Rent-seeking is a term economists use to describe an organization’s ability to generate above average economic returns without providing any relative incremental value. Wikipedia may explain it a bit better.
The simplest definition of rent-seeking is to expend resources in order to gain wealth by increasing one’s share of currently existing wealth instead of trying to create wealth. Since resources are expended but no new wealth is created, the net effect of rent-seeking is to reduce total social wealth. It is important to distinguish between profit-seeking and rent-seeking.
Profit-seeking is the creation of wealth, while rent-seeking is the use of social institutions such as the power of government to redistribute wealth among different groups without creating new wealth. Rent-seeking generally implies extraction of uncompensated value from others without making any contribution to productivity.
The origin of the term refers to gaining control of land or other pre-existing natural resources. In a modern economy, a more common example of rent-seeking would be political lobbying to obtain government benefits/subsidies or to impose burdensome regulations on competitors in order to increase market share.
Studies of rent-seeking focus on efforts to capture special monopoly privileges such as manipulating government regulation of free enterprise competition. The term monopoly privilege rent-seeking is an often-used label for this particular type of rent-seeking. Often-cited examples include a lobby that seeks tariff protection, quotas, subsidies, or extension of copyright law.
How do traditional and pass-through PBMs employ a rent-seeking methodology?
Generating more than $400 billion annually, the PBM industry offers an extraordinarily valuable service, providing pharmacy benefits to nearly 250 million Americans. Unfortunately, very few people outside of the industry fully understand how it makes its money.
PBM clients include, but are not limited to, commercial and public sector employers, unions, health plans and health systems just to name a few. All of the different PBM business models will profess how much money they can help plan sponsors save or that they are the most effective at improving your pharmacy benefit plan. However, very few of them share how much revenue they retain. In other words, disclose their management fees.
Only two PBM business models will share their management fee – fiduciary or radically transparent PBM models. I mean, who are we kidding? Traditional, pass-through, and transparent PBM business models are for the most part the same. Do any of them reveal how much money they are being paid for their services?
Think about this for a second. Contracts between pharmacy benefit managers and pharmaceutical manufacturers and pharmacies are pretty much set in stone. Unless a PBM significantly outperforms its contract, the terms between the PBM and manufacturer or rebate aggregator will not change until the contract ends.