Arkansas HB 1150: A New Opportunity for Healthcare PE Investors?
Arkansas Passed a Law (HB 1150) Prohibiting PBMs from Owning and Operating Pharmacies
The law is set to take effect on January 1, 2026.
With PBMs being forced to divest their pharmacies, a large number of patients and customers will need to find new pharmacy providers. Additionally, fragmented independent pharmacies are likely to flourish. How much better might these pharmacies perform if acquired by a private equity firm using a roll-up strategy?
Other states have also taken legislative action against PBMs. What might this opportunity look like if other states followed suit? And what if a similar law were implemented nationally by the federal government?
What unknown unknowns—and opportunities—are healthcare private equity teams leaving on the table by not hiring clinicians like myself?
Pharmacy economics are horrible (outside of specialty / LTC / infusion). PBMs own traditional pharmacies as loss leaders that they price at dirt cheap / negative rates to support sales of their PBM business. Maybe this slows the race to the bottom on pricing in traditional pharmacy, but there are also other non PBM owned traditional pharmacies that have incentives to give it away at a loss (eg: Walmart / Costco). It’s the reason why Mark Cuban’s cost plus drugs isn’t relevant or the cheapest option - he’s pricing his drugs at cost plus when most traditional pharmacies are priced at cost minus (you can read some academic reports on this where they show the actual cost savings he delivers is minimal or none).
In my opinion the long term implication of this is just less access, especially if PBM owned mail order pharmacies are banned.
You make some great points. I hadn’t considered that retail pharmacies such as Walmart and Costco have an incentive to give away drugs at a loss. Still, I think the geographic distribution constraints of a Walmart or Costco would prevent them from serving certain portions of the population. So, I agree that the long-term implication is reduced access to medications—which have an inelastic demand. As a result of this lack of access, new players that provide services to pharmacy deserts will be able to command a premium.
As of now, about 50% of all U.S. counties are classified as pharmacy deserts.
In my opinion, the need for pharmacy services in these areas has never been greater. The opportunity to serve pharmacy deserts in innovative ways that Walmart and Costco cannot—or are not willing to—has also never been greater. This represents a chance for a firm to capture market share. With this new legislation, demand for pharmacy services in underserved areas will likely increase as patients seek alternative options. Furthermore, as PBM-owned pharmacies are forced to close, prescription transfer files may become available for purchase at relatively low prices.
Pharmacy deserts exist because of the lack of population density in those areas that make servicing those communities logistically infeasible. They’re best serviced via a mail order pharmacy, but most mail order pharmacies are owned by PBMs who offer that service at a loss to their clients to drive PBM services sales. You can’t run a mail order pharmacy today and make money because the rates you get are awful, so the only ones with incentives to offer it are PBMs or retailers trying to keep you in their ecosystem (eg: Amazon).
There is no PE market opportunity because you won’t get enough volume in those markets to offset the costs of running a brick and mortar pharmacy.
Traditional pharmacy is an absolute dogshit business at the unit economics level - it’s a complete commodity and individual pharmacies have no ability to negotiate rates with PBMs or wholesalers who provide them inventory. They get squeezed on both ends and that’s why the non vertically integrated players (independents, wgn, rite aide) are going under.
Henry Ford was a very successful businessman. We could both learn something from him. In his book "My Life and Work", Henry Ford once said the following:
"That is the way with wise people-they are so wise and practical that they always know to a dot just why something cannot be done; they always know the limitations. That is why I never employ an expert in full bloom. If ever I wanted to kill opposition by unfair means I would endow the opposition with experts. They would have so much good advice that I could be sure they would do little work."
Think about that for a second.
Now, let's face the facts.
Now, the billion-dollar question:
If you had to make a mail-order pharmacy profitable in Arkansas, where PBMs are legally forbidden from owning pharmacies, how would you do it?
Pharmacy Desert Source: https:(slash)(slash)www.goodrx.com/healthcare-access/research/many-americans-lack-convenien…
Would your willingness to pay for a bottle of water (and hence, the margins) be the same in the following scenarios?
What if it was for a loved one?
Lack of Access = Scarcity = Justification for Higher Prices and Higher Margins
This isn’t a relevant comparison because pharmacy pricing is negotiated between the pharmacy and the PBM. Consumer demand isn’t relevant. If you aren’t able to price your services competitively - ie: at horrible margins - you won’t contract with them. The individual pharmacy doesn’t set its on prices, it just accepts what the PBM offers them or drops coverage with that PBM. There are trade groups like PSAOs that try to negotiate via collective bargaining but they’re largely ineffective at changing this dynamic. Walgreens and rite aide went under because they couldn’t absorb the lower rates PBMs were demanding.
Most independent local pharmacies (even in the middle of nowhere) margin is the cash back on the credit card they use to purchase inventory and the profit on the cigarettes and candy they sell at the front of the store.
Hey Associate, remember me? Here is a fictional but accurate pro forma income statement that I made for an independent pharmacy. By adding certain services, I was able to achieve a gross profit margin of 30% and net margin of 17%. Industry net margin is 2.4% and industry gross profit margin is 18%.
The average margins are trash, but not every firm is average. There are so many opportunities to increase margins that people are not aware of. The very select few that are dominating are doing certain things to improve performance....I assure you it isn't luck.
Additionally, there are certain things that can be done that people are not doing that can generate significant income. You have no idea what is possible in this industry. You probably have never even worked in a retail pharmacy. And that's the problem with getting advice from experts. They read a few reports, build a few models, get indoctrinated on why things can't work, and spew out the same trash they are consuming.
Do you know what confirmation bias is? Did you ever wonder what you could come up with if you asked, "How can I make this work?"?
Now I know why Henry Ford said this:
"My Life and Work", Henry Ford once said the following:
"That is the way with wise people-they are so wise and practical that they always know to a dot just why something cannot be done; they always know the limitations. That is why I never employ an expert in full bloom. If ever I wanted to kill opposition by unfair means I would endow the opposition with experts. They would have so much good advice that I could be sure they would do little work."
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