Rule2026-22306
Improving Transparency Into Pharmacy Benefit Manager Fee Disclosure
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
November 2, 2026
Effective
January 4, 2027
Issuing agencies
Labor DepartmentEmployee Benefits Security Administration
Abstract
The Department is issuing a final regulation that will require providers of pharmacy benefit management services and affiliated providers of brokerage and consulting services to disclose information about their compensation to fiduciaries of large, self-insured group health plans subject to the Employee Retirement Income Security Act (ERISA). Pharmacy spending is a major driver of overall healthcare costs for employers and is growing faster than medical and surgical spending. These disclosure requirements apply for purposes of ERISA's statutory prohibited transaction exemption for service arrangements under section 408(b)(2). These disclosures are needed so that fiduciaries can assess the reasonableness of contracts or arrangements with these service providers, including the reasonableness of the service providers' compensation. As directed in section 12 of President Trump's Executive Order 14273, Lowering Drug Prices by Once Again Putting Americans First, the Department is issuing this rule to improve employer health plan transparency into the direct and indirect compensation received by pharmacy benefit managers. This final rule will affect sponsors and other fiduciaries of large, self-insured group health plans and certain service providers to such plans.
Full Text
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[Federal Register Volume 91, Number 210 (Monday, November 2, 2026)]
[Rules and Regulations]
[Pages 69092-69196]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2026-22306]
[[Page 69091]]
Vol. 91
Monday,
No. 210
November 2, 2026
Part III
Department of Labor
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Employee Benefits Security Administration
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29 CFR Part 2550
Improving Transparency Into Pharmacy Benefit Manager Fee Disclosure;
Final Rule
Federal Register / Vol. 91, No. 210 / Monday, November 2, 2026 /
Rules and Regulations
[[Page 69092]]
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
29 CFR Part 2550
RIN 1210-AB37
Improving Transparency Into Pharmacy Benefit Manager Fee
Disclosure
AGENCY: Employee Benefits Security Administration, Department of Labor.
ACTION: Final rule.
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SUMMARY: The Department is issuing a final regulation that will require
providers of pharmacy benefit management services and affiliated
providers of brokerage and consulting services to disclose information
about their compensation to fiduciaries of large, self-insured group
health plans subject to the Employee Retirement Income Security Act
(ERISA). Pharmacy spending is a major driver of overall healthcare
costs for employers and is growing faster than medical and surgical
spending. These disclosure requirements apply for purposes of ERISA's
statutory prohibited transaction exemption for service arrangements
under section 408(b)(2). These disclosures are needed so that
fiduciaries can assess the reasonableness of contracts or arrangements
with these service providers, including the reasonableness of the
service providers' compensation. As directed in section 12 of President
Trump's Executive Order 14273, Lowering Drug Prices by Once Again
Putting Americans First, the Department is issuing this rule to improve
employer health plan transparency into the direct and indirect
compensation received by pharmacy benefit managers. This final rule
will affect sponsors and other fiduciaries of large, self-insured group
health plans and certain service providers to such plans.
DATES: This regulation is effective January 4, 2027. This regulation is
applicable to plan years beginning on or after July 1, 2027.
FOR FURTHER INFORMATION CONTACT: Stephen Sklenar, Office of Regulations
and Interpretations, Employee Benefits Security Administration,
Department of Labor, at 202-693-1000 ext. 18554, or Saliha Moore,
Office of Health Plan Standards and Compliance Assistance, Employee
Benefits Security Administration, Department of Labor, at 202-693-1000
ext. 12913. These are not toll-free numbers.
Customer service information: Individuals interested in obtaining
general information from the Department of Labor concerning Title I of
ERISA may call the EBSA Toll-Free Hotline at 1-866-444-EBSA (3272) or
visit the Department's website (<a href="http://www.dol.gov/agencies/ebsa">www.dol.gov/agencies/ebsa</a>).
SUPPLEMENTARY INFORMATION:
A. Executive Summary
In Executive Order 14273, Lowering Drug Prices by Once Again
Putting Americans First, President Trump instructed the Department to
propose regulations under ERISA section 408(b)(2) to improve employer
health plan transparency into the direct and indirect compensation
received by pharmacy benefit managers.\1\ Businesses that provide
pharmacy benefit management services (``PBMs,'' unless otherwise
specified) to ERISA-covered self-insured group health plans have
acquired significant influence over prescription drug costs in recent
years. By addressing the influence of PBMs and promoting transparent
pricing, President Trump's Executive Order aims to create a fairer and
more competitive prescription drug market that lowers costs and ensures
accountability across the entire healthcare system.\2\ This final rule
responds to Executive Order 14273 and is a part of the Trump
Administration's larger initiative to address rising healthcare costs
for Americans.\3\
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\1\ 90 FR 16441 (Apr. 18, 2025).
\2\ See Fact Sheet: President Donald J. Trump Announces Actions
to Lower Prescription Drug Prices (Apr. 15, 2025) (``The [Executive]
Order builds off [the Administration's] critical work and
reevaluates the role of middlemen by: Improving disclosure of fees
that pharmaceutical benefit managers (PBMs) pay to brokers for
steering employers to utilize their services . . .''), available at
<a href="https://www.whitehouse.gov/fact-sheets/2025/04/fact-sheet-president-donald-j-trump-announces-actions-to-lower-prescription-drug-prices/">https://www.whitehouse.gov/fact-sheets/2025/04/fact-sheet-president-donald-j-trump-announces-actions-to-lower-prescription-drug-prices/</a>.
\3\ See, e.g., Department of Labor News Release, Departments of
Labor, Health and Human Services, Treasury Announce Move to
Strengthen Healthcare Price Transparency, available at <a href="https://www.dol.gov/newsroom/releases/ebsa/ebsa20250522">https://www.dol.gov/newsroom/releases/ebsa/ebsa20250522</a> (May 22, 2025);
Executive Order 14221, ``Making America Healthy Again by Empowering
Patients with Clear, Accurate, and Actionable Healthcare Pricing
Information,'' which directs the Secretaries of Treasury, Labor, and
Health and Human Services to build on the groundbreaking
transparency regulations launched during President Trump's first
term. E.O. 14221 (Feb. 25, 2025); Executive Order 13877, ``Improving
Price and Quality Transparency in American Healthcare to Put
Patients First'' (June 24, 2019); Executive Order 13813, ``Promoting
Healthcare Choice and Competition Across the United States'' (Oct.
12, 2017).
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ERISA section 408(b)(2) is a statutory exemption from ERISA's
prohibited transaction rules applicable to contracts or arrangements
for services. ERISA section 406(a)(1)(C) provides that the furnishing
of goods, services, or facilities between employee benefit plans
(including group health plans) and parties in interest to the plans is
a prohibited transaction.\4\ A person providing services to the plan is
a ``party in interest'' to the plan.\5\ To satisfy the conditions of
the exemption, ERISA section 408(b)(2)(A) provides that the service
contract or arrangement must be reasonable, the services must be
necessary for the establishment or operation of the plan, and no more
than reasonable compensation may be paid for the services. In addition,
under recent amendments to ERISA section 408(b)(2)(B) as part of the
Consolidated Appropriations Act, 2026 (CAA, 2026), a broad group of
service providers to group health plans including PBMs must provide
specified disclosures to the group health plan for the services
contract or arrangement to meet the reasonableness condition of the
exemption.\6\ This final rule implements ERISA section 408(b)(2)(B) for
PBMs and affiliated brokers and consultants, with respect to the
covered plans described in the final rule.
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\4\ See 29 U.S.C. 1106(a)(1)(C). See also Cunningham v. Cornell
University, 604 U.S. 693, 697 (2025) (ERISA section 406
``supplements the fiduciary's general duty of loyalty to the plan's
beneficiaries . . . by categorically barring certain transactions
deemed `likely to injure the pension plan.' '') (citations omitted).
If the conditions of an exemption are not satisfied, responsible
plan fiduciaries entering into service arrangements with parties in
interest to self-insured group health plans, and the parties in
interest themselves, may be subject to enforcement action by the
Department and the imposition of a civil penalty under ERISA section
502. See 29 U.S.C. 1132.
\5\ ERISA section 3(14)(B).
\6\ Section 6702 of Title VII of Division B of the Consolidated
Appropriations Act, 2026, amending definition of ``covered service
provider'' in ERISA section 408(b)(2)(B).
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PBMs are the ``middlemen'' in the pharmaceutical supply chain.\7\
For ERISA-covered self-insured group health plans, PBMs perform a wide
range of services including, but not limited to, organizing pharmacy
networks, negotiating pharmacy reimbursement amounts and drug
rebates,\8\ establishing drug formularies,\9\ processing claims, and
managing utilization. In connection with these services, PBMs receive
compensation from self-insured group health plans as
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well as from other sources in the pharmaceutical supply chain.
Responsible plan fiduciaries of self-insured group health plans
(including plan sponsors and other fiduciaries who are responsible for
prudently selecting and monitoring service providers) \10\ also
commonly rely on brokers or consultants to help them with advice,
recommendations, and referrals regarding pharmacy benefit management
services. The brokers or consultants may, in some cases, be affiliated
with a PBM. They also may receive compensation from sources other than
group health plans.
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\7\ See, e.g., Federal Trade Commission, Interim Staff Report,
Pharmacy Benefit Managers: The Powerful Middlemen Inflating Drug
Costs and Squeezing Main Street Pharmacies (July 2024), available at
<a href="https://www.ftc.gov/system/files/ftc_gov/pdf/pharmacy-benefit-managers-staff-report.pdf">https://www.ftc.gov/system/files/ftc_gov/pdf/pharmacy-benefit-managers-staff-report.pdf</a>.
\8\ As discussed below in section B.3.2 of this preamble,
rebates are discounts on drugs offered by the pharmaceutical
manufacturer in return for preferred placement on a self-insured
group health plan's formulary.
\9\ A formulary is a list of drugs covered by the plan.
\10\ It is well established that plan sponsors as defined in
ERISA section 3(16)(B)(i) often wear two hats--a settlor hat and a
fiduciary hat. See, e.g., McKee Foods Corp. v. BFP Inc., 173 F.4th
242, 256 (6th Cir. 2026); Reetz v. Aon Hewitt Inv. Counseling, Inc.,
74 F.4th 171, 179-80 (4th Cir. 2023); Bennett v. Conrail Matched
Savings Plan Admin. Comm., 168 F.3d 671, 679 (3d Cir. 1999). Yet it
is equally well established that ``ERISA does require, however, that
the fiduciary with two hats wear only one at a time, and wear the
fiduciary hat when making fiduciary decisions.'' Pegram v. Herdrich,
530 U.S. 211, 225 (2000). Under this principle, a contract or
arrangement with a covered service provider necessary for the
establishment or operation of the self-insured group health plan
does not evade the requirements of this proposed regulation merely
because it is signed by a plan sponsor.
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Concerns have existed for many years that PBMs, including in their
capacities as brokers and consultants with respect to pharmacy benefit
management services, are not fully disclosing their compensation to the
responsible plan fiduciaries. These concerns prompted the ERISA
Advisory Council to recommend that the Department consider extending
its service provider disclosure regulation to require specific
disclosures by PBMs.\11\ Congress took that step by amending ERISA
section 408(b)(2) to specify disclosure requirements for PBMs and other
covered service providers to group health plans.\12\ Additionally,
Congress has provided that effective for plan years beginning on or
after August 3, 2028, PBMs must pass through rebates, fees, alternative
discounts, and other remuneration received from drug manufacturers and
other entities to the group health plans that the PBMs are providing
services to (or to health insurance issuers on behalf of the
plans).\13\ A new ERISA section 726, added to part 7 of ERISA, will
require additional, retrospective disclosures by providers of pharmacy
benefit management services regarding drug spending and drug
utilization under the group health plan, effective for plan years
beginning on or after August 3, 2028.\14\
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\11\ See Advisory Council on Employee Welfare and Pension
Benefit Plans (ERISA Advisory Council), PBM Compensation and Fee
Disclosure at 20 (Nov. 2014) available at <a href="https://www.dol.gov/sites/dolgov/files/ebsa/pdf_files/2014-pbm-compensation-and-fee-disclosure.pdf">https://www.dol.gov/sites/dolgov/files/ebsa/pdf_files/2014-pbm-compensation-and-fee-disclosure.pdf</a> (``Plan sponsors uniformly testified about the
difficulties in obtaining the disclosure of PBM compensation, and
how this interfered with their efforts to negotiate and monitor PBM
contracts.'').
\12\ Section 6702 of Title VII of Division B of the Consolidated
Appropriations Act, 2026 amended subparagraph (b)(2)(B) of ERISA
section 408.
\13\ Section 6702 of Title VII of Division B of the Consolidated
Appropriations Act, 2026 added subparagraph (b)(2)(C) to ERISA
section 408.
\14\ ERISA section 726, added by section 6701 of Title VII of
Division B of the Consolidated Appropriations Act, 2026. Section
6701 also added parallel provisions in Public Health Service Act
section 2799A-11 and Internal Revenue Code section 9826.
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The Department's final rule implementing ERISA section 408(b)(2)(B)
is intended to provide much needed transparency into contracts and
arrangements with PBMs and affiliated brokers and consultants, so that
the responsible plan fiduciaries of large ERISA-covered self-insured
group health plans can fulfill their statutorily mandated role to
determine whether these service contracts or arrangements are
reasonable. Under the Department's final rule, these service providers
must furnish detailed disclosures to responsible plan fiduciaries of
large self-insured group health plans describing their compensation for
such services, and advance disclosure of compensation they reasonably
expect to receive. The final rule also includes audit provisions
designed to ensure that the responsible plan fiduciaries of large self-
insured group health plans can verify the accuracy of the disclosures.
The responsible plan fiduciaries will be able to use the disclosures in
their process of selecting a provider of pharmacy benefit management
services, engaging an affiliated broker or consultant, and monitoring
these service providers' operations and compliance with contractual
obligations.
B. Background
1. Group Health Plan Prescription Drug Coverage
Approximately 136 million Americans receive health coverage through
their employers (or their family members' employers) in group health
plans covered by ERISA.\15\ Group health plans provide healthcare
benefits such as hospitalization, sickness, prescription drugs, vision,
and dental. Group health plans provide these benefits by purchasing
insurance \16\ or by self-funding \17\ (also known as self-insured)
benefits from the employer's general assets or from a funded trust.
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\15\ U.S. Department of Labor, Health Insurance Coverage
Bulletin: Abstract of Auxiliary Data for the March 2023 Annual
Social and Economic Supplement to the Current Population Survey at 6
(Aug. 30, 2024), available at <a href="https://www.dol.gov/sites/dolgov/files/EBSA/researchers/data/health-and-welfare/health-insurance-coverage-bulletin-2023.pdf">https://www.dol.gov/sites/dolgov/files/EBSA/researchers/data/health-and-welfare/health-insurance-coverage-bulletin-2023.pdf</a>.
\16\ In a fully insured plan, the employer pays a fixed monthly
premium to an insurance carrier that assumes all risk for paying
claims. Premiums are generally fixed for a year, providing high
budget predictability. Under this model, employers have more limited
design flexibility, since plans are standardized by the insurance
carrier. For fully insured plans, the insurer manages all claims
processing, network management, and regulatory compliance and must
adhere to both federal and state-mandated insurance and coverage
regulations. The fully insured model may appeal more to smaller,
risk-averse firms.
\17\ In a self-insured plan, the employer assumes the financial
risk for providing health benefits to employees, rather than paying
a fixed premium to an insurance carrier. Additionally, the employer
pays for claims as they are incurred. While this can save on
premiums and administrative costs, it exposes the employer to
volatility; thus, employers often buy ``stop-loss'' coverage to
protect against high-cost, catastrophic claims. Under self-funding,
employers have more control over the plan design, allowing them to
customize coverage to employee needs. Benefits are typically managed
by a Third-Party Administrator (TPA), and the plan is subject to
federal ERISA regulations, but exempt from many state-mandated
benefits.
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Employer pharmacy spending is increasing faster than medical and
surgical expenses, representing a growing concern for employers and
workers about affordability and adherence. Retail prescription drug
spending in the U.S. amounted to nearly $495 billion in 2024 and is
projected to grow 7 percent in 2025, but to grow more slowly from 2026
to 2033.\18\ Against this backdrop, employers anticipate an 11 to 12
percent increase in pharmacy costs in 2025 into 2026.\19\
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\18\ Centers for Medicare & Medicaid Services, National Health
Expenditure Projections 2025-2034, available at <a href="https://www.cms.gov/files/document/nhe-projections-forecast-summary.pdf">https://www.cms.gov/files/document/nhe-projections-forecast-summary.pdf</a> (``From 2025-27,
average growth is projected to slow to 5.6 percent due to decreasing
Marketplace enrollment and slower anti-obesity medication uptake.
For 2028-33, growth is projected to average 4.7 percent.'').
\19\ Business Group on Health, 2026 Employer Health Care
Strategy Survey: Executive Summary, (Aug. 19, 2025), available at
<a href="https://www.businessgrouphealth.org/resources/2026-employer-health-care-strategy-survey-executive-summary">https://www.businessgrouphealth.org/resources/2026-employer-health-care-strategy-survey-executive-summary</a>.
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For employer-sponsored group health plans, the cost of prescription
drugs is usually shared between the group health plan and the
individual participant, where the participant pays a fixed amount
(copayment), a percentage of the drug's cost (coinsurance), or the full
cost of the drug up to the amount of the annual deductible, if the
group health plan applies a deductible. The group health plan's drug
formulary identifies the drugs that are covered and organizes the drugs
into tiers, with different cost-sharing requirements imposed on
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participants. The tiers often distinguish between generic drugs and
brand-name drugs, and plans may have one or more separate tiers for
``specialty drugs.'' \20\
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\20\ Generic drugs are ``medication[s] created to be the same as
an already marketed brand-name drug in dosage form, safety,
strength, route of administration, quantity, performance
characteristics, and intended use.'' U.S. Food & Drug
Administration, Generic Drugs: Questions & Answers (June 8, 2026),
available at <a href="https://www.fda.gov/drugs/frequently-asked-questions-popular-topics/generic-drugs-questions-answers#q1">https://www.fda.gov/drugs/frequently-asked-questions-popular-topics/generic-drugs-questions-answers#q1</a>. Specialty drugs
do not have a standard definition, but some characteristics that may
identify specialty drugs are special handling requirements or high
costs. Federal Trade Commission, Interim Staff Report, Pharmacy
Benefit Managers: The Powerful Middlemen Inflating Drug Costs and
Squeezing Main Street Pharmacies at 17-18 (July 2024), available at
<a href="https://www.ftc.gov/system/files/ftc_gov/pdf/pharmacy-benefit-managers-staff-report.pdf">https://www.ftc.gov/system/files/ftc_gov/pdf/pharmacy-benefit-managers-staff-report.pdf</a>.
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Managing a group health plan's prescription drug coverage is
exceedingly complex due to the vast number of drugs available on the
market and the large number of drug manufacturers and pharmacies, among
other reasons. Further, the pharmaceutical supply chain involves
multiple entities--including drug manufacturers, drug wholesalers,
pharmacies, PBMs, payors (e.g., group health plans), and participants--
that interact with each other in arrangements that can be quite
opaque.\21\
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\21\ See Federal Trade Commission, Interim Staff Report,
Pharmacy Benefit Managers: The Powerful Middlemen Inflating Drug
Costs and Squeezing Main Street Pharmacies at 1 (July 2024),
available at <a href="https://www.ftc.gov/system/files/ftc_gov/pdf/pharmacy-benefit-managers-staff-report.pdf">https://www.ftc.gov/system/files/ftc_gov/pdf/pharmacy-benefit-managers-staff-report.pdf</a> (``PBM business practices and
their effects remain extraordinarily opaque.''); United States
Senate Finance Committee, Staff Report, Insulin: Examining the
Factors Driving the Rising Cost of a Century Old Drug at 65,
available at <a href="https://www.finance.senate.gov/imo/media/doc/Grassley-Wyden%20Insulin%20Report%20">https://www.finance.senate.gov/imo/media/doc/Grassley-Wyden%20Insulin%20Report%20</a>(FINAL%201).pdf. Many sources that
discuss the pharmaceutical supply chain find it useful to include a
chart to map out the parties involved. See, e.g., U.S. Government
Accountability Office, Prescription Drugs: Selected States'
Regulation of Pharmacy Benefit Managers at 9 (GAO-24-106898, Mar.
2024), available at <a href="https://www.gao.gov/assets/gao-24-106898.pdf">https://www.gao.gov/assets/gao-24-106898.pdf</a>.
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Due to the complexity of the pharmaceutical supply chain and the
myriad players involved, responsible plan fiduciaries of group health
plans often outsource pharmacy benefit management services. When group
health plan benefits are obtained through insurance, pharmacy benefit
management services are often integrated with the insurance contract.
When group health plans are self-insured, however, the responsible plan
fiduciaries may engage a PBM directly, or they may obtain pharmacy
benefit management services through a third-party administrator (TPA)
or other entity.
2. Pharmacy Benefit Managers' Services Provided to Self-Insured Group
Health Plans
PBMs perform numerous services related to self-insured group health
plans' prescription drug coverage, including identifying the
prescription drugs that will be covered by a plan and negotiating
prices with various entities in the pharmaceutical supply chain.\22\
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\22\ See National Association of Insurance Commissioners, A
Guide to Understanding Pharmacy Benefit Manager and Associated
Stakeholder Regulation (2025), available at <a href="https://content.naic.org/sites/default/files/pmbwhitepap.pdf">https://content.naic.org/sites/default/files/pmbwhitepap.pdf</a>; U.S.
Government Accountability Office, Prescription Drugs: Selected
States' Regulation of Pharmacy Benefit Managers (GAO-24-106898, Mar.
2024), available at <a href="https://www.gao.gov/assets/gao-24-106898.pdf">https://www.gao.gov/assets/gao-24-106898.pdf</a>;
Federal Trade Commission, Interim Staff Report, Pharmacy Benefit
Managers: The Powerful Middlemen Inflating Drug Costs and Squeezing
Main Street Pharmacies (July 2024), available at <a href="https://www.ftc.gov/system/files/ftc_gov/pdf/pharmacy-benefit-managers-staff-report.pdf">https://www.ftc.gov/system/files/ftc_gov/pdf/pharmacy-benefit-managers-staff-report.pdf</a>; Dennis W. Carlton, Mary Coleman, Nauman Ilias,
Theresa Sullivan, & Nathan Wilson, PBMs and Prescription Drug
Distribution: An Economic Consideration of Criticisms Levied against
Pharmacy Benefit Managers (Apr. 2025), available at <a href="https://compass-lexecon.files.svdcdn.com/production/files/documents/Carlton-PBM-Report-Sections-I-VII-2025.04.22.pdf?dm=1745347921">https://compass-lexecon.files.svdcdn.com/production/files/documents/Carlton-PBM-Report-Sections-I-VII-2025.04.22.pdf?dm=1745347921</a>; United States
Senate Finance Committee, Staff Report, Insulin: Examining the
Factors Driving the Rising Cost of a Century Old Drug (2021);
available at <a href="https://www.finance.senate.gov/imo/media/doc/Grassley-Wyden%20Insulin%20Report%20">https://www.finance.senate.gov/imo/media/doc/Grassley-Wyden%20Insulin%20Report%20</a>(FINAL%201).pdf; Advisory Council on
Employee Welfare and Pension Benefit Plans, PBM Compensation and Fee
Disclosure (Nov. 2014), available at <a href="https://www.dol.gov/sites/dolgov/files/ebsa/pdf_files/2014-pbm-compensation-and-fee-disclosure.pdf">https://www.dol.gov/sites/dolgov/files/ebsa/pdf_files/2014-pbm-compensation-and-fee-disclosure.pdf</a>.
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2.1. Formulary Development and Design
PBMs develop a self-insured group health plan's prescription drug
formulary,\23\ which is a list of drugs (brand, generic, and specialty)
that the self-insured group health plan will cover. A variety of
different, tiered cost-sharing requirements may apply to the drugs in
the formulary, either through coinsurance (a percentage off list price)
or copayments (a fixed price not tied to list price).\24\ Formularies
generally balance access to prescription drugs with managing costs, and
their development is similar across PBMs in that they often follow a
multi-step process involving several distinct committees.\25\ For
example, a pharmacy and therapeutics (P&T) committee is often used as
an external body of experts who ``evaluate clinical and medical
literature to select the most appropriate medications for individual
disease states and conditions.'' \26\ These committees are staffed with
healthcare providers including physicians, pharmacists, and patient
representatives. Following their analyses, the P&T committee makes
recommendations for the PBM's template formulary or for an individual
client's custom formulary.\27\ Notably, this is only one of several
possible PBM committees that may have influence over formulary
design.\28\ There are also formulary review and value assessment
committees which review P&T committee recommendations to make formulary
placement decisions and trade relations committees which negotiate and
approve rebate agreements with drug manufacturers.\29\
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\23\ Some formularies are open--covering virtually all drugs--
while others are more restrictive. There has been a growing trend
over the last decade, however, in usage of more restrictive
formularies, excluding more drugs. United States Senate Finance
Committee, Staff Report, Insulin: Examining the Factors Driving the
Rising Cost of a Century Old Drug, at 71, available at <a href="https://www.finance.senate.gov/imo/media/doc/Grassley-Wyden%20Insulin%20Report%20">https://www.finance.senate.gov/imo/media/doc/Grassley-Wyden%20Insulin%20Report%20</a>(FINAL%201).pdf; Federal Trade
Commission, Interim Staff Report, Pharmacy Benefit Managers: The
Powerful Middlemen Inflating Drug Costs and Squeezing Main Street
Pharmacies 66-67 (July 2024), available at <a href="https://www.ftc.gov/system/files/ftc_gov/pdf/pharmacy-benefit-managers-staff-report.pdf">https://www.ftc.gov/system/files/ftc_gov/pdf/pharmacy-benefit-managers-staff-report.pdf</a>.
\24\ Tasmina Hydery & Vimal Reddy, Journal of Managed Care &
Specialty Pharmacy, A Primer on Formulary Structures and Strategies,
Journal of Managed Care & Specialty Pharmacy (Feb. 3, 2024),
available at <a href="https://www.jmcp.org/doi/10.18553/jmcp.2024.30.2.206">https://www.jmcp.org/doi/10.18553/jmcp.2024.30.2.206</a>.
\25\ Id.
\26\ National Association of Insurance Commissioners, A Guide to
Understanding Pharmacy Benefit Manager and Associated Stakeholder
Regulation at 18 (2025), available at <a href="https://content.naic.org/sites/default/files/pmbwhitepap.pdf">https://content.naic.org/sites/default/files/pmbwhitepap.pdf</a>.
\27\ United States Senate Finance Committee, Staff Report,
Insulin: Examining the Factors Driving the Rising Cost of a Century
Old Drug at 35 (2021), <a href="https://www.finance.senate.gov/imo/media/doc/Grassley-Wyden%20Insulin%20Report%20">https://www.finance.senate.gov/imo/media/doc/Grassley-Wyden%20Insulin%20Report%20</a>(FINAL%201).pdf.
\28\ Id. at 36.
\29\ Id. at 36, 38.
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In connection with formulary development, PBMs and their affiliates
enter into rebate contracts with drug manufacturers and negotiate for
rebates and fees on prescription drugs and other remuneration in return
for preferred formulary placement.\30\ PBMs use the large number of
participants across multiple self-insured group health plans to
negotiate with drug manufacturers based on ``covered lives,'' primarily
[[Page 69095]]
where there are competing therapeutic alternatives.\31\ Rebates are
paid to the PBM periodically after the prescriptions are filled and may
be passed through to the self-insured group health plan to the extent
required by the services contract.\32\
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\30\ Federal Trade Commission, Interim Staff Report, Pharmacy
Benefit Managers: The Powerful Middlemen Inflating Drug Costs and
Squeezing Main Street Pharmacies at 10-11 (July 2024), available at
<a href="https://www.ftc.gov/system/files/ftc_gov/pdf/pharmacy-benefit-managers-staff-report.pdf">https://www.ftc.gov/system/files/ftc_gov/pdf/pharmacy-benefit-managers-staff-report.pdf</a>; U.S. Government Accountability Office,
Prescription Drugs: Selected States' Regulation of Pharmacy Benefit
Managers at 8 (GAO-24-106898, Mar. 2024), available at <a href="https://www.gao.gov/assets/gao-24-106898.pdf">https://www.gao.gov/assets/gao-24-106898.pdf</a>; National Association of
Insurance Commissioners, A Guide to Understanding Pharmacy Benefit
Manager and Associated Stakeholder Regulation at 19 (2025),
available at <a href="https://content.naic.org/sites/default/files/pmbwhitepap.pdf">https://content.naic.org/sites/default/files/pmbwhitepap.pdf</a>.
\31\ Dennis W. Carlton, Mary Coleman, Nauman Ilias, Theresa
Sullivan, & Nathan Wilson, PBMs and Prescription Drug Distribution:
An Economic Consideration of Criticisms Levied against Pharmacy
Benefit Managers at 8 (April 2025), available at <a href="https://compass-lexecon.files.svdcdn.com/production/files/documents/Carlton-PBM-Report-Sections-I-VII-2025.04.22.pdf?dm=1745347921">https://compass-lexecon.files.svdcdn.com/production/files/documents/Carlton-PBM-Report-Sections-I-VII-2025.04.22.pdf?dm=1745347921</a>; United States
Senate Finance Committee, Staff Report, Insulin: Examining the
Factors Driving the Rising Cost of a Century Old Drug at 29 (2021),
available at <a href="https://www.finance.senate.gov/imo/media/doc/Grassley-Wyden%20Insulin%20Report%20">https://www.finance.senate.gov/imo/media/doc/Grassley-Wyden%20Insulin%20Report%20</a>(FINAL%201).pdf. ``Covered lives'' means
the total number of eligible members covered under a benefit plan.
Truveris, The Truveris Pharmacy Benefits Glossary of Terms (Feb. 6,
2022), <a href="https://truveris.com/pharmacy-benefits-glossary/">https://truveris.com/pharmacy-benefits-glossary/</a>).
\32\ National Association of Insurance Commissioners, A Guide to
Understanding Pharmacy Benefit Manager and Associated Stakeholder
Regulation at 19 (2025), available at <a href="https://content.naic.org/sites/default/files/pmbwhitepap.pdf">https://content.naic.org/sites/default/files/pmbwhitepap.pdf</a>; United States Senate Finance
Committee, Staff Report, Insulin: Examining the Factors Driving the
Rising Cost of a Century Old Drug at 39 (2021), available at <a href="https://www.finance.senate.gov/imo/media/doc/Grassley-Wyden%20Insulin%20Report%20">https://www.finance.senate.gov/imo/media/doc/Grassley-Wyden%20Insulin%20Report%20</a>(FINAL%201).pdf.
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While PBMs historically have negotiated these contracts directly
with drug manufacturers, PBM-affiliated group purchasing organizations
(GPOs), also known as rebate aggregators, have taken over much of the
rebate negotiation function for commercial health plans in return for
incremental fees, or for a portion of the rebate that is then shared
with the PBM and the self-insured group health plan, pursuant to
contractual terms.\33\ Each of the three largest PBMs is part of a
vertically integrated entity which owns and controls such GPO
subsidiaries. These GPOs are affiliates of their respective PBMs and
perform the role of rebate aggregator, and two of these GPOs are
currently headquartered outside of the United States.\34\
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\33\ Federal Trade Commission, Interim Staff Report, Pharmacy
Benefit Managers: The Powerful Middlemen Inflating Drug Costs and
Squeezing Main Street Pharmacies at 21 (July 2024), available at
<a href="https://www.ftc.gov/system/files/ftc_gov/pdf/pharmacy-benefit-managers-staff-report.pdf">https://www.ftc.gov/system/files/ftc_gov/pdf/pharmacy-benefit-managers-staff-report.pdf</a>; United States Senate Finance Committee,
Staff Report, Insulin: Examining the Factors Driving the Rising Cost
of a Century Old Drug at 83 (2021), available at <a href="https://www.finance.senate.gov/imo/media/doc/Grassley-Wyden%20Insulin%20Report%20">https://www.finance.senate.gov/imo/media/doc/Grassley-Wyden%20Insulin%20Report%20</a>(FINAL%201).pdf.
\34\ Federal Trade Commission, Interim Staff Report, Pharmacy
Benefit Managers: The Powerful Middlemen Inflating Drug Costs and
Squeezing Main Street Pharmacies at 24 (July 2024), available at
<a href="https://www.ftc.gov/system/files/ftc_gov/pdf/pharmacy-benefit-managers-staff-report.pdf">https://www.ftc.gov/system/files/ftc_gov/pdf/pharmacy-benefit-managers-staff-report.pdf</a>.
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2.2. Drug Utilization Management
PBMs provide a range of utilization management services--such as
prior authorization, step therapy, and quantity limits--to promote
medication use, improve clinical outcomes, and control drug costs.\35\
While formularies act as the ``menu'' of drugs the self-insured group
health plan will cover, utilization management techniques dictate the
``how'' a participant may access drugs prescribed by their healthcare
provider. As illustrated above, formularies typically sort drugs into
tiers of cost-sharing requirements. Additionally, PBMs may require
providers to obtain approval before a drug can be dispensed, a process
known as prior authorization. Step therapy, on the other hand, requires
participants to try and fail on a less expensive drug first before
progressing to another, more expensive option. PBMs may also implement
quantity limits that cap the amount of a drug a participant can receive
for a particular condition within a given period.
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\35\ Federal Trade Commission, Interim Staff Report, Pharmacy
Benefit Managers: The Powerful Middlemen Inflating Drug Costs and
Squeezing Main Street Pharmacies at 12 (July 2024), available at
<a href="https://www.ftc.gov/system/files/ftc_gov/pdf/pharmacy-benefit-managers-staff-report.pdf">https://www.ftc.gov/system/files/ftc_gov/pdf/pharmacy-benefit-managers-staff-report.pdf</a>; U.S. Government Accountability Office,
Prescription Drugs: Selected States' Regulation of Pharmacy Benefit
Managers at 8 (GAO-24-106898, Mar. 2024), available at <a href="https://www.gao.gov/assets/gao-24-106898.pdf">https://www.gao.gov/assets/gao-24-106898.pdf</a>.
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2.3. Pharmacy Contracting and Network Design
PBMs develop pharmacy networks for self-insured group health plans
which can be divided into three types of dispensing formats: retail,
mail-order, and specialty.\36\ Retail pharmacies, which may be part of
a pharmacy chain or independent, purchase prescription drugs from drug
manufacturers and drug wholesalers and make them available to self-
insured group health plan participants.\37\ Mail-order pharmacies
dispense and deliver prescriptions directly to participants and are
often utilized for prescription drugs that are taken regularly.\38\
Specialty drugs that meet certain characteristics such as special
handling needs or high cost may be provided through a separate
pharmacy.\39\
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\36\ Federal Trade Commission, Interim Staff Report, Pharmacy
Benefit Managers: The Powerful Middlemen Inflating Drug Costs and
Squeezing Main Street Pharmacies at 11 (July 2024), available at
<a href="https://www.ftc.gov/system/files/ftc_gov/pdf/pharmacy-benefit-managers-staff-report.pdf">https://www.ftc.gov/system/files/ftc_gov/pdf/pharmacy-benefit-managers-staff-report.pdf</a>; U.S. Government Accountability Office,
Prescription Drugs: Selected States' Regulation of Pharmacy Benefit
Managers at 8 (GAO-24-106898, March 2024), available at <a href="https://www.gao.gov/assets/gao-24-106898.pdf">https://www.gao.gov/assets/gao-24-106898.pdf</a>.
\37\ Federal Trade Commission, Interim Staff Report, Pharmacy
Benefit Managers: The Powerful Middlemen Inflating Drug Costs and
Squeezing Main Street Pharmacies at 17 (July 2024), available at
<a href="https://www.ftc.gov/system/files/ftc_gov/pdf/pharmacy-benefit-managers-staff-report.pdf">https://www.ftc.gov/system/files/ftc_gov/pdf/pharmacy-benefit-managers-staff-report.pdf</a>.
\38\ Id.
\39\ Id. at 17-18.
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Pharmacy networks can be open (which includes most pharmacies as
in-network and apply uniform cost-sharing) or restrictive (which limit
in-network status to a narrow group of pharmacies). An open network
allows participants to fill prescriptions at nearly any licensed
pharmacy nationwide, offering broad convenience and access. This wider
access, however, often comes with higher costs for both the plan and
its participants, as broader networks may reduce a plan's leverage to
negotiate lower reimbursement rates. Recent analysis by the Federal
Trade Commission (FTC), Congress, and others have highlighted that the
largest PBMs utilize restrictive networks to steer participants to
their own vertically integrated or PBM-affiliated pharmacies, even when
another pharmacy may provide the same or better pricing, raising
concerns about diminished competition and potential conflicts of
interest.\40\
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\40\ Id. at 11.
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In developing pharmacy networks, PBMs negotiate reimbursement rates
and post-sale adjustment provisions that determine the amount the
pharmacy is ultimately reimbursed. The reimbursement rate is typically
determined using the lowest price among various indices using the
``lesser of'' logic, for example, the lesser of: (1) Average Wholesale
Price, (2) Wholesale Acquisition Cost, (3) Usual and Customary Price,
(4) Submitted Costs, or (5) Maximum Allowable Costs (MAC).\41\ MAC
lists represent the amount that a group health plan will pay for
generics and, in some cases, brand name drugs with generic
equivalents.\42\ MAC lists are often proprietary and are created,
maintained, and updated by PBMs exclusively.
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\41\ Id.; Dennis W. Carlton, Mary Coleman, Nauman Ilias, Theresa
Sullivan, & Nathan Wilson, PBMs and Prescription Drug Distribution:
An Economic Consideration of Criticisms Levied against Pharmacy
Benefit Managers at 26 (Apr. 2025), available at <a href="https://compass-lexecon.files.svdcdn.com/production/files/documents/Carlton-PBM-Report-Sections-I-VII-2025.04.22.pdf?dm=1745347921">https://compass-lexecon.files.svdcdn.com/production/files/documents/Carlton-PBM-Report-Sections-I-VII-2025.04.22.pdf?dm=1745347921</a>.
\42\ U.S. Government Accountability Office, Prescription Drugs:
Selected States' Regulation of Pharmacy Benefit Managers at 13 (GAO-
24-106898, March 2024), <a href="https://www.gao.gov/assets/gao-24-106898.pdf">https://www.gao.gov/assets/gao-24-106898.pdf</a>.
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[[Page 69096]]
2.4. Claims Administration and Other Services
Finally, PBMs also perform prescription drug claims administration
services, which like the other services, are important to a self-
insured group health plan's pharmacy benefit program. Claims processing
may involve the determination of ``(1) whether an individual was an
eligible participant: (2) whether the prescribed drug was covered by
the plan; (3) whether the participant met his or her deductible; and
(4) what the participant's co-payment would be if required by the
plan.'' \43\ PBMs have developed systems to transmit prescription
information between themselves and pharmacies, permitting the rapid
processing of claims as prescriptions are being filled.\44\ Other
services include adjudicating appeals, plan recordkeeping and
regulatory compliance.\45\
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\43\ Advisory Council on Employee Welfare and Pension Benefit
Plans, PBM Compensation and Fee Disclosure at 9 (Nov. 2014),
available at <a href="https://www.dol.gov/sites/dolgov/files/ebsa/pdf_files/2014-pbm-compensation-and-fee-disclosure.pdf">https://www.dol.gov/sites/dolgov/files/ebsa/pdf_files/2014-pbm-compensation-and-fee-disclosure.pdf</a>.
\44\ Federal Trade Commission, Interim Staff Report, Pharmacy
Benefit Managers: The Powerful Middlemen Inflating Drug Costs and
Squeezing Main Street Pharmacies at 13 (July 2024), available at
<a href="https://www.ftc.gov/system/files/ftc_gov/pdf/pharmacy-benefit-managers-staff-report.pdf">https://www.ftc.gov/system/files/ftc_gov/pdf/pharmacy-benefit-managers-staff-report.pdf</a>; Dennis W. Carlton, Mary Coleman, Nauman
Ilias, Theresa Sullivan, & Nathan Wilson, PBMs and Prescription Drug
Distribution: An Economic Consideration of Criticisms Levied against
Pharmacy Benefit Managers at 11 (April 2025), <a href="https://compass-lexecon.files.svdcdn.com/production/files/documents/Carlton-PBM-Report-Sections-I-VII-2025.04.22.pdf?dm=1745347921">https://compass-lexecon.files.svdcdn.com/production/files/documents/Carlton-PBM-Report-Sections-I-VII-2025.04.22.pdf?dm=1745347921</a>.
\45\ U.S. Government Accountability Office, Prescription Drugs:
Selected States' Regulation of Pharmacy Benefit Managers at 8 (GAO-
24-106898, Mar. 2024), available at <a href="https://www.gao.gov/assets/gao-24-106898.pdf">https://www.gao.gov/assets/gao-24-106898.pdf</a>; Advisory Council on Employee Welfare and Pension
Benefit Plans, PBM Compensation and Fee Disclosure at 6 (Nov. 2014),
available at <a href="https://www.dol.gov/sites/dolgov/files/ebsa/pdf_files/2014-pbm-compensation-and-fee-disclosure.pdf">https://www.dol.gov/sites/dolgov/files/ebsa/pdf_files/2014-pbm-compensation-and-fee-disclosure.pdf</a>.
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3. PBM Contracts and Arrangements With Self-Insured Group Health Plans
When engaging in a request for proposal process, responsible plan
fiduciaries of self-insured group health plans receive bids to contract
directly with a PBM for services, or they may contract for services
with a TPA or other entity (examples discussed herein) that agrees to
provide pharmacy benefit management services to the self-insured group
health plan.\46\ Some responsible plan fiduciaries also join coalitions
or cooperatives that negotiate with PBMs on behalf of a group of
employer-sponsored self-insured group health plans.\47\
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\46\ See Matthew Fiedler, Loren Adler, & Richard G. Frank, A
Brief Look at Current Debates about Pharmacy Benefit Managers, The
Brookings Institution (Sept. 7, 2023), available at <a href="https://www.brookings.edu/articles/a-brief-look-at-current-debates-about-pharmacy-benefit-managers/">https://www.brookings.edu/articles/a-brief-look-at-current-debates-about-pharmacy-benefit-managers/</a>.
\47\ Dennis W. Carlton, Mary Coleman, Nauman Ilias, Theresa
Sullivan, & Nathan Wilson, PBMs and Prescription Drug Distribution:
An Economic Consideration of Criticisms Levied against Pharmacy
Benefit Managers at 19-20, 59 (Apr. 2025), <a href="https://compass-lexecon.files.svdcdn.com/production/files/documents/Carlton-PBM-Report-Sections-I-VII-2025.04.22.pdf?dm=1745347921">https://compass-lexecon.files.svdcdn.com/production/files/documents/Carlton-PBM-Report-Sections-I-VII-2025.04.22.pdf?dm=1745347921</a>.
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Negotiating a pharmacy benefit contract is a complex process that
requires specialized expertise. Responsible plan fiduciaries,
especially those without internal expertise and practices to manage
drug benefits, often work with a separate consultant or broker to
select and negotiate a direct contractual agreement with the PBM. As a
best practice, the Department is of the view that large employers
should ensure that strategic financial leaders, including the company's
Chief Financial Officer or similarly situated individual(s), both lead
and collaborate closely with internal teams in selecting, designing,
and engaging in procurement for employee health benefits. This will
ensure alignment of health benefits with the company's overall
strategic financial plan and assist in addressing rising healthcare
costs, improving benefits, and reducing administrative burdens.
Consultant or broker services can include requests for proposals
(RFPs), PBM oversight, and PBM audit services.\48\ In some cases, the
consultants and brokers receive indirect compensation (i.e.,
compensation from the PBMs or other sources other than the self-insured
group health plan) that create a conflict of interest with respect to
their self-insured group health plan customers.\49\ Consulting firms
and brokerages reportedly may receive payments on a per prescription or
per covered employee basis, or they may share in rebates earned by
PBMs.\50\ Consultants may have preferred relationships with certain
PBMs which may impact their recommendations.\51\
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\48\ Milliman, Pharmacy Benefits Consulting, available at
<a href="https://www.milliman.com/en/services/pharmacy-benefits-consulting">https://www.milliman.com/en/services/pharmacy-benefits-consulting</a>.
\49\ Advisory Council on Employee Welfare and Pension Benefit
Plans, PBM Compensation and Fee Disclosure at 3 (Nov. 2014),
available at <a href="https://www.dol.gov/sites/dolgov/files/ebsa/pdf_files/2014-pbm-compensation-and-fee-disclosure.pdf">https://www.dol.gov/sites/dolgov/files/ebsa/pdf_files/2014-pbm-compensation-and-fee-disclosure.pdf</a>. Deidre S. Gifford,
Connecticut Health Strategy, Report of Pharmacy Benefit Manager
Practices at 34 (Feb. 2025), available at <a href="https://portal.ct.gov/-/media/ohs/reports/ohs-report-of-pharmacy-benefit-manager-practices-pa-23-171-s7.pdf?rev=01a4809a4795421e890970d8cd5f2fc1">https://portal.ct.gov/-/media/ohs/reports/ohs-report-of-pharmacy-benefit-manager-practices-pa-23-171-s7.pdf?rev=01a4809a4795421e890970d8cd5f2fc1</a>.
\50\ Bob Herman, `It's beyond unethical': Opaque conflicts of
interest permeate prescription drug benefits (June 20, 2023),
available at <a href="https://www.statnews.com/2023/06/20/pbms-consulting-firms-investigation/">https://www.statnews.com/2023/06/20/pbms-consulting-firms-investigation/</a>.
\51\ Advisory Council on Employee Welfare and Pension Benefit
Plans, PBM Compensation and Fee Disclosure at 21 (Nov. 2014),
available at <a href="https://www.dol.gov/sites/dolgov/files/ebsa/pdf_files/2014-pbm-compensation-and-fee-disclosure.pdf">https://www.dol.gov/sites/dolgov/files/ebsa/pdf_files/2014-pbm-compensation-and-fee-disclosure.pdf</a>.
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In addition to the complexity of the negotiations, PBM contracts
themselves are complex and responsible plan fiduciaries often lack
knowledge of how PBMs operate and how they receive compensation.\52\
For example, PBM contracts may be for one year or multiple years, and
may be amended at any point during the contract period if the formulary
changes. The contracts may also allow for interim ``market checks.''
\53\ As described by one source, this involves ``a comparison of the
aggregate program pricing terms with the market access product types/
distribution channels, administrative fees, allowances, other financial
guarantees, and rebates to determine if the plan sponsor is receiving
competitive market rates.'' \54\ The contracts also address the ability
of the responsible plan fiduciary to audit the PBM's compliance with
the contract.\55\ PBMs often limit a self-insured group health plan's
audit rights, however, providing only a sample of records relating to
contractual performance,
[[Page 69097]]
requiring that the auditor be approved by the PBM, or that the audit be
conducted on-site at a facility chosen by the PBM.
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\52\ Congress has prohibited plans and issuers from entering
into contracts with healthcare providers, networks or association of
providers, third-party administrators, or other service providers
offering access to a network of providers that would prohibit them
from electronically accessing de-identified claims and encounter
information or data, including financial information, such as the
allowed amount, or any other claim-related financial obligations
included in the provider contract; however, such provisions do not
affirmatively provide disclosure to responsible plan fiduciaries.
See ERISA section 724; Code section 9824(a)(1)(B); PHS Act section
2799A-9.
\53\ Dennis W. Carlton, Mary Coleman, Nauman Ilias, Theresa
Sullivan, & Nathan Wilson, PBMs and Prescription Drug Distribution:
An Economic Consideration of Criticisms Levied against Pharmacy
Benefit Managers at 60 (Apr. 2025), available at <a href="https://compass-lexecon.files.svdcdn.com/production/files/documents/Carlton-PBM-Report-Sections-I-VII-2025.04.22.pdf?dm=1745347921">https://compass-lexecon.files.svdcdn.com/production/files/documents/Carlton-PBM-Report-Sections-I-VII-2025.04.22.pdf?dm=1745347921</a>; Alex Johnson &
Brian N. Anderson, PBM Best Practices Series, RFP Process; Milliman
White Paper at 4 (Sept. 2016), available at <a href="https://edge.sitecorecloud.io/millimaninc5660-milliman6442-prod27d5-0001/media/Milliman/PDFs/Articles/Best-practices-PBM-RFP-process.pdf">https://edge.sitecorecloud.io/millimaninc5660-milliman6442-prod27d5-0001/media/Milliman/PDFs/Articles/Best-practices-PBM-RFP-process.pdf</a>.
\54\ Alex Johnson & Brian N. Anderson, PBM Best Practices
Series, RFP Process; Milliman White Paper at 4 (September 2016),
available at <a href="https://edge.sitecorecloud.io/millimaninc5660-milliman6442-prod27d5-0001/media/Milliman/PDFs/Articles/Best-practices-PBM-RFP-process.pdf">https://edge.sitecorecloud.io/millimaninc5660-milliman6442-prod27d5-0001/media/Milliman/PDFs/Articles/Best-practices-PBM-RFP-process.pdf</a>.
\55\ Scott McEachern & Patrick Cambel, PBM Contracts: Understand
then Optimize; Milliman White Paper (Aug. 2020), available at
<a href="https://us.milliman.com/en/insight/pbm-contracts-understand-then-optimize">https://us.milliman.com/en/insight/pbm-contracts-understand-then-optimize</a> (``PBMs normally define all audit rights and limitations in
the PBM contract and plan sponsors must initiate the audit.'');
Advisory Council on Employee Welfare and Pension Benefit Plans, PBM
Compensation and Fee Disclosure at 24 (Nov. 2014), available at
<a href="https://www.dol.gov/sites/dolgov/files/ebsa/pdf_files/2014-pbm-compensation-and-fee-disclosure.pdf">https://www.dol.gov/sites/dolgov/files/ebsa/pdf_files/2014-pbm-compensation-and-fee-disclosure.pdf</a>.
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3.1. Administrative Fees and Spread Pricing
PBM compensation arrangements with self-insured group health plans
may have multiple components, but the compensation models are sometimes
described as falling into two general categories: pass through pricing
and spread pricing.\56\
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\56\ National Association of Insurance Commissioners, A Guide to
Understanding Pharmacy Benefit Manager and Associated Stakeholder
Regulation at 13 (2025), available at <a href="https://content.naic.org/sites/default/files/pmbwhitepap.pdf">https://content.naic.org/sites/default/files/pmbwhitepap.pdf</a>; House Committee on Oversight
and Accountability Staff, The Role of Pharmacy Benefit Managers in
Prescription Drug Markets at 7 (2024), available at <a href="https://oversight.house.gov/wp-content/uploads/2024/07/PBM-Report-FINAL-with-Redactions.pdf">https://oversight.house.gov/wp-content/uploads/2024/07/PBM-Report-FINAL-with-Redactions.pdf</a>; Dennis W. Carlton, Mary Coleman, Nauman Ilias,
Theresa Sullivan, & Nathan Wilson, PBMs and Prescription Drug
Distribution: An Economic Consideration of Criticisms Levied against
Pharmacy Benefit Managers at 2 (Apr. 2025), available at <a href="https://compass-lexecon.files.svdcdn.com/production/files/documents/Carlton-PBM-Report-Sections-I-VII-2025.04.22.pdf?dm=1745347921">https://compass-lexecon.files.svdcdn.com/production/files/documents/Carlton-PBM-Report-Sections-I-VII-2025.04.22.pdf?dm=1745347921</a>.
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In a pass-through pricing model, self-insured group health plans
may pay the PBM the average wholesale price (AWP) for a drug minus a
negotiated discount (also referred to as the negotiated rate) plus an
administrative fee, which may be structured on a per claim basis, per
participant basis, flat rate, or other mechanism.\57\ In a spread
pricing model, self-insured group health plans may pay AWP or AWP minus
a smaller negotiated discount than in a pass-through model, but will
either not pay or pay only a reduced administrative fee.\58\ The PBM
will instead retain the spread between the price reimbursed to the
pharmacy, which might be based on MAC or a different formula, and the
negotiated rate with self-insured group health plans.\59\
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\57\ National Association of Insurance Commissioners, A Guide to
Understanding Pharmacy Benefit Manager and Associated Stakeholder
Regulation at 13 (2025), available at <a href="https://content.naic.org/sites/default/files/pmbwhitepap.pdf">https://content.naic.org/sites/default/files/pmbwhitepap.pdf</a>; Dennis W. Carlton, Mary
Coleman, Nauman Ilias, Theresa Sullivan, & Nathan Wilson, PBMs and
Prescription Drug Distribution: An Economic Consideration of
Criticisms Levied against Pharmacy Benefit Managers at 142-43 (Oct.
2024), available at <a href="https://compass-lexecon.files.svdcdn.com/production/files/documents/Carlton-PBM-Report-Sections-I-VII-2025.04.22.pdf?dm=1745347921">https://compass-lexecon.files.svdcdn.com/production/files/documents/Carlton-PBM-Report-Sections-I-VII-2025.04.22.pdf?dm=1745347921</a>.
\58\ Dennis W. Carlton, Mary Coleman, Nauman Ilias, Theresa
Sullivan, & Nathan Wilson, PBMs and Prescription Drug Distribution:
An Economic Consideration of Criticisms Levied against Pharmacy
Benefit Managers at 119 (Apr. 2025), available at <a href="https://compass-lexecon.files.svdcdn.com/production/files/documents/Carlton-PBM-Report-Sections-I-VII-2025.04.22.pdf?dm=1745347921">https://compass-lexecon.files.svdcdn.com/production/files/documents/Carlton-PBM-Report-Sections-I-VII-2025.04.22.pdf?dm=1745347921</a>.
\59\ National Association of Insurance Commissioners, A Guide to
Understanding Pharmacy Benefit Manager and Associated Stakeholder
Regulation at 13 (2025), available at <a href="https://content.naic.org/sites/default/files/pmbwhitepap.pdf">https://content.naic.org/sites/default/files/pmbwhitepap.pdf</a>; U.S. Government Accountability
Office, Prescription Drugs: Selected States' Regulation of Pharmacy
Benefit Managers at 7-8 (GAO-24-106898, Mar. 2024), available at
<a href="https://www.gao.gov/assets/gao-24-106898.pdf">https://www.gao.gov/assets/gao-24-106898.pdf</a>.
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The spread pricing model does not utilize an agreed upon AWP for a
given drug. Accessing AWP data may be costly, and AWP providers use
proprietary, hard-to-verify data sources and methodologies.\60\
Additionally, PBMs typically have not disclosed to the responsible plan
fiduciaries either the reimbursement amount paid to pharmacies or the
pharmacies' acquisition costs.\61\ Even where a price guarantee is
included in a PBM contract, this guarantee may apply on an aggregate
basis where PBMs may use periodic true-ups to show compliance with the
price guarantee, rather than ensuring each individual prescription is
billed at or below the guaranteed price.\62\ One testimony to the ERISA
Advisory Council indicated that PBMs may also use complex pricing
algorithms in aggregate calculations, which can involve including or
excluding certain claims in ways that affect the calculations used to
measure the fulfillment of price guarantees.\63\
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\60\ AWP is ``an estimate of the price wholesalers charge for
drugs.'' National Association of Insurance Commissioners, A Guide to
Understanding Pharmacy Benefit Manager and Associated Stakeholder
Regulation at 12 (2025), available at <a href="https://content.naic.org/sites/default/files/pmbwhitepap.pdf">https://content.naic.org/sites/default/files/pmbwhitepap.pdf</a>. AWP prices are available from
third-party vendors. Andrew W. Mulcahy & Vishnupriya Kareddy,
Prescription Drug Supply Chains: An Overview of Stakeholder
Relationships, RAND Corporation at 30 (2021), available at <a href="https://aspe.hhs.gov/sites/default/files/documents/0a464f25f0f2e987170f0a1d7ec21448/RRA328-1-Rxsupplychain.pdf">https://aspe.hhs.gov/sites/default/files/documents/0a464f25f0f2e987170f0a1d7ec21448/RRA328-1-Rxsupplychain.pdf</a>. The
Department reviewed the publicly available information on the
websites of AWP providers and found no methodology documents,
quality control practices, or sample price lists or analysis that
could validate the accuracy of the AWP.
\61\ National Association of Insurance Commissioners, A Guide to
Understanding Pharmacy Benefit Manager and Associated Stakeholder
Regulation at 21 (2025) (``Pharmacy pricing is complex, and the
process is not transparent. Plan sponsors are often unaware of the
difference between the amount they are billed and the pharmacy
reimbursement.''), available at <a href="https://content.naic.org/sites/default/files/pmbwhitepap.pdf">https://content.naic.org/sites/default/files/pmbwhitepap.pdf</a>; Eastern Research Group, An
Examination of Pharmaceutical Supply Chain Intermediary Margins in
the U.S. Retail Chain at ii (Sept. 27, 2024), available at <a href="https://aspe.hhs.gov/sites/default/files/documents/db1adf86053b1fda8ae9efd01c10ddc8/Pharma%20Supply%20Chains%20Margins%20Report_Final_2024.09.27_Clean_508.pdf">https://aspe.hhs.gov/sites/default/files/documents/db1adf86053b1fda8ae9efd01c10ddc8/Pharma%20Supply%20Chains%20Margins%20Report_Final_2024.09.27_Clean_508.pdf</a>.
\62\ Scott McEachern & Patrick Cambel, PBM Contracts: Understand
then Optimize, Milliman White Paper (Aug. 2, 2020), available at
<a href="https://us.milliman.com/en/insight/pbm-contracts-understand-then-optimize">https://us.milliman.com/en/insight/pbm-contracts-understand-then-optimize</a> (``Contracts with PBMs typically involve guarantees in a
number of pricing areas. The PBM may guarantee individual pricing by
dispensing channel (retail, mail order, and specialty) as well as by
drug type (brand or generic). The PBM might commit to these pricing
metrics such that overall, at the end of the year, the aggregate
pricing within each channel and drug type will be at least as good
as the guarantees outlined in the contract. In the case that a PBM
has not met a guarantee, the PBM would issue a true-up payment to
the plan sponsor to make up for any deficiencies. However, some
contracting language may allow the PBM to cover its underperformance
by using any overperformance from other channels.'').
\63\ Advisory Council on Employee Welfare and Pension Benefit
Plans, PBM Compensation and Fee Disclosure at 22 (Nov. 2014),
available at <a href="https://www.dol.gov/sites/dolgov/files/ebsa/pdf_files/2014-pbm-compensation-and-fee-disclosure.pdf">https://www.dol.gov/sites/dolgov/files/ebsa/pdf_files/2014-pbm-compensation-and-fee-disclosure.pdf</a>.
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Some responsible plan fiduciaries may view the spread pricing model
as providing potential benefits such as smoothing fluctuations in drug
costs, which could reduce unpredictability, compared to models where
the full drug costs are passed through to the self-insured group health
plan, without applying a price smoothing mechanism.\64\ However, the
spread pricing model may be less transparent to responsible plan
fiduciaries if there are no disclosures of the differences between the
amounts the PBM paid to pharmacies and the amounts charged to the self-
insured group health plan, or if pricing guarantees are verified only
in the aggregate. Comparatively, in the pass-through model, PBMs charge
the plan the same amount they reimburse pharmacies, and compensation is
more plainly identified, which some responsible plan fiduciaries
characterize as a more ``transparent'' arrangement.\65\ Some PBMs that
offer pass-through pricing also have business models that provide
customers with frequent audit
[[Page 69098]]
opportunities and minimal limitations on access to PBM data.\66\
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\64\ Dennis W. Carlton, Mary Coleman, Nauman Ilias, Theresa
Sullivan, & Nathan Wilson, PBMs and Prescription Drug Distribution:
An Economic Consideration of Criticisms Levied against Pharmacy
Benefit Managers at 34 (Apr. 2025), available at <a href="https://compass-lexecon.files.svdcdn.com/production/files/documents/Carlton-PBM-Report-Sections-I-VII-2025.04.22.pdf?dm=1745347921">https://compass-lexecon.files.svdcdn.com/production/files/documents/Carlton-PBM-Report-Sections-I-VII-2025.04.22.pdf?dm=1745347921</a>.
\65\ House Committee on Oversight and Accountability Staff, The
Role of Pharmacy Benefit Managers in Prescription Drug Markets at 26
(2024), available at <a href="https://oversight.house.gov/wp-content/uploads/2024/07/PBM-Report-FINAL-with-Redactions.pdf">https://oversight.house.gov/wp-content/uploads/2024/07/PBM-Report-FINAL-with-Redactions.pdf</a>; Dennis W. Carlton,
Mary Coleman, Nauman Ilias, Theresa Sullivan, & Nathan Wilson, PBMs
and Prescription Drug Distribution: An Economic Consideration of
Criticisms Levied against Pharmacy Benefit Managers at 142 (Apr.
2025), available at <a href="https://compass-lexecon.files.svdcdn.com/production/files/documents/Carlton-PBM-Report-Sections-I-VII-2025.04.22.pdf?dm=1745347921">https://compass-lexecon.files.svdcdn.com/production/files/documents/Carlton-PBM-Report-Sections-I-VII-2025.04.22.pdf?dm=1745347921</a>.
\66\ House Committee on Oversight and Accountability Staff, The
Role of Pharmacy Benefit Managers in Prescription Drug Markets at 26
(2024), available at <a href="https://oversight.house.gov/wp-content/uploads/2024/07/PBM-Report-FINAL-with-Redactions.pdf">https://oversight.house.gov/wp-content/uploads/2024/07/PBM-Report-FINAL-with-Redactions.pdf</a>.
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Additionally, as discussed in greater detail later in the
Regulatory Impact Analysis, the largest PBMs have become vertically
integrated with health insurance companies, pharmacies, drug
manufacturers, and other entities.\67\ PBMs sometimes operate
affiliated pharmacies and require plan participants to use these
affiliated pharmacies for certain prescriptions such as mail-order and/
or specialty drugs.\68\ In some ways, the vertically integrated
structure can be efficient and cost-effective, but it may affect price
competition when participants are required to use a PBM-affiliated
pharmacy for certain prescriptions.\69\ With respect to specialty
drugs, which are an increasing source of drug spending, the FTC found
in a recent study that the three largest PBMs ``reimbursed their
affiliated pharmacies at a higher rate than unaffiliated pharmacies on
nearly every specialty generic drug examined.'' \70\
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\67\ Federal Trade Commission, Interim Staff Report, Pharmacy
Benefit Managers: The Powerful Middlemen Inflating Drug Costs and
Squeezing Main Street Pharmacies at 1-2 (July 2024), available at
<a href="https://www.ftc.gov/system/files/ftc_gov/pdf/pharmacy-benefit-managers-staff-report.pdf">https://www.ftc.gov/system/files/ftc_gov/pdf/pharmacy-benefit-managers-staff-report.pdf</a>.
\68\ Federal Trade Commission, Interim Staff Report, Pharmacy
Benefit Managers: The Powerful Middlemen Inflating Drug Costs and
Squeezing Main Street Pharmacies at 12 (July 2024), available at
<a href="https://www.ftc.gov/system/files/ftc_gov/pdf/pharmacy-benefit-managers-staff-report.pdf">https://www.ftc.gov/system/files/ftc_gov/pdf/pharmacy-benefit-managers-staff-report.pdf</a>; Advisory Council on Employee Welfare and
Pension Benefit Plans, PBM Compensation and Fee Disclosure at 11
(Nov. 2014), <a href="https://www.dol.gov/sites/dolgov/files/ebsa/pdf_files/2014-pbm-compensation-and-fee-disclosure.pdf">https://www.dol.gov/sites/dolgov/files/ebsa/pdf_files/2014-pbm-compensation-and-fee-disclosure.pdf</a>.
\69\ National Association of Insurance Commissioners, A Guide to
Understanding Pharmacy Benefit Manager and Associated Stakeholder
Regulation at 23 (2025), available at <a href="https://content.naic.org/sites/default/files/pmbwhitepap.pdf">https://content.naic.org/sites/default/files/pmbwhitepap.pdf</a>; Dennis W. Carlton, Mary
Coleman, Nauman Ilias, Theresa Sullivan, & Nathan Wilson, PBMs and
Prescription Drug Distribution: An Economic Consideration of
Criticisms Levied against Pharmacy Benefit Managers at 18 (Apr.
2025), available at <a href="https://compass-lexecon.files.svdcdn.com/production/files/documents/Carlton-PBM-Report-Sections-I-VII-2025.04.22.pdf?dm=1745347921">https://compass-lexecon.files.svdcdn.com/production/files/documents/Carlton-PBM-Report-Sections-I-VII-2025.04.22.pdf?dm=1745347921</a>.
\70\ Federal Trade Commission, Second Interim Staff Report,
Specialty Generic Drugs: A Growing Profit Center for Vertically
Integrated Pharmacy Benefit Mangers at 2 (Jan. 2025), <a href="https://www.ftc.gov/system/files/ftc_gov/pdf/PBM-6b-Second-Interim-Staff-Report.pdf">https://www.ftc.gov/system/files/ftc_gov/pdf/PBM-6b-Second-Interim-Staff-Report.pdf</a>.
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3.2. Payments From Drug Manufacturers
Payments from drug manufacturers are another component of PBM
compensation. These types of payments include, but are not limited to,
rebates, administrative fees, price protection fees, and so on. These
payments are often defined by reference to list price, which
incentivizes PBMs to choose high-list price, high-rebate drugs when
creating a self-insured group health plan's formulary.\71\
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\71\ See Federal Trade Commission, FTC Secures Landmark
Settlement with Express Scripts to Lower Drug Costs for American
Patients (Feb 4. 2026), available at <a href="https://www.ftc.gov/news-events/news/press-releases/2026/02/ftc-secures-landmark-settlement-express-scripts-lower-drug-costs-american-patients">https://www.ftc.gov/news-events/news/press-releases/2026/02/ftc-secures-landmark-settlement-express-scripts-lower-drug-costs-american-patients</a> (``The complaint
alleges that this system pushed insulin manufacturers, among others,
to compete for preferred formulary coverage based on the size of
rebates off the list price rather than net price, which ultimately
benefitted the PBMs, including ESI, which keep a portion of the
inflated rebates.'').
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Rebates are discounts on drugs offered by the pharmaceutical
manufacturer in return for preferred placement on a self-insured group
health plan's formulary; and the extent to which rebates are retained
by the PBM or passed through to the self-insured group health plan is
negotiated by the parties.\72\ PBMs also earn administrative fees from
drug manufacturers when prescriptions are filled based on the
utilization of the drugs and plan design decisions made by plan
sponsors, including formulary and utilization management
strategies.\73\ Price protection fees are an additional rebate that a
manufacturer pays the PBM if list prices rise faster than inflation or
another agreed upon amount.\74\
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\72\ National Association of Insurance Commissioners, A Guide to
Understanding Pharmacy Benefit Manager and Associated Stakeholder
Regulation at 19 (2025), available at <a href="https://content.naic.org/sites/default/files/pmbwhitepap.pdf">https://content.naic.org/sites/default/files/pmbwhitepap.pdf</a>.
\73\ United States Senate Finance Committee, Staff Report,
Insulin: Examining the Factors Driving the Rising Cost of a Century
Old Drug at 8 (2021), available at <a href="https://www.finance.senate.gov/imo/media/doc/Grassley-Wyden%20Insulin%20Report%20">https://www.finance.senate.gov/imo/media/doc/Grassley-Wyden%20Insulin%20Report%20</a>(FINAL%201).pdf;
Dennis W. Carlton, Mary Coleman, Nauman Ilias, Theresa Sullivan, &
Nathan Wilson, PBMs and Prescription Drug Distribution: An Economic
Consideration of Criticisms Levied against Pharmacy Benefit Managers
at 13 (Apr. 2025), available at <a href="https://compass-lexecon.files.svdcdn.com/production/files/documents/Carlton-PBM-Report-Sections-I-VII-2025.04.22.pdf?dm=1745347921">https://compass-lexecon.files.svdcdn.com/production/files/documents/Carlton-PBM-Report-Sections-I-VII-2025.04.22.pdf?dm=1745347921</a>.
\74\ United States Senate Finance Committee, Staff Report,
Insulin: Examining the Factors Driving the Rising Cost of a Century
Old Drug at 9 (2021), available at <a href="https://www.finance.senate.gov/imo/media/doc/Grassley-Wyden%20Insulin%20Report%20">https://www.finance.senate.gov/imo/media/doc/Grassley-Wyden%20Insulin%20Report%20</a>(FINAL%201).pdf;
Dennis W. Carlton, Mary Coleman, Nauman Ilias, Theresa Sullivan, &
Nathan Wilson, PBMs and Prescription Drug Distribution: An Economic
Consideration of Criticisms Levied against Pharmacy Benefit Managers
at 13 (Apr. 2025), available at <a href="https://compass-lexecon.files.svdcdn.com/production/files/documents/Carlton-PBM-Report-Sections-I-VII-2025.04.22.pdf?dm=1745347921">https://compass-lexecon.files.svdcdn.com/production/files/documents/Carlton-PBM-Report-Sections-I-VII-2025.04.22.pdf?dm=1745347921</a>.
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To the extent rebates, fees, and other sources of remuneration are
passed through to the self-insured group health plan, such amounts can
help defray the cost of the healthcare benefits being provided.\75\
However, even if there are contracted obligations requiring that
rebates, fees, and other sources of remuneration be passed through to
the plans, the responsible plan fiduciaries may benefit from more
transparent disclosures to ensure that such amounts are passed through
as agreed to under the contract with the PBM, in part due to evolving
terminology used in the contracts and or re-routing or recharacterizing
of the amounts.\76\ The role of rebate aggregators adds complexity to
drug pricing and transparency for disclosure of rebates owed to group
health plans.\77\
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\75\ For example, rebates passed through to a trust established
to fund a self-insured group health plan would be required to be
used for the exclusive purposes of providing benefits to the plan's
participants and beneficiaries and defraying reasonable expenses of
administering the plan. See ERISA section 403(c)(1). See also Deidre
S. Gifford, Report of Pharmacy Benefit Manager Practices at 38
(2025) (``From the plan sponsor's perspective, rebates are a
valuable tool in keeping plan premiums low as most plans use rebate
value to directly offset plan liability and do not share rebate
value with members at the point of sale.''), available at <a href="https://portal.ct.gov/-/media/ohs/reports/ohs-report-of-pharmacy-benefit-manager-practices-pa-23-171-s7.pdf?rev=01a4809a4795421e890970d8cd5f2fc1">https://portal.ct.gov/-/media/ohs/reports/ohs-report-of-pharmacy-benefit-manager-practices-pa-23-171-s7.pdf?rev=01a4809a4795421e890970d8cd5f2fc1</a>.
\76\ Joanna Shepherd, Pharmacy Benefit Mangers, Rebates, and
Drug Prices: Conflicts of Interest in the Market for Prescription
Drugs, Yale L. & Pol'y Rev. at 382 (2020), available at <a href="https://openyls.law.yale.edu/server/api/core/bitstreams/fc20e184-b2d6-4b02-a0f6-a495e3fb5cd2/content">https://openyls.law.yale.edu/server/api/core/bitstreams/fc20e184-b2d6-4b02-a0f6-a495e3fb5cd2/content</a> (``PBMs rarely disclose the rebates they
receive from manufacturers, and in situations in which they've
agreed to share rebate information, the PBMs may recategorize
rebates as fees to circumvent disclosure obligations.''); Advisory
Council on Employee Welfare and Pension Benefit Plans, PBM
Compensation and Fee Disclosure at 22 (Nov. 2014), <a href="https://www.dol.gov/sites/dolgov/files/ebsa/pdf_files/2014-pbm-compensation-and-fee-disclosure.pdf">https://www.dol.gov/sites/dolgov/files/ebsa/pdf_files/2014-pbm-compensation-and-fee-disclosure.pdf</a>.
\77\ Eric Percher, Trends in Profitability and Compensation of
PBMs & PBM Contracting Entities, Nephron Research at 2 (Sept. 18,
2023), available at <a href="https://cdn.ymaws.com/www.wsparx.org/resource/resmgr/legislative_session/2024/pbm_campaign/nephron_pbm.pdf">https://cdn.ymaws.com/www.wsparx.org/resource/resmgr/legislative_session/2024/pbm_campaign/nephron_pbm.pdf</a>.
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The rebate payment structure would also benefit from more
transparent disclosure for other reasons. One commonly cited concern is
that PBMs have an incentive to select certain drugs with high-list
prices over others for group health plan formularies due to the size of
the rebate payments from drug manufacturers.\78\ In addition to
[[Page 69099]]
providing PBMs with an incentive to select higher priced drugs for the
formularies, drug manufacturers offer higher rebates to PBMs to exclude
competing products from the formulary.\79\ Disclosure of rebates and
other payments from drug manufacturers will enable responsible plan
fiduciaries to evaluate the way the PBM has designed the formulary, the
extent to which its composition might be influenced by financial
incentives, and to determine whether the impacts of these incentives
require mitigation to ensure the reasonableness of the contract or
arrangement.
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\78\ National Association of Insurance Commissioners, A Guide to
Understanding Pharmacy Benefit Manager and Associated Stakeholder
Regulation at 20 (2025), available at <a href="https://content.naic.org/sites/default/files/pmbwhitepap.pdf">https://content.naic.org/sites/default/files/pmbwhitepap.pdf</a> <a href="https://content.naic.org/sites/default/files/pmbwhitepap.pdf">https://content.naic.org/sites/default/files/pmbwhitepap.pdf</a> <a href="https://content.naic.org/sites/default/files/pmbwhitepap.pdf">https://content.naic.org/sites/default/files/pmbwhitepap.pdf</a> (``The existence of rebates alone is
not a problem. However, the PBM's ability to retain a percentage of
the rebate creates a concern, as they are also commonly in charge of
formulary design. These two factors give PBMs a financial incentive
to prioritize drugs in the formulary based on the highest rebate
instead of the lowest total cost to the plan sponsor or
consumer.''); House Committee on Oversight and Accountability Staff,
The Role of Pharmacy Benefit Managers in Prescription Drug Markets
at 7 (2024), available at <a href="https://oversight.house.gov/wp-content/uploads/2024/07/PBM-Report-FINAL-with-Redactions.pdf">https://oversight.house.gov/wp-content/uploads/2024/07/PBM-Report-FINAL-with-Redactions.pdf</a>; Shepherd,
Pharmacy Benefit Mangers, Rebates, and Drug Prices: Conflicts of
Interest in the Market for Prescription Drugs, Yale L. & Pol'y Rev.
at 360 (2020), <a href="https://openyls.law.yale.edu/server/api/core/bitstreams/fc20e184-b2d6-4b02-a0f6-a495e3fb5cd2/content">https://openyls.law.yale.edu/server/api/core/bitstreams/fc20e184-b2d6-4b02-a0f6-a495e3fb5cd2/content</a>; T. Joseph
Mattingly II, David A Hyman, Ge Bai, Pharmacy Benefit Managers:
History, Business Practices, Economics, and Policy, available at
<a href="https://pubmed.ncbi.nlm.nih.gov/37921745/">https://pubmed.ncbi.nlm.nih.gov/37921745/</a>.
\79\ Federal Trade Commission, Interim Staff Report, Pharmacy
Benefit Managers: The Powerful Middlemen Inflating Drug Costs and
Squeezing Main Street Pharmacies at 4 (July 2024) (``We share
evidence that PBMs and brand pharmaceutical manufacturers sometimes
enter agreements to exclude generic drugs and biosimilars from
certain formularies in exchange for higher rebates from the
manufacturer.''), available at <a href="https://www.ftc.gov/system/files/ftc_gov/pdf/pharmacy-benefit-managers-staff-report.pdf">https://www.ftc.gov/system/files/ftc_gov/pdf/pharmacy-benefit-managers-staff-report.pdf</a>; United
States Senate Finance Committee, Staff Report, Insulin: Examining
the Factors Driving the Rising Cost of a Century Old Drug at 8
(2021), available at <a href="https://www.finance.senate.gov/imo/media/doc/Grassley-Wyden%20Insulin%20Report%20">https://www.finance.senate.gov/imo/media/doc/Grassley-Wyden%20Insulin%20Report%20</a>(FINAL%201).pdf.
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Rebates and related PBM formulary practices have also been shown to
correspond to increases in the manufacturers' drug list prices.\80\
Drug manufacturers often raise list prices to accommodate rebate
demands to secure preferred formulary placement to protect market
share, profits, or to recoup the costs for research and
development.\81\ While increases in list prices have a marginal impact
on self-insured group health plans, as they generally pay a lower price
due to rebates and other discounts negotiated by the PBMs, they can be
detrimental to participants.\82\
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\80\ Neeraj Sood, Rocio Ribero, Martha Ryan, & Karen Van Nuys,
The Association Between Drug Rebates and List Prices at 3, U.S.C.
Schaeffer (Feb. 2020), available at <a href="https://schaeffer.usc.edu/wp-content/uploads/2024/10/SchaefferCenter_RebatesListPrices_WhitePaper-1.pdf">https://schaeffer.usc.edu/wp-content/uploads/2024/10/SchaefferCenter_RebatesListPrices_WhitePaper-1.pdf</a> (``Our finding
that increased rebates are positively associated with increased list
prices supports the notion that PBMs' demand for rebates is at least
partly responsible for increasing list prices.''); United States
Senate Finance Committee, Staff Report, Insulin: Examining the
Factors Driving the Rising Cost of a Century Old Drug at 80 (2021),
<a href="https://www.finance.senate.gov/imo/media/doc/Grassley-Wyden%20Insulin%20Report%20">https://www.finance.senate.gov/imo/media/doc/Grassley-Wyden%20Insulin%20Report%20</a>(FINAL%201).pdf.
\81\ See Joanna Shepherd, Pharmacy Benefit Mangers, Rebates, and
Drug Prices: Conflicts of Interest in the Market for Prescription
Drugs, Yale L. & Pol'y Rev. at 362 (2020), available at <a href="https://openyls.law.yale.edu/server/api/core/bitstreams/fc20e184-b2d6-4b02-a0f6-a495e3fb5cd2/content">https://openyls.law.yale.edu/server/api/core/bitstreams/fc20e184-b2d6-4b02-a0f6-a495e3fb5cd2/content</a>.
\82\ U.S. Department of Health and Human Services, Office of the
Assistant Secretary for Planning and Evaluation, Report to Congress:
Prescription Drug Spending, Pricing Trends, and Premiums in Private
Health Insurance Plans at 4 (Nov. 2024), available at <a href="https://www.dol.gov/sites/dolgov/files/ebsa/laws-and-regulations/laws/no-surprises-act/2024-report-to-congress-prescription-drug-spending.pdf">https://www.dol.gov/sites/dolgov/files/ebsa/laws-and-regulations/laws/no-surprises-act/2024-report-to-congress-prescription-drug-spending.pdf</a>
(noting that ``[f]or many drugs, however, list prices are not the
prices ultimately paid to manufacturers; payers or pharmacy benefit
managers (PBMs) negotiate with manufacturers over formulary
placement in exchange for discounts in the form of rebates off the
list price,'' and that ``[a]s used throughout this report, the term
`rebates' includes rebates, fees, and other remuneration transferred
to PBMs from drug manufacturers and pharmacies.'').
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To offset rising drug prices, employers are increasingly shifting
towards cost-sharing structures that make participants more sensitive
to list prices. Participants in self-insured group health plans often
pay the full cost of the drug up to the amount of their annual
deductible and a portion of prescription drug costs after the
deductible is satisfied, typically in the form of coinsurance. In many
self-insured group health plans, coinsurance is often based on list
price, resulting in higher out-of-pocket costs for participants.\83\
---------------------------------------------------------------------------
\83\ Neeraj Sood, Rocio Ribero, Martha Ryan, & Karen Van Nuys,
The Association Between Drug Rebates and List Prices at 5, U.S.C.
Schaeffer (Feb. 2020), available at <a href="https://schaeffer.usc.edu/wp-content/uploads/2024/10/SchaefferCenter_RebatesListPrices_WhitePaper-1.pdf">https://schaeffer.usc.edu/wp-content/uploads/2024/10/SchaefferCenter_RebatesListPrices_WhitePaper-1.pdf</a> (``We find that
rebates and list prices are positively related, with an increase in
rebates associated with a roughly dollar-for-dollar increase in list
price. This suggests that reducing or eliminating rebates could
result in lower list prices, thereby decreasing out-of-pocket costs
for uninsured patients and for insured patients with deductibles or
coinsurance.''); Joanna Shepherd, Pharmacy Benefit Mangers, Rebates,
and Drug Prices: Conflicts of Interest in the Market for
Prescription Drugs, Yale L. & Pol'y Rev. at 362-63 (2020), available
at <a href="https://openyls.law.yale.edu/server/api/core/bitstreams/fc20e184-b2d6-4b02-a0f6-a495e3fb5cd2/content">https://openyls.law.yale.edu/server/api/core/bitstreams/fc20e184-b2d6-4b02-a0f6-a495e3fb5cd2/content</a>; T. Joseph Mattingly II, David A
Hyman, & Ge Bai, Pharmacy Benefit Managers: History, Business
Practices, Economics, and Policy, available at <a href="https://pubmed.ncbi.nlm.nih.gov/37921745/">https://pubmed.ncbi.nlm.nih.gov/37921745/</a>.
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3.3. Payments From Pharmacies
PBMs receive payments from pharmacies in several different
circumstances. If a participant's copay is higher than the total
reimbursement owed to the pharmacy, a PBM may ``claw-back'' the
overpayment amount.\84\ For example, if a participant's copayment for a
generic drug is $15 dollars, but the PBM has agreed to pay the pharmacy
$5, the PBM will ``claw-back'' the excess $10. In such cases, it is not
clear whether such overpayments are generally or ever reimbursed to the
self-insured group health plan (or participant).\85\
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\84\ National Association of Insurance Commissioners, A Guide to
Understanding Pharmacy Benefit Manager and Associated Stakeholder
Regulation at 21 (2025), available at <a href="https://content.naic.org/sites/default/files/pmbwhitepap.pdf">https://content.naic.org/sites/default/files/pmbwhitepap.pdf</a>. Advisory Council on Employee
Welfare and Pension Benefit Plans, PBM Compensation and Fee
Disclosure at 23 (Nov. 2014), available at <a href="https://www.dol.gov/sites/dolgov/files/ebsa/pdf_files/2014-pbm-compensation-and-fee-disclosure.pdf">https://www.dol.gov/sites/dolgov/files/ebsa/pdf_files/2014-pbm-compensation-and-fee-disclosure.pdf</a>.
\85\ Some self-insured plans have benefit-design edits that make
copayments the ``lesser of'' the copayment amount and the
acquisition cost to prevent overpayment and therefore claw-backs.
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PBMs also reportedly recoup amounts paid to pharmacies for other
reasons, including ``network participation fees, fees for non-
compliance or lower performance with quality measures, and
reimbursement reconciliation.'' \86\ A relatively new PBM practice is
``effective rate reconciliation,'' in which the contractual
reimbursement rate paid by a PBM to a pharmacy for dispensing a drug is
determined by an aggregate effective rate, typically expressed as a
percentage discount from AWP.\87\ The PBM periodically reconciles the
payments made to pharmacies at the point of sale with the specified
effective rate and will adjust future reimbursement to the pharmacy to
account for the difference between the amount paid at the point of sale
and the effective rate following the reconciliation.\88\ In addition to
generic
[[Page 69100]]
effective rate and brand effective rate, the PBM may also include a
``dispensing fee effective rate'' for the administrative cost charged
by a pharmacy to dispense a drug.\89\
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\86\ Deidre S. Gifford, Report of Pharmacy Benefit Manager
Practices at 17 (2025) (``Brokers earn revenues in several ways that
may not be apparent to the plan sponsor, such as commissions,
bonuses, fees, TPA fees paid by PBMs, per prescription fees,
etc.''), available at <a href="https://portal.ct.gov/-/media/ohs/reports/ohs-report-of-pharmacy-benefit-manager-practices-pa-23-171-s7.pdf?rev=01a4809a4795421e890970d8cd5f2fc1">https://portal.ct.gov/-/media/ohs/reports/ohs-report-of-pharmacy-benefit-manager-practices-pa-23-171-s7.pdf?rev=01a4809a4795421e890970d8cd5f2fc1</a>. Federal Trade
Commission, Interim Staff Report, Pharmacy Benefit Managers: The
Powerful Middlemen Inflating Drug Costs and Squeezing Main Street
Pharmacies at 11 (July 2024), available at <a href="https://www.ftc.gov/system/files/ftc_gov/pdf/pharmacy-benefit-managers-staff-report.pdf">https://www.ftc.gov/system/files/ftc_gov/pdf/pharmacy-benefit-managers-staff-report.pdf</a>.
\87\ Andrew W. Mulcahy & Vishnupriya Kareddy, Prescription Drug
Supply Chains: An Overview of Stakeholder Relationships, RAND
Corporation at 19 (2021), available at <a href="https://aspe.hhs.gov/sites/default/files/documents/0a464f25f0f2e987170f0a1d7ec21448/RRA328-1-Rxsupplychain.pdf">https://aspe.hhs.gov/sites/default/files/documents/0a464f25f0f2e987170f0a1d7ec21448/RRA328-1-Rxsupplychain.pdf</a>.
\88\ U.S. Senate Committee on Finance, Pharmacy Benefit Managers
and the Prescription Drug Supply Chain: Impact on Patients and
Taxpayers, Written testimony of Jonathan Levitt (2023), available at
<a href="https://www.finance.senate.gov/imo/media/doc/Jonathan%20Levitt%20Testimony%20US%20Senate%20Committee%20on%20Finance%20-%20Frier%20Levitt%20-%20March%202023_Redacted1.pdf">https://www.finance.senate.gov/imo/media/doc/Jonathan%20Levitt%20Testimony%20US%20Senate%20Committee%20on%20Finance%20-%20Frier%20Levitt%20-%20March%202023_Redacted1.pdf</a>.
\89\ Pharmacy Benefit Managers and the Prescription Drug Supply
Chain: Impact on Patients and Taxpayers, U.S. Senate Committee on
Finance, 118th Cong. (2023) (Written testimony of Jonathan Levitt);
Elevate Provider Network, What are GERs/BERs/DFERs?, available at
<a href="https://www.alliantrx.com/wp-content/uploads/2020/05/GER-Explainer-Document.pdf">https://www.alliantrx.com/wp-content/uploads/2020/05/GER-Explainer-Document.pdf</a> Last accessed July 17, 2026.
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C. Service Provider Arrangements Under ERISA
1. Prohibited Transaction Framework
Responsible plan fiduciaries of group health plans must determine
that service provider relationships involving the group health plan
meet certain conditions to avoid constituting a prohibited transaction
under ERISA. Specifically, unless an exemption applies, the furnishing
of goods, services, or facilities between a group health plan and a
party in interest to the plan is a prohibited transaction under ERISA
section 406(a)(1)(C). A person providing services to the group health
plan is defined by ERISA section 3(14)(B) to be a ``party in interest''
to the group health plan.
ERISA section 408(b)(2) exempts certain arrangements between ERISA-
covered plans (including group health plans) and service providers that
otherwise would constitute prohibited transactions under ERISA section
406. Section 408(b)(2) provides relief from ERISA's prohibited
transaction rules for service contracts or arrangements between a plan
and a party in interest if the contract or arrangement is reasonable,
the services are necessary for the establishment or operation of the
plan, and no more than reasonable compensation is paid for the
services.
The Department's regulation under ERISA section 408(b)(2) clarifies
the exemption's ``necessary service,'' ``reasonable contract or
arrangement,'' and ``reasonable compensation'' conditions.\90\ The
regulation also clarifies that the exemption in ERISA section 408(b)(2)
does not extend to acts described in ERISA section 406(b) relating to
fiduciary conflicts of interest and provides examples illustrating this
principle.\91\
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\90\ 29 CFR 2550.408b-2(b), (c), (d).
\91\ 29 CFR 2550.408b-2(e).
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In 2012, the Department amended its regulation under ERISA section
408(b)(2) to require parties who are ``covered service providers'' with
respect to pension plans to disclose specified information to a
responsible plan fiduciary, in order for certain services contracts or
arrangements to be reasonable.\92\ The amended regulation generally
requires covered service providers to provide initial disclosure of:
the services to be provided; the status of the covered service
provider, an affiliate, or a subcontractor as a fiduciary, if
applicable; the direct and indirect compensation reasonably expected to
be received by the covered service provider, their affiliates and their
subcontractors; as well as allocations of compensation reasonably
expected to be made among the covered service providers and its
affiliates and subcontractors. The amended regulation also establishes
ongoing disclosure obligations in the event of a change in the
information required to be provided in the initial disclosures and
disclosures to be provided upon the written request of the responsible
plan fiduciary as needed for the plan to comply with the reporting and
disclosure requirements of title I of ERISA. The amended regulation
also carries over a provision from the initial regulation regarding
termination of the contract or arrangement.\93\
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\92\ Reasonable Contract or Arrangement Under Section
408(b)(2)--Fee Disclosure, 77 FR 5632 (Feb. 3, 2012) (codified at 29
CFR 2550.408b-2(c)).
\93\ 29 CFR 2550.408b-2(c)(3) (``No contract or arrangement is
reasonable within the meaning of section 408(b)(2) of the Act and
paragraph (a)(2) of this section if it does not permit termination
by the plan without penalty to the plan on reasonably short notice
under the circumstances to prevent the plan from becoming locked
into an arrangement that has become disadvantageous. A long-term
lease which may be terminated prior to its expiration (without
penalty to the plan) on reasonably short notice under the
circumstances is not generally an unreasonable arrangement merely
because of its long term. A provision in a contract or other
arrangement which reasonably compensates the service provider or
lessor for loss upon early termination of the contract, arrangement,
or lease is not a penalty. For example, a minimal fee in a service
contract which is charged to allow recoupment of reasonable start-up
costs is not a penalty. Similarly, a provision in a lease for a
termination fee that covers reasonably foreseeable expenses related
to the vacancy and reletting of the office space upon early
termination of the lease is not a penalty. Such a provision does not
reasonably compensate for loss if it provides for payment in excess
of actual loss or if it fails to require mitigation of damages.'').
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The amended regulation defines a responsible plan fiduciary as a
fiduciary with authority to cause the plan to enter into, or extend or
renew, a contract or arrangement for the provision of services to the
plan.\94\ The Department's amended regulation is accompanied by an
administrative class exemption for responsible plan fiduciaries,
codified at paragraph (c)(1)(ix), which provides prohibited transaction
relief for responsible plan fiduciaries in the event a covered service
provider fails to disclose information as required under the
regulation. In the absence of an exemption providing otherwise, the
service provider's failure to comply with the regulation will result in
a prohibited transaction by the responsible plan fiduciary.\95\
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\94\ 29 CFR 2550.408b-2(c)(1)(viii)(E).
\95\ See ERISA section 406(a)(1) (``Except as provided in
[section 408] . . . [a] fiduciary with respect to a plan shall not
cause the plan to engage in a transaction, if he knows or should
know that such transaction constitutes a direct or indirect . . .
furnishing of goods, services, or facilities between the plan and a
party in interest.'').
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In the final rule amending its regulation, the Department reserved
paragraph (c)(2) for future guidance on disclosure with respect to
welfare plans (including self-insured group health plans). The
Department concluded that there were significant differences between
service and compensation arrangements for welfare plans and those
involving pension plans, and that those differences supported the
development of specifically tailored disclosure requirements for
welfare plans.\96\
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\96\ 77 FR at 5649. The Department held a public hearing on
December 7, 2010, to explore operational, disclosure, and fee
transparency issues concerning welfare benefit plans. See <a href="https://www.dol.gov/agencies/ebsa/laws-and-regulations/rules-and-regulations/public-comments/1210-AB37">https://www.dol.gov/agencies/ebsa/laws-and-regulations/rules-and-regulations/public-comments/1210-AB37</a>.
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In 2014, the ERISA Advisory Council studied PBM fee disclosures and
recommended that the Department should ``consider making Section
408(b)(2) Regulations applicable to welfare plan arrangements with
PBMs, and thereby deem such arrangements reasonable only where PBMs
disclose direct and indirect compensation, including compensation paid
among related parties such as subcontractors, in a manner consistent
with current Section 408(b)(2) Regulations.'' \97\
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\97\ Advisory Council on Employee Welfare and Pension Benefit
Plans, PBM Compensation and Fee Disclosure at 3 (Nov. 2014),
available at <a href="https://www.dol.gov/sites/dolgov/files/ebsa/pdf_files/2014-pbm-compensation-and-fee-disclosure.pdf">https://www.dol.gov/sites/dolgov/files/ebsa/pdf_files/2014-pbm-compensation-and-fee-disclosure.pdf</a>.
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The report included several findings related to this
recommendation, including:
<bullet> ``Plan sponsors of group health plans who testified at the
Council hearings were unanimous in their view that they face many
challenges managing pharmacy benefits on a cost-effective basis.
However, plan sponsors uniformly testified that PBM services are a
valuable part of this effort.''
<bullet> ``Testimony submitted to the Council revealed that drug
pricing methodologies and PBM compensation are complex and evolving,
including rebates, price spreads, discounts, and other payments from
retail pharmacy chains and manufacturers. Substantial evidence was
submitted to the Council
[[Page 69101]]
from ERISA plan sponsors and others that many PBMs do not fully
disclose compensation in a manner which is readily understandable to
even the most sophisticated plan sponsors and consultants.''
<bullet> ``Testimony before the Council indicated that some forms
of PBM compensation have the potential for creating conflicts of
interest. Sponsors of ERISA health plans may or may not be aware of
these potential conflicts.''
<bullet> ``ERISA group health plans that contract directly with
PBMs frequently use consultants to assist in negotiations with the PBM.
Testimony was submitted to the Council that it is common for
consultants to receive indirect compensation. The payment of indirect
compensation to consultants who are advising plan sponsors in
negotiations with the PBM may create the potential for conflicts of
interest that may be adverse to the plan sponsor. Sponsors of ERISA
health plans may or may not be informed of such indirect
compensation.''
<bullet> ``Plan sponsors testified that disclosure of PBM
compensation would better enable them to comply with their obligations
to determine reasonable compensation under Section 408(b)(2).
Nondisclosure creates the potential for impediments to plan sponsors'
ability to comply with 408(b)(2).''
The second recommendation of the ERISA Advisory Council related to
audits of a PBM's compliance with its contract with the welfare
plan.\98\ Specifically, the Council recommended that the Department
should ``consider issuing guidance to assist plan sponsors in
determining whether to and how to conduct a PBM audit of direct and
indirect compensation.'' \99\
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\98\ The Council noted this audit should not be confused with
the requirement under ERISA section 103(3)(A).
\99\ Advisory Council on Employee Welfare and Pension Benefit
Plans, PBM Compensation and Fee Disclosure, at 5 (Nov. 2014),
available at <a href="https://www.dol.gov/sites/dolgov/files/ebsa/pdf_files/2014-pbm-compensation-and-fee-disclosure.pdf">https://www.dol.gov/sites/dolgov/files/ebsa/pdf_files/2014-pbm-compensation-and-fee-disclosure.pdf</a>.
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Findings related to this recommendation included identification of
the following problem areas, among others:
<bullet> ``The exclusion of auditors who the PBM believes hold
hostile views.''
<bullet> ``On-site audits are required at PBM headquarters.''
<bullet> ``PBMs limit the auditor to transcribing notes of
documents.''
<bullet> ``Confidentiality agreements can be overly broad and put
unnecessary burdens on the parties when they prohibit disclosure of
information by an auditor to its client plan.''
<bullet> ``PBMs will not disclose documents requested by some
auditors such as PBM contracts with retail pharmacies and drug
manufacturers.''
<bullet> ``Access to claims data is restricted.''
<bullet> ``Audit rights restricted to limited periods (such as 2
years).''
<bullet> ``Some necessary data sources such as AWP pricing are not
public and access is expensive . . . and disclosure is limited.''
2. Consolidated Appropriations Act, 2021 408(b)(2) Amendment
In the Consolidated Appropriations Act (CAA), 2021, Congress
amended the ERISA section 408(b)(2) statutory exemption to add a new
paragraph (B) applicable to certain services arrangements with group
health plans, effective December 27, 2021.\100\ As part of the
amendment, Congress designated the pre-existing text as ERISA section
408(b)(2)(A).\101\ The requirements in ERISA section 408(b)(2)(B) as
originally enacted applied to a group of covered service providers,
defined as persons or entities who provide ``brokerage services'' or
``consulting'' to group health plans with respect to a list of sub-
services including pharmacy benefit management services.\102\
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\100\ Section 202 of Title II of Division BB of the Consolidated
Appropriations Act, 2021.
\101\ ERISA section 408(b)(2)(A) now provides an exemption for
``[c]ontracting or making reasonable arrangements with a party in
interest for office space, or legal, accounting, or other services
necessary for the establishment or operation of the plan, if no more
than reasonable compensation is paid therefor.''
\102\ Specifically, as originally enacted ERISA section
408(b)(2)(B)(ii)(I)(bb)(AA) defined a covered service provider as
one who provides brokerage services ``provided to a covered plan
with respect to selection of insurance products (including vision
and dental), recordkeeping services, medical management vendor,
benefits administration (including vision and dental), stop-loss
insurance, pharmacy benefit management services, wellness services,
transparency tools and vendors, group purchasing organization
preferred vendor panels, disease management vendors and products,
compliance services, employee assistance programs, or third party
administration services.'' ERISA section 408(b)(2)(B)(ii)(I)(bb)(BB)
as originally enacted defined a covered service provider as one who
provides consulting services ``related to the development or
implementation of plan design, insurance or insurance product
selection (including vision and dental), recordkeeping, medical
management, benefits administration selection (including vision and
dental), stop-loss insurance, pharmacy benefit management services,
wellness design and management services, transparency tools, group
purchasing organization agreements and services, participation in
and services from preferred vendor panels, disease management,
compliance services, employee assistance programs, or third party
administration services.''
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ERISA section 408(b)(2)(B) closely tracks the Department's
regulation for pension plan arrangements. It requires disclosure of:
the services to be provided; the status of the covered service
provider, an affiliate, or a subcontractor as a fiduciary, if
applicable; the direct and indirect compensation reasonably expected to
be received by the covered service provider, their affiliates and their
subcontractors; as well as allocations of compensation reasonably
expected to be made among the covered service providers and its
affiliates and subcontractors. It also establishes ongoing disclosure
obligations in the event of a change in the information required to be
provided in the initial disclosures and disclosures to be provided upon
the written request of the responsible plan fiduciary as needed for the
plan to comply with the reporting and disclosure requirements of title
I of ERISA.
In December 2021, the Department provided a guidance and temporary
enforcement policy addressing questions about ERISA section
408(b)(2)(B).\103\ In general, the policy provided that, pending future
guidance or rulemaking, covered service providers and responsible plan
fiduciaries would be expected to implement the ERISA section
408(b)(2)(B) requirements using a good faith, reasonable interpretation
of the law.
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\103\ Field Assistance Bulletin No. 2021-03 (Dec. 30, 2021),
available at <a href="https://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/field-assistance-bulletins/2021-03">https://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/field-assistance-bulletins/2021-03</a>.
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With respect to the terms ``brokerage services'' and ``consulting''
as used in the definition of a covered service provider, the Department
noted that neither term was defined and the categories may overlap in
some circumstances, but that the fact that a service provider did not
call itself a broker or consultant would not be dispositive. Instead,
the Department's enforcement policy would apply to parties who
reasonably and in good faith determined their status as a covered
service provider. The Department expressed that ``service providers who
reasonably expect to receive indirect compensation from third parties
in connection with advice, recommendations, or referrals regarding any
of the listed sub-services . . . should be prepared, if the Department
is auditing their 408(b)(2)(B) compliance, to be able to explain how a
conclusion that they are not covered service providers is consistent
with a reasonable good faith interpretation of the statute.'' \104\
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\104\ Id. (emphasis added). In addition to the ERISA section
408(b)(2)(B), in 2019, Congress added a distinct statutory exemption
in ERISA section 408(h) for the provision of pharmacy benefit
services, although in a limited context. The exemption is available
to ``an entity described in [ERISA section 3(37)(G)(vi)]'' or any
related organization or subsidiary, provides pharmacy benefit
services to a group health plan sponsored by the entity or any other
group health plan sponsored by a regional council, local union, or
other labor organization affiliated with such entity, see Section
1302 of Division P of the Further Consolidated Appropriations Act,
2020. The Department is aware that the United Brotherhood of
Carpenters and Joiners of America takes the position that it is a
501(c)(5) organization, tax exempt under Section 501(a) of the Code,
and was established in Chicago, Illinois, on August 12, 1881, as
referenced in ERISA section 3(37)(G)(vi). See Exemption from Certain
Prohibited Transaction Restrictions Involving the United Brotherhood
of Carpenters and Joiners of America, 90 FR 2748 n. 3 (Jan. 13,
2025).
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[[Page 69102]]
D. Consolidated Appropriations Act, 2026
1. ERISA Amendments
The Department issued a proposed rule entitled Improving
Transparency Into Pharmacy Benefit Manager Fee Disclosure on January
30, 2026.\105\ On February 3, 2026, Congress made further changes to
ERISA in the CAA, 2026. Among other things, the CAA, 2026 amended
subparagraph (B) of ERISA section 408(b)(2), added a new subparagraph
(C) to ERISA section 408(b)(2), and added a new section 726 to ERISA
entitled ``Oversight of Entities that Provide Pharmacy Benefit
Management Services.''
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\105\ 91 FR 4348.
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1.1. Amendments to ERISA Section 408(b)(2)
In subparagraph (B) of ERISA section 408(b)(2), the CAA, 2026
revised the definition of covered service provider to remove the words
``brokerage services'' and ``consulting.'' This change clarified that
providers of pharmacy benefit management services (as well as a broad
range of other service providers to group health plans, including third
party administrators) are covered service providers and are required to
make the disclosures under the statute to rely on the prohibited
transaction exemption. Additionally, new language was added to
subparagraph (B) stating that a service provider for pharmacy benefit
management services that contracts with a health insurance issuer in
connection with health insurance coverage for a group health plan is
considered an indirect provider of services to the plan and a party in
interest under ERISA. This language clarified that providers of
pharmacy benefit management services that provide services to fully
insured plans through an insurance contract are considered parties in
interest that must comply with an exemption to avoid participating in a
prohibited transaction. The CAA, 2026 amendments also specified that
the Department has authority to issue regulations addressing the time,
manner, and content of the disclosures identified in subparagraph (B).
The amendments to subparagraph (B) were effective on February 3, 2026,
upon enactment of the CAA, 2026.
New subparagraph (C) of ERISA section 408(b)(2) focuses solely on
providers of pharmacy benefit management services. Under that
subparagraph, which is effective for plan years beginning on or after
August 3, 2028, providers of pharmacy benefit management services are
required to remit to group health plans (or to the insurance company on
behalf of the plan) ``100% of rebates, fees, alternative discounts, and
other remuneration'' received from ``any applicable entity'' related to
the utilization of drugs or drug spending under the plan.\106\
Applicable entities are defined in new ERISA section 726 and generally
include: drug manufacturers, rebate aggregators, affiliated group
purchasing organizations; affiliates of the plan, health insurance
issuer, PBM, or drug manufacturers; and other entities that the
Secretary specifies in rulemaking. Subparagraph (C) includes related
disclosure and audit provisions.
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\106\ ERISA section 408(b)(2)(C)(vi) provides that ``[n]othing
in this subparagraph shall be construed to--(I) prohibit reasonable
payments to entities offering pharmacy benefit management services
for bona fide services using a fee structure not described in this
subparagraph, provided that such fees are transparent and
quantifiable to group health plans and health insurance issuers;
[and] (II) require a third-party administrator of a group health
plan or covered service provider for pharmacy benefit management
services under such health plan or health insurance coverage to
remit bona fide service fees to the group health plan . . .''
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1.2. New ERISA Section 726
ERISA section 726 provides that certain group health plans must
receive a report from providers of pharmacy benefit management services
every six months (or, at the plan's request, quarterly) containing
detailed information about drug spending under the plan. Relatedly,
applicable entities must agree by contract with plans and providers of
pharmacy benefit management services (i) not to limit or delay
disclosure of information in such a manner as to prevent the provider
from making the required reports and (ii) to supply the required
information. ERISA section 726 is applicable to plan years beginning on
or after August 3, 2028, and the Department, along with the Secretaries
of the Treasury and of Health and Human Services, has authority to
issue regulations necessary to implement it.
Under ERISA section 726, the report is required for self-insured
plans of ``specified large employers'' (generally with at least 100
employees) and self-insured ``specified large plans'' (generally with
at least 100 participants).\107\ Employers with fully insured plans
that meet these size specifications can opt in to receive the
report.\108\ Under ERISA section 726, all group health plans regardless
of size must also receive certain information from the entity providing
pharmacy benefit management services on behalf of the group health
plan. All group health plans must receive a summary document of the
information required to be provided for self-insured plans of specified
large employers and self-insured specified large plans, as specified by
the Secretary through guidance, program instruction, or otherwise.\109\
ERISA section 726 also requires that all group health plans regardless
of size receive a summary document that plans can provide to
participants and beneficiaries upon request by the participant or
beneficiary.\110\ Further, ERISA section 726 provides for a limited
form of report to be defined by the Secretary for any group health plan
established by a plan sponsor that is, or is affiliated with, a drug
manufacturer, drug wholesaler, or any other participant in the drug
supply chain, ``to prevent anti-competitive behavior.'' \111\
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\107\ ERISA section 726(e)(8), (9).
\108\ ERISA section 726(b)(3).
\109\ ERISA section 726(b)(2)(B)(i)
\110\ ERISA section 726(b)(2)(B)(ii).
\111\ ERISA section 726(b)(4)(G).
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The required reports for the self-insured group health plans of
specified large employers and self-insured specified large plans
include a list of drugs for which a claim was filed and related
information about costs, compensation, and distribution channel,
including information on spread compensation received by the provider
of pharmacy benefit management services as well as the total amount
received, or expected to be received, by the provider of pharmacy
benefit management services from applicable entities in rebates, fees,
alternative discounts or other remuneration.\112\ The report must also
include a list of each therapeutic class for which a claim was filed
and related information about costs, utilization, and formulary
placement; for any drug for which gross spending exceeded $10,000
during the reporting period (or the 50 drugs with the highest spending
if gross spending exceeded $10,000 during the reporting period with
respect to fewer than 50 drugs), information about other drugs in
[[Page 69103]]
the same therapeutic class, rationale for formulary placement and any
change in the formulary placement compared to prior year; and for
plans, issuers, and providers of pharmacy benefit management services
with affiliated pharmacies, information about benefit design that
encourages/requires use of mail order, specialty or retail pharmacies,
percentage of prescriptions dispensed by such pharmacies, and a list of
drugs dispensed along with amount charged to the plan and comparative
cost information from other pharmacies.\113\
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\112\ ERISA section 726(b)(2)(A)(i).
\113\ ERISA section 726(b)(2)(A)(ii)-(iv).
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2. Comments on Interaction With the Department's Rule
Upon enactment of the CAA, 2026, the Department published a notice
in the Federal Register drawing the public's attention to the new
amendments to ERISA and extending the comment period on the proposed
rule by an additional 15 days to allow interested persons to address
``whether the rule should be adjusted in light of the CAA, 2026
amendments to ERISA, and if so, what adjustments are needed.'' \114\
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\114\ Improving Transparency Into Pharmacy Benefit Manager Fee
Disclosure: Extension of the Comment Period, 91 FR 10033 (Mar. 2,
2026). In the notice, the Department also specifically sought
comment on ``whether specific provisions of the rule should be
revised or whether new provisions should be added, in order to
minimize complexity or align with the new statutory provisions,
while continuing to fulfill the stated transparency goals of the
proposal.'' Id. at 10034.
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Many commenters responded to the Department on the interaction of
the proposed rule and the CAA, 2026, amendments to ERISA. These
commenters generally touched on whether the Department should move
forward to a final rule or withdraw its proposal, as well as ways that
the Department should align provisions of its regulation with the CAA,
2026 amendments.
On the topic of whether the Department should move forward to a
final rule or withdraw the proposal, commenters weighed in on both
sides. A few commenters advocated for withdrawal of the Department's
proposal based on their view that in the CAA, 2026, Congress
established a disclosure framework for PBM transparency that rendered
the Department's regulatory project unnecessary, or even outside its
regulatory authority. Commenters said the CAA, 2026 amendments address
the transparency issues that motivated the Department's rulemaking, and
the Department should focus its efforts on implementing the CAA, 2026
framework under ERISA section 726 with the Departments of Treasury and
Health and Human Services. Some commenters noted the Department could
then evaluate whether additional regulation is warranted.
Some commenters also expressed a related concern that if the
Department proceeded to a final rule at this time, the rule could end
up being duplicative or even conflict with requirements under the CAA,
2026 amendments to ERISA that will become effective several years from
now, resulting in compliance inefficiencies and difficulties and
confusion for plan fiduciaries. One commenter said that implementing
the Department's rule only to later make changes to satisfy the CAA,
2026 amendments would impose operational and financial burdens on the
healthcare system. One commenter said these types of compliance burdens
would particularly impact mid-market PBMs. Several commenters suggested
the Department should at least repropose its rule to ensure its
provisions are consistent with the CAA, 2026 amendments.
A few commenters also recognized that providers of pharmacy benefit
management services are now clearly covered service providers under
ERISA section 408(b)(2)(B) and expressed concern that such service
providers would be required to comply with three sets of disclosure
obligations: the statutory provisions of ERISA section 408(b)(2)(B),
the Department's rule, and ERISA section 726. Another commenter opposed
the Department proceeding with a regulation under the prohibited
transaction framework because of the potential for penalties such as
excise taxes for covered service providers as well as equitable
remedies which the commenter said could disrupt the provision of
pharmacy benefit management services.
Many more commenters expressed strong support for the proposal and
urged the Department to finalize it. Commenters expressed particular
support for the proposal's focus on transparency and accountability for
providers of pharmacy benefit management services. Commenters also
supported supplying plan fiduciaries with disclosures necessary to
assess contracts with these providers and to satisfy the fiduciaries'
obligations under ERISA. Some commenters expressed the view that the
proposal represented an important protection of group health plan
participants' interests.
One commenter who supported finalizing the rule noted that the CAA,
2026 provision that amended ERISA to add section 726 did not contain
any preemptive language, did not rescind or prohibit rulemaking under
ERISA section 408(b)(2), and did not state that the section 726
provisions are exclusive. Commenters also highlighted the distinct
purpose of ERISA section 408(b)(2) as a statutory prohibited
transaction exemption that requires group health plan fiduciaries to
determine the reasonableness of services contracts or arrangements as a
reason for the Department to proceed to a final rule. Some commenters
identified the initial disclosures in particular as helpful to
fiduciaries in discharging this obligation at the time they are
entering into a contract and noted there is no counterpart in ERISA
section 726. A few commenters also described how certain specific
disclosures in the proposed rule would complement, not conflict with,
those in ERISA section 726. For example, one commenter said that the
pre-contract disclosure of spread pricing at the formulary level in the
Department's proposed rule along with the post-transaction drug level
reporting on spread under ERISA 726 would work together to allow for
prospective fiduciary review as well as retrospective transaction
verification. One commenter said the Department's adoption of a final
rule at this time would provide impacted parties the opportunity to
implement and gain experience with the disclosures in preparation for
implementation of the CAA, 2026 amendments.
Regardless of their views on whether the Department should withdraw
its proposal or proceed to a final rule, there was consensus among many
commenters that if the Department determined to proceed to a final
rule, it should align with the CAA, 2026 amendments to the extent
possible. Many such commenters focused on alignment with the ERISA
section 726 disclosures, including areas of scope, definitions, and
timing.
Commenters also discussed the impact of the new subparagraph (C) of
ERISA section 408(b)(2) on service provider arrangements. As that
provision will require covered service providers to pass through to the
group health plans ``100% of rebates, fees, alternative discounts, and
other remuneration'' received from ``any applicable entity,''
commenters asserted that some of the contractual practices disclosed
under the Department's rule would no longer persist after subparagraph
(C)'s effective date. One commenter suggested sunsetting some of the
disclosures while leaving in place robust audit rights to ensure that
compensation is not recharacterized or shifted to avoid the pass-
through
[[Page 69104]]
requirements. Other commenters suggested disclosures would still be
needed with respect to any compensation not passed through to the group
health plan. One commenter said that the definition of ``applicable
entity'' does not specifically include pharmacies and therefore--unless
the Department (with the Departments of Treasury and Health and Human
Services) uses its regulatory authority to include them within the
definition--revenue streams from pharmacies would continue to exist
after the rebate-pass through provision takes effect.
3. The Department's Responses
The Department has carefully considered the interaction of its
proposal with the CAA, 2026 amendments to ERISA, as well as comments
urging withdrawal of the rule, but has determined that it would not be
appropriate or prudent to withdraw its proposal in favor of a
disclosure regime based solely on ERISA section 726. In making this
determination, the Department acknowledges that the disclosures
required under new ERISA section 726 have areas of overlap with the
disclosures the Department had proposed under ERISA section 408(b)(2).
However, the Department believes that, for many of the reasons cited by
supportive commenters, it is appropriate to proceed to a final rule on
its proposal.
Chiefly, the Department believes that the ERISA section 408(b)(2)
disclosures serve a function that is distinct from those in ERISA
section 726. First and foremost, the Department's regulation is
designed to improve transparency in large self-insured group health
plan contracting practices involving providers of pharmacy benefit
management services. It will ensure responsible plan fiduciaries can
determine the reasonableness of the contract or arrangement by
providing them a description of each pharmacy benefit management
service to be provided to the covered plan and disclosure of the direct
and indirect compensation that service providers contracting for
pharmacy benefit management services receive. This is achieved through
initial disclosures, at the time of contracting, extension or renewal,
as well as semiannual disclosures and audit rights that will support
the fiduciaries' ongoing monitoring of the services contract or
arrangement. Section 726, on the other hand, is a retrospective
disclosure containing detailed information about drug spending and drug
utilization under the group health plan that goes beyond the disclosure
requirements of the Department's final rule.
Congress' amendments to ERISA section 408(b)(2)(B) clarified that
providers of pharmacy benefit management services are covered service
providers, and the legislation also provided specific authority to the
Department to issue regulations addressing time, manner, and content of
the disclosures. The fact that Congress added disclosure obligations
for providers of pharmacy benefit management to both ERISA section
408(b)(2) and new ERISA section 726 in a single piece of legislation
detailing separate, albeit related, disclosure regimes compels the
conclusion that Congress meant for both disclosure regimes to coexist.
In the Department's view, these two regimes complement each other.
In sum, the Department issues this final rule to implement
disclosure obligations under ERISA section 408(b)(2)(B) with respect to
the covered service providers and covered plans described in the rule,
thus satisfying the provisions of section 408(b)(2)(B) for those
covered service providers and responsible plan fiduciaries. The
Department is operating under the authority granted in section
408(b)(2)(B) to regulate the time, manner, and content of those
disclosures, applying the statutory framework. The Department has added
a provision to the regulation in paragraph (a) to confirm this
position.
The Department also acknowledges, as some commenters noted, that
the new subparagraph (C) of ERISA section 408(b)(2) requiring pass-
through to group health plans of ``100% of rebates, fees, alternative
discounts, and other remuneration'' received from ``any applicable
entity'' is likely to result in changes to pharmacy benefit manager
compensation arrangements. The Department considered whether to sunset
related disclosure obligations but, as discussed in greater detail
below, determined that it would be preferable to retain the disclosure
obligations generally as proposed to ensure transparency regarding how
the payments are being handled. In this regard, the Department notes
that, once in effect, ERISA section 408(b)(2)(C) will require the
rebates, fees, alternative discounts, and other remuneration not only
to be passed through to the group health plan but also to be fully
disclosed to such plan.\115\
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\115\ ERISA section 408(b)(2)(C)(ii)(I)(bb).
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Overall, the Department concurs with commenters who stressed the
importance of aligning with the CAA, 2026 amendments to avoid
inefficiencies and potential confusion on the part of plan fiduciaries.
The Department has made a number of changes to the text of the rule to
achieve alignment. These changes, which are discussed in greater detail
below, include:
<bullet> Limitation to large self-insured group health plans: The
final rule applies only to self-insured plans of specified large
employers and self-insured specified large plans, defined in the same
way that such plans are defined in ERISA section 726. This is
consistent with the approach in ERISA section 726(b)(2) in which the
detailed information about drug spending will be provided to these
plans.
<bullet> Disclosure period: The final rule provides for disclosures
on a semiannual basis or, at the request of the group health plan,
quarterly, for consistency with the reporting period in ERISA section
726(b)(1).
<bullet> Manufacturer payments: The final rule's disclosures
regarding payments from drug manufacturers use the terminology
``rebate[s], fee[s], alternative discount[s], or other remuneration''
for consistency with the reporting obligation in ERISA section
726(b)(2)(A)(i)(X) and (XI).
<bullet> Spread compensation: The final rule's disclosures
regarding spread compensation define spread compensation consistently
with ERISA section 726(b)(2)(A)(i)(I)-(III).
<bullet> Drug pricing methodology: The final rule's disclosures
regarding drug pricing methodology use terminology from ERISA section
726(b)(2)(A)(i)(VII).
The Department sought and received thoughtful comments on the
extent to which this rule should align with the CAA, 2026. Comments on
legal arguments regarding the Department's authority to issue the final
rule in light of the CAA, 2026 are discussed along with the
Department's responses, in section E.14 of this preamble.
The Department has not aligned the effective date of this final
rule with the August 3, 2028 effective date of the CAA, 2026
amendments, as some commenters requested. The Department concurs with
commenters who expressed concern about unduly delaying the introduction
of much needed transparency in the area of group health plans'
contracts with providers of pharmacy benefit management services.
Implementing this final rule without delay will benefit responsible
plan fiduciaries of self-insured group health plans by providing timely
access to the more detailed information required to be disclosed. It
will also provide timely guidance to
[[Page 69105]]
covered service providers regarding their compliance with ERISA section
408(b)(2)(B), as amended effective February 3, 2026, who may use the
guidance in this final rule to determine their own disclosure
obligations.
Furthermore, as noted earlier in this preamble, the addition of new
subparagraph (C) of ERISA section 408(b)(2) and the addition of section
726 of ERISA under the CAA, 2026 do not take effect until 30 months
after the date of enactment. In contrast, Congress' amendments to ERISA
section 408(b)(2)(B), establishing statutory disclosure requirements
for pharmacy benefit management service providers wishing to take
advantage of the exemption, became effective upon enactment of the CAA,
2026 on February 3, 2026. In the Department's view, this indicates
Congress' intent that responsible plan fiduciaries should have the
required disclosures to evaluate the contracts or arrangements with
pharmacy benefit management service providers on an earlier timetable.
The provisions in this final rule implement the statutory disclosure
requirements in section 408(b)(2)(B), dictating against delaying
applicability longer than necessary to allow parties to develop
compliance structures. Accordingly, the Department has made the final
rule effective January 4, 2027, and applicable to plan years beginning
after July 1, 2027.
4. ERISA Section 408(b)(2)(B) Compliance
Several commenters urged the Department to acknowledge and
highlight that the amendments to ERISA section 408(b)(2)(B) are in
effect currently. The Department concurs with these commenters that the
broader range of service providers to group health plans must make the
disclosures outlined in the statute to rely on the exemption, for
contracts or arrangements, extensions or renewals, effective as of
February 3, 2026. As specified in ERISA section 408(b)(2)(B), as
amended, covered service providers include, in addition to providers of
brokerage services and consulting, providers of: pharmacy benefit
management services, third-party administration services, insurance
services and insurance product selection services (including vision and
dental), recordkeeping services, and others.\116\
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\116\ See ERISA section 408(b)(2)(B)(ii)(I)(bb) (``The term
`covered service provider' means a service provider that enters into
a contract or arrangement with the covered plan and reasonably
expects $1,000 (or such amount as the Secretary may establish in
regulations to account for inflation since December 27, 2020, as
appropriate) or more in compensation, direct or indirect, to be
received in connection with providing one or more of the following
services, pursuant to the contract or arrangement, regardless of
whether such services will be performed, or such compensation
received, by the covered service provider, an affiliate, or a
subcontractor: (AA) Services (including brokerage services), for
which the covered service provider, an affiliate, or a subcontractor
reasonably expects to receive indirect compensation or direct
compensation described in item (dd), provided to a covered plan with
respect to selection of insurance products (including vision and
dental), recordkeeping services, medical management vendor, benefits
administration (including vision and dental), stop-loss insurance,
pharmacy benefit management services, wellness services,
transparency tools and vendors, group purchasing organization
preferred vendor panels, disease management vendors and products,
compliance services, employee assistance programs, or third party
administration services. (BB) Other services, for which the covered
service provider, an affiliate, or a subcontractor reasonably
expects to receive indirect compensation or direct compensation
described in item (dd), including any of the following: plan design,
insurance or insurance product selection (including vision and
dental), recordkeeping, medical management, benefits administration
selection (including vision and dental), stop-loss insurance,
pharmacy benefit management services, wellness design and management
services, transparency tools, group purchasing organization
agreements and services, participation in and services from
preferred vendor panels, disease management, compliance services,
employee assistance programs, or third-party administration
services, or consulting services related to any such services.'').
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This final rule implements the requirements of ERISA section
408(b)(2)(B), as amended, for the covered service providers and covered
plans identified herein. Although the statutory provisions apply to all
ERISA-covered group health plans, the Department believes the detailed
descriptions of compensation streams and arrangements in this rule that
are tailored to the pharmaceutical supply chain will provide
particularly valuable information to responsible plan fiduciaries of
large, self-insured group health plans. Furthermore, to demonstrate
alignment with the statutory disclosures as appropriate following the
CAA, 2026 amendments, and in response to commenters requesting
additional clarity regarding the application of the disclosure
obligations to indirect compensation, the Department has revised the
rule to categorize the disclosures in the final rule as either
``direct'' or ``indirect'' compensation.\117\
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\117\ See ERISA section 408(b)(2)(B)(iii)(III) and (IV) (``A
covered service provider shall disclose to a responsible plan
fiduciary, in writing, the following (in accordance with regulations
issued by the Secretary addressing time, manner, and content of such
disclosures) . . . (III) A description of all direct compensation,
either in the aggregate or by service, that the covered service
provider, an affiliate, or a subcontractor reasonably expects to
receive in connection with the services . . . [and] (IV)(aa) A
description of all indirect compensation that the covered service
provider, an affiliate, or a subcontractor reasonably expects to
receive in connection with the services . . .'').
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Some commenters asked the Department to offer an enforcement policy
for all covered service providers identified in the amended ERISA
section 408(b)(2)(B), which was effective as of February 3, 2026, as
these providers work to come into compliance with the statutory
disclosure obligations. Commenters also asked for safe harbors for
responsible plan fiduciaries who demonstrate good faith efforts to
comply with their obligations with respect to determining the
reasonableness of the service contract or arrangement.
The Department concurs that enforcement relief under ERISA section
408(b)(2)(B) is appropriate as parties develop mechanisms to comply
with obligations that became effective when the CAA, 2026 was enacted
on February 3, 2026, and believes the appropriate period for a
temporary enforcement policy should end on the final rule's
applicability date of plan years beginning on or after July 1, 2027.
This temporary enforcement policy will apply to all covered service
providers and responsible plan fiduciaries of covered plans, each as
defined in ERISA section 408(b)(2)(B), regardless of whether they are
covered service providers and plan fiduciaries of covered plans
addressed in this final rule. Accordingly, from the period from
February 3, 2026 to the applicability date of the final rule, the
Department will not treat a covered service provider as defined in
ERISA section 408(b)(2)(B) as having failed to make the required
disclosures to a responsible plan fiduciary under ERISA section
408(b)(2)(B) as long as the covered service provider made disclosures
in accordance with a good faith interpretation of ERISA section
408(b)(2)(B), as amended. Further, prior to the applicability date of
the final rule, the Department will not treat a responsible plan
fiduciary of a covered plan as defined in ERISA section 408(b)(2)(B) as
having engaged in a prohibited transaction in entering into a contract
or arrangement with a covered service provider as long as the fiduciary
acted in accordance with a good faith interpretation of their
obligations under ERISA to determine the reasonableness of the contract
or arrangement.
E. Description of the Final Rule
1. Scope of the Final Rule
1.1. General--Paragraph (a)
As discussed above in section C of this preamble, ERISA section
408(b)(2)
[[Page 69106]]
provides an exemption for services contracts and arrangements with
ERISA-covered plans, provided that the contracts or arrangements are
reasonable, the services are necessary for the establishment or
operation of the plan, and no more than reasonable compensation is
paid. Paragraph (a) of the final rule \118\ provides that no contract
or arrangement for services between a ``covered plan'' and a ``covered
service provider,'' nor any extension or renewal, is reasonable unless
the requirements of ERISA section 408(b)(2)(B) are satisfied.\119\
Paragraph (a) includes additional language that was not in the
proposal, specifying that this final rule implements ERISA section
408(b)(2)(B) with respect to the covered service providers defined
herein, and further that a contract or arrangement between a covered
plan and a covered service provider, as defined in the final rule, that
satisfies the requirements of the final rule also satisfies the
requirements of ERISA section 408(b)(2)(B). These sentences were added
to clarify the relationship between the statutory exemption and the
final rule.
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\118\ 29 CFR 2550.408b-22(a).
\119\ Title I of ERISA sets forth various requirements for
covered plans, which, subject to certain specific exceptions,
``apply to any employee benefit plan if it is established or
maintained . . . by any employer . . . or . . . by any employee
organization . . . or . . . by both.'' ERISA section 4(a); 29 U.S.C.
1003(a). However, Title I of ERISA specifically does ``not apply to
any employee benefit plan if . . . such plan is a governmental
plan.'' ERISA section 4(b); 29 U.S.C. 1003(b). ``Governmental plan''
is defined for purposes of this exclusion as ``a plan established or
maintained for its employees by the Government of the United States,
by the government of any State or political subdivision thereof, or
by any agency or instrumentality of any of the foregoing.'' ERISA
section 3(32); 29 U.S.C. 1002(32).
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1.2. Covered Plan--Paragraph (b)
As provided in paragraph (b) of the final rule,\120\ covered plans
are generally defined to include large ERISA-covered self-insured group
health plans. Specifically, a covered plan for purposes of this rule is
a group health plan as defined in ERISA section 733(a) that is offered
by a specified large employer or that is a specified large plan, each
as defined in paragraph (m) of the final rule, with two exceptions. One
is a group health plan in which all of the benefits are provided
exclusively through a contract or policy of insurance issued by a
health insurance issuer as defined in 29 CFR 2590.701-2. The second is
a group health plan established by a plan sponsor that is in the drug
supply chain, as discussed in further detail in section E.1.2.4 of this
preamble. The definition of covered plans includes excepted benefits,
such as limited scope dental and vision plans.\121\ ERISA section
733(a)(1) expressly excludes qualified small employer health
reimbursement arrangements from the definition of group health plan,
and therefore such arrangements are not covered plans under the final
rule.
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\120\ 29 CFR 2550.408b-22(b).
\121\ See Field Assistance Bulletin No. 2021-03, Q&A 3,
available at <a href="https://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/field-assistance-bulletins/2021-03">https://www.dol.gov/agencies/ebsa/employers-and-advisers/guidance/field-assistance-bulletins/2021-03</a> (``ERISA
section 733(c)(2) provides that certain benefits are not subject to
certain requirements of Part 7 of ERISA if offered separately,
including limited scope dental or vision benefits. . . . The view of
the Department is that limited scope dental and vision plans,
although excepted from certain requirements in Part 7 of ERISA, are
`covered plans' subject to the requirements of ERISA section
408(b)(2)(B). The definition of a ``covered plan'' in ERISA section
408(b)(2)(B) refers to ERISA section 733(a), without any indication
that the definition is further limited by ERISA section
733(c)(2).'').
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While the proposed rule applied to all self-insured group health
plans, the final rule further limited the scope to large self-insured
group health plans and included a new exception for group health plans
established by a plan sponsor that is, or that is affiliated with, a
drug manufacturer, distributor, wholesaler, or rebate aggregator (or
other purchasing entity designed to aggregate rebates), as discussed in
the next sections of the preamble.
1.2.1. Limitation to Large, Self-Insured Group Health Plans
The final rule applies only to self-insured group health plans
offered by ``specified large employers'' and self-insured group health
plans that are ``specified large plans.'' These terms are defined in
paragraph (m) \122\ and are generally consistent with those terms in
ERISA section 726. A specified large employer means, in connection with
a group health plan established or maintained by a single employer,
with respect to a calendar year, an employer who employed an average of
at least 100 employees on business days during the preceding calendar
year and who employs at least 1 employee on the first day of the
calendar year. For purposes of counting employees to determine whether
an employer is a specified large employer, employees must be counted in
accordance with the rules for counting employees and employer
aggregation under section 4980H of the Internal Revenue Code and its
implementing regulations at 26 CFR 54.4980H. A specified large plan
means a group health plan established or maintained by a plan sponsor
described in ERISA section 3(16)(B)(ii) or (iii) that had an average of
at least 100 participants on business days during the preceding plan
year. Whether a group health plan is a specified large plan is
determined by taking the sum of the total number of participants (not
including beneficiaries) for each calendar month in the preceding plan
year, and dividing by 12. The result, if not a whole number, is then
rounded to the next lowest whole number. Self-insured group health
plans that are not described in those definitions are not covered plans
for purposes of the final rule, but they are covered plans for purposes
of the application of the statutory exemption in ERISA section
408(b)(2)(B) to entities providing pharmacy benefit management
services. Accordingly, covered service providers not addressed in this
rule must provide the generalized compensation disclosures specified in
the statute to rely on the prohibited transaction exemption.
---------------------------------------------------------------------------
\122\ 29 CFR 2550.408b-22(m).
---------------------------------------------------------------------------
The Department determined to limit the scope of the final rule in
response to several different types of comments. First, commenters
asked the Department to align the covered plan definition with ERISA
section 726. Under ERISA section 726, the larger group health plans
(i.e., offered by a specified large employer or a specified large plan)
receive a report with detailed information about drug spending while
smaller group health plans will receive a summary document that
includes information ``that the Secretary determines useful to group
health plans for purposes of selecting pharmacy benefit management
services, such as an estimated net price to group health plan and
participant or beneficiary, a cost per claim, the fee structure or
reimbursement model, and estimated cost per participant or
beneficiary.'' \123\ In the Department's view, aligning the definition
of a covered plan so that only the larger self-insured group health
plans receive the detailed disclosures under this final rule is
responsive to those comments and is consistent with the Secretary's
authority to specify the time, manner and content of the section
408(b)(2)(B) disclosures. Based on that same authority, the Secretary
has determined that the smaller self-insured group health plans should
receive the generalized compensation disclosures pursuant to ERISA
section 408(b)(2)(B).
---------------------------------------------------------------------------
\123\ ERISA section 726(b)(2)(B).
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Limiting the detailed disclosures under the final rule to large,
self-insured group plans is also responsive to other comments on the
proposal. Commenters expressed the view that smaller employers with
limited resources may
[[Page 69107]]
face substantial challenges analyzing the detailed disclosures in the
proposal, and having received the detailed disclosures, may face
increased litigation risk second guessing their disclosure-related
decisions. Other commenters said that providing the detailed
disclosures in the proposal would unduly burden smaller providers of
pharmacy benefit management services who commonly serve smaller
employers.
The Department believes that increased transparency in the area of
pharmacy benefit management services is critical but it recognizes
that, as a practical matter, the detailed disclosures required under
the final rule may be most useful to responsible plan fiduciaries of
larger employers, who are more likely to have compliance staff and
sufficient resources to analyze the disclosures and take appropriate
action. Proceeding with the more limited scope in the final rule is
intended to avoid unintended negative consequences for smaller
employers as described by some commenters while ensuring they receive
disclosures under the statute to determine the reasonableness of the
contracts or arrangements, including their covered service providers'
compensation.\124\
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\124\ Providing at least some disclosures is important for
smaller employers because, as one commenter highlighted, their
average deductible for individual coverage is $2,631--significantly
higher than the $1,670 average deductible for larger employers--and
half of the nation's smallest employers do not offer health
insurance at all.
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This approach will not result in the smaller self-insured group
health plans receiving no disclosures to assist them in selecting a
provider of pharmacy benefit management services. These group health
plans are covered plans under the statutory exemption in ERISA section
408(b)(2)(B) and would receive the disclosures required under the
statute from covered service providers--including providers of pharmacy
benefit management services--wishing to take advantage of the
exemption. The disclosures are required at the time of the initial
contract or arrangement and any extension or renewal, and include, for
example, the services to be provided; the status of the covered service
provider, an affiliate, or a subcontractor as a fiduciary, if
applicable; and the direct and indirect compensation reasonably
expected to be received by the covered service provider, their
affiliates and their subcontractors. The statute also provides for
disclosure in the event of a change in the information required to be
provided in the initial disclosures and for disclosures to be provided
upon the written request of the responsible plan fiduciary, as needed
for the plan to comply with the reporting and disclosure requirements
of Title I of ERISA. Simply put, the covered service providers of these
smaller self-insured group health plans, alongside those that serve
fully-insured entities through a health insurance issuer, will not be
required to provide the disclosures described in the final rule, which
are more specific, prescriptive, and detailed with respect to the
compensation streams than the disclosure provisions in the statute, but
they will still need to follow the statute. As such, after considering
comments, the Department believes that these more detailed disclosures
are appropriately directed to the responsible plan fiduciaries of
larger self-insured group health plans.
1.2.2. Fully Insured Plans
The definition of ``covered plan'' in the final rule excludes fully
insured group health plans because the Department is reserving for
future action more detailed regulatory disclosure obligations with
respect to these plans. However, these group health plans remain
covered plans under ERISA section 408(b)(2)(B) and therefore covered
service providers serving fully insured plans that wish to rely on the
statutory prohibited transaction exemption are required to provide the
generalized statutory disclosures.
In the proposal, the Department had reserved regulatory disclosure
obligations with respect to fully insured group health plans for future
action based on the preliminary view that responsible plan fiduciaries
may focus on different considerations when contracting with an
insurance company for health insurance coverage that integrates
prescription drug coverage, as opposed to self-insuring medical care
and contracting for pharmacy benefit management services. Specifically,
the Department questioned whether responsible plan fiduciaries would
find the specific disclosures proposed in the regulation useful when
negotiating a fully insured arrangement as to justify the costs
associated with the detailed disclosures (both to the covered service
provider providing the disclosures and the responsible plan fiduciary
reviewing and analyzing the disclosures). The Department also noted its
understanding that, in some instances, other relevant reporting and
disclosure requirements may apply under State law to the health
insurance issuer, either independently under the applicable insurance
code, or as part of the issuer's routine form filing review.
In the proposal, the Department sought comments on the relevance of
the proposed disclosures to responsible plan fiduciaries of fully
insured group health plans. In these arrangements in which services are
fully bundled with insurance, the Department assumed that responsible
plan fiduciaries discharged their obligation to ensure that the
contract or arrangement is reasonable by focusing on premiums, covered
benefits, coverage limits, exclusions, and cost-sharing requirements.
The proposal further assumed that responsible plan fiduciaries would
not, in these circumstances, benefit from the specific disclosures
required under the proposal because when the pharmacy benefit
management services are fully bundled with insurance, the responsible
plan fiduciary has a clearer understanding of the total compensation
paid for the services.
Some commenters supported the Department's proposed exclusion of
fully insured group health plans as covered plans under the regulation.
Commenters said a contract of insurance is different from the services
arrangements involving self-insured plans and involves state insurance
law oversight (i.e., Medical Loss Ratio requirements). A few commenters
also took the position that extending the proposed disclosures to
responsible plan fiduciaries of fully insured group health plans would
not be legally supportable. One commenter said that, in the case of a
fully insured group health plan, the provider of pharmacy benefit
management services is a vendor to the insurer and therefore does not
have a contractual relationship with the plan. This commenter further
argued that, in a fully insured group health plan, the insurer (not the
plan) assumes financial risk, administers the benefits, and is
responsible for all components of the insurance product. The same
commenter also suggested that Congress addressed the mechanisms for
fully insured arrangements to receive prescription drug reporting under
ERISA section 726.
Many other commenters on the proposal said the Department should
extend disclosure obligations under the final rule to covered service
providers of fully insured group health plans. Many of these commenters
said that excluding fully insured plans would leave fiduciaries without
the benefit of the disclosures in the rule despite those fiduciaries
having an obligation under ERISA to assess the reasonableness of
contractual arrangements. Further, commenters believed that a
consistent approach to transparency across self-insured plans and fully
insured plans
[[Page 69108]]
was desirable. Some commenters specifically referenced concerns about
transparency in connection with the vertical integration of the largest
PBMs and health insurance issuers. Other commenters noted that fully
insured plans that are offered by specified large employers or that are
specified large plans can receive the detailed report required under
ERISA section 726 (although such plans must specifically opt in to do
so). One commenter said the Department's stated rationale for excluding
fully insured plans--which was based on integration with a health
insurance contract--was not compelling, on the basis that the rule
would apply to other cases where the commenter believed that pharmacy
benefits are integrated with medical services, such as in arrangements
offered by TPAs.
A few commenters who supported extending disclosure obligations to
covered service providers of fully insured group health plans asked the
Department to conduct a future rulemaking for these products,
acknowledging the differences between fully insured and self-insured
contracts and arrangements. One commenter said the Department would
have flexibility to tailor disclosures to reflect differences in the
fully insured group health plan context. A commenter opposing the
expansion of this rule to include fully insured group health plans also
expressed the view that fiduciaries making decisions about an insurance
contract would not act on the particular disclosures in the
Department's proposal.
The Department has carefully considered comments encouraging the
Department to extend the final rule's disclosure obligations to covered
service providers with respect to fully insured plans. In the
Department's view, some of these commenters argued for disclosures to
be made to fully insured plans as a matter of policy, without
addressing whether the proposed disclosures would be meaningful for
responsible plan fiduciaries of fully insured group health plans. The
Department believes that arrangements in which pharmacy benefit
services are bundled with insurance are distinct from self-insured
arrangements offered by TPAs in which pharmacy benefit management
services are integrated with medical services, as referenced by one
commenter. The bundling with health insurance raises different issues
because of the insurance guarantees. When an employer self-insures a
group health plan, the employer bears the financial risk of paying
claims and managing the plan. To assist with managing the plan, these
employers often contract with service providers such as TPAs to process
claims and provide other plan administration services. For a fully
insured plan, generally the employer purchases a pre-packaged insurance
product where the issuer bears the financial risk of covering costs.
These differences in financial risk and plan management require a
different approach for developing meaningful disclosures for plan
fiduciaries of fully insured plans. The Department is persuaded by the
commenters who believe further work would need to be done before
developing a framework for disclosures to responsible plan fiduciaries
of fully insured group health plans.
The Department notes however that, contrary to an assertion by one
commenter, providers of pharmacy benefit management services that
contract with health insurers providing coverage to fully insured plans
are in fact parties in interest and covered service providers, as
clarified by the CAA, 2026.\125\ Accordingly, these covered service
providers have disclosure obligations under the statute that must be
satisfied if they wish to rely on the exemption set forth in ERISA
section 408(b)(2).
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\125\ See ERISA section 408(b)(2)(B)(i) (``For purposes of
applying section 1106(a)(1)(C) of this title with respect to a
transaction described under this subparagraph or subparagraph (C), a
contract or arrangement for services between a covered plan and an
entity providing services to the plan, including a health insurance
issuer providing health insurance coverage in connection with the
covered plan, in which such entity contracts, in connection with
such plan, with a service provider for pharmacy benefit management
services, shall be considered an indirect furnishing of goods,
services, or facilities between the covered plan and the service
provider for pharmacy benefit management services acting as the
party in interest.'').
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1.2.3. Other Types of Group Health Plans
Some commenters asked the Department to exclude excepted benefits
such as limited scope dental and vision plans from the definition of
covered plan. The commenters said that including excepted benefits is
inconsistent with the CAA, 2026 amendments to ERISA. A few commenters
also asked the Department to clarify whether the rule would apply to
Taft-Hartley plans or welfare benefit plans under ERISA section 3(1).
The final rule applies to covered plans which are defined as group
health plans under ERISA section 733(a) that are offered by a specified
large employer or that are specified large plans, each as defined in
paragraph (m), other than a group health plan in which all of the
benefits are provided exclusively through a contract or policy of
insurance issued by a health insurance issuer. Although excepted
benefits are not subject to certain requirements in Part 7 of ERISA,
such benefits are ``covered plans'' subject to the requirements of
ERISA section 408(b)(2)(B) to the extent that such benefits satisfy the
definition of ``group health plan'' under ERISA Sec. 733(a)(1). The
Department notes that in accordance with ERISA section 732(b) and (c),
the market requirements of part 7 of ERISA do not apply to a group
health plan or a health insurance issuer in the group or individual
market in relation to the provision of excepted benefits described in
ERISA section 733(c). However, ERISA section 408(b)(2)(B) provides that
covered plan means a group health plan as defined in ERISA section
733(a). Under ERISA section 733(a) a group health plan is defined as
``an employee welfare benefit plan to the extent that the plan provides
medical care . . . to employees or their dependents (as defined under
the terms of the plan) directly or through insurance, reimbursement, or
otherwise.'' Section 733(a)(1) of ERISA specifically excludes qualified
small employer health reimbursement arrangements.
The definition of a group health plan in ERISA section 733(a) does
not exclude excepted benefits, which are defined under ERISA section
733(c)(2). Therefore, excepted benefits are not excluded from the
disclosure requirements under this final rule. To the extent that a
covered service provider enters a contract or arrangement with an
excepted benefit plan, the disclosure obligations required to qualify
for a prohibited transaction exemption may apply. Similarly, the
definition of group health plan does not exclude Taft-Hartley plans,
and such plans are covered plans under ERISA section 408(b)(2)(B) and
this regulation if they meet the size criteria.
1.2.4. Group Health Plans of Sponsors in the Drug Supply Chain
A few commenters raised the potential for anticompetitive harm
associated with detailed disclosures to responsible plan fiduciaries of
self-insured group health plans sponsored by drug manufacturers or
other employers in the drug supply chain. Commenters pointed to a
special provision in ERISA section 726 directing the Secretary (along
with the Secretaries of Treasury and Health and Human Services) to
define through rulemaking a limited form of report for any group health
plan established by a plan sponsor that is, or is affiliated with,
[[Page 69109]]
a drug manufacturer, drug wholesaler, or other direct participant in
the drug supply chain, ``to prevent anti-competitive behavior.'' \126\
The commenters said the Department should include a similar limited
initial disclosure and semiannual disclosure for these group health
plans.
---------------------------------------------------------------------------
\126\ ERISA section 726(b)(4)(G).
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No commenters articulated why plan fiduciaries of self-insured
group health plans sponsored by drug manufacturers or other employers
in the drug supply chain should receive detailed disclosures under this
final rule. Commenters highlighted that, in recent years, multiple
cases have been brought by plan participants claiming that their plan
fiduciaries did not fulfill their fiduciary responsibilities regarding
PBM services by incurring excessive fees, failing to negotiate better
pricing terms for prescription drugs, and not behaving prudently when
selecting the plan's PBM.\127\ One of these cases involved a
pharmaceutical manufacturer, highlighting that employers in the drug
supply chain are also expected to scrutinize the agreements they enter
into with PBMs.
---------------------------------------------------------------------------
\127\ See Knudsen v. MetLife Grp., Inc., 117 F.4th 570 (3d Cir.
2024); Navarro v. Wells Fargo & Co., No. 24-cv-3043 (LMP/DTS), 2025
WL 897717, (D. Minn. Mar. 24, 2025); Lewandowski v. Johnson &
Johnson, No. CV 24-671 (ZNQ) (RLS), 2025 WL 288230 (D.N.J. Jan. 24,
2025).
---------------------------------------------------------------------------
Although the disclosures under the final rule would assist
employers in the drug supply chain in satisfying their fiduciary
obligations, the Department is persuaded that Congress' inclusion of
this special provision in CAA, 2026 reflects a deliberate judgement
that anticompetitive harm could result from those with a direct
financial stake in the drug supply chain receiving detailed
disclosures. Therefore, the definition of covered plan in the final
rule was revised from the proposal to exclude group health plans
established by a plan sponsor that is, or that is affiliated with, a
drug manufacturer, distributor, wholesaler, rebate aggregator (or other
purchasing entity designed to aggregate rebates). Plan sponsors that
are considered direct participants in the drug supply chain for
purposes of exclusion under this final rule include but are not limited
to drug manufacturers, market authorization holders (if different than
the manufacturer) that retain control over the drug's list price;
distributors or wholesalers, pharmacy benefit managers; rebate
aggregators, including GPOs; and affiliated pharmacies, including
retail, mail-order, and specialty pharmacies. While group health plans
of these sponsors would not receive disclosures under this final rule,
they would receive the disclosures required under ERISA section
408(b)(2)(B) from those wishing to take advantage of the exemption as
well as ERISA section 726 once the Secretaries define through
rulemaking a limited form report.\128\
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\128\ ERISA section 726(b)(4)(G).
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1.3. Covered Service Providers--Paragraph (c)
Paragraph (c) of the final rule \129\ defines the entities that are
covered service providers under the final rule and therefore have
disclosure and related audit obligations. The final rule identifies two
types of covered service providers: (i) providers of pharmacy benefit
management services (as defined in paragraph (d) of the final rule) and
(ii) providers of advice, recommendations, or referrals regarding
pharmacy benefit management services who are themselves providers of
pharmacy benefit management services or their affiliates.\130\ In each
case, to be a covered service provider, the entity must reasonably
expect to receive $1,000 \131\ or more in compensation, direct or
indirect, in connection with providing the services.\132\ These
provisions in the definition of covered service provider in the final
rule are consistent with the definition in the Department's proposal.
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\129\ 29 CFR 2550.408b-22(c).
\130\ Non-affiliated brokers and consultants remain subject to
the ERISA section 408(b)(2)(B) disclosures.
\131\ This $1,000 threshold is consistent with the thresholds in
the statute (ERISA section 408(b)(2)(B)(ii)(I)(bb)) and the
Department's service provider disclosure regulation for pension
plans (29 CFR 2550.408b-2(c)(1)(iii)).
\132\ Under proposed paragraph (m)(3), compensation is defined
as ``anything of monetary value but does not include any item or
service valued at $250 or less, in the aggregate, during the term of
the service contract or arrangement.'' The $250 threshold in this
context is consistent with the definitions in the statutory
provision (ERISA 408(b)(2)(B)(ii)(I)(dd)(AA)) and the Department's
service provider disclosure regulation for pension plans (29 CFR
2550.408b-2(c)(1)(viii)(B)).
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Some commenters asked the Department to clarify whether the $1,000
threshold figure would be calculated on a per claim basis or based on
total aggregate earnings within a year. Commenters also asked whether
the threshold applies to any combination of the services identified in
the definition of pharmacy benefit management services. In response,
the Department confirms the $1,000 is measured against total aggregate
earnings within the year and applies to any combination of the pharmacy
benefit management services.
1.3.1. Other Types of Service Providers
In the proposal, the Department noted that it was focusing on
pharmacy benefit managers in response to President Trump's Executive
Order 14273, Lowering Drug Prices by Once Again Putting Americans
First, which instructed the Department to propose regulations to
improve employer health plan transparency into the direct and indirect
compensation received by pharmacy benefit managers. However, the
Department recognized that self-insured group health plans have other
service providers that were not covered by the proposal. These service
providers include TPAs, health insurers, and others involved in the
administration of self-insured group health plans' medical claims, such
as for hospital stays, surgeries, and chronic treatment, but whose
services are unrelated to pharmacy benefit management. Stakeholders had
indicated that group health plan fiduciaries may not have access to all
claims data, payments to providers, and fee and pricing data that could
enable negotiation for cost savings to group health plans and
participants.\133\ The Department sought comment on whether it should
expand the proposed disclosures to cover additional service providers
beyond providers of pharmacy benefit management services; and if so,
which service providers should be covered. Additionally, the Department
sought comment on whether the disclosures in the proposal would be
sufficient to bring transparency into arrangements with those
additional service providers or whether additional disclosures would be
needed, such as claims data, payments to providers, and other fee and
pricing data.
---------------------------------------------------------------------------
\133\ See letter to The Honorable Donald J. Trump from Cynthia
A. Fisher, <a href="http://PatientRightsAdvocate.org">PatientRightsAdvocate.org</a> (November 25, 2025), available
at <a href="https://www.patientrightsadvocate.org/lettertopresidentonaffordabilityandhealthcare">https://www.patientrightsadvocate.org/lettertopresidentonaffordabilityandhealthcare</a>.
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As discussed in section D. of this preamble, shortly after the
Department published its proposed rule, Congress amended ERISA section
408(b)(2)(B) in the CAA, 2026, which in part clarified which service
providers are covered service providers for purposes of the prohibited
transaction exemption. The phrase ``Brokerage services'' was removed
and replaced with ``Services (including brokerage services),'' in
subparagraph (AA) of section 408(b)(2)(B)(ii)(I)(bb). The term
``Consulting'' was removed and replaced with ``Other services'' in
subparagraph (BB) of section 408(b)(2)(B)(ii)(I)(bb). Additionally, in
subparagraph (BB) of section 408(b)(2)(B)(ii)(I)(bb), the phrase
[[Page 69110]]
``related to the development or implementation of'' and the list of
services that followed were removed and replaced with ``including any
of the following'' and an updated list of services that includes
consulting services.
In response to the CAA, 2026, the Department extended the comment
period for the proposed rule to allow stakeholders to address how to
harmonize the proposed rule with the new statutory requirements.\134\
Many commenters said the Department should expand the definition of
covered service provider to include additional types of service
providers. They mentioned TPAs, independent brokers and consultants,
insurers, and network vendors, for example. Commenters said the need
for transparency was not limited to the context of pharmacy benefit
management services, with some commenters also stating that
arrangements with other service providers also suffered from
undisclosed conflicts of interest, misaligned incentives, and indirect
compensation streams that may not be known by the responsible plan
fiduciaries. A few commenters said that the compensation flows among
various group health plan service providers are inseparable, especially
due to vertical integration of service providers and expressed concern
that failure to expand the definition of covered service provider would
allow parties to evade disclosure obligations and undermine the
transparency goals of the rulemaking. Some commenters noted expansion
to other types of service providers would be consistent with Congress'
action clarifying the broader definition of covered service provider in
ERISA section 408(b)(2)(B).
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\134\ Improving Transparency Into Pharmacy Benefit Manager Fee
Disclosure: Extension of the Comment Period, 91 FR 10033 (Mar. 2,
2026). In the notice, the Department also specifically sought
comment on ``whether specific provisions of the rule should be
revised or whether new provisions should be added, in order to
minimize complexity or align with the new statutory provisions,
while continuing to fulfill the stated transparency goals of the
proposal.''
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Some commenters provided information on the types of disclosures
that should be required should the Department expand the final rule to
include other covered service providers, especially TPAs with respect
to medical claims. Commenters mentioned compensation retained on
provider reimbursements; shared savings or gainsharing arrangements;
network access or discount fees; repricing or claims-editing fees; and
many others. Commenters raised the point that TPAs often receive
compensation from network lessors, specialty vendors, and utilization
management companies by routing business through those entities, for
the plans the TPA serves. These indirect sources of compensation may
not be known to plan sponsors as they are not always identified in the
contracts between TPAs and plans. Commenters also identified brokers
and consultants who advise plans on service provider selection and may
receive compensation from selected providers.
Other commenters said the Department should not expand the
definition of covered service providers to other types of service
providers beyond providers of pharmacy benefit management services. One
commenter said that TPA and claims administration services are
fundamentally different from pharmacy benefit management services and
disclosure issues would not be able to be addressed by expanding the
disclosures in the Department's rule which had been developed for
providers of pharmacy benefit management services. Another commenter
noted that TPAs are included in the proposed rule to the extent they
provide pharmacy benefit management services. Commenters also said that
Congress had made clear that there is a broader set of covered service
providers in the statutory exemption but did not single them out for
detailed disclosure obligations.
The Department concurs with commenters who said that broader
transparency encompassing additional covered service providers to group
health plans would be beneficial and consistent with law. As discussed
above, a broad range of covered service providers are now covered
service providers for purposes of the statutory exemption in ERISA
section 408(b)(2)(B), including TPAs. Commenters identified multiple
types of service providers that contract with group health plans to
provide a wide array of services with multiple sources of direct and
indirect compensation that group health plan service providers, such as
TPAs, may utilize. However, based on the comments identifying the
compensation streams that should be disclosed, the Department believes
disclosures for the expanded group of covered service providers would
best be addressed in a separate regulatory or subregulatory guidance
project tailored to those other types of service providers, and will
consider adding this project to a future regulatory agenda.
For now, although not covered by this final rule, the Department
expects this expanded group of covered service providers to make a
good-faith effort to comply with their disclosure obligations under
ERISA section 408(b)(2)(B), in line with the Department's temporary
enforcement policy announced herein, in order to rely on the exemption.
For example, a TPA providing services to a group health plan for
medical management should disclose, pursuant to ERISA section
408(b)(2)(B), direct and indirect compensation. This includes direct or
indirect compensation such as administrative fees, per-employee-per-
month fees, or 340B-related income; provider and network compensation;
affiliate, subcontractor, and vertically integrated compensation; data
monetization compensation; and payment and recovery compensation.
1.3.2. Compensation of Individuals Who Are Officers, Directors,
Employees or Partners
Some commenters noted that the definition of an ``affiliate''
includes officers, directors, employees, and partners of the covered
service provider. These commenters said the final rule should not
require disclosure of any individual's compensation in connection with
providing pharmacy benefit management services. The Department agrees
that compensation of individuals is not the focus of this regulatory
project and notes that ERISA section 408(b)(2)(B) specifically provides
that the requirement to disclose indirect compensation does not extend
to compensation received by an employee from an employer on account of
work performed by the employee.\135\ The Department has added a similar
provision in paragraph (c) of the final rule that specifies that the
regulation does not require disclosure of the compensation of
individuals who are officers, directors, employees and partners.
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\135\ ERISA section 408(b)(2)(B)(iii)(IV)(aa)(BB).
---------------------------------------------------------------------------
1.4. Providers of Pharmacy Benefit Management Services--Paragraph
(c)(1)(i)
Paragraph (c)(1)(i) of the final rule defines, as covered service
providers, service providers who enter into a contract or arrangement
with a covered plan to provide pharmacy benefit management services.
Like the proposed rule, the final rule clarifies that this would be the
case regardless of whether the services will be performed by the
covered service provider, an affiliate, an agent, or a
subcontractor.\136\ Thus, the
[[Page 69111]]
final rule recognizes that the pharmacy benefit management services may
be performed by the covered service provider, or they may be performed
by an affiliate, an agent, or a subcontractor of the covered service
provider. Likewise, the final rule recognizes that compensation in
connection with the services may be received by the covered service
provider or it may be received by an affiliate, an agent, or a
subcontractor of the covered service provider.
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\136\ The definition of pharmacy benefit management services in
paragraph (d) of the final rule is discussed in the next subsection
of this preamble. The terms affiliate, agent, and subcontractor are
defined in paragraph (m) of the final rule and are discussed in the
following subsection of this preamble.
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Under this framework, paragraph (c)(1)(i) of the final rule focuses
on the entity that has a contract or arrangement with the covered plan
to provide any pharmacy benefit management services to that plan--that
party is the covered service provider. The Department believes that the
service provider directly responsible to the covered plan for the
provision of pharmacy benefit management services is the appropriate
party to ensure that the required disclosures under the regulation are
made. This approach is consistent with ERISA section 408(b)(2)(B) as
well as the Department's service provider regulation applicable to
pension plans (29 CFR 2550.408b-2(c)(1)).\137\
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\137\ ERISA section 408(b)(2)(B)(ii)(I)(bb) (``The term `covered
service provider' means a service provider that enters into a
contract or arrangement with the covered plan . . .''); Reasonable
Contract or Arrangement Under Section 408(b)(2)--Fee Disclosure;
Interim Final Rule, 75 FR 41600, 41606 (July 16, 2010) (``In the
view of the Department, the service provider directly responsible to
the plan for the provision of services is the appropriate party to
ensure that the required disclosures under the regulation are
made.'').
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In this regard, the Department understands that responsible plan
fiduciaries to covered plans may take a number of different approaches
in identifying and selecting a provider of pharmacy benefit management
services. The covered plan may ultimately contract directly with the
entity that will perform the services, or it may enter into a contract
with a different entity that agrees to provide the services to the
covered plan through an affiliate, an agent, or a subcontractor. It is
common, for example, for responsible plan fiduciaries to work with a
consultant or broker to conduct a request for proposal and to assist in
negotiations with the providers of pharmacy benefit management
services. In that case, the covered plan will enter a contract directly
with the PBM.
On the other hand, the Department understands that TPAs may
contract directly with covered plans to provide a range of health-care
related services, such as creating networks of healthcare providers,
negotiating payments rates, and processing and paying health claims.
One component of these services may be pharmacy benefit management
services. If the TPA contracts with the covered plan to provide
pharmacy benefit management services, the TPA would be a covered
service provider under this regulation, even if it intends to rely on
another provider to perform those services. In that event, the TPA
would be responsible for making the disclosures to the responsible plan
fiduciary required under the final rule and therefore must be able to
obtain information from the provider performing the pharmacy benefit
management services necessary for those disclosures.
Covered plans may access pharmacy benefit management services
through other similar types of arrangements, where the provider may or
may not refer to itself as a TPA. For example, it is common for group
health plans to enter level-funded arrangements that have stop-loss
policies to emulate characteristics of fully insured arrangements, such
as predictable spending, but that are actually self-funded
arrangements. These arrangements commonly include pharmacy benefit
services and the entity that contracts with the covered plan to provide
those services would be the covered service provider. As in the TPA
example, even if the entity contracting or arranging with the covered
plan is not providing the services itself, it nonetheless would be
responsible for making the disclosures to the responsible plan
fiduciary required under the final rule, and therefore must be able to
obtain information from the provider performing the pharmacy benefit
management services necessary for those disclosures.
Questions may arise regarding which party is the covered service
provider and which party is the responsible plan fiduciary in the
context of a multiple employer welfare arrangement (MEWA).\138\ For
MEWAs that are considered single ERISA plans, the responsible plan
fiduciary for the covered plan would receive the disclosures from the
party that contracts with the covered plan to provide pharmacy benefit
management services. In the case of a MEWA that is not considered a
single ERISA plan but rather involves a number of covered plans each
sponsored by an employer individually, the party operating the MEWA is
likely to be the covered service provider that contracts with the
individual covered plans to provide pharmacy benefit management
services. In that case, the MEWA operator would have the responsibility
to make the disclosures required by the final rule to the responsible
plan fiduciaries (i.e., the employers or other fiduciary responsible
for entering into the contract or arrangement to provide such
services),\139\ and therefore must obtain the necessary information
from the provider (e.g., as a subcontractor) performing the pharmacy
benefit management services.
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\138\ For more information on MEWAs, see MEWAs Multiple Employer
Welfare Arrangements under the Employee Retirement Income Security
Act (ERISA): A Guide to Federal and State Regulation, available at
<a href="https://www.dol.gov/sites/dolgov/files/ebsa/pdf_files/mewa-under-erisa-a-guide-to-federal-and-state-regulation.pdf">https://www.dol.gov/sites/dolgov/files/ebsa/pdf_files/mewa-under-erisa-a-guide-to-federal-and-state-regulation.pdf</a>.
\139\ See paragraph (m)(4) defining ``responsible plan
fiduciary.''
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Covered plans alternatively may access pharmacy benefit management
services through employer consortiums or other types of employer
groups. The analysis of who the covered service provider is in those
arrangements would depend on the details of the arrangement and,
specifically, which entity contracts with the covered plan to provide
the pharmacy benefit management services. If the consortium or other
group assists in negotiating with the provider of pharmacy benefit
management services but the covered plan contracts directly with the
provider--which the Department believes is the predominant approach--
the provider of pharmacy benefit management services would be the
covered service provider. However, if the consortium or other employer
group were to contract to provide the services to the covered plan, the
consortium or other group would be the covered service provider.
Finally, a covered plan may directly contract with more than one
entity for pharmacy benefit management services as such services are
defined in paragraph (d) of the rule. In such circumstances, the
covered plan would thus have more than one PBM, each of which would be
a covered service provider and responsible for making its own
disclosures with respect to services under its contract or arrangement
with the covered plan.
1.4.1. Definition of Pharmacy Benefit Management Services--Paragraph
(d)
Paragraph (d) of the final rule \140\ defines pharmacy benefit
management services as services necessary for the management or
administration of a covered plan's prescription drug benefits
(including the covered plan's provision of prescription drugs through
the plan's medical benefit), regardless of whether the person,
business, or entity
[[Page 69112]]
performing the service identifies itself as a ``pharmacy benefit
manager.'' The definition includes a list of examples of such services,
as follows:
---------------------------------------------------------------------------
\140\ 29 CFR 2550.408b-22(d).
---------------------------------------------------------------------------
<bullet> acting as a negotiator or aggregator of rebates, fees,
discounts and other price concessions for prescription drugs;
<bullet> establishing or maintaining prescription drug formularies;
<bullet> establishing or maintaining pharmacy networks, through
contract or otherwise, including a mail order pharmacy, a specialty
pharmacy, a retail pharmacy, a nursing home pharmacy, a long-term care
pharmacy, and an infusion or other outpatient pharmacy, to provide
prescription drugs;
<bullet> performing utilization review and management, including
the instituting and processing of prior authorization requests for
drugs, step therapy protocols, patient compliance analyses, conducting
therapeutic intervention, and administering generic and biosimilar
substitution programs.
The definition also includes examples of other services that, in
conjunction with any of the services described above, are considered
pharmacy benefit management services. These services are:
<bullet> processing and payment of claims for prescription drugs;
<bullet> adjudicating appeals or grievances related to the covered
plan's prescription drug benefits;
<bullet> recordkeeping related to the covered plan's prescription
drug benefits; and
<bullet> performing regulatory compliance with respect to the
covered plan's prescription drug benefits under the contract or
arrangement.
As discussed above, pharmacy benefit management encompasses a
number of services related to developing drug formularies, negotiating
with drug manufacturers for rebates and other discounts, negotiating
with pharmacies, and processing claims and other functions for covered
plans. The examples provided in the definition are intended to describe
the services expansively to ensure comprehensive disclosures are made.
Consequently, the definition specifies that whether the person
providing the services identifies itself as a PBM is not dispositive of
the requirement to disclose. Additionally, a person will be a covered
service provider by virtue of performing any of the services identified
in the definition; covered service provider status does not depend on
comprehensively providing all the services set forth in the definition.
The definition in the final rule was revised from the proposal
based on comments stating that certain examples included in the
proposed definition were too broad. Commenters identified the following
examples as ones that in isolation may identify service providers that
should not be considered to provide pharmacy benefit management
services: ``processing and payment of claims for prescription drugs;''
``adjudicating appeals or grievances related to the covered plan's
prescription drug benefits;'' ``recordkeeping related to the covered
plan's prescription drug benefits;'' and ``regulatory compliance with
respect to the covered plan's prescription drug benefits under the
contract or arrangement.'' One commenter, for example, said that health
reimbursement account (HRA) service providers may process and pay
claims for prescription drugs as part of their account administration,
but the commenter did not believe the Department should cover HRA
service providers as providers of pharmacy benefit management services.
The Department is persuaded by the examples provided by these
commenters that the examples may be too broad in isolation, and has
accordingly revised the definition of pharmacy benefit management
services. Under the revised definition, certain services described in
the examples will, standing alone, be considered pharmacy benefit
management services. Those services are: acting as a negotiator or
aggregator of rebates, fees, discounts, and other price concessions for
prescription drugs; establishing or maintaining prescription drug
formularies; establishing or maintaining pharmacy networks, through
contract or otherwise, including a mail order pharmacy, a specialty
pharmacy, a retail pharmacy, a nursing home pharmacy, a long-term care
pharmacy, and an infusion or other outpatient pharmacy, to provide
prescription drugs; and performing utilization review and management,
including the instituting or processing of prior authorization requests
for drugs, step therapy protocols, patient compliance analyses,
conducting therapeutic intervention, and administering generic and
biosimilar substitution programs. These services can be considered core
pharmacy benefit management services.
The Department revised the example regarding utilization review and
management based on comments suggesting that the example should be
expanded to be comprehensive. In the final rule, the words
``instituting or'' were added before ``processing of prior
authorization requests for drugs,'' so that the example extends to
``instituting or processing of prior authorization requests for drugs''
and the word ``biosimilar'' was added to the phrase regarding
administering generic substitution programs, so that the example reads
``administering generic and biosimilar substitution programs.''
Other examples in the definition will be considered pharmacy
benefit management services only if they are performed ``in conjunction
with'' the core services. Those services are: processing and payment of
claims for prescription drugs; adjudicating appeals or grievances
related to the covered plan's prescription drug benefits; recordkeeping
related to the covered plan's prescription drug benefits; and
performing regulatory compliance with respect to the covered plan's
prescription drug benefits under the contract or arrangement. Under
this approach, entities who provide these services along with the core
pharmacy benefit management services would consider the compensation
from these services when determining if the $1,000 threshold is met for
status as a covered service provider. Compensation received in
connection with these services would be disclosed under the various
disclosure provisions in the final rule.
Some commenters focused on the example regarding ``performing
regulatory compliance'' and asked whether, under that example,
providers of legal services would be considered covered service
providers. The revised definition should make clear that attorneys and
other providers of legal services would generally not be considered
providers of pharmacy benefit management services under the final rule.
The definition is intended to encompass entities that perform any of
the core services described above and also provide regulatory
compliance--for example, ensuring compliance with the rebate pass
through requirements of ERISA section 408(b)(2)(C) when that section
takes effect. Under the definition of pharmacy benefit management
services in the final rule, it is not necessary for an entity to
provide all the services described in the examples. One commenter said
the word ``and'' connecting the e
[…truncated; see source link]Indexed from Federal Register on November 2, 2026.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.