures more than 95%. This may help to explain the bipartisan support behind the investigation into these middlemen—with all five of the FTC commissioners, including three Democrats and two Republicans, voting to pursue the inquiry.

The growth in the size and influence of PBMs reflects a broader trend that permeates today’s economy, and the problems that arise as too much power shifts from manufacturers, farmers, other creators and consumers to the middlemen who connect them. They are the linkers. They act as the conduits for goods when they travel from manufacturer to consumer. These are banks that move money from the savers to those who wish to purchase homes or businesses. They are our connective tissue. However, in their connection, middlemen also serve as a barrier and a facilitator, blinding each side to the consequences of their actions and contributing to countless problems such as dangerous concentrations and fragility of power, inequality, and skyrocketing prescription drug prices.

Walmart, the retail giant, has been a top-ranked company on the Fortune 500 17 times over the past 20 years. Amazon is number two, growing at an even faster rate: These middlemen are the country’s biggest employers, their founding families are some of the wealthiest people on the planet, and virtually all of us shop at one or both of them. Although these middlemen can make products more affordable and easier to use, there are hidden costs. A study by Walmart found that supercenters owned by Walmart are responsible for 10 percent of U.S. obesity since 1980.

These well-known middlemen hide another layer of middlemen, which, while not as visible, is no less important. Companies such as Cargill which moved grain, meat, and other products all over the globe and provided related services, are just a few examples of this layer.

Cargill is one of just four meat processors—the middlemen that stand between animal farmers and consumers—that control 55 to 85 percent of the market, a reflection of how concentrated and powerful the largest middlemen have become. Cargill is also the largest private company in the U.S. As rising food prices created hardships for families around the world, they also elevated five descendants of William Wallace Cargill, the company’s founder, onto the Bloomberg Billionaires Index of the world’s 500 people wealthiest people.

New domains are seeing middlemen emerge. In the past, Americans bought stock directly from companies when they saved for retirement. Individuals held over 90 percent of U.S. stock in 1950. Today, the majority of people invest in mutual funds and exchange-traded fund (aka ETFs) or through other financial intermediaries. In 2021, just three asset managers—BlackRock, Vanguard Group and State Street Corp.—held 22 percent of the average S&P 500 company. They continue to transfer all economic risk but retain full voting rights. Blackrock, along with its peer firms, have a large influence over corporate America.

Over the past half-century, power and size have increased for middlemen. The value of middlemen is often in their ability to provide services which make it easier for us to get our goods at a lower price and simplify our lives. Many middlemen also help to navigate complicated terrain such as the web of private and public insurance. As their power increases, however, many of the costs associated with their influence start to exceed the benefits. Hopefully, the FTC’s inquiry into PBMs will be just the starting point of a much broader effort to restore a healthier balance of power between middlemen and the creators, consumers, and others they were designed to serve.

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