The Federal Trade Commission recently launched an inquiry into the practices of pharmacy benefit managers, known in the industry as PBMs. PBMs are the hidden middlemen who were supposed to make drug distribution more efficient. Yet over time, they have grown in size and power, and research suggests they have contributed to the rapidly rising costs of prescription drugs, while taking home a growing chunk of those ballooning prices. 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. It is instead reflective of the way the growing size and power of middlemen is undermining the health of the economy and the real people the economy is supposed to help serve.
PBMs have been around for decades. Like many middlemen, they started out providing real value, facilitating the flow of payments and otherwise serving as a helpful bridge between insurers and drug companies. 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.
The rapidly rising price of insulin illustrates how this has happened. More than 30 million Americans are diabetic, and a quarter of them require insulin to manage their symptoms. A 2020 study published in the Journal of the American Medical Association found the list price of insulin increased just over 260 percent between 2007 and 2018. Discounts—such as those negotiated by PBMs—also increased, making it look like PBMs were doing a good job. But even after taking those discounts into account, the net price paid for insulin increased more than three times the rate of inflation. Another study, also published through the JAMA network, found that even though the price paid for insulin products increased 40 percent between 2014 and 2018, the amount actually paid to the manufacturers of those products declined by a 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. In short, evidence is mounting that PBMs are raking in huge profits at the expense of those they connect. 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.
PBMs are far from the only reason drug prices are so high. But numerous experts have pointed to their growth and increasing influence as a key factor helping to explain why prices often just keep rising, even for existing drugs. Excessive concentration in the industry doesn’t help. An oft-cited analysis from 2020 suggests that the three biggest PBMs control more than 75 percent of the market, and the six biggest capture more than 95 percent. 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. Middlemen are the connectors. They are the retailers through whom goods travel when moving from producer to consumer. They are the banks through whom money moves from savers to people who want to buy homes and businesses that want to grow. Middlemen are the connective tissue that make life as we know it possible. Yet in the process of connecting, they also stand between and separate, blinding both sides to the impact of their actions on others and often contributing to a host of problems, including dangerous concentrations of power, fragility, and inequality alongside those sky-high prescription drug prices.
Walmart, a retail middleman, has topped the Fortune 500 a whopping 17 times in the last 20 years. Number two on the list, and growing even faster: Amazon. 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. These middlemen make goods cheaper and more convenient, but even these supposed benefits can be costs in disguise. One study found that the spread of Walmart-owned supercenters is responsible for a full tenth of the increase in obesity in the U.S. since the 1980s.
Behind these well-known middlemen lies yet more middlemen that, like PBMs, are often partially hidden from view but no less significant. This layer includes companies such as Cargill, which brought in more than $130 billion in fiscal year 2021, moving grain, meat and other food products around the world and providing related services.
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.
Middlemen are also popping up in new domains. Traditionally, when Americans saved money for retirement, they bought stocks directly in companies. In 1950, individuals held more than 90 percent of the U.S. public stock outstanding. Today, most people invest through mutual funds, exchange-traded funds (aka ETFs), and other financial middlemen. In 2021, just three asset managers—BlackRock, Vanguard Group and State Street Corp.—held 22 percent of the average S&P 500 company. And although they continue to pass along all of the economic risk, they retain all of the voting rights for themselves. This gives Blackrock and its peers an outsized influence on corporate America.
For the last half century, middlemen have grown in size and power. Middlemen often provide valuable services, helping to make goods cheaper and our lives a little easier. They often also play important roles helping to navigate difficult terrain, such as that created by the maze of public and private health insurers. But as their power grows, the myriad costs of their influence often start to outweigh 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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