Latest / The Buyout Show with Fexingo: Private Equity, Roll-Ups, and Business Acquisitions / How Private Equity Is Buying Up Pharmacy Benefit Managers
Transcript
- Lucas: You've probably never met your pharmacy benefit manager. But they're the reason your prescription costs what it does. And private equity has quietly been buying them up for the last decade. Luna: PBMs — the middlemen between drug manufacturers, insurers, and pharmacies. They negotiate discounts, create formularies, and process claims. And yeah, they make a lot of money doing it. Lucas: A lot is an understatement. The top three PBMs — Express Scripts, CVS Caremark, and OptumRx — now control about 80 percent of the market. And private equity firms have been rolling up the remaining independents to build challengers. Luna: So it's not just the big three. pe backed PBMs are buying regional players and stringing them together into bigger, more powerful entities. Lucas: Exactly. Take a firm called Madison Dearborn Partners. In 2021 they bought a PBM called Envolve Pharmacy Solutions from Centene. Then they acquired another, called RxSense, and merged them. The combined entity manages about 30 million lives. Luna: Thirty million is not small. That's roughly the population of Texas. Lucas: Right. And Hellman & Friedman did something similar. They bought a PBM called Capital Rx, then later acquired a company called PBM Plus. They're building a national platform. Luna: What's the economics here? How does a PBM actually make money? Lucas: The core model is pretty simple: they negotiate rebates from drug manufacturers in exchange for placing their drugs on a preferred formulary. Then they keep a portion of that rebate instead of passing it all to the plan sponsor. That's called the spread. Luna: So they're getting paid by the drug company to push their drugs, and they're also charging the insurer a fee. That's two sides of the same coin. Lucas: And increasingly, they own their own mail-order pharmacies, their own specialty pharmacies, even their own pharmacy networks. So they can capture the margin at every step. Luna: Vertical integration. That's what CVS did when it bought Aetna and combined with Caremark. You get the insurer, the PBM, and the pharmacy all under one roof. Lucas: That specific structure — insurer plus pbm plus pharmacy — is now the dominant model. And private equity is trying to replicate it at a smaller scale with the independent PBMs they buy. Luna: But aren't there regulatory risks? The Federal Trade Commission has been investigating PBM practices for years. Lucas: Yes, the FTC released an interim report in 2024 that was pretty critical. They found that the big three PBMs steer patients to their own pharmacies, charge higher spreads on independent pharmacies, and pocket rebates that should lower premiums. pe backed PBMs face the same scrutiny. Luna: So what happens when a PE firm rolls up a bunch of small PBMs? Do they get the same kind of scrutiny, or do they fly under the radar? Lucas: They fly under the radar for a while. A lot of these acquired PBMs serve smaller employer groups, unions, state plans — not the national accounts. So they're not immediately on the FTC's radar. But as they grow, they will be. Luna: And there's another angle: the drug pricing transparency movement. Several states have passed laws requiring PBMs to report how much they make on each claim. That's going to squeeze margins. Lucas: It will. But PE firms are betting that the consolidation itself creates enough negotiating leverage to offset that. If you have 20 million lives, you can go to a manufacturer and say, 'Give me a better rebate, or I'll move your drug to a non-preferred tier.' Luna: That's the classic roll-up playbook: buy small, combine, build scale, then use that scale to extract better terms. It's worked in veterinary practices, dental groups, and urgent care. Lucas: But PBMs are different because they sit at the intersection of every healthcare dollar. A 1 percent improvement in the spread on a $100 billion book of business is a billion dollars. That's the math that attracts PE. Luna: Let's talk about a specific deal. In 2023, a firm called Altamont Capital Partners bought a PBM called Prime Therapeutics? No, wait — that's not right. Actually, there was a deal where a PE firm bought a PBM called MedImpact. Can you walk through that one? Lucas: Sure. MedImpact is one of the larger independent PBMs, with about 9 million lives. In late 2023, a private equity consortium including Welsh, Carson, Anderson & Stowe and other investors acquired a majority stake. The idea was to give MedImpact capital to build out its specialty pharmacy and technology platform. Luna: Specialty pharmacy is key because those drugs account for a huge share of total drug spend — maybe 50 percent or more. Lucas: Yes. Specialty drugs are typically biologics for conditions like rheumatoid arthritis, multiple sclerosis, cancer. They cost tens of thousands per patient per year. The PBM that can manage those drugs effectively and capture the dispensing fee is sitting on a gold mine. Luna: So PE is buying PBMs not just for the spread, but for the specialty pharmacy margin. That's where the real growth is. Lucas: Exactly. And the roll-up isn't just of PBMs themselves. Some private equity firms are buying the technology companies that PBMs use — the claims processing platforms, the formulary management software, the rebate aggregators. That's a deeper play. Luna: So you could own the PBM and the software it runs on. That's double the margin. Lucas: And if you also own a specialty pharmacy, you control the entire chain. The drug manufacturer pays you a rebate to get on formulary, the plan sponsor pays you a fee to manage the benefit, and the patient pays you when they fill their prescription at your pharmacy. Luna: It's like owning the tollbooth, the road, and the car wash. Lucas: That's the vision. But it's also attracting more scrutiny. In 2025, the FTC sued the big three PBMs over their insulin pricing practices, alleging that they excluded lower-cost alternatives to protect their own profits. If that ruling goes against them, it could reshape the whole model. Luna: And that would affect the pe backed roll-ups too, because they follow the same playbook. Lucas: Absolutely. The regulatory environment is the biggest risk. But for now, private equity sees PBMs as one of the last great consolidatable corners of healthcare. Luna: If listeners want to understand why their co-pay is $50 at one pharmacy and $15 at another, this is why. The PBM decides. Lucas: And if today's episode helped clarify that, you might appreciate knowing how we keep these conversations going without ads or sponsors. It's all listener-supported, through buy me a coffee dot com slash fexingo. Luna: Yeah, it's a small way to make sure we stay independent. And we appreciate every single one. Lucas: So back to the roll-up — one thing I find interesting is how these pe backed PBMs are positioning themselves as the 'transparent' alternative to the big three. They claim they pass 100 percent of rebates to the plan sponsor. Luna: Is that true, or is it marketing? Lucas: Some are genuinely transparent, like Capital Rx. They charge a flat fee per claim and pass all rebates through. But others say they're transparent while still making money on the spread in other ways. It's not always easy to verify. Luna: So the PE roll-ups are partly a bet that employers and unions will want an alternative to the big three, and that a transparent PBM with scale can win that business. Lucas: That's the pitch. And if you're a private equity firm, you're thinking: 'We'll build a PBM with 50 million lives, we'll be transparent, we'll use technology to lower costs — and we'll still make a great return on the spread and the pharmacy margin.' Luna: But the big three aren't standing still. They're acquiring their own technology, launching their own transparent products, and locking up long-term contracts with the largest employers. Lucas: It's a fascinating arms race. And the outcome will determine who controls the pricing of every prescription drug in America. Luna: That's the kind of thing that should make us all pay attention.