The FTC’s Fight Against Non-Monopolies Won’t Help Consumers

Popular Bloomberg News columnist Matt Levine likes to make a comical point in his popular Moneystuff column for Bloomberg that from the SEC’s perspective nearly everything a company does (or its executives) that violates the law can be construed as securities fraud.

The Federal Trade Commission under Lina Khan has embraced a similarly omnivorous jurisdictional appetite by declaring that a wide array of heretofore commonly accepted business practice could potentially be construed as a violation of antitrust laws. Abandoning the notion that the FTC should be concerned first and foremost with consumer welfare and prices has given Khan the freedom to pursue an overtly political agenda, which a cursory exam of the industries in her crosshairs makes abundantly clear. Two issues in particular illustrate the extent to which the current FTC is pursuing a narrow ideological agenda rather than attempting to improve consumer welfare.

For starters, last year, the FTC made explicit its intention to examine—and reduce—the role Pharmacy Benefit Managers play in the prescription drug market, and a few Congressmen appear eager play populist and abet the the Commission’s actions. Next week, for instance, the House Committee on Science, Space, and Technology has scheduled a hearing on PBMs.

The FTC’s investigatory announcement labeled PBMs with the implied pejorative of “middlemen” in order to clearly indicate the supposed “dubious” role that the industry plays.

The FTC’s objection seems to be—besides the agency’s Leninist notion that middlemen don’t add anything of value—that PBMs accumulate a modicum of market power, which is in and of itself grounds for this FTC to address them. However, PBMs—which negotiate lower drug prices on behalf of unions, large employers, insurance plans, and even governments—are successful precisely because they accumulate market power. Instead of the monopolistic drug companies (by dint of their patents) dictating whatever price is best for them, they are forced to negotiate with a handful of PBMs that have enough patients that the drug companies would lose a lot of money if they could not reach an agreement to sell to one of them. Without the PBMs’ check on their power, the other end of the drug pricing negotiating table, known as pharmacy service administrative organizations (PSAOs)—which are controlled by the nation’s top three drug wholesalers—would seemingly have free rein to inflate costs on pharmacies and the American public.

What’s more, PBMs have pushed hard to implement the direct delivery of prescription drugs, which greatly improves adherence and—in turn—health outcomes as well, saving lives and billions of dollars in the process. The idea that they need to be constrained to protect consumers is simply incongruous with reality.

Another issue the FTC has seen fit to engage in has been the so-called “Right to Repair” movement, which pushes for legislation that would allow consumers to do any necessary repair to their tractor, boat, or various other products they own. The FTC’s allegation is that manufacturers prevent consumers from accessing the central processor that controls the engine, which means that the manufacturer or a dealer must make any adjustments or fixes if it is the cause of the problem. That gives them, they aver, market power over the repair market.

While the FTC may aver that this requirement gives the manufacturer leverage over consumers that it can exploit, it’s also the case that for gasoline-powered engines, the computer processor regulates the performance of the engine to ensure that it is in compliance with EPA emissions regulations. The main reason many consumers want to access the processor is to defeat the emissions regulator in order to obtain more speed or acceleration.

For instance, in a 2019 survey of 770 equipment dealers, one-third of respondents said that they had serviced equipment that had been illegally modified in some way, and that nearly half of those modifications involved changes that impaired or disabled emissions-control equipment.

There is also considerable evidence that equipment owners that modify their equipment can end up compromising safety—again in the pursuit of enhanced performance. NHTSA registered its objections to a proposed 2019 ballot initiative that would have required manufacturers to provide owners and third party repair facilities with access to vehicle systems, stating that such a requirement would increase the risk of cybersecurity attacks and could jeopardize public safety.

Harvard economist and former Treasury Secretary Larry Summers recently observed that the FTC’s push to reduce the size and scope of big businesses merely for the perceived sin of being big may earn Lina Khan praise from the left-wing activists in her party, but the likely outcome if she succeeds in her attempts to cut these companies down to size is going to be higher consumer prices and further inflationary pressure on the economy.

Indeed, Khan’s array of statements defending her efforts to limit mergers and take on the big tech firms are increasingly puzzling—her 2022 comment that more mergers could result in a greater prevalence of monopsonistic labor markets suggests she is unconcerned about both jurisdiction and economic reality.

Reducing the power of PBMs simply because they have accumulated market power won’t benefit consumers and acquiescing to consumers’ complaints about their right to tweak their equipment however they want stands at odds with other ostensible priorities of her administration with regard to carbon emissions.

When the FTC becomes more concerned with politics than economics, there are few winners.

From: Ike Brannon <[email protected]>

Date: Sunday, February 5, 2023 at 3:43 PM

To: Tommy Behnke <[email protected]>

Subject: draft

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