Latest / The Buyout Show with Fexingo: Private Equity, Roll-Ups, and Business Acquisitions / How Private Equity Is Consolidating the Pharmacy Benefit Manager Industry
Transcript
- Lucas: There's a quiet roll-up happening in American healthcare that most patients have never heard of, and it involves the companies that decide which drugs your insurance will cover and at what price. Luna: You're talking about pharmacy benefit managers. PBMs. The middlemen that sit between drug manufacturers, insurers, and pharmacies. Lucas: Exactly. And private equity has been buying up the mid-tier PBMs at a surprising pace. The latest big move happened in late 2025 when New Mountain Capital led a consortium to acquire EmpiRx Health — a PBM serving about 4 million members, mostly through employer-sponsored plans. Luna: EmpiRx was one of the larger independent PBMs left. The three giants — Caremark, Express Scripts, and OptumRx — control almost 80 percent of the market. So buying a company like EmpiRx gives a PE firm immediate scale. Lucas: That's the core of the thesis. If you can aggregate several regional or mid-size PBMs, you start to have meaningful leverage when negotiating rebates with drug manufacturers. And the spread between what a PBM pays a pharmacy and what it charges the insurer can be very attractive. Luna: Let's talk numbers. What's the margin on a typical prescription? Lucas: For a generic drug, the PBM might make roughly one dollar twenty per prescription. But for a branded drug — especially one with no generic competition — margins can exceed 15 percent. And the total prescription volume in the U.S. is about 6 billion per year. So even a small per-script margin adds up fast. Luna: And private equity firms are betting they can improve those margins by consolidating claims processing, rebate contracting, and pharmacy network management. Lucas: Right. A lot of the independent PBMs still run on legacy IT systems. PE comes in, invests in a unified tech platform, and suddenly you can process claims more efficiently and negotiate better rebate terms because you represent a larger pool of covered lives. Luna: But there's a reputational risk here. PBMs have been in the crosshairs of the FTC for years. The agency's 2024 interim report on PBM practices highlighted how rebate agreements can steer patients toward higher-priced drugs and inflate list prices. Lucas: And that's the tension. The PE playbook relies on opacity — the less transparent the rebate structure, the more room there is for the PBM to capture spread. But regulators are pushing for more disclosure. Several states have passed laws requiring PBMs to report their rebate retention rates. Luna: So the question is whether the roll-up creates enough efficiency to withstand that transparency, or whether the business model depends on keeping the details hidden. Lucas: I think the smart firms are already building compliance into their models. If you can show employers that your consolidated PBM saves them 8 percent on drug spend versus the big three, you have a story to tell. And that's what New Mountain is doing with EmpiRx — positioning it as a transparent, employer-focused alternative. Luna: You know, this episode is exactly the kind of analysis I find valuable — peeling back a layer of an industry most people interact with but never understand. And honestly, if this conversation moved your thinking forward in some small way, there's a simple way to keep the show ad-free. Lucas: Yeah, listener support is what allows us to dig into these topics without sponsors dictating the angle. If today's episode was worth the price of a coffee to you, that link is buy me a coffee dot com slash fexingo. Luna: It's a small gesture that adds up. And we appreciate everyone who's chipped in. So back to the PBM roll-up — what's the next frontier for these firms after they've consolidated the mid-tier? Lucas: Well, the next logical step is vertical integration. Some pe owned PBMs are starting to acquire specialty pharmacies. Specialty drugs — for conditions like rheumatoid arthritis, cancer, multiple sclerosis — account for more than half of all drug spending in the U.S., even though they're only a small percentage of prescriptions. Luna: Because those drugs are expensive. A single specialty drug can cost tens of thousands of dollars per year. Lucas: Right. If a PBM also owns the specialty pharmacy that dispenses those drugs, it can capture margin on both sides — the rebate from the manufacturer and the dispensing fee. And that's exactly what we're seeing. In 2025, at least three pe backed PBM platforms acquired specialty pharmacy assets. Luna: So the roll-up is turning into a roll-up plus vertical integration. That makes the eventual exit options more attractive — a buyer like UnitedHealth or Cigna might pay a premium for a combined pbm specialty pharmacy platform. Lucas: Exactly. And that brings us to the endgame. The big three PBMs are already vertically integrated with insurers and pharmacy chains. The pe backed independents know they can't outsize them, so they're building something niche but defensible — focused on employer clients, transparent pricing, and specialty capabilities. Luna: What about the regulatory risk from the FTC? The agency's current chair has signaled more aggressive enforcement. Could that chill the roll-up? Lucas: It could, but I think the bigger risk is state-level action. Over a dozen states have passed PBM transparency laws since 2023. If those laws really bite — forcing PBMs to disclose the exact rebate amounts they keep — the margin compression could be significant. Luna: But the large PBMs have armies of lobbyists. The independents don't. So the regulatory burden might actually advantage the big players, because compliance costs are fixed. Lucas: That's a really good point. And it's why the PE firms are being selective. They're not buying PBMs that serve Medicare or Medicaid populations, which are heavily regulated. They're targeting commercial employer plans, where there's more flexibility in contract design. Luna: So the roll-up is real, it's strategic, and it's happening in the shadows of a healthcare system most of us interact with weekly. If I'm an employer listening, what should I be asking my PBM? Lucas: First question: what percentage of rebates do you retain? Second: can you show me the net cost of my drug spend after rebates, not just the list price? And third: are you owned by a private equity firm? If the answer is yes, ask how long their typical hold period is — because you want to know whether your contract will outlast the investment horizon. Luna: Good advice. And a fitting note to end on. Thanks, Lucas. Lucas: Thanks, Luna. Next time, we'll look at how PE is consolidating the audiology clinic space — hearing aid chains, cochlear implant centers, the whole vertical.