Healthcare in America is in the midst of a seismic shift. With prescription drugs costing more in the U.S. than anywhere else in the developed world, and healthcare spending representing nearly 20% of GDP, policymakers are vigorously pushing for reforms that will overhaul the sector. For General Partners, this is not an incremental shift; it is a bifurcation of risk and opportunity.
Congress, regulators, and states are steadfast in curbing the influence of pharmacy benefit managers. Concurrently, fresh incentives for rare disease and orphan drug development are accelerating discovery and derisking investment. Today, we will detail the headwinds facing PBMs and the tailwinds propelling drug discovery. For GPs, knowing how these crosscurrents collide is key to capturing value and generating alpha.
Legislative & Regulatory Actions to Watch
PBM Reform & Market Structure
- PBM Reform Act of 2025 (bipartisan): Introduces a delinked compensation model in Medicare Part D (flat service fees vs. spread), and bans spread pricing in Medicaid, pushing PBMs toward fee-for-service economics.
- Patients Before Monopolies Act (proposed): Prohibits PBM ownership of pharmacies, directly targeting vertical integration that enables steering and conflicts of interest.
- FTC Action (ongoing): Active investigation into PBM practices (spread pricing, data use, steering to owned specialty pharmacies). A previously filed suit against the three largest PBMs has been paused, but enforcement intent remains a material risk for integrated models.
- State-Level Laws (expanding):
- Bans on spread pricing (Idaho, Vermont, Arkansas, Nebraska, and several others considering similar measures).
- Prohibitions on PBM-owned pharmacies (Arkansas — though implementation is under litigation).
- Reimbursement floors tied to NADAC to stabilize independent pharmacy economics (Nebraska, Arkansas).
Rare Disease & Orphan Drug Acceleration
- ORPHAN Cures Act (H.R. 946) (bipartisan, proposed): Clarifies that orphan drugs treating more than one rare disease remain exempt from Medicare price negotiation under the IRA, preserving incentives to broaden indications.
- One Big Beautiful Bill Act (OBBBA) (enacted, 2025): Broadens the Orphan Drug Exclusion under the IRA and delays negotiation eligibility when orphan drugs later add non-orphan indications—extending commercial runway and ROI.
- FDA Rare Disease Evidence Principles (RDEP) (2025): Establishes a flexible evidence framework for ultra-rare conditions (<1,000 patients), enabling single-arm trials, natural history data, and mechanistic support where traditional RCTs are impractical.
- FDA Rare Disease Innovation Hub (2025): A centralized FDA effort to coordinate stakeholders, run public workshops, and advance innovative trial designs, lowering scientific and operational barriers for developers.
Where GPs Can Capture Value
Private Equity (PE)
Positioning: Tech-enabled services and specialty distribution that benefit from transparency mandates and orphan-drug growth.
- Firms well-positioned:
- Welsh, Carson, Anderson & Stowe (WCAS): Deep healthcare services and tech DNA; experienced with payer/provider plumbing.
- Thoma Bravo: Scale software investor; well suited to back SaaS for independent pharmacies (reimbursement tracking, inventory, patient engagement).
- GTCR: Strong track record backing management teams in healthcare tech and services, including potential transparent, flat-fee PBM models.
- Themes:
- Pharmacy SaaS/analytics: Transparency, auditability, and contracting tools for independents and employers.
- Alternative PBMs: Flat-fee, pass-through economics aligned with plan sponsors.
- Specialty pharmacy services: Distribution and patient-support operations for high-complexity orphan therapies.
Venture Capital (VC)
Positioning: Science-forward platforms aligned with accelerated pathways and durable exclusivity.
- Firms well-positioned:
- OrbiMed, RA Capital Management, Third Rock Ventures, Chiesi Ventures (rare/orphan focus).
- Themes:
- Orphan pipelines with credible surrogate endpoints and mechanistic validation.
- AI-enabled discovery & trial design for small populations.
- Digital health for rare disease (remote monitoring, PROs, registries) that de-risk studies and support market access.
Private Credit (PC)
Positioning: Provide flexible capital to winners from structural change; avoid PBM-dependent cash-flows without adaptation plans.
- Firms well-positioned:
- Ares Management, KKR Credit, Macquarie Group.
- Themes:
- Growth capital to independent pharmacies upgrading tech and expanding footprint.
- Acquisition financing for PE-led platform and add-on strategies in tech-enabled services and specialty distribution.
Where GPs Should Be Cautious
Private Equity (PE)
- Vertically integrated PBMs: Spread-pricing bans, delinking, and anti-steering rules threaten core economics. PE exposure to traditional PBM models (even at smaller scale) carries policy risk.
- Physician practice roll-ups: Consolidation plays (e.g., dermatology, ophthalmology) are under heightened FTC and state scrutiny. Firms active in these strategies (e.g., Audax Private Equity, Cressey & Company, Waud Capital Partners) should assume tougher review, slower closes, and tighter theses.
Private Credit (PC)
- PBM-dependent borrowers: Credits tied to rebates/spread from the Big Three PBMs face contracting and cash-flow volatility as rules tighten. Lenders should require contingency plans, covenants tied to payer concentration, and KPI reporting on reimbursement dynamics.
The GP Playbook (Action Items)
- Exposure audit: Map portfolio and pipeline to PBM reliance, payer mix (Medicare/Medicaid), and orphan-drug optionality.
- Underwriting with policy scenarios: Build base/aggressive/stalled cases for PBM reform and orphan acceleration; adjust revenue share, rebate pass-through, and price-negotiation assumptions.
- Tilt toward transparency and specialty: Favor tech-enabled pharmacy, flat-fee PBMs, and orphan-aligned services; in VC, prioritize pipelines with surrogate endpoints and mechanistic evidence that fit RDEP.
- Credit structuring: For PC, pair flexibility (delayed draws, A&R mechanics) with guardrails (springing covenants, payer-mix thresholds, step-ups on data/reporting).
Bottom Line
Policy is no longer background noise, it is the primary catalyst redefining healthcare’s profit pools and incentive structure. The regulatory framework for prescription drugs is being fundamentally reimagined, with cost containment and innovation as its anchor. For General Partners, success will depend on aligning capital with transparent intermediaries, leaner drug development models, and orphan-drug innovators, while insulating portfolios from legacy PBM economics and opaque reimbursement structures.
We are at a critical juncture for the pharmaceutical industry. Consequently, tracking and anticipating policy shifts is not optional; it is central to investment strategy. For investors, the prescription is clear: make policy awareness a core competency and position portfolios today to withstand headwinds while capturing tomorrow’s tailwinds.
