In June 2007, Apple ushered in a new wave of cell phones.  Although the concept of a smartphone was not entirely new, Apple’s iPhone led to a new era in digital communications.  According to this 2011 Pew study, over 1/3 of adults now own a smartphone, just 4 1/2 years after the iPhones release.

Since the launch of the iPhone, Apple has sold over 315 million iPhones and averages around 40 app downloads per phone sold.  When you include iPads into the mix, you’re talking about over 200 million mobile devices sold by Apple that run iOS, Apple’s mobile operating system, and can thus run apps sold from the iTunes Store.  Since the inception of app sales in the iTunes Store, there have been over 14 billion apps downloaded from the Apple Store. Although those include both paid and free apps, any download represents an act that could be helping to drive job growth.  Many of these apps derive their income from sources other than a purchase at the point of sale—some derive income from advertising, while others, such as magazines, can get revenue from subscriptions.  If you take into account that Apple has the revenue derived from app sales, and you can see what a lucrative field app creation has become.

And Apple isn’t the only one in the game—far from it. Android, an operating system created by Google and run on a variety of smartphone handsets, is run on over 250 million phones, with 11 billion apps downloaded from the Android Marketplace.  And there are many phone using Microsoft’s platform, encouraging applications that reach across many different devices.

There are plenty of examples of companies making it big by creating apps for mobile devices.  One of the biggest examples is the maker of everyone’s favorite time-waster game, Angry Birds. The creator, Rovio Mobile, says that over 500 million of their apps have been downloaded across the mobile platforms their apps are available on for download.

And it’s not just mobile platforms.  Facebook has created an ecosystem of its own, allowing their nearly 1 billion users to access thousands of apps for a variety of uses.  One company, Zynga, went public in December 2011, and is now valued in the area of $7 billion.  Zynga is one of many companies that have been able to build a successful business and create hundreds of jobs because of this new marketplace.

Mobile devices have become a huge part of people’s lives, with the average person being attached to their smartphone for over an hour per day.  And get ready for this economy and smartphone use to continue to boom.  A study released yesterday by Forrester makes the claim that 1 billion people will own smartphones by 2016–just four short years away.  In a larger sense, companies not in the app business will also be affected by the huge growth in mobile computing and app creation.  Many traditional companies, such as retail operations, will perhaps find an entirely new market for their products, and will need to prepare for their products to be sold in this new marketplace.  As the TechNet study points out, it’s not just tech jobs being created.  There are sales jobs, marketing, and administrative and operational positions that need to be filled.  It’s a new digital frontier, the likes of which we probably haven’t seen since the dot-com boom of the late 90’s.  Only this time, it appears that real wealth and jobs are being created.

Zack Christenson writes on digital tech issues for the American Consume Institute

“Consumers are outraged at news reports today that Google used a work-around hack to “trick” the Apple Safari browser into allowing the dominant Internet and advertising company to track the web browsing habits of millions of Apple users. Google’s willful disregard for the privacy choices of consumers and the privacy policies of Apple is a new low even for Google. Unfortunately for consumers, this move is only the latest example of Google’s bad acts when it comes to protecting users’ privacy and promoting consumer transparency. Whether it’s illegally collecting user data through its Street View product, posting confusing and sometimes conflicting privacy policies or settling with the FTC for violating its own privacy policy with Google Buzz, the company has proven that it has little regard for the privacy rights of consumers. This behavior should make all consumers, and policymakers, question Google as it prepares to radically and retroactively change its privacy policies next month to allow the Internet giant to learn even more about consumers who interact with Google anywhere on the web. We cannot trust what Google is doing with the personal online information of consumers, and we cannot believe that Google will fix these privacy violations on its own.”

“Additionally, the company has been criticized by a federal judge for copying the work of authors without their permission for its Google books project, and last year had to surrender $500 million in profits in a settlement with the Justice Department for knowingly running ads for phony and dangerous pharmaceuticals. This track record of bad behavior makes clear why Google simply cannot be trusted and has been the target of investigations by the FTC, the Justice Department and state attorneys general, while facing criticism by members of Congress on both sides of the aisle. Clearly, Google cannot be trusted to Do No Evil. Scrutiny needs to be heightened by regulators and policymakers. Because of the ongoing pattern of online privacy violations, Google should be banned from collecting online consumer information until it can settle and abide with its own policies.”

Market Failure  

Who do PBMs represent?  Typically, when a firm (a principal) contracts with an agent, they expect the agent to act with the firm’s best interest in mind.  The agent is often incentivized to perform well.  However, there are cases where conflicts of interest create what is commonly referred to as the principal-agent problem.  These problems can arise from a lack of transparency between the principal and agent, or in this case, when it comes to the prescription plan’s sponsors and PBMs.  While plan sponsors understand the direct financial effects of the particular prescription plan being offered to its members or employees, only PBMs have a complete understanding of revenue streams, pricing and costs surrounding the many facets involved in management of prescription plans.[2]  This is because PBMs are involved in more than just administering prescription plan between the sponsor and its members.  PBMs also interact and negotiate with pharmacies and drug manufacturers, creating what becomes a conflict of interest between the various parties.  The lack of transparency leads to asymmetric market information, where PBMs have much better information on costs and prices than do all of the other parties involved in the process, which gives PBMs leverage over dealings with these other parties.[3]  In this way, asymmetric information represents a market failure.  When there are substantial costs at stake, market failures could require regulatory and legal remedies to protect consumers.[4]  In addition to this market failure, the proposed merger will lead to an increase in PBM industry concentration that will exceed DOJ/FTC current guidelines. This begs the need for addressing market conduct and performance, in order to determine whether there is a presence of sustained market power that poses serious anticompetitive risks for consumers.    

Market Conduct

Plan sponsors hire PBMs to run their prescription insurance plans and manage its costs.  PBMs get paid by the plan’s sponsors for running the plan.  However, PBM’s cut deals with pharmacies, promising them access to the plan’s subscribers in return for cutting fees for what the pharmacies would normally earn for filing a prescription.  This adds additional profits for the PBMs over and above what plan sponsors pay PBMs for managing their plans.  In other words, as the middleman, the PBM profit from the spread between plan sponsors and pharmacies.  This profiting occurs without the sponsors knowing the various wholesale prices paid by various parties or the recovery of pharmacy fees.

Next, PBMs promise manufacturers higher volumes of drug sales in return for manufacturer discounts and rebates.  This again represents another source of profits for PBMs.  Once again, the specific terms and conditions agreed between PBMs and manufacturers are unknown by either the pharmacies or the plan sponsors.  In other words, PBMs profit from their dealings with drug manufacturers and by squeezing pharmacies, in addition to having plan sponsors pay them for managing the plan. 

While it is logical to conclude that PBMs profit when they reduce prescription plan costs, the end result is not necessarily so.  Because PBMs will work with manufacturers to change their formulary (the menu of drugs offered to patients for their prescription plans) in exchange for higher discounts, rebates, and kickbacks from the drug manufacturers, these added incentives drive PBMs toward maximizing profit, which may not minimize the plans cost.  For example, if a manufacturer pays a PBM an incentive to offer a higher cost generic drug, by adding the drug to the plan’s formulary, the sponsor’s costs increase, as will the PBMs profits.  This clear conflict of interest suggests that PBMs do not necessarily represent the interest of the plan’s sponsors or their subscribers.  Thus, the incentive for PBMs to do what is best for the plan and consumers are in direct conflict with the PBMs incentive to profit. 

To summarize the sources of profits, when PBMs manage the sponsors’ plans, they profit when: 1) the consumer and plan sponsors pay a bit more; 2) PBMs funnel sales to favored manufacturers in return for kickbacks and discounts; and 3) PBMs threaten to drop qualified pharmacies in order to squeeze concessions for prescriptions filled at pharmacies.  Nowhere are all of the wholesale and average prices between the various parties published or transparent – not to the drug manufacturers, not to the consumers, not to the pharmacies, nor the sponsors who offer their employees prescription plans.  So, it is not always clear who PBMs represent.  They are making money on all sides.

As PBMs have grown, they are able to leverage their size.  Imagine a pharmacy working with only two PBMS in a particular community.  In this example, the pharmacy’s access to the market (consumers) is highly restricted, since it must work through one or two PBMs to serve many of its customers.  Now, if the Express Scripts and Medco merger takes place, a pharmacy could see its ability to reach consumers reduced from two PBMs to one PBM.  In this way, the PBM now becomes the price-maker, and the pharmacy a price-taker, which means that the pharmacy must either comply with the PBM’s demand or exit the market.  In other words, the merger can facilitate legal collusion by consolidating a few channels that aggregate the majority of customers in a community, thereby curtailing the pharmacy’s access to the market.  Moreover, even if pharmacy discounts are conceded, there is no market pressure for the PBMs to flow these savings through to sponsors or to consumers in the form of lower prices.  Therefore, the merger would provide no obvious benefit for consumers.[5] 

There is yet another conflict of interest.  Large PBMs also provide mail-order prescriptions.  If you are a customer that regularly gets drugs for a particular medical condition, PBMs can easily capture that customer for (typically lower-cost) reoccurring business, thus bypassing the pharmacy.  In other words, PBMs can cream-skim customers to its own mail-order business.  By virtue of these various conflicts of interest (self-dealings) and the lack of transparency contributing to a market failure, PBMs engage in market conduct which permits the influence of market power.  For this reason, some have concluded that the PBM industry’s conduct is “anticompetitive and, in some cases, plainly illegal conduct,”[6] as well as others calling for industry regulation.[7] 

Market Performance

With the risk of anticompetitive conduct, profitability is the most acceptable means to test for market power, and indications suggest that the BPM market is very profitable, including the profitability of Express Scripts and Medco, the two merging companies. 

According to financial reports, from 2005 to 2010, company earnings before interest and taxes grew for PBMs – at about twice the average rate of its peers in other healthcare industries.  Specifically, data on Medco and Express Scripts (the two merging PBMs) had pre-tax profits far exceeding retail pharmacies (collectively Walgreen and Rite Aid), CVS Caremark, wholesalers (collectively McKesson, Cardinal and Amerisourcebergen), pharmacos (collectively Pfizer, Johnson & Johnson and Merck) and medical device companies (collectively Medtronic and Baxter) and managed care organizations (collectively UnitedHealth, WellPoint, Aetna, Humana and Cigna). 

Other data also suggests strong performance.  Express Scripts profits have grown 400 times in the last decade.[8]  According to company reports, Express Scripts extracts $3.72 in earnings (before interest, taxes and depreciation) per prescription, representing a 110% increase from the 2006 rate of $1.77.”[9]  As another benchmark, in 2010, Medco’s return on equity (35.2%) was lower than Express Scripts (48.8%), but higher than Bristol-Myers Squibb (30.2%), Wal-Mart (23.2%), Costco (13.1%), Walgreen (18.6%), and Kroger (23.0%).  By several measures the merging company is highly profitable.

From this quick analysis, PBMs are more profitable than their peer industries.  The rate of profitability suggests that market entry and subsequent competition is not sufficient.  Pre-merger, the presence of sustained profitability suggests a potential for market power, which poses anticompetitive risks for consumers.  Thus, on a post-merger basis, the combination will likely result in increased market power and substantial consumer harm. 

Summary: PMB Market Power

From a structure, conduct and performance assessment, there are indications that the PBM market is anticompetitive and that it exhibits market power.  This is due to a principal-agent problem, a market failure caused by asymmetric information and a lack of transparency, conflicts of interest both vertically and horizontally, the collusive pricing of group plans, profiting on the spread, self-dealing, and manufacture kickbacks in return for a favorable formulary placement.  The profitability of the industry confirms market power and provides evidence that total social welfare is being adversely affected.  The merger will only increase these problems. 

In summary, this ConsumerGram addresses the risks associated with the proposed Express Scripts/Medco merger.  Even without the merger, our analysis finds that there are already serious problems, including a potential market failure, within the current PBM market.  Because of these findings, the merger of the two largest PBMs will likely exacerbate these problems, leading to an additional increase in market power and posing substantial anticompetitive risks for consumers. 

In the recent State of the Union address, President Obama highlighted his America Built to Last Plan – a blueprint for boosting domestic manufacturing.  The proposal called for giving a 20% income tax credit to manufacturers that bring their operations back to the U.S., a doubling of tax deductions for advanced manufacturing, and reauthorizing the expensing of businesses investment, along with other recommendations.  Citing jobs as the number one issue for the nation, his proposal is a “long term strategy” intended to bring jobs back into America.

Challenges Remain

While the concept of boosting manufacturing, on the surface, makes sense, it comes with many challenges.  First, as the chart below shows, except for World War II, manufacturing as a percent of total US employment has been on a steady and sharp decline.  This trend comes despite a low dollar that makes U.S. goods cheaper in overseas markets, and such trends are not easily reversed by a one-time tax stimulus.  However, it can be argued that lowering corporate tax rates in line with other countries can provide some competitive parity.  But, why just reduce corporate tax rates on manufacturing?

Manufacturing Chart

The problem with a single focus on manufacturing is that all industries are so intertwined that helping some sectors at the disadvantage of others can be somewhat counterproductive.  For instance, ending tax credits on some energy producers could have the unfortunate consequence of raising energy prices, which in turn could affect manufacturing costs.  For example, the energy cost to produce a single vehicle (including steel, glass, plastic and electronics) could total $2,000 across all of the stages of production – from raw materials to final assembly.  Along with energy, transportation is certainly part of the calculus of where manufacturers will locate, as are many, many other industries.  In fact, manufacturing and information technologies are so inextricable linked that the health of one depends largely on the other, as I will explain.  So, why lower tax rates for one industry (manufacturing) at the cost of all others?

Information Services Link to Manufacturing

Information services, consisting primarily of broadband, video and telecommunications networks, are a major linchpin to the success of domestic manufacturers – both as buyers and suppliers.  As a buyer, manufacturers see broadband networks as a necessary input to its production produce, a means to sell digital goods and software, and the linkage to communications, engineering and design.  Encouraging state-of-the-art broadband and wireless network provides manufacturers with a competitive advantage at home.  Just as industries had located near major transportation centers many generations ago, information transport is a necessary part in design, production, inventory control, distribution and sales.  As such, encouraging investments in information networks, say via tax breaks, is critical to the success of many industries, including advanced manufacturing.

As a seller, manufacturers produce the plant and equipment purchased and installed by network providers.  Just last year, the top ten cable and telecommunications accounted for nearly $50 billion in investment, and, in less than 30 years since the production of the first cell phone, wireless network companies have invested one-third of a trillion dollars in the US economy.  For every dollar invested more than two dollars of production cascades through the economy.  This means that information service providers are major buyers of manufactured goods, which makes this investment vital to spurring economic growth in the economy.  The expensing of plant and equipment purchased by these network companies will encourage more investment in state-of-the-art infrastructure, which would benefit many industries and provide another reason for manufacturers to relocate to the US.  Furthermore, providing additional tax advantages to these network services companies for the purchase of domestic plant and equipment would be doubly beneficial.

There is yet another important link between network service companies and manufactures.  As these investments are made, consumer products are designed and manufactured to ride on these networks.  Specifically, broadband and wireless services have created a market for manufactured consumer goods – smart phones, tablets, notebooks, laptops, desktops, monitors, software, routers and other equipment.  That in turn has encouraged development of web services like Google, eBay, Facebook, Amazon and millions of online and wireless applications.  Furthermore, fiber deployment and upgrades in wireless telecommunications and cable/video networks provide consumer services spark the consumer purchase of cell phones, teleconferencing equipment, set top boxes, digital cameras, HDTVs, game consoles (like Xbox), and so on.  Along with these computing and Internet-enabled devices is the derived demand for software and applications.  In effect, these network services are the path on which consumers ride using electronic consumer goods purchased and hopefully manufactured domestically.  It would be counterproductive to disadvantage network service companies or other information technologies for the benefit of manufacturers, much like it would be counterproductive to help one foot to run faster than the other.

The reality is that information technology service – like transportation, like energy and many other industries – go hand-in-hand with manufacturing and research & development.  There is no need to favor one over the other.

Is it better for the government not to pick winners and losers?

While it would be nice to see resurgence in manufacturing, focusing on manufacturing at the expense of other industries does not mean that more jobs will be created.  The fact is that stimulating one sector of the economy, while disadvantaging other sectors ignores the symbiotic relationship across many industries and that will likely lead to suboptimal results.  A better approach would be to broaden the plan’s focus and take advantage of these linkages.  That should mean broad and permanent corporate tax reforms across all industries, as well as a serious look at addressing the root causes of international competitiveness, if reversal of the manufacturing trend is important a long term strategy.  Picking industry winners and losers will not work to create lasting jobs.

Steve Pociask is president of the American Consumer Institute, a nonprofit educational and research institute.  For more information, visit www.theamericanconsumer.org.

Why is this interesting?  Because Sprint put up a major fight to the proposed merger, which could have spurred billions of dollars in infrastructure investment by the two companies, creating better service and better coverage for customers of both companies.  Instead of investing in infrastructure and attempting to improve service for customers, it appears as if Sprint is taking the opposite route and downgrading service for their customers that reside in non-urban settings.

By switching so many customers onto a roaming plan, Sprint is taking advantage of an FCC rule that forces wireless companies to offer their networks to competitors for roaming services.  Many were critical of this rule at the time of its drafting, and warned of a situation that could foster less investment, less innovation, poorer service for customers, and increased costs to consumers.  It appears that with Sprint’s decision, they may be proving many of the critics of the FCC rule right.  In effect, the detractors were worried that some wireless providers would simply say, “Why buy (in this case, build), when you can rent?”

Although Sprint’s decision won’t affect Sprint customers in the form of immediate price increases (most Sprint customers have roaming built into their plans), it could be a major blow to customers of not just Sprint, but to wireless consumers everywhere.  This decision could lead to higher prices and poorer service in the long run, as more and more consumers are piled onto the same network, without any investment into new networks.  The FCC roaming rule doesn’t seem to provide wireless providers any incentive to build out their own networks, when it’s just as easy and much cheaper to take advantage of existing networks built by competitors.

Alternatively, it appears AT&T may be ready to pay a high premium in order to secure more broadband, in order to roll out its LTE network to its customers.  There are signals that AT&T may be interested in purchasing Dish Network in a deal that would be worth well over $5 billion.

The FCC’s stated goal has been to increase broadband access to everyone, and about the need to increase spectrum to increase the accessibility of high-speed Internet to everyone.  If the Sprint announcement is a sign of things to come, then it looks as if the FCC could have made a miscalculation in the most appropriate way to make wireless broadband accessible to more people.

“No-fault” insurance fraud can be fixed by a bill (e.g. Florida’s HB 119) that amends current law by stating each behavior that’s unlawful and subjecting it to felony-length prison time, or by a bill (e.g. HB 1007) that repeals “no-fault” law and replaces it with an obligation to carry liability coverage – the norm in states which believe bad drivers should pay heavily for bad driving.

The Florida bills’ “fix no-fault” and “replace no-fault” approaches carefully preserve a sane requirement for immediate emergency treatment coverage (up to $10,000) for victims of an automobile accident.

But “fix no-fault” and “replace no-fault” approaches come down hard on anyone involved in fraud, inappropriate medical treatment, abusive litigation, and slow reimbursement by insurance companies.   Besides stern penalties, these laws specify what diagnostic treatments are legitimate, that medical charges and attorney fees must be reasonable, what personal injury treatment advertising is permitted and they put limits on what kind of client solicitation clinic-owning lawyers can do.   They also affirm the right of insurers to sue all parties involved in insurance fraud.

It’s regrettable that the legislature needed to craft laws so very complex, but fraud and danger to the public are so rampant that it’s necessary.   The soupy mess called “no-fault” may have seemed stylish when passed, but it was clearly a Trojan horse for ripping off the Florida consumer and exposing us to injury or death due to staged accidents.   Our kudos to the legislators who haven’t forgotten about protecting the consumer!

Alan Daley is a retired businessman living in Florida.  He follows public policy from the consumer’s perspective

No longer do businesses have to spend thousands of dollars on information technology infrastructure, expensive servers, or on overpriced licenses for software. The acceleration of lightweight tools being produced by startups in New York, Silicon Valley, and in enclaves across the country.

Cloud computing is a broad term that can encompass many tools and services available across the Internet. Small startups like Evernote and Dropbox, large companies like Microsoft and Apple, and mid-sized companies who have been in the game for a long time like 37signals offer a broad array of tools that allow small businesses to work and store their information online.

Evernote is a simple notepad tool that allows you to take notes and store information that you deem important. Not unlike how many would have used Notepad or TextEdit. The genius behind Evernote, however, is its ability to sync across multiple platforms, and be available to multiple users of Evernote. I can write out notes on my laptop, access them while I’m on the road via the iPhone app, and grant access to others on my team who can read and edit the same notepad. Microsoft and Apple are now offering similar tools in Microsoft’s OneNote and Apple’s iCloud service.

Dropbox is a relatively new service that allows you to upload and store large files on their servers. Have a big PowerPoint presentation or a large Photoshop file that you’ll created at the office, but will need at home or at another location? You can upload the file to your Dropbox folder, which is stored conveniently on your desktop or in your toolbar, and be able to access the file anywhere you’re logged into your Dropbox account. Have a file you need to share with members of your team spread out across the country? You can create a public URL that allows people to simply click a link and download the file directly to your computer. Box.net is a similar service, and services customers both large and small. Box.net has grown into a huge company, currently calling 77% of Fortune 500 companies clients.

In the past, small businesses spent thousands of dollars to accountants and lawyers to keep their books and pay their taxes. Now, there are a number of web-based services that allow companies to keep their books and their finances organized. New startups like Freshbooks allows companies to issue invoices and keep track of billing online, and established organizations like Inuit offer a variety of online based services to help keep their finances in order. 

Word Processing is an industry that has long been dominated by Microsoft, but has recently been challenged by Google, who offers a variety of cloud services with their Google Docs service. Microsoft, however, has recently released Office 365, an innovative and easy to use cloud computing service that allows you to access your Word documents and Excel spreadsheets from wherever you work, with all of your documents stored in the cloud.

Square is a service founded by one of the co-founders of Twitter. It turns any smartphone or tablet into a mobile credit card reader, and allows businesses to bypass the expensive and onerous steps needed to accept credit cards. So far, it’s been adopted by over 800,000 businesses, and processes $2 billion a year in transactions. This lightweight, simple technology has made doing retail business much more inexpensive, and opens up the door to even more possibilities of innovative technologies to help small businesses operate.

When companies utilize these low cost tools to make their businesses more productive, helps spur the economy, and frees up their capital to spend on what many might consider to be more important expenditures. It cuts the red tape and allows small businesses do what they do best.